In a recent legal battle between Mo Pow and Crypto, the spotlight has fallen sharply on expert testimony, specifically the lost profits analysis provided by Mo Pow 4’s expert, David A. Hall. This case, fundamentally about two failed digital currency mining agreements, has turned into a fascinating examination of expert witness reliability and the challenges to their methodologies.
Firstly, to set the stage, the Court initially found breaches of contract by both parties and requested further expert opinions to quantify damages. Mo Pow 4 subsequently engaged Hall, who presented a report claiming $5,374,000 in lost profits. However, Crypto immediately raised concerns, focusing on Hall’s decision to use Odessa, Texas, as the hosting site for his calculations, rather than Strafford, Missouri, as stipulated in the second agreement.
Consequently, Crypto filed a motion to strike Hall’s opinions, arguing that this substitution was a deliberate attempt to inflate damages, and further claimed that Hall’s methodology was unreliable, based on undisclosed documents, and failed to account for crucial contractual terms. Conversely, Mo Pow 4 contended that Crypto was merely challenging Hall’s assumptions, not his methodology, and asserted their right to relocate the mining site.
Accounting Expert Witness
David Hall is a Managing Director with Alvarez & Marsal Disputes and Investigations in Denver. He has more than 30 years of experience providing expert consulting and testimony services to clients on accounting, economic, financial and damages issues.
Hall earned a bachelor’s degree from the University of Michigan and an MBA (highest honors) from the University of Texas at Austin. A Certified Management Accountant (CMA), Certified Valuation Analyst (CVA) and a Certified Fraud Examiner (CFE), he is also a member of the Institute of Management Accountants, the National Association of Certified Valuators and Analysts, the National Contract Management Association and the Association of Certified Fraud Examiners.
Crypto’s primary objection centered on Hall’s use of Odessa, Texas, as the location for calculating lost profits, instead of Strafford, Missouri, as specified in the second agreement. They argued that this substitution was a deliberate attempt to inflate the lost profits figure, implying that the Texas site was chosen precisely because it would yield a higher damage calculation. In essence, they accused Hall of manipulating his analysis to favor Mo Pow 4. Crypto broadly claimed that Hall’s entire calculation was based on an unreliable methodology.
This objection encompassed concerns about the assumptions Hall made, the variables he included or excluded, and the overall approach he took to calculating lost profits. Further, Crypto asserted that Hall relied on documents and information related to the Texas site that were not timely disclosed during the discovery process, arguing that this constituted a violation of discovery rules and prejudiced their ability to effectively challenge Hall’s opinions. Finally, Crypto argued that Hall’s opinions failed to consider various terms of the Second Agreement, additional costs, and rate variances that would significantly impact his calculations, pointing to specific omissions, such as the use of inappropriate electrical rates, failure to account for “uptime” variations, and neglecting adverse market conditions.
Plaintiff’s Counterarguments
In opposition, Mo Pow 4 countered that Crypto’s objections were fundamentally challenges to the assumptions and variables that Hall chose to consider, rather than to the underlying methodology itself. They argued that Hall’s use of the AICPA-approved incremental profit method was sound, and that Crypto’s concerns were simply disagreements about the inputs used in that method. Mo Pow 4 asserted that they had the authority to unilaterally relocate the cryptocurrency mining site to Texas after Crypto failed to perform under the Second Agreement, providing an explanation as to why the relocation would have occured, and that even though the notice was not sent, it was still a valid assumption.
Mo Pow 4 explained that the documents in question did not become relevant until Hall performed his expert work, which occurred after the initial discovery period. They also pointed to the fact that the Court had reopened expert discovery, and that they provided the documents as soon as possible, arguing that their supplemental disclosure was substantially justified, given the circumstances and the Court’s prior orders. Finally, Mo Pow 4 argued that many of Crypto’s concerns, such as the use of specific electrical rates and the omission of certain variables, were matters of weight that could be addressed through cross-examination, rather than grounds for excluding Hall’s testimony altogether, emphasizing that the Court’s role as a gatekeeper was not to determine the accuracy of Hall’s opinions, but rather to ensure that his methodology was reliable.
Analysis
The Court found Hall’s expert report to meet the reliability standards of Rule 702, despite the challenges raised by Crypto. Thus, while the use of the Texas site and other assumptions were subject to scrutiny, they did not render the report fundamentally unreliable. Therefore, the Court emphasized that vigorous cross-examination and the presentation of contrary evidence were the appropriate remedies for any perceived weaknesses in the expert testimony.
Since the motion was referred to a magistrate judge, a final determination was not made as to whether Mo Pow’s supplemental disclosures were substantially justified or harmless out of an abundance of caution, and only a recommendation was provided to the assigned district court judge. The magistrate judge recommended that the Court find Mo Pow’s failure to provide certain documents Hall relied upon in his report until after his report issued, was substantially justified.
Held
The Court found that Mo Pow’s expert, Mr. David A. Hall, and the opinions presented in his expert report, met the requirements of Federal Rule of Civil Procedure 26(a)(2)(B) and Federal Rule of Evidence 702. Moreover, the magistrate judge recommended that the presiding judge determine that Mo Pow’s failure to provide certain documents relied upon by Hall to support his lost profits damage opinion until after the close of discovery had been substantially justified.
Key Takeaway:
The Court, acting as a gatekeeper under federal rules, found Hall’s qualifications and methodology met reliability standards, distinguishing between disputed assumptions affecting evidence weight and fundamental flaws impacting admissibility. Ultimately, the Court emphasized that vigorous cross-examination, rather than exclusion, was the appropriate remedy for perceived weaknesses in the expert’s analysis.
Polypack sued Nestlé for breach of contract and breach of implied covenant of good faith, claiming Nestlé failed to make final payments for equipment and service fees. Nestlé counterclaimed, alleging defective equipment and failure to meet performance requirements, resulting in significant financial losses, including lost profits, additional labor costs, and storage fees.
Nestlé retained David R. Tantlinger, Jr., a Certified Public Accountant (CPA), to provide expert testimony on the damages incurred due to Polypack’s alleged equipment failures. Polypack challenged Tantlinger’s qualifications, the reliability of his methodologies, and the relevance of his opinions, seeking to exclude his testimony.
Accounting Expert Witness
David R. Tantlinger, Jr. has been a CPA for 39 years and is “experienced in performing accounting services, including forensic accounting services and the computation of damages to commercial and other enterprises.”
He has experience in accounting, taxation, finance and business management with a variety of industries.
Polypack argued that Nestlé failed to adequately define Tantlinger’s specific field of expertise. They claimed this lack of clarity made it impossible to properly assess his qualifications, suggesting Nestlé was trying to pass off company information as expert opinion.
Nestlé asserted that they clearly identified Tantlinger as an expert on damages. They emphasized his long-standing experience as a CPA and his specific experience in forensic accounting and damages calculations. They also pointed out that Polypack had the opportunity to question Tantlinger’s qualifications during his deposition.
The Court found Tantlinger qualified, noting his 39 years as a CPA and experience in forensic accounting and damages computation. The Court also noted that Polypack had opportunity to question the expert at deposition, and failed to do so.
Reliability
Polypack’s Objection
Polypack attacked the reliability of Tantlinger’s methodologies. They alleged he:
Failed to identify or apply established methodologies for calculating lost profits.
Did not conduct independent research or analysis.
Ignored other potential causation factors that could have contributed to Nestlé’s losses.
Nestlé’s Opposition:
Providing detailed explanations of his calculations, demonstrating that they were not arbitrary.
Stating that damages experts are allowed to rely on information provided by the client.
Arguing that questions about other potential causes of losses go to the weight of the evidence, not its admissibility.
Court Observation:
The Court rejected Polypack’s arguments, emphasizing that Tantlinger explained his calculations and that a damages expert can rely on client-provided data. The Court stated that questioning the causation factors goes to the weight of the evidence, not its admissibility.
Relevancy:
Polypack argued that many of Tantlinger’s calculations were simple mathematical operations that required no specialized expertise. They contended that his testimony would not “assist the trier of fact” because it was within the understanding of a layperson.
Nestlé acknowledged that some calculations were mathematical but emphasized that Tantlinger’s work involved extensive data analysis, document review, and the application of accounting principles. They argued that this level of analysis went beyond the capabilities of a layperson and would assist the jury.
Tantlinger calculated Nestlé’s total damages—including lost profits and plow-down costs resulting from production delays allegedly caused by the equipment, which are clearly beyond simple arithmetic. While acknowledging that simple math is not typically considered expert testimony, the Court found that Tantlinger’s analysis of extensive data and complex calculations, including lost profits, made his testimony helpful to the jury. Tantlinger compiled and analyzed a large amount of data to perform the challenged calculations.
Held
The Court denied the Plaintiff Polypack, Inc.’s motion to exclude Nestlé USA, Inc.’s expert witness David R. Tantlinger, Jr.
Key Takeaway:
This case serves as a valuable example of the challenges involved in admitting expert testimony. The Court’s meticulous application of the Daubert standard and Rule 702 highlights the importance of thorough preparation and clear articulation of expert opinions. This case also shows the importance of proper deposition preparation, and how those depositions can be used in motions to exclude expert witnesses.
