PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the attorneys and client representatives identified herein. Any unauthorized disclosure, distribution, or copying of this memorandum is strictly prohibited.
MEMORANDUM
TO: Priya Anand, Partner, Calderwood & Harkness LLP Simone Laroche, Senior Associate, Calderwood & Harkness LLP
FROM: Jeffrey Park, Associate, Calderwood & Harkness LLP
DATE: April 20, 2023
RE: Analysis of Cardinal Peak's Expert Report — Dr. Theodore Voss, Pinnacle Economics Group LLC (dated April 12, 2023)
MATTER: Cardinal Peak Industries v. Nexford Industrial Holdings Inc., Case No. 2022-L-008471, Circuit Court of Cook County, Illinois, County Department, Law Division
C&H MATTER NO.: 1005-00005
CLIENT: Nexford Industrial Holdings Inc.
I. Executive Summary
The purpose of this memorandum is to analyze and critique the expert report submitted by Dr. Theodore Voss of Pinnacle Economics Group LLC (1900 Sixteenth Street, Suite 400, Denver, CO 80202) on behalf of plaintiff Cardinal Peak Industries, dated April 12, 2023 (the "Voss Report"). Dr. Voss was retained by Cardinal Peak to opine on the damages allegedly sustained as a result of Nexford Industrial Holdings Inc.'s ("Nexford" or the "Client") refusal to pay certain raw-material surcharges invoiced under the parties' Master Supply Agreement ("MSA").
Dr. Voss concludes that Cardinal Peak is owed total damages of $5.11 million, consisting of $4.73 million in unpaid surcharges and $0.38 million in prejudgment interest calculated at the Illinois statutory rate. Dr. Voss characterizes the full $4.73 million as liquidated and undisputed amounts due under the MSA, and he treats the prejudgment interest as a straightforward statutory entitlement flowing from Nexford's nonpayment.
Having carefully reviewed the Voss Report, the underlying MSA, the relevant deposition transcripts, the discovery record, and Dr. Anita Rosenthal's rebuttal report dated March 15, 2023 on behalf of Nexford, this memorandum identifies several critical methodological flaws, data-source errors, and contractual misinterpretations that fundamentally undermine Dr. Voss's conclusions. The principal deficiencies are as follows:
• Dr. Voss relies on Cardinal Peak's internal "blended cost" metric for raw-material inputs rather than the published indices specified in Exhibit C to the MSA — a deviation that results in an overstatement of approximately $1.47 million.
• Dr. Voss entirely ignores the 15-business-day Surcharge Notice delivery requirement under Section 7.4(a) of the MSA, failing to account for the fact that 7 of the 14 disputed months had late Surcharge Notices, representing approximately $2.18 million in surcharges that were improperly noticed.
• Dr. Voss fails to apply the 12% surcharge cap under Section 7.4(c) of the MSA, ignoring approximately $1.08 million in surcharge amounts that exceeded the contractual ceiling without the required prior written consent of the Buyer.
• As a result of the inflated principal, Dr. Voss's prejudgment interest calculation of $0.38 million is necessarily overstated.
• Dr. Voss improperly characterizes Nexford's partial payments of $1.68 million as an implicit acknowledgment that all surcharges are valid, a characterization that is both legally and factually unfounded.
These flaws align precisely with the three principal defense categories previously identified in our initial case assessment and confirmed in Dr. Rosenthal's rebuttal report: (1) late Surcharge Notices, (2) deviation from the Exhibit C methodology, and (3) surcharge cap exceedances. The Voss Report does not address, or even acknowledge, any of these defenses.
Overall Conclusion: Dr. Voss's report is unreliable and substantially overstates Cardinal Peak's damages. When the contractually mandated methodology is properly applied, the notice requirements are enforced, and the surcharge cap is respected, Nexford's maximum additional exposure remains at most $0.21 million beyond the $1.68 million already paid — a total maximum valid obligation of $1.89 million, compared to Cardinal Peak's claimed $5.11 million. The Voss Report is vulnerable to challenge both on evidentiary grounds (Illinois Rule 702 / Daubert) and on the merits at mediation or trial.
II. Background and Procedural Context
A. The Expert Reports
The parties have exchanged damages expert reports as part of the discovery phase of this litigation, which has been ongoing from approximately December 2022 through April 2023. The relevant reports are as follows:
Dr. Anita Rosenthal of Meridian Bridge Consulting LLC (311 South Michigan Avenue, Suite 1500, Chicago, IL 60604) submitted Nexford's damages rebuttal expert report on March 15, 2023 (the "Rosenthal Report"). Dr. Rosenthal, a forensic economist with extensive experience in commercial supply agreement disputes, was retained by Calderwood & Harkness on behalf of Nexford to analyze the surcharge calculations at issue and to quantify Nexford's maximum exposure under the MSA. Her report provides a month-by-month analysis of each of the 14 disputed months and applies the contractually mandated indices and surcharge cap to arrive at her conclusions.
Dr. Theodore Voss of Pinnacle Economics Group LLC submitted Cardinal Peak's damages report on April 12, 2023 (the "Voss Report"). Dr. Voss is presented as an expert in industrial supply chain economics and commercial damages quantification. His report purports to calculate the total surcharges owed by Nexford and arrives at a total claimed damages figure of $5.11 million.
Both reports were exchanged pursuant to the discovery schedule established by the Court. The deadline for expert depositions has not yet passed, and supplemental expert reports may be submitted within the timeframes permitted by the Court's scheduling order.
