Economic Damages Expert Witness held to Employ Valid Methodology for Computing Lost Licensing Profits

Economic Damages Expert Witness held to Employ Valid Methodology for Computing Lost Licensing Profits

Plaintiff Brand Design Company, Inc., d/b/a House Industries (“House”), a design studio and typeface foundry is in the business of developing and marketing proprietary fonts. House accused Defendant Rite Aid Corporation of appropriating one of these proprietary fonts and its corresponding font software—Neutraface—in the pharmacy chain’s rebranding effort, with the assistance of Defendants GA Communications, Inc., d/b/a PureRED Creative, LLC (“PureRED”), Burns Group, NYC, LLC (“Burns Group”), and Sway Creative Labs, LLC (“Sway”) (collectively, “Defendants”), violating licensing agreements that prohibited them from using Neutraface for this purpose in this breach of contract, unfair competition, and unjust enrichment lawsuit. House alleged that Defendants obtained access to Neutraface by purchasing a “standard form ‘desktop’ license” from House. House contended that certain uses of the Licensed Software and Fonts and glyphs generated were expressly prohibited.

House hired Graham D. Rogers, an economic consultant, to identify damages resulting from Defendants’ alleged actions. His report calculated damages in two general categories: (1) actual damages sustained by House, and (2) disgorgement of each Defendants’ profits.

Defendants Burns Group and PureRED filed a Daubert motion to exclude the testimony of Rogers. The parties also sought to seal various portions of Rogers’ report and their Daubert motion briefing.

Economic Damages Expert Witnesses

Graham D. Rogers’ professional career spans more than 35 years. For more than 25 of these years, Rogers has been assisting clients with their intellectual property needs. He has been retained as an expert to determine economic damages in a variety of litigation matters including patent infringement, trademark infringement, theft of trade secrets, and copyright infringement disputes. He has quantified economic damages that include the calculation of lost profits, the determination of reasonable royalties including hypothetical negotiation scenarios, the quantification of unjust enrichment, the identification and quantification of actual damages for both trademark and trade secret matters, and the assessment of the economic value of intellectual property. Rogers has testified in several federal jurisdictions as well as various state courts.

Discussion by the Court

While calculating actual damages sustained by House, Rogers explained in his report that the “commonly accepted remedy of actual damages” in a licensing dispute is “lost profits in the form of lost licensing profits”—in other words, the value of the hypothetical license that Defendants were obligated to, but did not, obtain.

In order to determine the value of this hypothetical license, Rogers utilized the methodology set forth in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y. 1970) which listed evidentiary factors which helped determine a reasonable royalty for a patent license, such as “the rates paid by the licensee for the use of other patents comparable to the patent in suit”; “the commercial relationship between the licensor and licensee”; “the duration of the patent and the term of the license”; and “the extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.” Roger stated that this methodology provided helpful guidance to experts and the parties when determining a hypothetical license value in non-patent license disputes before concluding that “House [would be] in a strong bargaining position during the hypothetical negotiation” with Defendants. And, extrapolating from prior licensing agreements negotiated by House considering those factors, he ultimately concluded that the total lost profit from Defendants’ hypothetical license was approximately $7.5 million.

In the alternative, Rogers utilized the “income approach,” to calculate the lost profits if Defendants had sought to purchase (rather than license) House’s font—something his report acknowledged “is not common practice in the industry.” The “income approach,” values an intangible asset based on the present value of the future income streams expected from the asset under consideration. Rogers testified that following hypothetical negotiations, Defendants would have agreed to purchase, and House would have agreed to sell, Neutraface for approximately $7.7 million.

With regards to disgorgement of profits, Rogers’ report aimed to identify the percentage of Defendants’ revenue that could be reasonably attributed to their improper use of Neutraface. As to the advertising agencies, he opined that their “profits were directly tied to either their alleged breach of the licensing agreements or alleged unjust enrichment.” After totaling the invoices related to the Rite Aid rebranding, and offsetting this sum by his estimation of deductible costs, Rogers concluded that the profit subject to disgorgement from PureRED, Burns Group, and Sway was approximately $6 million, $775,000, and $41,000, respectively.

Both Burns Group and PureRED challenged the fit of Rogers’ expert opinions, arguing (albeit for somewhat different reasons) that his report would not assist the trier of fact. PureRED objected to Rogers computing House’s lost licensing profits by evaluating a hypothetical negotiation between House and Rite Aid, rather than a hypothetical negotiation between House and the other Defendants because it rendered the opinions in his report irrelevant as to any damages caused by PureRED’s alleged breach of contract. Rogers responded by stating that his damages’ estimate reflected the lost value of a license that would have been utilized by all four Defendants to this action, not just the damages resulting from Rite Aid’s own alleged breach of contract.