In early 2015, Plaintiffs, US Thrillrides, LLC (“USTR”) and Polercoaster, LLC began discussions with Defendant, Intamin Amusement Rides Int. Corp. Est. about partnering to build Polercoasters for Plaintiffs’ customers. The “Polercoaster” is “a roller coaster that is supported or suspended from a vertical tower instead of moving along a horizontal track.”
This case arises from a project to build a roller coaster at the Dubai Hills Mall. The developer of the Dubai Project, Emaar Entertainment LLC, originally entered into a Letter of Acceptance (“LOA”) agreement with Plaintiff US Thrillrides LLC (“USTR”) relating to the Dubai Project. However, Emaar ultimately terminated that agreement and contracted with Defendant to build a different roller coaster.
Basically, Plaintiffs filed claim for breach of the Confidentiality Non-Disclosure Agreement (“CNDA”) insofar as it is based on unauthorized use of Plaintiffs’ copyrights by Defendant and Plaintiff Polercoaster LLC’s (“Polercoaster”) copyright infringement claim.
Defendant filed a motion to exclude the testimony of Plaintiffs’ damages expert, Eric Lee while Plaintiff filed a motion to exclude the testimony of Defendant’s expert, Dr. Keith Ugone.
Accounting Expert Witness
Eric Lee is a financial and fraud expert with over 20 years of experience. He is a Certified Fraud Examiner (CFE) and Certified Insolvency and Restructuring Advisor (CIRA) and has a bachelor of science degree in accounting from Arizona State University.
Also, Lee has spent the last 15+ years in litigation, forensic and bankruptcy consulting, including the quantification of complex financial damages, lost profits, class action litigation, fraud investigations, reconstruction of financial records, corporate internal investigations, funds tracing, and other financial analyses.
Dr. Keith R. Ugone has provided economic and damages consulting services in antitrust cases, breach of contract cases, business interruption cases, class action certification matters, employment / loss of earnings cases, intellectual property cases, lender liability cases, professional negligence cases, and securities-related cases, among others.
Moreover, he specializes in the application of economic principles to complex business disputes and generally is retained in cases requiring economic analyses and/or damages-related analyses.
Plaintiffs’ claims are based on the breach of the CNDA due to unauthorized use of copyrights and copyright infringement. Lee’s expert opinions relate to actual damages, which are recoverable for both causes of action.
As is typical with damages expert opinions, Lee assumed that Plaintiffs will prevail on their substantive claims and that Plaintiffs are entitled to an award of actual damages. With those assumptions in place, Lee calculated the amount of damages that he opined would be appropriate.
Basically, Lee calculated two types of damages: (1) lost profits from consulting fees and royalty fees that Plaintiffs would have earned had the LOA not been terminated and their participation in the Dubai Project been completed; and (2) a reasonable royalty for the misappropriation of Plaintiffs’ intellectual property.
Lost Profits
Plaintiffs have not and cannot prove that Defendant caused the termination of the LOA or the end of Plaintiffs’ involvement in the Dubai Project. Multiple representatives involved in the decision to terminate Emaar’s relationship with Plaintiffs made clear that they would have chosen to have no roller coaster at the Dubai Hills Mall before they would have continued their relationship with Plaintiffs.
Therefore, the Court held that Lee’s opinions as to the amount of lost profits—i.e., the unpaid consulting fees and royalty contemplated under the LOA—will be excluded because Plaintiffs are not entitled to an award of such damages.
Reasonable Royalty
Lee’s opinions involve the calculation of a reasonable royalty for all of the intellectual property, confidential information, and trade secrets that Plaintiffs alleged were misappropriated or infringed in this case combined.
However, Lee did not break down the analysis by type of intellectual property or information. As relevant here, Lee’s opinions did not allocate a reasonable royalty to the use of Plaintiffs’ copyrights, specifically.
Without any basis to parse the damages allocated to copyright infringement—as opposed to patents, trade secrets, or confidential information which are no longer at issue—Lee’s opinions would only serve to confuse the jury.
The Court held that Lee’s opinions regarding the reasonable royalty, which do not allocate a royalty based on Plaintiffs’ copyrights specifically, must be excluded.
Keith Ugone
Plaintiffs sought to exclude the expert testimony of Defendant’s expert, Dr. Keith Ugone. As indicated by Defendant, Ugone is purely a rebuttal expert, offering a critique of Lee’s damages opinions. Because Lee’s opinions are being excluded, the Court held that Ugone’s opinions are no longer relevant and will also be excluded.
Held
The Court granted Defendant’s motion to exclude the testimony of Eric Lee.
2. The Court granted Plaintiffs’ motion to exclude Keith Ugone’s Testimony.
Key Takeaway:
To begin with, an expert’s offered opinion and the facts of the case must be an appropriate fit. There is no fit where a large analytical leap must be made between the facts and the opinion.
The Court excluded Lee’s opinions regarding the reasonable royalty because there is simply no “fit” between the facts remaining at issue in this case and the opinions rendered.
Please refer to the blog previously published about this case:
Plaintiffs, Angelique L. Lingard and Sudarien D. Smith brought this proposed consumer class action on behalf of themselves and other military servicemembers who are similarly situated against Defendants Holiday Inn Club Vacations, Inc. f/k/a Orange Lake Country Club, Inc. (“HICV”) for alleged violations of the Military Lending Act.
Plaintiffs and the proposed class members purchased timeshare interests from Defendants. Defendants are in the business of selling timeshare plans to consumers throughout the United States. These plans give their owners’ points, which allow them to stay at Holiday Inn Club Vacation Resorts throughout the United States, stay at out-of-network resorts around the world, and buy airline tickets, cruises, rental cars, and other vacation services. Plaintiffs alleged that Defendants’ timeshare contracts violate the MLA. Specifically, Plaintiffs alleged that their and proposed class members’ contracts contain mandatory arbitration, class action waiver, and jury trial waiver provisions in violation of the Act. For these alleged violations, Plaintiffs, on behalf of themselves and the class, sought an order declaring the contracts void from inception and awarding actual damages.
MLA Class: All persons who have entered into Timeshare Purchase Agreements to purchase one or more timeshare interests in the Orange Lake Revocable Trust, in substantially the same form as Exhibit C, after February 24, 2018[,] and who were identified as an active duty servicemember or a dependent within a [Department of Defense (DoD)] Man[p]ower database on the contract date. Default Subclass: All members of the MLA Class whose accounts are or were delinquent as evidenced by [Holiday Inn Club Vacations (HICV)] imposing a “use restriction” on their timeshare interest for nonpayment.
Defendants relied on the report of its expert, Paul Habibi, in its response in opposition to Plaintiffs’ motion for class certification. In rebuttal to Defendants’ expert, Plaintiffs disclosed Dr. Christopher Young and sought to rely upon his report to refute Habibi’s report. The parties sought to exclude each other’s proposed experts.
Economics Expert Witness
Christopher Young, Ph.D., MBA, MAFF, CVA is a professor of business ethics in the Department of Management and Global Business and a research fellow at Rutgers’ Institute for Ethical Leadership. His research focus is in the area of forensic economics, legal and business ethics. He holds a Ph.D. and M.B.A. in global political economy, finance, and accounting from Rutgers University.
Young is a nationally recognized testifying expert and writer in the field of economics, finance and business ethics. He has testified in state and federal courts, with respect to economics, financial policy, and business ethics matters. He has been invited to speak at many government and industry trade organizations. In addition to his academic career, Young has more than twenty-five years of experience in corporate finance, strategy, business ethics, and economic analysis. Outside of the University, he manages various research and consulting projects through his company, Red Maple Economics.
Paul Habibi is the owner of a real estate expert services firm. He is also a senior continuing lecturer at the University of California Los Angeles Schools of Management and Law, where he teaches in the areas of real estate, finance, and accounting. He holds a Master of Business Administration and is a licensed realtor, broker, and certified public accountant. Habibi teaches a course on timeshares for the MBA program at UCLA. He also teaches a course on business skills for lawyers, which covers business valuations and economic damages.
A full Daubert analysis is only required at the class certification stage “when an expert’s report or testimony is critical to class certification.”
The Court held that Young’s report is not critical to the its determination of whether to certify the proposed class because Plaintiffs have not heavily relied upon it for class certification. Indeed, Plaintiffs only refer to Young’s report in one sentence related to the manageability requirement for class certification under Federal Rule of Civil Procedure 23(b)(3)(D).
Plaintiffs sought to rely upon Young’s report to rebut Defendants’ expert’s opinion on the issue of class certification. Defendants have moved to exclude Young’s report on two grounds. Defendants contended that Young’s report was untimely disclosed and lacked reliability under Daubert.
Late Disclosure
The case management and scheduling order expressly stated that Plaintiffs’ deadline for disclosing class action expert reports was March 26, 2024. According to Defendants, Plaintiffs did not identify any expert or serve any expert report on that date. Instead, Defendants asserted that Plaintiffs disclosed Young’s identity and report on May 28, 2024, the day that class discovery closed.
The crux of Young’s opinion is that a common methodology can be used to estimate the offset owed to Holiday Inn from the proposed class members who used their timeshare points.
Although Plaintiffs recited the substantially justified or harmless standard under Rule 37, the Court held that they did not make any argument in support of their position. Rather, Plaintiffs explained that Young’s expert report was timely provided as a rebuttal expert report. The Court has rejected that argument. Plaintiffs have, therefore, failed to meet their burden of showing that their late disclosure was substantially justified or harmless.