B. The Underlying Dispute
The underlying dispute arises from the Master Supply Agreement, designated as MSA-NIH-CPI-2020-001, executed on January 15, 2020 between Nexford Industrial Holdings Inc., as Buyer, and Cardinal Peak Industries, as Seller. The MSA governs the purchase and sale of hot-rolled coil ("HRC") and cold-rolled coil ("CRC") steel products for use in Nexford's manufacturing operations.
The principal commercial terms of the MSA relevant to this dispute are as follows:
• Term: Three (3) years, commencing January 15, 2020 and expiring January 14, 2023, with automatic renewal for successive one-year periods unless either party provides written notice of termination at least 180 days prior to the expiration of the then-current term.
• Base Pricing: HRC at $620 per ton; CRC at $740 per ton. These are the 2020 base prices, subject to quarterly adjustment per Section 7.2 of the MSA, which provides for base price recalibration based on market benchmarks.
• Estimated Annual Volume: Approximately 18,000 tons of HRC and 6,500 tons of CRC, for a total estimated annual volume of approximately 24,500 tons per year.
• Estimated Annual Spend: Approximately $15.97 million per year, consisting of approximately $11.16 million in HRC purchases and approximately $4.81 million in CRC purchases.
The disputed period encompasses surcharges invoiced for the months of March 2021 through May 2022, a span of 14 months. It is important to note that the surcharge for April 2021 was paid in full by Nexford and is excluded from the disputed period; accordingly, only 14 of the 15 months in this timeframe are at issue. During the disputed period:
• Total surcharges invoiced by Cardinal Peak: $6.41 million
• Amount paid by Nexford: $1.68 million
• Cardinal Peak's claimed unpaid amount: $4.73 million ($6.41 million minus $1.68 million)
Cardinal Peak filed this lawsuit on or about August 2022, asserting claims for breach of contract (Count 1) and unjust enrichment (Count 2), seeking recovery of the $4.73 million in allegedly unpaid surcharges plus prejudgment interest, attorneys' fees, and costs. Nexford has answered and asserted affirmative defenses based on Cardinal Peak's failure to comply with the MSA's surcharge provisions.
C. Key MSA Provisions
The following MSA provisions are central to the analysis of Dr. Voss's report and to Nexford's defenses:
Section 7.4 (Surcharge Clause): This section governs the mechanism by which the Seller may pass through documented raw-material surcharges — specifically for scrap, energy, and alloy cost increases — to the Buyer. The right to impose surcharges is subject to two express conditions:
(a) The Seller must deliver a Surcharge Notice with supporting documentation to the Buyer no later than 15 business days after the end of the applicable month in which the surcharge-triggering costs were incurred; and
(b) The surcharge components must be calculated in accordance with the methodology set forth in Exhibit C to the MSA.
These two conditions are not merely procedural formalities; they are substantive prerequisites to the Seller's right to collect surcharges. The 15-business-day notice requirement ensures that the Buyer receives timely information to verify and, if necessary, dispute the surcharge. The Exhibit C methodology requirement ensures that surcharges are calculated on the basis of objective, publicly available data rather than the Seller's subjective internal cost experience.
Exhibit C (Surcharge Methodology): Exhibit C prescribes a specific methodology for calculating raw-material surcharges. Under this methodology:
• Surcharges are calculated using the published Ferrous Scrap Index (as reported by Drayton Partners LLC ("SPI")) and the Industrial Energy Cost Index.
• The contractual baseline scrap cost is $340 per ton, and the contractual baseline energy cost is $48 per ton.
• The surcharge for any given month is determined by the difference between the published index values for that month and the contractual baselines, applied to the tonnage of product actually delivered during the month.
The use of published indices is a deliberate contractual choice. Published indices provide an objective, verifiable benchmark that both parties can independently confirm. This eliminates the risk that one party's internal cost accounting — which may reflect idiosyncratic purchasing decisions, hedging strategies, or operational inefficiencies — will distort the surcharge calculation.
Section 7.4(c) (Cap Provision): This provision imposes a ceiling on the aggregate monthly surcharge:
The aggregate monthly surcharge may not exceed 12% of the applicable Base Price for the relevant product category without the prior written consent of the Buyer.
For the products at issue in this dispute, the caps are:
• HRC: 12% of $620/ton = $74.40 per ton
• CRC: 12% of $740/ton = $88.80 per ton
The cap provision serves a critical risk-allocation function: it ensures that the Buyer's cost exposure is bounded and predictable, even in periods of rapid raw-material price escalation. The requirement of prior written consent for any exceedance means that the Buyer must affirmatively agree to bear costs above the cap — silence or inaction does not constitute consent.
Section 7.4(d) (Dispute Procedure): The MSA provides a structured mechanism for disputing surcharges:
The Buyer must notify the Seller of any disputed surcharge within 30 calendar days of receipt of the Surcharge Notice. If the dispute is not resolved through good-faith negotiations between the parties' designated representatives, it is escalated to senior officers of each party for resolution. If senior officers are unable to resolve the dispute, it proceeds to mediation under Section 14.3 of the MSA.
The dispute procedure further underscores the importance of timely Surcharge Notices under Section 7.4(a): the Buyer's 30-day dispute window is triggered by receipt of the Surcharge Notice, and a late notice disrupts the entire contractual mechanism for surcharge verification and dispute resolution.
III. Overview of Dr. Voss's Report
A. Summary of Dr. Voss's Conclusions
Dr. Voss's report reaches the following principal conclusions:
1. Total claimed damages: $5.11 million, consisting of:
• Principal unpaid surcharges: $4.73 million (representing the difference between the $6.41 million invoiced by Cardinal Peak during the disputed period and the $1.68 million paid by Nexford).
