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Wealthmark Advisors Inc. v. Phoenix Life Insurance Co.

United States District Court, W.D. Texas, San Antonio Division

March 24, 2017




         Before the Court is the Motion to Strike Defendants' Expert Witness (“Motion”) [#40] filed by Plaintiffs Wealthmark Advisors Incorporated and David Shields (collectively, “Plaintiffs” or “Wealthmark”). Pretrial matters have been referred to the undersigned pursuant to Western District of Texas Local Rule CV-72 and Appendix C [#21].[1] The district court has original jurisdiction over this case pursuant to 28 U.S.C. § 1332(a)(1), and the undersigned has authority to enter this order pursuant to 28 U.S.C. § 636(b)(1)(A). See, e.g., Target Strike, Inc. v. Marston & Marston, Inc., No. SA-10-cv-0188-OLG-NN, 2011 WL 676185, at *1 (W.D. Tex. Feb. 16, 2011) (noting that motions to exclude experts are non-dispositive).

         Wealthmark moves to strike Charles F. McAleer, III, the expert witness for Defendants Phoenix Life Insurance Company and PHL Variable Insurance Company (collectively, “Defendants” or “Phoenix”). In their motion, Plaintiffs assert that (1) McAleer is not qualified to provide the opinions for which he was retained, and (2) McAleer does not set out verifiable standards for his analysis, identify who created these standards, or explain their relevance. Alternatively, Wealthmark moves to exclude testimony by McAleer[2] regarding two of his conclusions as well as related to topics addressed in three different sections of his report, arguing that the expert's testimony is unsupported, constitutes impermissible personal beliefs, invades the province of the jury, and/or constitutes legal conclusions.

         Having considered the Motion, Phoenix's Response [#41], the relevant law, and the pleadings, the Court DENIES the Motion [#40] except for the limited relief GRANTED herein. The Court declines to strike McAleer. In addition, the Court holds that McAleer is qualified to testify as an expert on independent marketing organizations (“IMOs”) and regarding Wealthmark's compliance or lack of compliance with industry standards; such testimony is both relevant to this suit and reliable. Notwithstanding the foregoing, McAleer may not testify as to the meaning of legal terms, whether Wealthmark met its contractual obligations, any third party's state of mind, or whether any actions constitute violations of applicable law.[3]

         I. BACKGROUND

         In June 2010, Phoenix contracted with Wealthmark, an IMO, to market and sell Phoenix's insurance products. (See Annuity Distributor Agreement at Resp., Ex. 2.) Pursuant to the parties' agreement, Wealthmark agreed it would recruit Representatives, defined as “Producers and/or Subproducers” for contracting with Phoenix. (Id.) In addition to recruiting Representatives, Wealthmark agreed to “cause and require” all of its Representatives to “comply with the Terms of this Agreement and all applicable state and federal laws.” (Id.) Wealthmark further agreed that it would “make best efforts” to ensure its Representatives were aware of their obligation to ensure all sales were “appropriate and suitable for the needs of the insured” at the time of the sale in accordance with “Applicable Law governing suitability of insurance products.” (Id.) In or around late 2011 or early 2012, Phoenix entered into a Producer Agreement with Anthony Friendshuh, a Minnesota licensed Resident Insurance Producer, [4] to sell its products in Minnesota in exchange for commissions on the sales. (See Defendants' Answer and Counterclaim [#3] ¶¶ 12-14.) It is Phoenix's position that Friendshuh became one of Wealthmark's Representatives, obligating Wealthmark to ensure that Friendshuh complied with all applicable laws and ensure that all sales were suitable to each customer's needs. (Id. ¶¶ 8, 15). Wealthmark concedes that it received commissions on Friendshuh's sales but contends that it relied upon Phoenix to vet Friendshuh's sales for both compliance and suitability. (See Original Third Party Complaint [#31] ¶ 7.)