Defendants maintained that they were prejudiced because Plaintiffs disclosed Young on the day class discovery closed. Although Defendants deposed Young after the Court granted an extension to the class discovery deadline solely for this to occur, Defendants asserted there is still unfair prejudice because many topics could not be fully explored at the deposition.
Given the prejudice caused by the untimely disclosure, the inability to cure the prejudice at the deposition, and the fact that the trial is only months away, the Court decided that Young’s opinion will be excluded.
Reliability
The Court held that Young’s report is full of limitations because he has not tested the theories he asks the Court to accept. For example, he opines that the market approach methodology “can be used” to estimate the offset due to Holiday Inn.
According to Young, this approach entails evaluating the following market observations to determine the value of the Holiday Inn points: (1) the purchase of points by the issuer, (2) the purchase of points in order to complete a transaction, (3) the sale of points in secondary markets, and (4) the redemption of points for items such as holiday stays, cruises, and car rentals, versus the cost of purchasing them. Young did not analyze these observations to make any calculations because he was not provided with this data, and he speculates as to whether Holiday Inn maintains this data.
In his report, Young offered only methods unapplied to this case that might determine the value of potential class members’ Holiday Inn points. According to the Court, this unapplied and speculative methodology did not support that a reliable class-wide damages methodology existed.
Paul Habibi
Defendants heavily relied on Habibi’s report to oppose Plaintiff’s motion for class certification. Specifically, they referred to the report to challenge Plaintiffs’ assertion that the issues in the proposed class action that are subject to generalized proof predominate over the damages issue subject to individualized proof. Plaintiffs challenged the admissibility of Habibi’s report under Daubert.
Habibi provided three opinions based on his training and experience: (1) Plaintiffs and proposed class members acquired unique and variable timeshare interests in different structures with different use rights, financing terms, and financing disclosures before and during the Proposed Class Period; (2) any negative impact on Plaintiffs’ and proposed class members’ credit scores, ability to obtain financing, and professional careers in the military cannot be reliably assessed using a common approach across the entire class; and (3) the remedies sought by Plaintiffs would require an individualized analysis of each proposed class member’s respective purchase, interest, and use history.
Qualifications
Plaintiffs asserted that Habibi is not qualified to render an opinion in this matter because his curriculum vitae does not refer to expertise in timeshares or economics or valuing non-traditional property interests such as timeshare vacation points.
However, the Court disagreed. Habibi’s extensive educational background and experience qualify him to provide expert testimony in this matter.
Relevance and Helpfulness
Plaintiffs maintained that Habibi’s first opinion is irrelevant and unhelpful because Plaintiffs’ proposed class definition is now limited to servicemembers who purchased one type of timeshare interest, an interest in the Orange Lake Revocable Trust. Initially, in the operative complaint, Plaintiffs’ proposed class definition was not limited to one type of timeshare interest and sought to include “all covered borrowers who financed a timeshare from Holiday Inn.”
Plaintiffs have the burden of showing that rescission is feasible and equitable on a class-wide basis based on the facts of the case.
According to Habibi, Plaintiffs have offered no way to determine, on a class-wide basis, the type of timeshare interest purchased by each proposed class member and the use rights of each proposed class member.
The Court held that Habibi’s first opinion is relevant to the predominance class certification analysis because the parties dispute whether actual damages can be easily calculated for all class members.
Plaintiffs contended that Habibi’s second opinion is also irrelevant and unhelpful because Plaintiffs did not seek damages for the harms described in the opinion.
The Court held that Habibi’s second opinion is relevant to the predominance class certification analysis because Defendants challenge whether determining standing for each proposed class member will predominate over issues subject to generalized proof.
As for Habibi’s third opinion, Plaintiffs maintained that it is irrelevant and unhelpful because Defendants failed to plead set-off as an affirmative defense. The Court found this argument unpersuasive because Habibi opined concerning Plaintiffs’ ability to establish a class-wide damages methodology, which they bore the burden of proving during the class certification stage and at trial.
The Court held that Habibi’s third opinion is relevant to the Court’s predominance class certification analysis since the parties dispute whether actual damages can be easily calculated for all class members.
Reliability
Plaintiffs argued that Habibi should have reviewed the third-party contracts that Holiday Inn had with other companies.
According to Plaintiffs, such a review would help determine a dollar value of points redeemed by class members for services provided by these third parties, which would help calculate the potential setoff for class members.
The Court found that Habibi analyzed the timeshare points usage history data of 300 proposed class members. Based on his analysis, Habibi determined the following: (1) 39% of the proposed class members redeemed all of their timeshare points to stay at another Holiday Inn resort, and (2) for the proposed class members who redeemed their points for external stays or outside services, the average class member used 26.9% of their total timeshare points towards outside services.
The Court held that Habibi’s analysis supported his conclusion that proposed class members have redeemed their points in various ways at different times such that there is no common value ascribed to points universally that could be used as a basis to ascribe a specific dollar value to the points on a class-wide basis.
Further, as mentioned above, Plaintiffs bore the burden of establishing that calculating damages on a class-wide basis predominates over issues subject to individualized proof. Defendants only offered Habibi’s testimony to rebut Plaintiffs’ assertion they have met their burden on this issue. Habibi’s nonscientific opinion about whether there is a common methodology that can be used to determine the value of the points redeemed by the proposed class members is reliable based on his training and experience, and the Court has already found this testimony to be relevant and helpful to the Court’s predominance class certification analysis.
Held
1. The Court denied Plaintiffs’ motion in limine to exclude the report and testimony of Paul Habibi.
2. The Court granted Defendants’ motion to exclude the opinions of Plaintiffs’ proposed expert Christopher Young.
3. The Court denied Plaintiffs’ motion to certify class. On or before March 14, 2025, Plaintiffs shall file a third amended complaint which omits class action allegations.
Key Takeaways:
Young’s report is full of limitations because he has not tested the theories he asked the Court to accept.
So long as the expert is minimally qualified, objections to the level of the expert’s expertise go to credibility and weight, not admissibility.
The fact that some of their contracts with their third-party vendors may provide some mechanism for reimbursement in dollars did not render unreliable Habibi’s opinion that there is no common approach that can be used to value the redeemed points of the proposed class members.
Case Details:
Case Caption:
Lingard Et Al V. Holiday Inn Club Vacations, Inc. Et Al
This case involves an alleged breach of a non-disclosure agreement (the NDA) and patent infringement stemming from the management, construction, and operation of a large lagoon in St. George, Utah (the Lagoon) by Defendants, Desert Color Manager, LLC, Desert Color St. George, LLC, and Pacific Aquascape International, Inc.
Specifically, Plaintiffs Crystal Lagoons U.S. Corp. and Crystal Lagoons Technologies Inc. (collectively, “Crystal Lagoons”) alleged that, after agreeing to the terms of the NDA, the Desert Color Defendants breached the NDA by disclosing designs, plans, technical information, and other confidential information to Defendant Pacific.
Plaintiffs then alleged that all Defendants infringed on U.S. Patent No. 8,062,514 (the ‘514 Patent) due to their management and construction of the Lagoon, which allegedly employs Crystal Lagoons’ patented technology. In its most basic sense, the ‘514 Patent is a patented structure to contain a large body of water for recreational use.
The ‘514 Patent involves, among other things, the design and construction of a structure to contain a water body larger than 15,000 m³, the use of a plastic liner to cover the bottom and walls of the structure, the use of a recycling system that uses pipes with injectors that also allow the application of chemicals, the use of a water inlet line and inlet chambers through which water is extracted to feed the fresh water feeding pipe system of the structure, and the use of a system of skimmers positioned along the border of the structure.
Plaintiffs retained Christopher D. Lidstone as an expert to opine on the infringement and validity of the ‘514 Patent, and they retained Richard F. Bero as an expert to opine on the issue of damages. Defendant filed motions to exclude the opinions offered by Lidstone and Bero.
Accounting Expert Witness
Richard F. Bero is the executive vice president of The BERO Group’s Economic Damages division. He is a certified public accountant (CPA) and a certified valuation analyst (CVA). Bero received his BBA in Accounting and Finance from the University of Wisconsin-Madison.
Bero provides accounting and financial consulting services and expert testimony pertaining to economic damages and valuation issues in a wide range of litigation matters with an emphasis on commercial litigation and intellectual property matters.
Christopher D. Lidstone is principal of CDLidstone, LLC, Fort Collins Colorado. He was formerly president and founder of Lidstone and Associates and managed that firm for 29 years until July, 2015. He sold Lidstone and Associates to Wenck Associates and served as a Principal and Regional Manager for that firm until January of 2021. In his current position as owner of CDLidstone LLC he continues his water resources engineering and geological career throughout the United States and internationally. He serves as a consultant to not only the mining but environmental industry as well as several municipalities, state and federal government. He has completed geological exploration and due diligence services in the US, Canada and Mexico and has completed work in Indonesia, Australia and Papua New Guinea.
His work expertise addresses both ground water and surface water studies including water supply, water development, erosion and sedimentation, flood control, geomorphic stability, geochemistry and water quality studies.