• Prejudgment interest: $0.38 million, calculated at the Illinois statutory rate of 5% per annum from the date each surcharge invoice became due through the date of the report.
2. Dr. Voss characterizes the full $4.73 million as liquidated and undisputed amounts due under the MSA. He treats each of Cardinal Peak's surcharge invoices as establishing an unconditional payment obligation on the part of Nexford, without qualification or reduction.
3. Dr. Voss calculates prejudgment interest on each monthly surcharge from the date the corresponding invoice became due under the MSA's payment terms (net 45 days from date of invoice), applying the Illinois statutory rate on a simple-interest basis through April 12, 2023.
4. Dr. Voss opines that Nexford's partial payments of $1.68 million constitute an acknowledgment of Cardinal Peak's entitlement to surcharges generally. He reasons that by paying some surcharges, Nexford has implicitly conceded the validity of the surcharge mechanism and cannot now contest the remaining amounts. This is a significant — and, as discussed below, unsupportable — interpretive leap.
B. Methodology Employed by Dr. Voss
Dr. Voss purports to reconstruct the surcharge amounts owed by Nexford on a month-by-month basis for each of the 14 disputed months. His methodology, as described in Sections III through V and Appendix B of his report, proceeds as follows:
First, Dr. Voss identifies the total tonnage of HRC and CRC delivered by Cardinal Peak to Nexford in each month of the disputed period. This tonnage data appears to be drawn from Cardinal Peak's shipping records and corresponding invoices, and it does not appear to be in dispute.
Second, Dr. Voss calculates the raw-material surcharge applicable to each month's deliveries. Here, however, Dr. Voss departs from the methodology prescribed by Exhibit C. Rather than using the published Ferrous Scrap Index (as reported by Platts/SPI) and the Industrial Energy Cost Index to determine the surcharge-triggering cost increase, Dr. Voss relies entirely on Cardinal Peak's internal "blended cost" metric for raw-material input costs. The blended cost metric reflects Cardinal Peak's actual weighted-average procurement costs across all of its scrap and energy sources, including sources and contracts that are not contemplated by the Exhibit C methodology.
Third, Dr. Voss multiplies the per-ton surcharge (as derived from the blended cost metric) by the tonnage delivered in each month to arrive at the total monthly surcharge. He then compares this amount to the payments actually made by Nexford and treats the difference as the unpaid balance.
Critically, Dr. Voss's methodology exhibits the following omissions:
• He does not independently verify his surcharge calculations against the published Ferrous Scrap Index or the Industrial Energy Cost Index — the indices that Exhibit C expressly designates as the basis for surcharge computation.
• He does not address the 15-business-day Surcharge Notice delivery requirement under Section 7.4(a) of the MSA, and he makes no effort to determine whether Cardinal Peak's Surcharge Notices were timely delivered for any of the 14 disputed months.
• He does not analyze or account for the 12% surcharge cap under Section 7.4(c) of the MSA, and he does not test whether any of the monthly surcharges exceeded the contractual ceiling.
• He treats Cardinal Peak's invoiced surcharge amounts as prima facie correct and does not subject them to any independent analytical scrutiny.
In essence, Dr. Voss's methodology consists of accepting Cardinal Peak's own numbers at face value, aggregating them, and presenting the total as the damages figure. The report lacks the independent analysis and contractual grounding that would be expected of a reliable expert damages opinion.
C. Data Sources Cited by Dr. Voss
Dr. Voss identifies the following data sources in Section II and Appendix A of his report:
• Cardinal Peak's internal cost accounting records and surcharge calculation worksheets. These are the documents from which Dr. Voss derives the "blended cost" figures used in his surcharge calculations. They reflect Cardinal Peak's actual procurement costs and are not reconciled to published indices.
• Invoices issued by Cardinal Peak to Nexford during the disputed period. Dr. Voss relies on these invoices as evidence of the surcharge amounts billed and as the starting point for his unpaid-balance calculation.
• Nexford's payment records. These records confirm that Nexford paid $1.68 million in surcharges during the disputed period. Dr. Voss does not dispute this figure.
• Testimony and documents produced in discovery. Dr. Voss references certain deposition testimony and document productions in general terms but does not engage with the substance of testimony that contradicts his assumptions — most notably, the Gunderson deposition testimony regarding Cardinal Peak's use of a blended cost approach rather than the published indices.
Notably absent from Dr. Voss's data sources are the published Ferrous Scrap Index data and the Industrial Energy Cost Index data that Exhibit C designates as the primary inputs for surcharge calculations. Dr. Voss does not cite these indices as primary inputs, does not use them in his calculations, and does not explain why he chose to rely on Cardinal Peak's internal data instead. This omission is not a minor oversight; it goes to the very foundation of his damages methodology.
IV. Detailed Critique of Dr. Voss's Methodology
A. Flaw #1: Reliance on Cardinal Peak's Internal "Blended Cost" Metric Rather Than Contractually Mandated Published Indices
1. The Contractual Requirement
As discussed in Section II.C above, Exhibit C to the MSA prescribes a specific and unambiguous methodology for calculating raw-material surcharges. Under that methodology, surcharges are to be calculated using two published indices: the Ferrous Scrap Index, as reported by Drayton Partners LLC ("SPI"), and the Industrial Energy Cost Index. These indices are publicly available, independently verifiable, and widely recognized in the steel industry as authoritative benchmarks for raw-material and energy costs.