The Court observed that even though PureRED attacked Rogers’ views about the likelihood of a sublicense, as well as his conclusion that an analysis of a hypothetical negotiation between House and Rite Aid accurately incorporates the damages that are attributable to the other Defendants, such disagreements went to the correctness of Rogers’ opinions making it a question for the trier of fact to decide when the expert is subjected to cross-examination.

Second and relatedly, PureRED argued that Rogers’ testimony would be unhelpful to a jury citing his failure to connect his damages estimate to the specific actions of each Defendant. By way of background, Pennsylvania requires Plaintiffs claiming breach of contract to “show a causal connection between the breach and the loss” to recover damages. PureRED contended that Rogers did not provide any evidence that the alleged damages were
proximately caused by PureRED’s alleged wrongful act. The Court held that the burden of establishing causation lies with House as part of its case-in-chief— not with the expert it hired to opine on damages. In other words, even if Rogers’ report was entirely silent with regards to causation, that would still not be a basis to exclude his testimony.

Rogers’ report relied on an assumption about causation that if Rite Aid would have obtained a single Neutraface license that could have also been utilized by its advertising agencies, it would make all four Defendants jointly liable for the lost value of that license. Thus, as his report put it, “Lost Licensing Profits would encompass all Defendants.” The Court held that an assumption about causation was not an objective fact, and Rogers was not allowed to present it as such in his trial testimony. But even if Rogers relied on an assumption about causation as a starting point, it was not a basis to exclude his conclusions.

Third, Burns Group attacked Rogers’ opinions concerning House’s lost opportunity to sell Neutraface. It did not object to the methodology itself—i.e., Rogers’ “income approach” for valuing an intangible asset—but rather homed in on the caveat that selling fonts “was not a common practice in the industry and that in the normal course of business House would not sell Neutraface.” Thus, Burns Group argues, because Rogers’ opinions regarding lost opportunity to sell damages were premised on an admittedly improbable scenario, they qualified for exclusion on account of their lack of bearing on this dispute. But again, the Court held that it is axiomatic that “a qualified expert may answer hypothetical questions.” And that is exactly what Rogers’ report did. The credibility of this scenario as a realistic measure of damages in this case is a question for the trier of fact.

Finally, both PureRED and Burns Group sought to exclude Rogers’ opinions regarding profits subject to disgorgement, highlighting significant gaps in his accounting of the income and expenses associated with the Rite Aid rebranding efforts in his report. But during discovery, House’s interrogatories specifically requested that each Defendant disclose all payments made by Rite Aid to each agency in connection with the New Rite Aid Logo or Rite Aid’s Rebranding and as Rogers’ report explained, he based his calculations on the records Defendants provided in their responses. The Court held that Defendants had every opportunity to examine discrepancies between Rogers’ opinions and these records as they sought to undermine his credibility at trial. But, particularly since Defendants were specifically asked to produce a complete accounting of their profits, the Court dismissed their complaints about Rogers’ report’s alleged failure to reflect documents that were not made a part of the record.

Burns Group also challenged the reliability of Rogers’ testimony. The question of “reliability” goes to the reliability of an expert’s methods. Courts must assess whether a particular methodology is scientifically valid, considering factors like whether it “has been subjected to peer review and publication, the frequency by which the methodology leads to erroneous results, the existence and maintenance of standards controlling the technique’s operation, and whether the methodology has been generally accepted in the scientific community.” As with the question of fit, the proponent of expert testimony bears the ultimate burden of establishing its reliability by a preponderance of evidence. With regards to House’s alleged lost licensing profits, Burns Group first objected to Rogers utilizing the Georgia-Pacific framework, arguing that that case involved a claim for patent infringement, not breach of contract.

The Court held that regardless of the change in context, the measure of damages in Georgia-Pacific—i.e., the value of a hypothetical license that “the parties would have agreed upon, if both were reasonably trying to reach an agreement,” was precisely the same as the “lost licensing profits” Rogers sought to estimate. Burns Group never explained why that case’s methodology for determining the value of such a hypothetical license was an inappropriate tool for the question Rogers was attempting to answer, nor did it cite any authority for its claim that the Georgia-Pacific factors were unreliable considerations outside patent royalty disputes. Next, Burns Group attacked how Rogers evaluated and weighted several of the Georgia-Pacific factors, arguing that his analysis relied on “nonsensical” assumptions, improper analogies, and ultimately produced a “grossly inflated” damages estimate. The Court observed that  its briefing spends considerable time setting fire to straw men, casting doubt on opinions that Rogers did not actually render. It was established that Rogers’ report included an estimation of profits associated with Neutraface (as part of his computation of profits subject to disgorgement) despite the Burns Group contending that Rogers “made no attempt to isolate the profit associated with the Neutraface font” while evaluating the thirteenth GeorgiaPacific factor (“The portion of the realizable profit that should be credited to the [font] as distinguished from [non-font] elements, the manufacturing process, business risks, or significant features or improvements added by the infringer”)