Christopher D. Lidstone’s Expert Opinions Regarding the Absence of Non-Infringing Alternatives, Long-Felt Need, and Copying Are Inadmissible
Lidstone is a water geologist, not a recreational water structure designer
First, Defendants argued Lidstone is a water geologist, not a recreational water structure designer. As such, he cannot be considered a person of “ordinary skill in the art,” which is necessary to opine on the infringement and validity of the ‘514 Patent.
Plaintiffs responded by pointing to, among other things, Lidstone’s 42 years of experience in the field of hydrology; his degrees in Geological Sciences and Geomorphology; his work experience with the design and construction of water supply, water treatment, and storage projects for public water supplies; his experience previously serving as a technical expert in other patent cases related to groundwater storage; his experience teaching courses on the building blocks for pools, like the use of liners, flocculation, disbursement, cation exchange, water, and concrete; and more.
The Court agreed with Plaintiffs that Lidstone has specific, relevant experience related to the ‘514 Patent to qualify him as a person of ordinary skill in the art with respect to water structure design generally, and there is no requirement that Lidstone have specific design experience with recreational water structures to opine on the validity and potential infringement of the Patent. After all, the potential for recreational use of these structures is only a small part of the invention.
Lidstone lacks a factual basis for his opinion that the ‘514 Patent is a “foundational” patent
Second, Defendants argued that Lidstone lacked a factual basis for his opinion that the ‘514 Patent is a “foundational” patent.
Defendants added that Lidstone never defined what the term “foundational” means, and they emphasized the potential lack of relevance of Lidstone’s testimony regarding the nature of the ‘514 Patent.
However, the Court held that Lidstone defined “foundational” as being the original, or foundational, patent filed by an applicant directed to a particular subject matter. Indeed, Lidstone identified the ‘514 Patent family as the first family of patents filed in the United States by Crystal Lagoons related to this technology, and he acknowledged the fact that other patents issued from the same initial application.
Lidstone relied on no data or facts whatsoever to support his opinion that there are no non-infringing alternatives to the technology of the ‘514 Patent
To prove the absence of acceptable, non-infringing alternatives, the patentee may prove either that the potential alternative was not acceptable to potential customers or was not available at the time of infringement.
Plaintiffs pointed to Lidstone’s opinions on the “foundational” nature of the ‘514 Patent as the basis for this opinion.
It was unclear to the Court how this opinion independently constituted a sufficiently reliable basis for an “absence of non-infringing alternatives” opinion. The most relevant expert testimony the Court could identify potentially relating to this issue is when Lidstone testified how “the technology covered by the ‘514 Patent constituted a significant departure from the technologies for building and maintaining large bodies of water for recreational purposes available at the time” as it allowed for “the design, construction, and operation of sustainable, clear lagoons of virtually unlimited sizes.”
Critically missing from Lidstone’s report and testimony, however, are any facts or analysis suggesting how at the time of Defendants’ alleged infringement there was an absence of acceptable, non-infringing alternatives.
At best, Lidstone provides an opinion on the novelty of the invention but cabins it to the exact moment Crystal Lagoons first patented its lagoon technology in the United States (in 2007)—he did not opine on the existence of non-infringing alternatives when Defendants allegedly infringed on the Patent by designing and building the accused Lagoon (between 2019 and 2020).This did not reliably demonstrate how in 2019, at the time of the alleged infringement, there was an absence of acceptable, non-infringing alternatives. Twelve or more years of technological advancements may have altered the lagoon technology landscape significantly, and it is a crucial consideration for any expert opinion regarding whether non-infringing alternatives existed at the time of infringement. The Court held that the expert testimony is unreliable and inadmissible.
Defendants argued that Lidstone has no factual basis for his opinion that the ‘514 Patent fulfilled a “long-felt need”
Plaintiffs contended that Lidstone’s factual basis for this opinion permissibly rests on (1) his opinion that the ‘514 Patent is a foundational patent, and (2) the increase in demands for lagoons after the ‘514 Patent was issued.
Lidstone’s rebuttal expert report consisted of only two, conclusory sentences that the ‘514 Patent “fulfilled a long felt need to develop and treat large bodies of water such as lakes and ponds.”
He later testified he based his long-felt-need conclusion on the nature of the patent, the history that predated the patent, and what happened after the patent came into play.
Specifically, Lidstone indicated how, based on his understanding of the relevant pool-related technology, “prior to this patent, there were no large lagoons that had been developed, and subsequent to the patent, lagoons were built,” but he admittedly could not identify any statements or other evidence prior to 2006 indicating a long-felt need.
The Court is unpersuaded that merely pointing to some level of eventual demand for a patented product renders reliable expert testimony regarding long-felt but unresolved need. If this were the case, all patented products that happen to generate sales over the life of the patent would essentially enjoy a presumption of satisfying a long-felt need. While a rapid increase in demand for the patented product may be suggestive of long-felt need, Lidstone did not analyze the rate of increase of demand for lagoons. He only analyzed and described Crystal Lagoons’ current success in the lagoon industry.
Defendants argued that Lidstone lacked sufficient facts and data supporting his opinion that the ‘514 Patent has been commercially successful
Defendants admitted Lidstone takes about a page of his report discussing various indicators of Plaintiffs’ commercial success, but they insisted Lidstone never analyzed data to reach his opinion that the commercial success resulted from the ‘514 Patent.
The Court held that Lidstone’s opinions on this subject are reliable and relevant as they adequately demonstrate and describe how the ‘514 Patent is advantageous to Crystal Lagoons’ commercial success. Lidstone described various indicators of Crystal Lagoons’ ongoing commercial success in his rebuttal report, and he linked the success to the ‘514 Patent by relying on his previous opinion that the technology of the ‘514 Patent provides the foundation for Crystal Lagoons’ technology to create large bodies of water for swimming and recreational use.
As discussed above, the Court held that his opinion on this subject is also reliable and admissible. Moreover, a correct understanding of Crystal Lagoons’ business model, which Lidstone understood, also supported his commercial success opinion. Crystal Lagoons generates revenue by issuing a collective license of all its intellectual property—which necessarily includes the’514 Patent—to lagoon builders for the design, construction, and operation of its lagoon technology. Notably, Crystal Lagoons did not design, build, and operate artificial water lagoons, nor did it license its Patents and other intellectual property on a patent-by-patent basis; instead, it licenses all of its technology only when it has ongoing involvement in a project such as providing (and getting paid for) its ongoing systems fees services.
Defendants argued that Lidstone failed to link any “industry praise” to the actual inventions of the ‘514 Patent
Lidstone’s explained how “based on the invention of the technology of the ‘514 Patent,” Fischmann (the inventor of the ‘514 Patent), has been honored many times with prestigious international awards, including Entrepreneur of the Year, Innovator of the Year, Businessman of the Year, the Innovation Stevie Award, the Real Innovator Award, the Green Apple Award, and two Guinness World Record Awards related to lagoons built and operated using Crystal Lagoons’ technology.
He also explained how hundreds of lagoon projects around the world currently use Crystal Lagoons’ technology.
As explained above, these awards presented to Fischmann for his lagoon-related inventions necessarily relate, at least in part, to the ‘514 Patent because this Patent is included in each sale of Crystal Lagoons’ collective license, and the technology likely forms a part of each resulting lagoon. Lidstone’s analysis and opinions on this subject are reliable and admissible.
Defendants argued that Lidstone failed to provide any factual basis to support his conclusion that Defendants “copied” the ‘514 Patent
Plaintiffs did not direct the Court to any reliable support for Lidstone’s opinions regarding copying of ‘514 Patent technology; they only argued that Lidstone’s opinions regarding Defendants’ infringement were sufficient to support his copying opinion. But precedent forecloses this argument. A review of Lidstone’s expert reports and deposition testimony reveals he similarly conflated the terms “copying” and “infringement.” Tellingly, the only explicit support for his copying opinion is his analysis of another lagoon’s infringement of the ‘514 Patent in a related case.
And when pressed about the basis for his copying opinion, Lidstone testified how “[he] look[ed] at similarities in designs and so forth,” but he admitted, “[w]hat Pacific Aquascape did to get there, I don’t know.” A reliable copying opinion would have focused on what Defendants “did to get there,” i.e., their efforts to replicate a specific product, not on the mere similarities between the accused device and the patent claims. The Court therefore concluded that Lidstone’s opinions and testimony on this subject are unreliable and inadmissible.
Richard F. Bero’s Expert Testimony Regarding Infringement Damages is Unreliable and Inadmissible
Defendants dedicated a few sentences of their Motion to argue Bero’s opinions regarding commercial success, breach of contract damages, and unjust enrichment damages are unreliable. But the Court found that this testimony was sufficiently supported and reliable to be admissible.
Patent infringement damages are customarily computed by calculating lost profits or a reasonable royalty, and Defendants challenged the admissibility of Bero’s testimony with respect to each calculation.
The Federal Circuit is clear that “apportionment is an important component of damages law generally, and . . . it is necessary in both reasonable royalty and lost profits analysis.”
Under the entire market value rule—which has been described as a “narrow exception” to the apportionment requirement and potentially applies regardless of whether the patentee relies on a reasonable royalty or lost profits calculation—the patentee may rely on the entire market value of the accused product if the patentee demonstrates that “the feature patented constitutes the basis for customer demand.”
Here, Plaintiffs do not sell products. Instead, as explained above, Crystal Lagoons primarily generates revenue by issuing a collective license of all its intellectual property to lagoon developers, which includes the ‘514 Patent, for the design, construction, and operation of its lagoon technology.