Exhibit C further establishes contractual baselines against which surcharge-triggering cost increases are measured:
• Baseline scrap cost: $340 per ton
• Baseline energy cost: $48 per ton
The surcharge for any given month is calculated by determining the difference between the published index value for that month and the applicable contractual baseline, and then applying that difference to the tonnage of product delivered during the month. This is a straightforward, objective, and replicable methodology that both parties negotiated and agreed to at the time the MSA was executed.
The parties' choice to anchor surcharge calculations to published indices was intentional and commercially significant. Published indices eliminate the information asymmetry that would exist if one party — here, the Seller — were permitted to unilaterally determine the cost basis for surcharges using its own internal data. The Buyer has no ability to audit or verify the Seller's internal procurement costs in real time, but it can readily verify published index values. Exhibit C was designed to provide transparency, predictability, and an objective basis for surcharge calculations.
2. Dr. Voss's Approach
Rather than applying the methodology prescribed by Exhibit C, Dr. Voss relies entirely on Cardinal Peak's internal "blended cost" metric for raw-material input costs. The blended cost metric, as described in Cardinal Peak's internal cost accounting records produced in discovery, represents a weighted-average cost calculated across multiple scrap sources and energy contracts — including non-standard scrap sources (such as prime industrial scrap and specialty alloy scrap) and premium energy contracts (such as peak-load electricity supply agreements) that are not contemplated by the Exhibit C methodology.
The blended cost metric is, by its nature, an internal, proprietary figure that reflects Cardinal Peak's specific purchasing decisions, supplier relationships, and operational circumstances. It is not tied to any published index, and it cannot be independently verified by the Buyer without full access to Cardinal Peak's procurement records.
Dr. Voss does not acknowledge the deviation between his chosen data source and the methodology prescribed by Exhibit C. His report does not contain any analysis of whether the use of a blended cost metric is permissible under the MSA, nor does it offer any contractual interpretation to justify substituting internal data for published indices. The deviation is simply presented as though it were unremarkable.
This omission is particularly significant in light of the deposition testimony of Cardinal Peak's own VP, Sales & Commercial, Natalie Gunderson. In her deposition on January 18, 2023, Ms. Gunderson acknowledged that Cardinal Peak used an internal blended cost approach to calculate surcharges rather than the published indices specified in Exhibit C. When questioned about this discrepancy, Ms. Gunderson stated that Cardinal Peak's finance team had determined that the blended cost approach was "more representative" of Cardinal Peak's actual cost experience, but she did not identify any contractual provision authorizing the substitution. This testimony is directly relevant to the reliability of Dr. Voss's methodology, yet Dr. Voss does not address it.
3. Impact on Damages Calculation
The deviation from Exhibit C methodology has a significant quantitative impact on the damages calculation. Per Dr. Rosenthal's rebuttal report (at pages 18–24 and Appendix D), the use of Cardinal Peak's blended cost metric rather than the published indices results in an overstatement of approximately $1.47 million over the 14 disputed months.
This overstatement arises because Cardinal Peak's blended cost systematically exceeded published index values during the disputed period. The reason for the discrepancy is straightforward: Cardinal Peak's blended cost includes costs from non-standard scrap sources (which carry premium pricing relative to the benchmark ferrous scrap reflected in the Platts/SPI index) and premium energy contracts (which carry higher per-unit costs than the average industrial energy costs reflected in the Industrial Energy Cost Index). These premium procurement choices were Cardinal Peak's own business decisions; they are not costs that the MSA — through Exhibit C — allocated to Nexford.
If surcharges are recalculated using the contractually mandated published indices, a significant portion of the claimed $4.73 million in unpaid surcharges is simply unsupported. The blended cost metric inflates the per-ton surcharge in virtually every disputed month, and the cumulative effect over 14 months is substantial.
4. Implications for Reliability
Dr. Voss's failure to use the correct data inputs fundamentally undermines the reliability of his entire damages model. The starting point for any expert damages analysis in a contract dispute is the contract itself. An expert who purports to calculate damages under a contract but does not apply the contract's own methodology cannot reliably opine on the amounts owed under that contract. The expert's opinion is, in effect, answering the wrong question: it tells us what Cardinal Peak's internal costs were, not what Cardinal Peak was contractually entitled to recover.
This deficiency has potential implications for the admissibility of Dr. Voss's testimony. Under Illinois Rule 702 and the Daubert reliability framework (as adopted in Illinois), expert testimony must be based on sufficient facts or data, be the product of reliable principles and methods, and reflect a reliable application of those principles and methods to the facts of the case. An expert who substitutes a party's self-serving internal data for the objectively verifiable methodology specified in the governing contract fails the "fit" requirement — his methodology does not fit the legal and factual framework of the dispute. We discuss this further in Section VI below.
B. Flaw #2: Failure to Account for Late Surcharge Notices Under Section 7.4(a)
1. The Contractual Requirement
Section 7.4(a) of the MSA imposes a clear and unequivocal deadline for the delivery of Surcharge Notices:
The Seller must deliver a Surcharge Notice, together with supporting documentation sufficient to permit the Buyer to verify the surcharge calculation, no later than 15 business days after the end of the applicable month in which the surcharge-triggering costs were incurred.
This deadline is not merely a scheduling convenience. It serves several important contractual functions. First, it ensures that the Buyer receives timely notice of cost increases so that it can plan its own operations and budget accordingly. Second, it provides the Buyer with a defined window within which to review and, if necessary, dispute the surcharge under Section 7.4(d). Third, it imposes discipline on the Seller's internal processes, requiring the Seller to calculate and document surcharges promptly after the close of each month.