         In or around late 2013 and early 2014, the Minnesota Attorney General began conducting an investigation on Friendshuh based upon consumer complaints concerning Friendshuh's annuity sales practices. (See Compl. [#1-1] ¶ 18; Third Pty. Compl. ¶ 11.) In conjunction with this investigation, the State of Minnesota Commissioner of Commerce issued a Cease and Desist Order, finding that Friendshuh, among other things: (1) misrepresented the terms, benefits, or advantages of Phoenix annuity products; (2) made improper and unsuitable sales to Minnesota clients, which were not in his clients' best interest and which subjected his clients to surrender penalties; and (3) engaged in “fraudulent coercive or dishonest practices in connection with the insurance business, ” all in violation of Minnesota law. In re Friendshuh, 2014 WL 10293771, at *4 (Minn. Dep't of Commerce Dec. 5, 2014). The State of Minnesota and Phoenix thereafter entered into a court-approved settlement agreement, referred to as the “Assurance of Discontinuance, ” whereby Phoenix agreed to rescind approximately 211 annuities sold by Friendshuh to Minnesota citizens. (See Resp., Exs. 1, 3-4; see also Third Pty. Compl. ¶ 12.) Phoenix thereafter demanded that Wealthmark repay the commissions on Friendshuh's rescinded sales. (See Answ. ¶ 24; Compl. ¶ 18.)

         In response to Phoenix's demand, Wealthmark filed suit in Bexar County District Court [#1-1], alleging that Phoenix was negligent in the way it handled the sales of its products in Minnesota. In its petition, Wealthmark also seeks a declaratory judgment that Phoenix is “not entitled to the return of any of the commissions paid to Wealthmark, nor of commissions paid to any of its representatives” because Phoenix allegedly “surrendered” the annuities more than twelve (12) months after the annuities were written and accepted and, pursuant to the parties' contract, no chargebacks on such paid commissions were due. Phoenix removed the case on the basis of diversity jurisdiction [#1] and counterclaimed for breach of contract [#3], alleging that Wealthmark is contractually obligated to return commissions paid to Wealthmark for the sale of the rescinded annuities and to indemnify Phoenix for all losses incurred in connection with the Assurance of Discontinuance.

         On December 19, 2016, Phoenix designated McAleer as an expert to testify regarding industry standards related to IMOs, as well as whether Wealthmark complied or failed to comply with those standards. (See Resp., Ex. 5.) Wealthmark now moves to strike McAleer.[5]


         In Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579, 589 (1993), the Supreme Court held that trial judges must ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable. Subsequent to Daubert, Rule 702 of the Federal Rules of Evidence was amended to provide that a witness “qualified as an expert . . . may testify . . . in the form of an opinion . . . if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.” See Guy v. Crown Equip. Corp., 394 F.3d 320, 325 (5th Cir. 2004) (quoting Fed.R.Evid. 702). The Rule 702 and Daubert analysis applies to all proposed expert testimony, including nonscientific “technical analysis” and other “specialized knowledge.” Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 141 (1999).

         Under Daubert, expert testimony is admissible only if the proponent demonstrates that: (1) the expert is qualified; (2) the evidence is relevant to the suit; and (3) the evidence is reliable. See Moore v. Ashland Chem. Inc., 151 F.3d 269, 276 (5th Cir. 1998); Watkins v. Telsmith, Inc., 121 F.3d 984, 989 (5th Cir. 1997). The overarching focus of a Daubert inquiry is the “validity and thus evidentiary relevance and reliability of the principles that underlie a proposed submission.” Watkins, 121 F.3d at 989 (quoting Daubert, 509 U.S. at 594-96). Because the Daubert test focuses on the underlying theory upon which the opinion is based, the proponent of expert testimony need not prove the expert's testimony is correct, but that the testimony is reliable. Moore, 151 F.3d at 276. This determination of reliability includes a preliminary determination of “whether the reasoning or methodology underlying the testimony is scientifically valid and of whether that reasoning or methodology properly can be applied to the facts in issue.” Daubert, 509 U.S. at 592-93.

         Notwithstanding the testing of an expert's qualification, reliability, and admissibility, “the rejection of expert testimony is the exception rather than the rule.” Fed.R.Evid. 702, Adv. Comm. Notes (2000). Daubert did not work a “seachange over federal evidence law, ” and “the trial court's role as gatekeeper is not intended to serve as a replacement for the adversary system.” Id. (quoting United States v. 14.38 Acres of Land, 80 F.3d 1074, 1078 (5th Cir. 1996)). “Vigorous cross-examination, presentation of contrary evidence, and careful instruction on burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.” Daubert, 509 U.S. at 596.

         III. ...

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