The Court held that Bero “never conducted any market studies or consumer surveys to ascertain whether the demand for [the collective license] is driven by the [‘514 Patent]” in dispute. Ultimately missing from Bero’s opinions are any sufficiently reliable facts or data suggesting the ‘514 Patent is what motivates consumers to purchase the Crystal Lagoons’ portfolio of property.
Movant’s Ignorance of the Law is Insufficient to Demonstrate Excusable Neglect
Plaintiffs made an oral motion seeking to allow Bero additional time to submit a supplemental expert opinion, which would address some of the deficiencies with his expert report. Federal courts are clear that a movant’s ignorance of the law is insufficient to demonstrate excusable neglect; accordingly, Plaintiffs have not satisfied their burden under Rules 6(b)(1)(B) and 16(b)(4) to modify the already expired expert discovery deadline.
Held
The Court granted in part both motions to exclude Plaintiffs’ experts Christopher D. Lidstone and Richard F. Bero.
Key Takeaways:
Even though Lidstone may lack experience with designing water structures primarily used for recreation, Lidstone’s experience with designing other water structures qualifies him to opine on key issues relevant to the structure-related claims of the ‘514 Patent.
Evidence of long-felt need is closely related to the failure of others, though they are distinct considerations. This evidence is particularly probative of obviousness when it demonstrates both that a demand existed for the patented invention, and that others tried but failed to satisfy that demand.
When the patented invention is a component of a commercially successful machine or process, the patentee need only “come forward with evidence sufficient to constitute a prima facie case of the requisite nexus,” and show “a legally sufficient relationship between that which is patented and that which is sold.” In this case, the ‘514 Patent necessarily forms a part of each sale of the collective license, and likely plays a part in the development of each resulting lagoon.
Plaintiffs and Bero rely solely on the “foundational” and “core” nature of the ‘514 Patent, the fact that the ‘514 Patent is included in every purchase of Crystal Lagoons’ collective licenses, and the lack of viable lagoons in the marketplace to make an impermissible inference that the Patent drives consumer demand for all of Crystal Lagoons’ intellectual property. None of these are adequate bases to justify Bero’s reliance on the entire market value rule.
Case Details:
Case Caption:
Crystal Lagoons Us Corp Et Al V. Desert Color Manager Et Al
Plaintiffs Weston D. McArtor (“McArtor”) and BEI Services, Inc. (“BEI Services”) (collectively, “Plaintiffs”), brought this civil action against the Defendants Valsoft Corporation Inc. (“Valsoft”) and Aspire USA, LLC dba Aspire Software (“Aspire”) (collectively, “Buyers” or Defendants”).
This action involved the sale of Plaintiffs’ business, Nexera, to Defendants. Prior to the acquisition, Nexera was in the business of “developing and providing data analytics software for performance measurement and benchmarking of service operations including, but not limited to, the printing industry.” Defendants, on the other hand, “specialize in the acquisition and development of software companies in vertical markets.”
In 2022, McArtor “began an extensive search to find a buyer to purchase and continue [Nexera’s] operations.” Ultimately, he found Valsoft and “initiated discussions wherein Defendants would purchase [Nexera], retain the employees and continue its operations.” These negotiations culminated in the parties entering into an Asset Purchase Agreement (“APA”). Under the APA, Defendants purchased Nexera, and the majority of BEI’s assets for $3.5 million. The APA also contained a provision allowing “BEI to receive future contingent payments and earnout payments if Nexera met certain performance goals for Defendants after the acquisition.” Additionally, BEI and Aspire entered into a Consulting Agreement…by which McArtor would serve as a part-time consultant on business related matters for a six-month term with a renewal option thereafter.
In the instant suit, Plaintiffs claimed Defendants breached the APA by fraudulently conspiring and intentionally underperforming, thereby thwarting BEI’s ability to receive the contingent and earnout payments. Further, Plaintiffs alleged that Defendants breached the Consulting Agreement by terminating McArtor as a post-acquisition consultant, less than six months after entering the Consulting Agreement. In sum, Plaintiffs asserted nine causes of action in both contract and tort.
Defendants filed a motion to strike Plaintiffs’ expert Brian Lappen.
Accounting Expert Witness
Brian Lappen holds a Master of Accountancy degree from the University of Wisconsin-Madison; he is a licensed CPA in Illinois and a Forensic & Valuation Principal with Plante Moran, an audit, tax, consulting, and wealth management firm. Lappen has 23 years of experience in public accounting, which includes “consulting with clients on a diverse array of forensic accounting engagements and litigation and dispute matters, including matters involving merger and acquisition disputes, damage calculations, and the application and interpretation of Generally Accepted Accounting Principles (“GAAP”) for the financial reporting of both private and publicly traded companies.”
Generally, Defendants argued that (1) Lappen’s opinions were not based on sufficient facts or data; (2) Lappen did not use reliable methodologies or reliably apply those methodologies; and (3) Lappen’s opinions would not assist the trier of fact.
Lappen has met the requirements of Rule 26(a)(2)(B)
The Court found that Lappen gave a satisfactory statement of all the opinions he will express, the bases/reasons for those opinions, the facts and data considered, and the exhibits that will be used to summarize or support his opinions.
Lappen has also satisfactorily set forth his qualifications. His curriculum vitae includes a list of all the publications he has authored in the past 10 years, and all the cases he has testified as an expert at trial or been deposed for in the last four years.
Finally, Lappen noted that he is being compensated “on an hourly basis at $525 per hour.” In reviewing Lappen’s expert report and attachments, the Court concluded that he has satisfied the requirements of Rule 26(a)(2)(B).
Lappen possesses the requisite “knowledge, skill, training, or education” required under Rule 702
First of all, Defendants did not directly question Lappen’s qualifications. In reviewing Lappen’s background, the Court concluded that he is qualified by his years of training, education, and experience.
Lappen’s opinions are sufficiently reliable
Lappen ignored certain facts and data when arriving at the conclusion that price increases post-acquisition had a material adverse effect
Defendants first argued that Lappen ignored certain facts and data when arriving at the conclusion that price increases post-acquisition had a material adverse effect. Defendants further argued that Lappen did not provide definitive proof that numerous customers left due to the purported rushed price changes.
However, Defendants conflate the appropriate standard; as noted, an expert does not need “definitive proof” to reach their conclusions. To the contrary, even if the Court thinks an expert’s conclusion is incorrect, it will be admissible so long as the expert’s opinions are based on reliable reasoning or methodology.
As Plaintiffs pointed out, Lappen based his opinion, at least in part, upon a spreadsheet that identified the reasons customers left. Moreover, Lappen and Defendants’ expert agreed that at least four customers left Nexera because of the rushed price increases.
Lappen’s opinions regarding firing Nexera personnel and cutting costs post-closing are unreliable
Defendants took issue with Lappen’s conclusion that Defendants’ decisions to fire certain Nexera personnel and cut costs post-closing was materially adverse to the operations of Nexera.
Once again, the Court found that Lappen’s opinions are supported by the record evidence—e.g., sworn testimony from Defendants’ employees, Bethany Sondeno and Nicola De Blasi.
Defendants argued that there were other explanations that could account for a decrease in business post-closing, and Lappen did not consider those potentialities.
However, as Plaintiffs correctly pointed out, “Lappen can evaluate the record evidence and accept or reject [it] in accord[ance] with what he deems credible based on his experience. Defendants cannot wish away record evidence damaging to their case any more than [they] can prevent Lappen from relying on the same as a basis for his opinions.”
The Court agreed and found that Lappen’s opinions regarding firing Nexera personnel and cutting costs post-closing are rooted in sufficient reasoning and methodology to meet the reliability threshold under Rule 702.
Defendants’ concerns with respect to the methodology, evidence, and data relied upon and not relied upon, go to the weight of the evidence, not admissibility
Finally, Defendants argued that Lappen’s opinion that “Defendants’ failure to cross-sell Nexera with another company…negatively affected Plaintiffs’ ability to meet the earnout and contingent payments” is methodologically flawed and fails to account for a software conflict that prevented cross-selling.
Once again, Defendants’ argument concerned the weight of the evidence, not its reliability. As far as the Court can surmise, in reaching his conclusions on cross-selling, Lappen relied upon the record evidence and his own experience. While Defendants clearly disagreed with his conclusion, the Court found Lappen’s opinion was sufficiently reliable under Rule 702.
Ultimately, the Court found that Lappen adequately set forth his opinions and the corresponding bases for those opinions based upon the inspection, review, and interpretation of facts and data; subsequently, he utilized his own personal knowledge, experience, and understanding of the industry to reach his opinions.
Lappen’s opinions will assist the trier of fact
In Cook v. Rockwell Intern. Corp., 580 F. Supp. 2d 1071 (D. Colo. 2006), it was held that “doubts about whether an expert’s testimony will be useful should generally be resolved in favor of admissibility unless there are strong factors such as time or surprise favoring exclusions.”
The Court must determine whether Lappen’s opinions will assist the trier of fact. In this case, the Court is the trier of fact. As such, the Court is afforded far greater leeway in determining whether expert testimony will assist the fact finder, i.e., itself. In this case, the Court found no such countervailing factors, and as such, the Court found that Lappen’s testimony and report will assist the fact finder.