The 15-business-day notice requirement is properly understood as a condition precedent to the Seller's right to collect surcharges. If the Seller fails to deliver a timely Surcharge Notice, the right to collect the surcharge for that month is forfeited — unless the Buyer expressly waives the deadline, which Nexford has never done. This interpretation is consistent with the structure of Section 7.4, which makes the Seller's surcharge right expressly contingent on compliance with the delivery requirement ("provided" that Seller delivers the notice within the specified timeframe).
Furthermore, the relationship between Section 7.4(a) and Section 7.4(d) reinforces the significance of timely notice. The Buyer's 30-calendar-day dispute window under Section 7.4(d) is triggered by receipt of the Surcharge Notice. A late Surcharge Notice disrupts the entire contractual timing mechanism: it compresses the Buyer's review period, may overlap with subsequent months' surcharge notices, and creates confusion about the applicable dispute deadlines. The parties clearly intended for the surcharge process to operate on a predictable, sequential timeline, and late notices undermine that structure.
2. Evidence of Late Notices
The discovery record and deposition testimony establish that 7 of the 14 disputed months had Surcharge Notices that were delivered after the 15-business-day deadline. This finding is based on a detailed analysis of the delivery dates for each Surcharge Notice, as documented in Cardinal Peak's own records and confirmed through Nexford's correspondence files.
The surcharge amounts associated with these 7 late-notice months total approximately $2.18 million. These are not borderline cases of notices delivered one or two days late; in several instances, the Surcharge Notices were delivered weeks or even months after the contractual deadline.
Ms. Gunderson acknowledged the delays in her January 18, 2023 deposition, attributing them to internal staffing issues and system transitions at Cardinal Peak. Specifically, Ms. Gunderson testified that Cardinal Peak experienced significant turnover in its finance department during 2021 and was simultaneously migrating to a new ERP system, both of which disrupted its ability to generate and deliver Surcharge Notices on a timely basis. While these explanations may be understandable from an operational perspective, they do not excuse non-compliance with a contractual deadline that is framed as a condition precedent. Cardinal Peak's internal staffing challenges and system transitions are not risks that the MSA allocates to the Buyer.
The surcharge invoice analysis prepared by our team — which catalogs all 14 disputed months, identifies the applicable 15-business-day deadline for each month, documents the actual delivery date of each Surcharge Notice, and calculates the number of business days by which each late notice exceeded the deadline — provides a comprehensive evidentiary foundation for this defense. This analysis has been reviewed and confirmed by Dr. Rosenthal and is incorporated into her rebuttal report at Appendix C.
3. Dr. Voss's Treatment
Dr. Voss's report makes no reference whatsoever to the timeliness of Cardinal Peak's Surcharge Notices. The report does not acknowledge Section 7.4(a)'s 15-business-day delivery requirement, does not analyze whether Cardinal Peak complied with that requirement for any of the 14 disputed months, and does not distinguish between months for which timely notices were delivered and months for which they were not.
Instead, Dr. Voss treats all 14 months of surcharges as equally valid and enforceable. He aggregates the surcharge amounts for all 14 months into a single damages figure without any adjustment for late notices. This approach implicitly assumes — without analysis or justification — that the notice deadline is either irrelevant to Cardinal Peak's right to collect surcharges or was waived by Nexford.
Neither assumption is supportable. The notice deadline is expressly stated in the MSA as a condition of the Seller's surcharge right, and Nexford has never waived it. To the contrary, Nexford consistently disputed late notices through contemporaneous correspondence and formal objections, as documented in the record.
By failing to account for the 7 late-notice months, Dr. Voss's damages calculation is inflated by approximately $2.18 million.
4. Legal Significance
Under Illinois law, compliance with contractual notice provisions is generally treated as a condition precedent to the exercise of contractual rights. Where a contract expressly conditions one party's right on timely notice, the failure to provide timely notice forfeits that right unless the other party has waived the requirement. See our research memorandum dated September 8, 2022 (analyzing Illinois surcharge pass-through provisions and contract interpretation, including the doctrines of waiver and condition precedent), which reviews the relevant Illinois authorities in detail.
The key legal principles, as set forth in that memorandum, are as follows:
• A condition precedent must be strictly complied with unless the beneficiary of the condition waives it, either expressly or through conduct inconsistent with an intent to enforce it.
• Waiver requires knowledge of the right and an intentional relinquishment of that right. Mere inaction or silence is generally insufficient to establish waiver of a contractual condition, particularly where the party has otherwise communicated its objection to noncompliance.
• Nexford's conduct is inconsistent with waiver: it consistently disputed late notices, raised the timeliness issue in correspondence with Cardinal Peak, and refused to pay surcharges for months in which the Surcharge Notice was untimely.
Accordingly, the surcharges associated with the 7 late-notice months — totaling approximately $2.18 million — should be excluded from any damages calculation. Dr. Voss's failure to address this issue is a critical omission that renders his damages opinion unreliable.
C. Flaw #3: Failure to Account for the 12% Surcharge Cap Under Section 7.4(c)
1. The Contractual Requirement
Section 7.4(c) of the MSA imposes a ceiling on the aggregate monthly surcharge that the Seller may charge without the Buyer's prior written consent:
The aggregate monthly surcharge for any product category shall not exceed 12% of the applicable Base Price for that product category without the prior written consent of the Buyer.