As for the opinions that Rogers did offer, Burns Group did not sufficiently demonstrate that Rogers’ conclusions regarding the Georgia-Pacific factors methods were erroneous or otherwise unreliable. At most, it demonstrated that reasonable experts might disagree regarding some of his assumptions. For example, when evaluating the first Georgia-Pacific factor (“The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty”), Rogers identified a license negotiated between House and Baskin-Robbins as “a starting point for assessing a likely licensing fee between House and Rite Aid.” An expert hired by Burns Group, in contrast, opined that the “desktop licenses” actually obtained by several Defendants in this case were a more reasonable starting assumption. The Court held that this kind of battle-of-the-experts constituted a quintessential example of a dispute that a Daubert motion could not resolve.

Burns Group alleged that Rogers’ followed “speculative and unreliable” methods to calculate Defendants’ profits subject to disgorgement since the company “had no profits” and that Rogers “overstated the profitability of Burns.” The Court once again held it to be a a dispute of fact, not an issue of reliability under Daubert. And while Burns Group further claimed that Rogers “failed to consider the impact of the relationship between Burns and Rite Aid on Burns’ profits,” it offered no explanation for why this supposed omission affected the reliability of Rogers’ expert opinions.

PureRED briefly argued that Rogers’ testimony must be excluded because its probative value was substantially outweighed by a danger of unfair prejudice as per the Federal Rule of Evidence 403. The Court observed that the only explanation it offered for why this evidence would be unfairly prejudicial was that “Rogers’ opinions on actual damages were solely based on considerations relating to Rite Aid, not PureRED. The Court held that it fell well short of the threshold for excluding evidence under Rule 403.

The parties had also moved to seal portions of their Daubert briefing and accompanying exhibits. House had sought leave to redact the portions of the parties’ Daubert briefing and its attachments (including Rogers’ report) containing three categories of information: (1) information regarding House’s proprietary pricing structure; (2) details of confidential contract terms and negotiations with non-parties; and, (3) details regarding House’s historical revenues. As its motion explained, public disclosure of this information would have caused House to suffer a competitive disadvantage in the marketplace by undermining its negotiating position in future licensing ventures. In addition, and for much the same reason, Burns Group and PureRED had sought redactions relating to non-public financial data of each Defendant, such as their historic revenues. The Court, having reviewed the documents in question and the parties’ proposed redactions, had agreed that release of this information had the strong potential to result in financial injury, warranting its sealing.

In addition to its proposed redactions to the parties’ briefing, PureRED had also moved to seal Rogers’ report in its entirety, arguing that it contained “specific confidential data.” The Court had noted that PureRED offered no explanation for why sealing Rogers’ report in toto (as opposed to redacting portions of it) was necessary to prevent a clearly defined and serious injury and had denied that portion of PureRED’s motion.


The Defendants’ motions to exclude the testimony of Graham D. Rogers was denied, and the parties’ respective motions to seal was granted in part and
denied in part.

Key Takeaways:

In the case, key takeaways regarding expert testimony included the necessity for experts to provide relevant and helpful opinions to the trier of fact, with disagreements over the correctness of the expert’s opinions typically considered issues for the trier of fact to resolve rather than grounds for exclusion. The burden of establishing causation rested with the Plaintiff, not with the expert hired to opine on damages, requiring transparency regarding any assumptions about causation and precluding the presentation of such assumptions as objective facts. Courts assessed the reliability of an expert’s methodology by considering factors such as peer review, frequency of erroneous results, maintenance of standards, and acceptance in the relevant scientific community, with disagreements about methodology typically resolved through cross-examination and presentation of opposing expert testimony. Experts were permitted to calculate profits subject to disgorgement based on available records provided by Defendants during discovery, with challenges to the accuracy or completeness of such calculations addressed through cross-examination. Arguments that the probative value of expert testimony was outweighed by the danger of unfair prejudice under Rule 403 of the Federal Rules of Evidence required meeting a high threshold for exclusion, with mere differences in opinion regarding relevance or scope generally insufficient to warrant exclusion under Rule 403.

Case Details:

Case Caption:Brand Design Company, Inc. V. Rite Aid Corporation Et Al
Docket Number:2:22cv1174
Court:United States District Court, Pennsylvania Eastern
Citation:2024 U.S. Dist. LEXIS 26344
Order Date:February 14, 2024