Concerns about reliability are diminished in a bench trial
In a bench trial setting, it is appropriate for the Court to allow the expert to testify, and later make determinations about the admissibility, weight, and credibility of the expert’s testimony.
The fact that the Court will sit as the finder or fact alone is not dispositive of the inquiry of expert qualification; however, given that Lappen met the requirements of Rule 26 and Rule 702—and concerns about presenting unreliable or irrelevant testimony to the jury are effectively neutralized—the Court saw no reason why Lappen should be barred from testifying, nor why his expert report should be stricken. Further, the trial court’s role as gatekeeper is not intended to serve as a replacement for the adversary system. Vigorous cross-examination, and presentation of contrary evidence are the traditional and appropriate means of attacking shaky but admissible evidence.
Held
The Court denied the Defendants’ motion to strike Plaintiffs’ expert Brian Lappen.
Key Takeaway:
In reaching most of his conclusions, Lappen relied upon the record evidence and his own experience. The Court found that Lappen adequately set forth his opinions and the corresponding bases for those opinions based upon the inspection, review, and interpretation of facts and data; subsequently, he utilized his own personal knowledge, experience, and understanding of the industry to reach his opinions. The absence of strong factors such as time or surprise favoring exclusions was noted.
Plaintiff Multiple Energy Technologies, LLC (“MET”) accused Under Armour of false advertising in relation to certain products that contain bioceramic powder. MET contended that Under Armour inaccurately claimed that the Federal Food and Drug Administration had determined that those products enhanced recovery.
Under Armour sells activewear and sleepwear products directly to consumers. This includes the sale of products containing a competing bioceramic product known as Celliant, which is manufactured by Hologenix, LLC (“Hologenix”). Under Armour advertises these products separately from their other product offers and as helping to promote recovery, especially for athletes.
Plaintiff MET brought four claims against Defendant Under Armour, Inc.: violation of the Lanham Act, violation of the Sherman Act, misappropriation of trade secrets; breach of non-disclosure agreement; tortious interference with contract; tortious interference with prospective business expectancies; unjust enrichment; unfair competition; conversion; a claim for an accounting; and a claim for injunctive relief.
Under Armour retained Jerome Schmitt to rebut MET’s damages expert, Peter Wrobel. MET filed a motion to exclude the expert testimony of Under Armour’s accounting expert witness, Jerome Schmitt.
Accounting Expert Witness
Jerome B. Schmitt is a Certified Public Accountant (CPA) and is accredited in business valuation, certified in financial forensics, and a Certified Fraud Examiner.
He has extensive experience in calculating damages—including claims for monetary relief in trademark infringement, false advertising, and other Lanham Act cases—and in the valuation of intellectual property, including trademarks and trade names.
Schmitt earned his Bachelor of Science in Business Administration in Accountancy from John Carroll University in 2000. He followed this with a Master of Business Administration degree from the same institution in 2002.
Schmitt concluded that any disgorgement of Under Armour’s profits from the sale of Recover products would not exceed $151,162. This was based on several assumptions and methods, including the following:
He assumed that the appropriate time frame for the disgorgement analysis spanned from July 1, 2017, to December 31, 2020.
He applied the “full absorption” method and determined that certain costs qualified as appropriate deductions for purposes of calculating the profits subject to disgorgement.
He assumed factors beyond the alleged advertising, such as contributions from Under Armour’s brand value and advertising of the Recover products beyond the alleged false statements, should be taken into account in calculating profits subject to disgorgement.
He used the relief from royalty method to discount damages due to Under Armour’s brand value.
MET argued that Schmitt’s opinions:
I. addressed topics beyond his qualifications.
II. used unreliable methodology for calculating damages.
III. presented a serious risk of confusing the jury and were unfairly prejudicial.
The Court addressed each of these arguments.
I. Schmitt has not opined on topics beyond his expertise
MET claimed that Schmitt offered opinions that he was unqualified to give, regarding:
(1) the appropriate time frame for measuring damages arising out of false advertising;
(2) the value of Under Armour’s brand and how that value reduced the amount of profit realized from false advertising;
(3) the impact of Under Armour’s advertisements beyond the alleged false statements; and
(4) reasons as to why Under Armour would or wouldn’t enter into a contract with MET.
Time frame for measuring damages
Based on evidence in the record and for the purpose of his analysis, Schmitt assumed that a potential disgorgement of Under Armour’s profits would be limited to sales of Recover products from July 1, 2017, to December 31, 2020.
The Court found this assumption regarding the appropriate time frame perfectly acceptable. The Court observed that MET confused Schmitt’s assumption for calculating Under Armour’s profits attributable to false advertising as an opinion about marketing and advertising.
It was held that his assumption about the appropriate time frame for measuring damages relied on evidence in the record. Specifically, it was based on responses to interrogatories indicating that Under Armour’s advertisements referencing the FDA had ended by March 2020. Additionally, the Court found that MET did not identify any specific instances of alleged false advertising after 2020. Therefore, the Court was held that the assumption was permissible.
Brand valuation
Schmitt opined that Under Armour’s brand contributed to Under Armour’s ability to make sales of Recover products. He applied the relief from royalty method to reduce Under Armour’s profits from the sale of Recover product by the value of the Under Armour brand.
MET argued that Schmitt was not qualified to opine on Under Armour’s brand value or the impact that it had impact on profits. However, the Court disagreed.
Given his qualifications as a CPA with extensive experience in calculating damages and the valuation of intellectual property, the Court found that Schmitt was qualified to opine on brand valuation and on how Under Armour’s brand and intellectual property contributed to the profit on sales of Recover products.
Impact of Under Armour’s advertisements beyond the alleged false statements
Schmitt opined that Under Armour’s advertisements for Recover products “contain additional language and concepts that are not alleged to be false advertising.” These included references to “fast recovery, the use of bioceramic powder, and the product’s functionality.” He stated that, assuming a finding of liability, it was appropriate to account for the contribution of such language relative to the alleged false advertising.
Analysis
To begin with, the Court found that Schmitt was qualified to opine on factors that could appropriately be considered as part of the disgorgement analysis. The Court found that, contrary to MET’s argument, Schmitt did not opine on the impact that the advertising at issue had on sales of particular products, particularly because he did not purport to calculate the amount of profits attributable to the effect of advertising that is not alleged to be false.
When MET argued that Schmitt’s testimony on causation was inappropriate, the Court found that Schmitt stated in his report and deposition testimony that his analysis was based on “an assumption that there will be a finding of liability.” Schmitt further explained that, while the damages expert is not necessarily opining as to the liability of the alleged act, the damages expert cannot simply calculate damages that are untethered to the act.
In conclusion, the Court found that Schmitt’s damages opinion “did not attempt to define the law applicable to the case.” Instead, the conclusions he drew in his report, such as the propriety of accounting for the effect of “positive” advertising when assessing profits for disgorgement, were based on his apportionment analysis under the Lanham Act.
Schmitt merely opined that the disgorgement calculation could be further reduced by the profits that are not attributable to the alleged false advertising. To sum up, this fell into the category of “facts leading to a legal analysis,” not a “legal conclusion.”
Analysis of Wrobel’s “reasonable royalty” calculation
MET argued that Schmitt inappropriately opined on “reasons as to why Under Armour would or would not enter into a contract with MET.” However, the Court interpreted Schmitt’s report differently. Schmitt instead opined that Wrobel’s “reasonable royalty” calculation was speculative because of his assumption that, but for the alleged misconduct, Under Armour would have entered into an agreement with MET instead of Hologenix.
Schmitt disputed this assumption by citing the record. He noted “a number of factors that influenced [Under Armour’s] decision to switch from” MET to Hologenix, “that are independent of the alleged false advertising or other alleged wrongful conduct.”
The Court found that, in rebutting Wrobel’s expert report, Schmitt made permissible assumptions. In other words, these assumptions were “reasonably based on the evidence in the record.” It added that any weaknesses in the facts and assumptions underlying Schmitt’s opinion could be explored on cross-examination.
II. Schmitt may use the full absorption method to calculate costs, but the Court will hold in abeyance its decision on the relief from royalty method
A. Full absorption method
To determine the profits available for disgorgement, Schmitt applied the full absorption method. This method “deducts costs that assist in the production, distribution, or sale of the products at issue, irrespective of whether or not such costs are considered fixed or variable.” After reviewing Under Armour’s financial reports and having a discussion with an Under Armour employee, he concluded that certain costs included in Under Armour’s selling, general, and administrative expenses contributed to the sales of the Recover products at issue. He then deducted these costs from the revenue on Recover products.
MET argued that Schmitt’s use of the full absorption method was inappropriate because Under Armour would have incurred much of those fixed costs without selling the infringing product which is why the method failed to show that the costs and profits excluded from the disgorgement analysis were not attributable to the infringing product.
The Court decided not to exclude Schmitt’s testimony applying the full absorption method. Generally, in trademark infringement cases, courts have used two methods for apportioning costs:
a) The incremental approach “under which only direct costs of production are deducted.”
b) the full absorption approach “under which overhead costs are apportioned to production of the infringing item.”
According to the Court, MET was correct that, for a disgorgement analysis under the Lanham Act, the infringer “bears the burden of proving all elements of cost or deduction” and “has the burden to isolate the profits which are attributable to” the infringement.