Applying this cap to the base prices established in the MSA yields the following per-ton ceilings:
The cap provision requires prior written consent for any exceedance. This is a specific and deliberate contractual requirement — not mere notice, not verbal agreement, but prior written consent from the Buyer. The use of the word "prior" means that consent must be obtained before the surcharge is invoiced, not after the fact. The requirement of written form ensures a clear evidentiary record and prevents disputes about whether oral consent was given.
The cap provision reflects a fundamental allocation of risk between the parties. In a volatile raw-material environment, surcharges can escalate rapidly and unpredictably. The 12% cap ensures that the Buyer's exposure is bounded to a known percentage of the base price, providing cost certainty for the Buyer's own manufacturing operations and downstream pricing. If the Seller's raw-material costs increase beyond the cap, the excess is borne by the Seller unless the Buyer affirmatively agrees in writing to share in the additional cost.
2. Evidence of Cap Exceedances
A review of Cardinal Peak's surcharge invoices for the 14 disputed months reveals that 4 of the 14 months had surcharges that exceeded the 12% cap. The excess above the 12% cap across these 4 months totals approximately $1.08 million.
The discovery record contains no evidence of prior written consent from Nexford for any surcharge exceedance during the disputed period. No emails, letters, memoranda, or other written communications from Nexford authorizing surcharges in excess of the 12% cap have been identified in the document productions.
This is confirmed by the deposition testimony of Russell Okonkwo, Nexford's VP, Procurement. In his deposition on February 7, 2023, Mr. Okonkwo testified unequivocally that Nexford never authorized surcharges above the 12% cap:
"At no point did Nexford — whether through my office, the finance team, or any other department — provide written consent for Cardinal Peak to invoice surcharges in excess of the twelve-percent cap. That cap was a negotiated term of the MSA, and we considered it a firm ceiling."
Mr. Okonkwo further testified that when Cardinal Peak invoiced surcharges exceeding the cap, Nexford's procurement team flagged the overages and communicated its objections to Cardinal Peak through its standard dispute process.
3. Dr. Voss's Treatment
Dr. Voss does not mention the 12% cap provision anywhere in his report. He does not cite Section 7.4(c) of the MSA, does not test whether any monthly surcharge exceeded the contractual ceiling, and does not address the absence of written consent from Nexford. His report proceeds as though the cap provision does not exist.
This omission is difficult to understand. The cap provision is a material term of the MSA that directly limits the surcharge amounts the Seller may recover. Any competent damages analysis under this contract must account for the cap; an analysis that ignores it is necessarily incomplete.
By failing to apply the 12% cap, Dr. Voss's damages calculation includes approximately $1.08 million in surcharge amounts that exceed the contractual ceiling and are not recoverable under the MSA.
4. Legal Significance
Cap provisions in commercial supply agreements are enforceable under Illinois commercial law and are routinely upheld by Illinois courts. The cap operates as a ceiling that cannot be exceeded without the affirmative written consent specified in the contract. Amounts invoiced above the cap without the required consent are simply not recoverable — they represent surcharges that the Seller had no contractual right to impose.
The requirement of prior written consent further strengthens Nexford's position. Even if Cardinal Peak could argue that informal discussions or course-of-dealing somehow modified the cap, the MSA's express requirement of written consent creates a high bar for any such argument. And here, the evidence is unambiguous: no written consent was ever provided, and Nexford's VP of Procurement has testified under oath to that effect.
D. Flaw #4: Overstatement of Prejudgment Interest
1. Dr. Voss's Prejudgment Interest Calculation
Dr. Voss claims prejudgment interest of $0.38 million as a component of Cardinal Peak's total damages. He calculates this interest by applying the Illinois statutory rate of 5% per annum on a simple-interest basis from the date each surcharge invoice became due (net 45 days from the invoice date) through April 12, 2023, the date of his report.
Dr. Voss's interest calculation assumes that the full $4.73 million in claimed unpaid surcharges is the proper principal from which interest accrues. He does not provide any alternative interest calculations based on a reduced principal amount, nor does he discuss the possibility that some portion of the claimed surcharges may not be recoverable.
2. Critique. Prejudgment interest under Illinois law accrues only on amounts that are actually owed. If the principal amount is overstated — as we have demonstrated it is — then the prejudgment interest calculation is necessarily flawed as well. The interest component is derivative of the principal; it cannot be calculated reliably if the underlying principal is wrong.
Given the defenses that reduce or eliminate the claimed surcharge amounts, the proper interest base is dramatically smaller than the $4.73 million assumed by Dr. Voss:
It must be noted that there is overlap among these three categories — some months are affected by more than one defense. However, even accounting for overlap, the net effect is to reduce the valid unpaid surcharge amount to, at most, $0.21 million beyond the $1.68 million already paid by Nexford.
If the maximum additional obligation is $0.21 million, then the prejudgment interest on that amount would be de minimis — on the order of a few thousand dollars at most, depending on the applicable accrual period. This stands in stark contrast to Dr. Voss's claimed $0.38 million.
Furthermore, Dr. Voss does not provide an alternative interest calculation for any reduced principal amount. A reliable expert report should, at minimum, present sensitivity analyses or alternative scenarios reflecting the possibility that not all claimed surcharges are recoverable. The absence of any such analysis further undermines the reliability and usefulness of his prejudgment interest opinion.
Additionally, to the extent Cardinal Peak pursues its unjust enrichment claim (Count 2 of the Complaint), prejudgment interest on that claim would not automatically accrue at the contractual rate or even at the statutory rate applicable to contract claims. Unjust enrichment is an equitable remedy, and the availability and rate of prejudgment interest in that context is subject to the court's discretion. Dr. Voss does not address this distinction.
