Katz, Abosch, Windesheim, Gershman & Freedman, P.A. v. Parkway Neuroscience & Spine Inst.

• Docket Number: 30-2022
• Decision Date: 30 August 2023
• Parties: KATZ, ABOSCH, WINDESHEIM, GERSHMAN & FREEDMAN, P.A., ET AL v. PARKWAY NEUROSCIENCE AND SPINE INSTITUTE, LLC Damages (less prejudgment interest) Prejudgment interest Damages (less prejudgment interest) - Updated May 17, 2021 Prejudgment interest Damages (less prejudgment interest) - Updated June 11, 2021 Prejudgment interest
• Court: Maryland Court of Appeals

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KATZ, ABOSCH, WINDESHEIM, GERSHMAN & FREEDMAN, P.A., ET AL
v.
PARKWAY NEUROSCIENCE AND SPINE INSTITUTE, LLC

No. 30-2022

Maryland Supreme Court

August 30, 2023

IN THE SUPREME COURT OF MARYLAND ^[*]

Argued: May 4, 2023

Circuit Court for Howard County Case No.: C-13-CV-18-000181

Fader, C.J. Watts Hotten Booth Biran Gould Eaves, JJ.

OPINION

BIRAN, J.

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When this Court adopted the Daubert^[1] expert testimony admissibility standard in Rochkind v. Stevenson, 471 Md. 1 (2020), we embraced a regime that prizes the reliability of an expert's methodology over its general acceptance. We empowered trial judges to protect juries from junk science while also broadening the range of possibly admissible opinions beyond just those dominant among practitioners. We asked judges to engage with the science without playing amateur scientist, and we promised the deference appropriate to courts administering a flexible approach to analyzing the admissibility of expert testimony. This case requires us to reflect on that flexibility and deference.

Parkway Neuroscience and Spine Institute, LLC ("PNSI", the Respondent here) is a medical and surgical practice that began to expand in 2011 and needed accounting help. In 2013, PNSI retained accounting firm Katz, Abosch, Windesheim, Gershman &Freedman, P.A. and, specifically, Mark Rapson, who specialized in medical practice accounting (we shall refer to the firm and Mr. Rapson, the Petitioners here, collectively as "KatzAbosch"). Within a few years after retaining KatzAbosch, PNSI began to disintegrate; members of the practice began leaving in 2015, and by the middle of 2016, only two members remained of the nine who had been in place at the end of 2014. PNSI terminated KatzAbosch's services in 2015.

PNSI alleges that malpractice by KatzAbosch caused the mass exodus of its members. In 2018, PNSI sued KatzAbosch in the Circuit Court for Howard County to recover damages for lost profits. To establish those damages, PNSI designated certified

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public accountant Meghan Cardell as an expert witness. She used the widely accepted "before-and-after" method to calculate PNSI's lost profits, choosing 2015 as a "baseline" period against which she would compare the actual profits in subsequent years through 2019, and adding up the differences to arrive at an estimate of what profits PNSI missed out on due to KatzAbosch's alleged harmful conduct. A few weeks before the June 2021 Daubert-Rochkind hearing, Ms. Cardell issued updated calculations reflecting some "normalizing adjustments" she had made; although PNSI's accounting records had not changed since her initial analysis, Ms. Cardell reviewed PNSI's financial information again and noticed some payments that had been categorized in the wrong years. She reallocated those payments to the years she believed to be correct and updated her calculations.

Those two issues - Ms. Cardell's choice of 2015 as the "before" in her "before-and-after" analysis and her June 2021 normalizing updates - rose to the top of the trial court's mind in the Daubert-Rochkind hearing. The trial court noted speculative and insufficiently substantiated judgment calls that Ms. Cardell had made in arriving at the 2015 benchmark. Among other things, the trial court wondered why Ms. Cardell had chosen 2015 (a profitable year) rather than, say, an average that included the several (unprofitable) years prior to the alleged harm event. The trial court also was concerned about Ms. Cardell's inability to articulate industry standards relating to the concept of "economic impact" and to the proper treatment of owner draws.

In addition to these points, the trial court commented several times about Ms. Cardell's June 2021 normalizing adjustments, which negatively affected its opinion of Ms. Cardell's reliability. Essentially, the court did not understand why it had taken Ms. Cardell

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so long to notice the errors. The court discussed these adjustments when considering the Daubert factors relating to a methodology's error rate and to whether the field of expertise claimed by the expert is known to reach reliable results for the type of opinion the expert would give.

Based on its application of the Daubert-Rochkind factors, the trial court excluded Ms. Cardell's testimony, leading to summary judgment in favor of KatzAbosch because PNSI could not prove damages.