However, MET’s criticisms of Schmitt’s application of the full absorption method concerned the weight of his testimony, not its admissibility. The Court held that these criticisms should be addressed through cross-examination of Schmitt, a crucial part of which would be his decision to use the full absorption method.
B. Relief from royalty method
To value the contribution of Under Armour’s intellectual property to the sale of its products, Schmitt used the relief from royalty method. Under this method, he applied a “market-based royalty for the subject intellectual property at issue as a reasonable proxy for the profit or value it contributes to the sale of products that use the intellectual property.”
Basically, to establish what the applicable royalty rate would be for the Under Armour brand, he looked at one instance in which Under Armour licensed its name and logo to an apparel distributor, through which Under Armour received a 14% royalty of the net revenue of apparel sold with its name or logo. He then reduced Under Armour’s profits from the sale of Recover products by 14%, to reflect the royalty that Under Armour “was relieved from paying by virtue of owning its brand.”
MET argued that Schmitt’s use of the relief from royalty method was improper because a hypothetical royalty amount isn’t a proper deduction when evaluating Lanham Act damages.
While Under Armour argued that “courts accept the apportionment of profits for contributions made by a Defendant in generating those profits,” it had not sufficiently established that the relief from royalty method had been subjected to peer review or that it is a generally accepted method for calculating proper costs or deductions in the Lanham Act context.
While the novelty of Schmitt’s methodology was “not a per se reason for exclusion,” the Court lacked a basis to decide whether his methodology was sufficiently reliable. Therefore, the Court declined to rule on whether Schmitt’s testimony applying the relief from royalty method should be excluded. The Court intended to hold an in limine hearing, with Schmitt in appearance-as to the relief from royalty methodology and its reliability.
III. The Court won’t exclude Schmitt’s report and testimony under Rule 403
MET argued that based on the purported deficiencies, Schmitt’s testimony presented a serious risk of confusing the jury and prejudicing MET as per Rule 403.
Balancing the probative value against the prejudice, the Court found that the probative value of Schmitt’s expert opinions was high. In other words, it was held that there was no danger of unfair prejudice. If any confusion or potential prejudice arose, the Court declared that it was open to curative jury instructions to assist the jury.
Held
The Court held that it would leave open the issue of whether Schmitt’s application of relief from royalty methodology is admissible under Rule 702. However, it denied MET’s motion to exclude expert Jerome Schmitt’s report and testimony in all other respects.
Key Takeaways:
The Court denied MET’s motion to exclude Jerome Schmitt’s testimony in all other respects for three main reasons:
Qualification and Expertise: The Court found that Schmitt did not exceed the scope of his expertise. His opinions regarding the timeframes, brand valuation, and advertising impact were all within his qualifications given his extensive experience in damages calculation and intellectual property valuation. The Court noted that Schmitt based his assumptions on evidence in the record and didn’t make impermissible legal conclusions.
Methodology: The Court accepted Schmitt’s use of the “full absorption” method to determine the profits available for disgorgement. The Court viewed MET’s criticism of the method as a challenge to its weight, not its admissibility. It determined that cross-examination could address these issues.
Rule 403 Balancing: The Court determined that Schmitt’s testimony had high probative value that outweighed any potential prejudice. Therefore, any risk of jury confusion could be addressed through curative jury instructions.
Please refer to the blogs previously published about this case:
Plaintiff American Power, LLC (“AMP”) is a trucking-logistics company headquartered in Dayton, Ohio. According to the Complaint, Plaintiff invested in and loaned $450,000 to Defendant Dektrix LLC, a transportation-servicing company headquartered in Utah. The Complaint charges that the investment and loan were fraudulently obtained and ultimately worthless.
Plaintiff sought to impose liability upon Dektrix and various other business entities and individuals for purported violations of federal securities laws and state common law.
Dektrix sought to exclude Randall S. Kuvin, CPA, ABV, CFF as an expert. Dektrix presented two arguments in their motion to exclude the testimony of Kuvin: (A) AMP failed to comply with Fed. R. Civ. P. 26; and (B) Fed. R. Evid. 702 and Daubert bars the expert’s testimony.
Accounting Expert Witness
Randall Kuvin has been with Flagel Huber Flagel almost 40 years and served as Managing Partner until 2023. Though he works across all aspects of business, Kuvin brings significant depth of experience and expertise in the areas of Business Valuation, Litigation Support, and accounting specific to the Real Estate industry.
Examples of his expertise include determining values of businesses for the purposes of asset division in divorce or other disputes as well as providing forensic analysis to determine income for purposes of spousal support or contract/damage matters.
To begin with, Dektrix claimed that AMP failed to comply with Rule 26 by not stating the opinions of each author of the damages study; not disclosing the compensation of the expert; failing to supplement the expert’s list of testimony; and not supplementing the expert report.
In response, AMP disclosed Kuvin’s compensation to opposing counsel, supplemented the expert’s list of testimony, and shared an updated expert report that included a higher damages number (when actual numbers were used) than the original report. AMP provided Dektrix with this supplemental information on November 20, 2024.
Courts within the Sixth Circuit weigh five factors to determine whether a party’s noncompliant disclosure was substantially justified or harmless: (1) the surprise to the party against whom the evidence would be offered; (2) the ability of that party to cure the surprise; (3) the extent to which allowing the evidence would disrupt the trial; (4) the importance of the evidence; and (5) the nondisclosing party’s explanation for its failure to disclose the evidence.
The surprise to the party against whom the evidence would be offered
Basically, Dektrix claimed it would be surprised by which expert will testify, Kuvin or Terry L. Yoho, or both. Trial is about a month away, and testimony from Kuvin in AMP’s case-in-chief may necessitate some adjustment’s to Dektrix’s trial strategy, but Dektrix should not have been surprised that Kuvin would testify as an expert because AMP provided the 2022 damages study in February 2022—well before the original disclosure deadline—and Dektrix could have deposed Kuvin, which it did not.
Therefore, the Court held that Dektrix’s attempt to recast this as a situation where AMP never provided an expert report, or that it had no idea who would testify, is misguided. Instead, Dektrix should not have been surprised Kuvin would provide expert testimony on his 2022 damages study nor does Dektrix cite any case law suggesting surprise to a party occurred in analogous circumstances.
The ability of the party to cure the surprise and the disruption on the trial
Dektrix emphasized that AMP had not provided compensation, an updated curriculum vitae (“CV”), and supplemental information in support of the 2022 Damages Report.
The Court held that this emphasis is misplaced because AMP cured any surprise about Kuvin’s compensation and CV on November 20, 2024 (almost two months before trial), which gives Dektrix sufficient time to prepare cross-examination on these two issues, if it so chooses.
Regarding the supplemented report on the damages AMP allegedly incurred after December 31, 2021, the Court agreed that AMP should have supplemented the 2022 damages study sooner, and if AMP had, it might have been able to recover higher damages. As such, AMP may use the 2022 damages study in connection with Kuvin’s expert testimony but may not use the supplemental damages information AMP provided on November 20, 2024.
The importance of the evidence
As Dektrix even acknowledges, “[i]n a contract dispute where speculative lost profits are sought, expert testimony is helpful to aid the factfinder.” Moreover, the Court reiterates that the 2022 damages report was not tardy. As such, and given the revealing damages information it contains, Kuvin’s expert testimony on his 2022 damages study constitutes important evidence.
The nondisclosing party’s explanation for its failure to disclose the evidence
AMP acknowledges that it did not supplement its 2022 damages study, provide Kuvin’s compensation, or update Kuvin’s CV before the discovery deadline. Basically, it did not offer a compelling explanation for its failure to comply with the Court’s discovery deadlines. AMP did acknowledge it has cured all three deficiencies two months before trial.
Absent a compelling justification, the Court held that AMP’s failure to comply with the discover deadline weighs in favor of excluding Kuvin’s testimony.
Although the fifth factor favors exclusion, the Court concluded that it does not overcome the other factors.
B. Federal Rule of Evidence 702 and Daubert
Dektrix claimed that the expert’s testimony is not based on sufficient facts or data; the testimony is the not the product of reliable principles and methods; and the expert’s testimony does not reflect a reliable application of the principles and methods.
However, the Court found that Kuvin’s testimony is sufficiently reliable and relevant to the issue of damages to survive Dektrix’s motion to exclude. Also, it appears that Kuvin’s testimony includes independent analysis that would be helpful to the trier of fact in understanding the damages that AMP asserts. Additionally, Dektrix’s arguments regarding the reliability of Kuvin’s testimony relate more to the weight and credibility that the trier of fact will give to Kuvin’s testimony rather than the reliability of his methodology.
Held
The Court denied Dektrix motion to exclude the testimony of Randall S. Kuvin.
Key Takeaways:
First, expert testimony on lost profit damages is admissible if it is helpful to the trier of fact in understanding a damages claim. In a contract dispute where speculative lost profits are sought, expert testimony is helpful to aid the factfinder.
Second, AMP’s late supplement was substantially justified or harmless, and Kuvin’s expert testimony was limited to his 2022 damages study rather than the more recently-supplemented report.
It all started when GE and X-Ray contracted for the acquisition, sale and purchase of certain equipment and services required to outfit a nuclear radiopharmaceutical laboratory—the first of its kind in Jamaica.
X-Ray later accused GE Entities of breaching their duties of care to X-Ray and breaching various components of the operative agreement– the International Finance and Sales Agreement (“IFSA”) as well as certain warranties.