E. Flaw #5: Unsupported Assumption That Partial Payments Constitute Acknowledgment
In Section VI of his report, Dr. Voss advances the argument that Nexford's partial payments of $1.68 million during the disputed period constitute an implicit acknowledgment that all surcharges invoiced by Cardinal Peak are valid and owed. Dr. Voss reasons that by paying some surcharges, Nexford has conceded the validity of the surcharge mechanism as a whole and cannot now selectively contest the remaining amounts.
This characterization is both legally and factually incorrect.
Factually, the $1.68 million paid by Nexford does not represent an indiscriminate acceptance of Cardinal Peak's surcharge invoices. To the contrary, Nexford's procurement and finance teams undertook a careful month-by-month analysis of each Surcharge Notice received from Cardinal Peak and paid only those surcharges that met all three contractual requirements: (a) the Surcharge Notice was delivered within the 15-business-day deadline; (b) the surcharge was properly calculated using the Exhibit C methodology (i.e., based on published indices, not Cardinal Peak's blended cost); and (c) the surcharge amount did not exceed the 12% cap. The $1.68 million represents the surcharges that passed all three tests. The remaining amounts were disputed and rejected precisely because they failed one or more of these conditions.
Nexford's dispute notices, correspondence, and formal objections — all of which are part of the discovery record — demonstrate a consistent and affirmative assertion of Nexford's contractual rights. Nexford did not passively accept surcharge invoices and simply fail to pay; it actively reviewed each invoice, identified the specific grounds for objection, and communicated those objections to Cardinal Peak in writing. This is the opposite of acquiescence.
Legally, partial payment on accepted amounts does not operate as a waiver of objections to disputed amounts under Illinois law. A party that pays the undisputed portion of a claim while expressly reserving its rights as to the disputed portion does not thereby concede the validity of the disputed amounts. Illinois courts have consistently held that partial payment, accompanied by contemporaneous objection, does not constitute an admission or waiver. Dr. Voss's suggestion to the contrary is unsupported by any legal authority cited in his report — indeed, he cites no legal authority at all for this proposition — and should be rejected.
V. Comparison with Dr. Rosenthal's Rebuttal Report
A. Methodological Differences
The differences between Dr. Rosenthal's methodology and Dr. Voss's methodology are stark and go to the core of each expert's analytical approach.
Data inputs. Dr. Rosenthal used the published Ferrous Scrap Index (as reported by Platts/SPI) and the Industrial Energy Cost Index as the primary data inputs for her surcharge calculations — consistent with the methodology prescribed by Exhibit C to the MSA. Dr. Voss, as discussed in detail in Section IV.A above, used Cardinal Peak's internal "blended cost" metric, which is not the methodology prescribed by Exhibit C.
Granularity of analysis. Dr. Rosenthal analyzed each of the 14 disputed months individually, examining the surcharge calculation, the timeliness of the Surcharge Notice, and the applicability of the 12% cap for each month separately. This month-by-month approach allowed her to categorize each month according to the applicable defense(s) and to quantify the impact of each defense with precision. Dr. Voss, by contrast, treated the 14 months in the aggregate, summing Cardinal Peak's invoiced surcharges without differentiating among months based on notice compliance, methodology adherence, or cap applicability.
Notice compliance. Dr. Rosenthal independently verified the delivery dates of each Surcharge Notice against the 15-business-day deadline prescribed by Section 7.4(a). She identified 7 months with late notices and quantified the surcharge amounts associated with those months. Dr. Voss did not address notice compliance at all.
Cap analysis. Dr. Rosenthal applied the 12% surcharge cap under Section 7.4(c) to each month's surcharge and identified 4 months in which the invoiced surcharges exceeded the cap. She quantified the excess and confirmed the absence of written consent from Nexford. Dr. Voss did not mention the cap or test for exceedances.
B. Summary of Dr. Rosenthal's Conclusions
Dr. Rosenthal's analysis, as set forth in her March 15, 2023 rebuttal report, reaches the following conclusions:
Dr. Rosenthal notes, and we concur, that there is overlap among these three categories. Some months are affected by more than one defense — for example, a month may have had both a late Surcharge Notice and a surcharge calculated using the blended cost metric that exceeded the 12% cap. The overlap means that the individual defense amounts cannot simply be summed to determine the total reduction. Dr. Rosenthal's report accounts for this overlap and arrives at a net conclusion that incorporates all three defenses simultaneously.
After applying all defenses and accounting for overlap, Dr. Rosenthal concludes that Nexford's maximum additional obligation is $0.21 million beyond the $1.68 million already paid. This yields a total maximum valid surcharge obligation of:
$1.68 million (already paid) + $0.21 million (additional) = $1.89 million
This figure stands in contrast to Dr. Voss's claimed $5.11 million — a difference of $3.22 million, or approximately 63%.
C. Contrast in Reliability
The contrast between the two expert reports is significant on the question of reliability. Dr. Rosenthal applies the contract's own methodology — the published indices, the notice requirements, the cap — to arrive at her conclusions. Her approach is grounded in the terms of the MSA and uses independently verifiable data sources. Dr. Voss substitutes Cardinal Peak's internal data for the contractually specified indices, ignores material contractual provisions (the notice deadline and the cap), and treats the plaintiff's invoiced amounts as inherently correct.