PNSI appealed, and the Appellate Court of Maryland^[2] held that the circuit court abused its discretion in finding Ms. Cardell's methodology unreliable. As to the 2015 baseline choice, the Appellate Court agreed with PNSI that the choice was a question of data (and thus a factual question for the jury) rather than of methodology. With respect to the normalizing adjustments, the Appellate Court said that Daubert's "error rate" factor must be understood as the rate of unknown errors in the methodology employed, not as an "error correction rate," or else courts would create incentives against experts disclosing and explaining errors they made. The intermediate appellate court reversed the trial court's exclusion of Ms. Cardell's expert testimony and remanded for consistent proceedings. KatzAbosch petitioned this Court for further review.

As we explain more fully below, the choice or calculation of the inputs to a methodology can be a part of the methodology itself, and we reject an unduly rigid dividing

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line between "data" and "methodology" that binds courts to admit methodologically questionable analyses cloaked as data. To the extent the trial court considered how Ms. Cardell's choice of data, assumptions, and other inputs affected the reliability of her methodology, the trial court's Daubert-Rochkind analysis was proper. However, the trial court erred in its consideration of the normalizing adjustments as reflecting on the reliability of Ms. Cardell's methodology, as opposed to the credibility (or reliability) of Ms. Cardell herself. After a careful review of the record, we determine that the fair and prudent course of action at this point is to remand the case to the circuit court to decide whether to admit or exclude Ms. Cardell's testimony without consideration of the June 2021 normalizing adjustments as reflecting on the reliability of Ms. Cardell's methodology.

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Background A. Facts

During the period relevant to this case, PNSI was a Western Maryland and Pennsylvania mixed medical practice that diagnosed, managed, and treated disorders of the brain, spine, and peripheral nervous system. It employed neurosurgeons, interventional and non-interventional pain physicians, neurologists, physicians' assistants, and support staff. The practice had operated since 1998. Beginning in 2011, PNSI expanded, hiring more physicians and support staff. These efforts caused PNSI to spend more on salaries and build-out expenses without offsetting revenue. At the end of 2014, the practice had nine member-owners, all physicians.

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1. The Engagement of KatzAbosch

None of these members, however, were accounting or finance experts. In early 2013, PNSI's long-time accountant advised PNSI that the practice had outgrown his firm's services and recommended that the practice retain a new accounting firm to help guide PNSI through its growth and expansion process. So PNSI began searching for a firm that specialized in medical practice accounting and finance. In October 2013, PNSI retained KatzAbosch to provide tax, accounting, and financial advice and services, as well as to provide "expert business and financial guidance and direction to help PNSI continue to grow its practice." The engagement included analyzing PNSI's general ledger and financial statements, making recommendations concerning PNSI's financial affairs, and designing and administering a new member compensation model. Mr. Rapson (chair of KatzAbosch's Medical Services Group) was responsible for the account.

PNSI's 2012 Operating Agreement provided the compensation terms for its member-physicians. First, each member was to maintain a capital account on the books of the practice, with a minimum balance that PNSI's Board of Managers (the "Board") would determine annually. Second, members were to be paid a monthly "draw" (determined by the Board) at the start of each year - in essence a form of salary. Third, revenue received by the practice for hospital and trauma calls would be distributed to the member who had taken the call, with PNSI functioning as a pass-through entity. These pass-through payments, along with the monthly draws, comprised "guaranteed payments" to the members. Finally, each quarter, the Board would distribute any excess cash flow ("distributions") in proportion to each member's ownership stake.

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In early 2014, KatzAbosch designed and proposed a new compensation model, and PNSI adopted it. According to PNSI, KatzAbosch's model did not reserve funds for known build-out-related expenses concerning one of PNSI's locations that would be coming due later that year as well as other significant expenses. PNSI alleges that, despite these expenses coming due, KatzAbosch directed PNSI to make almost $1 million in quarterly distributions to members between July and October 2014.

2. Termination of KatzAbosch and the Departure of Most of PNSI's Members

PNSI alleges that, as a result of KatzAbosch's erroneous advice, PNSI almost ran out of money by the end of 2014. According to PNSI, the practice had to use over $660,000 from its line of credit in the fourth quarter of 2014 alone. In January 2015, KatzAbosch disclosed to PNSI its precarious financial situation. While PNSI had had almost $1 million in cash on hand at the start of 2014, it had less than $40,000 by the start of 2015. PNSI terminated KatzAbosch's services in the spring of 2015.

The practice then began to come apart. PNSI alleges that members - who had personally guaranteed loans the practice had taken - were increasingly distressed...