X-Ray has disclosed a damages expert, Andre Sutherland, to testify primarily as to lost profits, and also as to “remediation costs” and “acquisition costs.”
On April 22, 2021, the Court granted GE’s motion to strike from X-Ray’s pleadings its request for lost profits damages, and found that lost profits damages were barred by the parties’ principal agreement, the IFSA. Accordingly, GE now seeks to strike Sutherland on grounds that his testimony would not be relevant because it pertains primarily to X-Ray’s stricken, lost profits damages. Separately, GE argued that Sutherland’s testimony, even if it survives the lost profits argument, is not the product of reliable principles and methods.
Accounting Expert Witness
Andre O. Sutherland is a Fellow Certified Chartered Accountant (FCCA), by the Association of Certified Chartered Accountants a Chartered Business Valuator by the CBV Institute (formerly the Canadian Institute of Chartered Business Valuators and an Accredited Senior Appraiser (ASA) by the American Society of Appraisers. He holds 14 years of professional experience including more than ten years of valuation experience.
Sutherland’s opinion centered on X-Ray’s lost profits due to its laboratory and equipment allegedly malfunctioning. To calculate those lost profits, Sutherland took X-Ray’s 2013 business plan; determined the projected customers over a six-year period; calculated the cost per PET/CT scan to determine revenues; subtracted expenses from those revenues; and compared those projected revenues to the actual revenues. Sutherland then generated two final numbers: one calculated as the most-likely scenario, and one calculated with a 50% weight for a worst-case scenario.
GE raised a myriad of alleged issues with Sutherland’s report. These include arguments that: Sutherland’s report relies entirely on X-Ray’s own 2013 business plan; he did not know who created that business plan and he did no independent market research about relevant market rates or industry costs.
The Court held that Sutherland failed to distinguish (1) which lost profits damages were caused by negligence (let alone each distinct and independent theory of negligence that X-Ray alleges) versus (2) which lost profits damages were caused by breaches of contract, breaches of warranty, and/or other factors.
Moreover, Sutherland’s report does not account for what portion of X-Ray’s lost profits are attributable to GE’s alleged negligence, as compared to GE’s alleged contract breaches, as compared to factors entirely unrelated to GE (e.g., a competitor, COVID-19 regulations, or internal factors).
It is noteworthy that X-Ray does not present any compelling authority or argument to explain why Sutherland’s opinion would still be reliable and helpful notwithstanding the report’s failure to divvy up blame.
Remediation Costs and Acquisition Costs
GE sought to exclude Sutherland’s anticipated testimony regarding acquisition and remediation costs, as GE believes such testimony does not required specialized knowledge. Remediation costs are, according to GE, the combined price of the equipment X-Ray purchased from GE.
The Court held that no expertise is required for X-Ray to explain to the trier of fact its purchase price for equipment (i.e., its “acquisition costs”). Indeed, to add up X-Ray’s composite purchase price, there is no need to affirmatively “exclude expenses which are unrelated” to that cost. Rather, X-Ray’s lay witnesses and lawyers can simply identify each purchase price, add them up, and present the final number.
As to remediation costs, GE argued that Sutherland simply relayed a number ($208,000.00) which “Management indicated” was incurred “to rectify the Quality Control Lab.” GE argued that expert testimony is not required because Sutherland did not calculate this amount, break down this amount, configure this amount, or even verify this amount; rather, he simply repeated a number that “management” provided to him.
X-Ray responded that “Sutherland extracted and articulated, only those costs incurred by X-Ray which accounted for costs of the equipment and costs incurred to attempt to remediate the equipment or create work-arounds.”
But X-Ray cited to no portion of Sutherland’s report in which he “extract[s]” remediation costs from any portion of the record that he was provided. To the contrary, Sutherland testified in his deposition that “[a]ccording to management, they did in fact incur at least $208,000.00 on remediation expenses.”
The Court held that GE has thus presented uncontroverted evidence that Sutherland’s testimony as to remediation costs imports no expertise, but instead is a recitation of a figure provided by management.
Held
The Court granted GE’s motion to exclude the testimony of Plaintiff’s expert Andre Sutherland. He cannot testify at trial as to lost profits, as to “acquisition costs,” or as to “remediation costs.”
Key Takeaways:
Sutherland’s testimony is fatally flawed and cannot be resurrected because he not present any basis to, at minimum, distinguish lost profit damages that indisputably arise from the contract.
Sutherland presents a report that presents lost profits figures that apparently factor in: GE’s negligence; GE’s breaches of contract and numerous other factors and considerations. In that report, Sutherland makes no effort to isolate what portion of the lost profits were caused by GE’s negligence. And because X-Ray’s surviving negligence claims are the only claims for which X-Ray now seeks lost profits, Sutherland’s testimony is unreliable and unhelpful to a trier of fact who seeks to determine what damages were caused by GE’s negligence.
The Court held that no expertise is required for X-Ray to explain to the trier of fact its purchase price for equipment (i.e., its “acquisition costs”). Thus, on this score, Sutherland’s calculation constitutes “simple arithmetic” which “is not beyond the understanding of the average lay person and therefore would not help the trier of fact.”
Case Details:
Case Caption:
X-Ray Diagnostics And Ultrasound Consultants Limited V. General Electric Company Et Al
The Plaintiffs sought damages and injunctive relief accusing the Defendants of willfully, intentionally, and calculatedly refusing to provide potable water to residents of the Plaintiffs’ manufactured home communities and a denial of applications by the Plaintiffs Grover Dinwiddie, and Sarina Shannon for municipal water utility services provided to other residents of the City of Oak Grove, Kentucky, in violation of the Equal Protection clause of the Fourteenth Amendment to the United States Constitution.
Defendants filed a motion to exclude Plaintiffs’ accountant expert Missy DeArk and prevent her from offering expert witness opinion testimony at trial, claiming that her disclosure did not comport with the requirements of Fed. R. Civ. P. 26 and “will result in unfair surprise and prejudice to Defendants because Defendants have no basis for or knowledge of DeArk’s opinion testimony.” Defendants therefore sought the exclusion of the late or undisclosed evidence under Fed. R. Civ. P. 37(c)(1), FRE 702, and Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993).
Accounting Expert Witness
Melissa Welch DeArk, CPA/CFF, CVA/MAFF is an associate director in Dean Dorton’s litigation support and business valuation groups. Prior to joining the firm in 2008, she was a controller and Chief Financial Officer for more than 16 years with full responsibility for all financial, administrative, and human resource functions for multi-million dollar organizations.
Although lacking in details and specifics, the Court does not find Plaintiffs’ expert disclosure to be a total surprise here. Plaintiffs’ disclosure of expert accountant Missy DeArk and the damages calculations about which she will testify is technically deficient under Rule 26, but not fatally so under Rule 37. The damages sought by Plaintiffs were outlined in discovery responses as early as February 2023. According to Plaintiffs’ Response, counsel reached out to defense counsel prior to the expert disclosure deadline and identified DeArk though they did not yet have a written report from her, and “Counsel for Defendants raised no objection and indicated that there were no issues with proceeding without a written report.”
Counsel for Defendants denies any such representation. It appears that there has been: 1) an honest misunderstanding by counsel; 2) some form of procedural gamesmanship on the part of counsel; or 3) a direct misrepresentation by counsel in these pleadings. Without specific evidence to the contrary, the Court will assume that there has been an honest misunderstanding by counsel. Plaintiffs’ counsel believes there to have been an understanding between the parties regarding disclosure of DeArk without the necessity of producing a report.
Although Plaintiffs’ counsel would have been well-advised to confirm such an understanding in writing, Subpart (B) of Rule 26(a)(2) does not require a writing and apparently contemplates such agreements regarding disclosures in its very text, “[U]nless otherwise stipulated.” Moreover, Plaintiffs’ failure to provide DeArk’s report can be excused by the Court under Rule 37(c) if, as he has alleged, Plaintiffs’ counsel was under the impression that Defendants’ counsel did not object to proceeding without DeArk’s report.
Analysis
When Plaintiffs formally and timely disclosed DeArk in a pleading, they also attached the Curriculum Vitae for DeArk which outlines her employment history and experience; CPA credentials with certifications in financial forensics, valuation analysis; and financial forensics specialty in matrimonial litigation.
No trial date has been set in this matter, so there is little risk that trial will be disrupted by the Court declining to strike DeArk’s testimony. The Court found that the evidence appears to be important particularly regarding calculation of Plaintiffs’ damages, to the extent that DeArk’s testimony can provide that proof. Also, Plaintiffs have explained that DeArk was disclosed as an expert witness to defense counsel well before the disclosure deadline.
Held
The Court exercised its discretion and directed Plaintiffs to supplement their expert disclosure with a written report. In conclusion, the Court denied the Defendants’ motion to strike Plaintiffs’ expert witness Missy DeArk.
Key Takeaway:
Plaintiffs’ failure to timely provide DeArk’s written report might warrant the sanction of exclusion if the failure to properly disclose were on the eve of trial, or if the deficient disclosure were in some way intended to sandbag Defendants. However, the Court found that, in this case and at this time, the harsh sanction of exclusion was not appropriate.
Case Details:
Case Caption:
Plainview Mobile Home Park Et Al V. City Of Oak Grove, Kentucky Et Al