From the perspective of Illinois evidentiary standards for expert testimony, Dr. Rosenthal's approach is substantially more likely to withstand scrutiny. Her methodology "fits" the contractual framework, her data sources are objective and verifiable, and her analysis is comprehensive. Dr. Voss's approach, by contrast, raises serious questions about both the reliability of his methodology and the sufficiency of his analysis of the contract's terms.
VI. Potential Grounds to Challenge Admissibility of Dr. Voss's Report
A. Illinois Rule 702 / *Daubert* Considerations
Illinois courts, following the adoption of the Daubert framework, evaluate expert testimony for both reliability and relevance (or "fit"). Under Illinois Rule 702, an expert's opinion must be based on sufficient facts or data, must be the product of reliable principles and methods, and must reflect a reliable application of those principles and methods to the facts of the case. Several aspects of Dr. Voss's report raise concerns under this standard:
Methodology does not "fit" the contractual framework. Dr. Voss purports to calculate damages arising from Nexford's alleged breach of the MSA, yet he does not follow the MSA's own surcharge methodology. His damages model answers a different question — "What did Cardinal Peak's raw-material costs actually increase?" — rather than the relevant question: "What surcharges was Cardinal Peak contractually entitled to charge under the MSA?" An expert opinion that does not address the right question lacks the requisite "fit" and is inadmissible under Daubert.
Failure to account for material contractual provisions. Dr. Voss's omission of the notice requirements under Section 7.4(a) and the surcharge cap under Section 7.4(c) renders his opinion incomplete. A damages opinion that ignores contractual provisions that limit or eliminate the plaintiff's recovery is not a reliable opinion — it is an advocacy document dressed in expert clothing. The court should not be asked to credit a damages figure that was calculated without regard to the contract's own limitations.
Reliance on a party's self-serving internal data without independent verification. An expert who relies exclusively on data provided by the retaining party, without independently verifying that data against objective external sources, undermines the objectivity that expert testimony is supposed to provide. Dr. Voss's uncritical acceptance of Cardinal Peak's blended cost figures and invoiced surcharge amounts — without any reconciliation to published indices or independent audit — raises serious questions about the independence and reliability of his analysis.
B. Recommended Motion Practice
Based on the foregoing analysis, we have several options for challenging Dr. Voss's report:
1. Motion in limine or *Daubert* motion to exclude Dr. Voss's report. We could file a motion seeking to exclude Dr. Voss's expert report and testimony in its entirety, or in the alternative, to limit his testimony to those aspects of his analysis that are methodologically sound (which, in practice, may be a very narrow scope). The grounds for the motion would focus on the failure to apply the Exhibit C methodology, the omission of the notice and cap defenses, and the reliance on Cardinal Peak's self-serving internal data. This motion would be supported by a detailed brief and could be accompanied by a declaration from Dr. Rosenthal explaining the methodological deficiencies.
2. Exploitation on cross-examination. Alternatively, or in addition, the flaws in Dr. Voss's report can be exploited effectively on cross-examination at trial. Dr. Voss's inability to explain why he did not use the published indices, his failure to address the notice deadline and cap provisions, and his reliance on Cardinal Peak's own data all present powerful cross-examination opportunities. In some circumstances, it may be strategically preferable to allow Dr. Voss to testify and then dismantle his opinions on the stand, rather than moving for exclusion and risking that the court allows a curative supplemental report.
3. Presentation at mediation. If this matter proceeds to mediation before or in lieu of trial, the critique of Dr. Voss's methodology can be presented to the mediator as a powerful tool for undermining Cardinal Peak's damages position. A mediator who understands the weaknesses in Cardinal Peak's expert's report will be better positioned to facilitate a realistic settlement discussion.
We recommend discussing with Priya Anand whether to pursue a formal exclusion motion, reserve the critique for mediation and trial, or pursue some combination of these approaches. The decision will depend in part on the Court's scheduling order, the status of mediation discussions, and strategic considerations regarding the timing and impact of our challenge.
VII. Implications for Settlement and Mediation Strategy
Dr. Voss's report is the cornerstone of Cardinal Peak's damages case. Without a credible expert opinion supporting the $5.11 million (or even the $4.73 million principal), Cardinal Peak's ability to sustain its claims through trial or to negotiate a favorable settlement is severely compromised. Demonstrating the flaws in Dr. Voss's methodology — and the corresponding reliability of Dr. Rosenthal's analysis — significantly weakens Cardinal Peak's negotiating position.
At mediation (whether already scheduled or anticipated), Nexford should present a detailed critique of Dr. Voss's methodology alongside Dr. Rosenthal's independent analysis. The presentation should be structured to walk the mediator through each of the three principal defenses — late notices, methodology deviation, and cap exceedances — and to show how each defense reduces the claimed damages. Visual aids, including side-by-side comparisons of Dr. Voss's and Dr. Rosenthal's month-by-month calculations, would be particularly effective.
The gap between Dr. Voss's $5.11 million total claim and Nexford's position that the maximum additional obligation is $0.21 million provides substantial room for a favorable settlement. Even if the mediator or the court were to discount one or more of Nexford's defenses, the remaining defenses would still dramatically reduce Cardinal Peak's recovery. This multi-layered defense posture gives Nexford significant leverage in settlement discussions.
From Cardinal Peak's perspective, the litigation risk is substantial. If any one of the three principal defenses is sustained — late notices, methodology deviation, or cap exceedances — Cardinal Peak's recovery drops well below the $4.73 million claimed by Dr. Voss. If all three defenses are sustained, the recovery is negligible. Cardinal Peak's counsel is presumably aware of these risks, and the weakness of their expert's analysis should make them more receptive to a reasonable settlement.