Expert Witness Profiler

Tag: Disgorgement

  • Accounting Expert Not Allowed to Opine on Transition Period

    Accounting Expert Not Allowed to Opine on Transition Period

    Robert Webster allegedly owed fiduciary duties, including duties of loyalty and honesty, to his employer, CellMark. He was also subject to contractual obligations restricting him from competing with CellMark or soliciting its customers or employees on behalf of himself or others. According to CellMark, Webster began breaching these duties in 2023 after deciding to leave the company and allegedly taking steps to move certain customers away from CellMark.

    CellMark claimed that, before Webster’s departure in June 2024, he had either diverted or prepared to divert several customers to CellMark’s competitors. The company further alleged that Göran Sohl, Fortex Americas, LLC, and DRC Industries, Inc., a supplier that later became a competitor, assisted or encouraged Webster’s conduct because they stood to benefit from the resulting business opportunities. CellMark also alleged that these entities were aware of Webster’s fiduciary and contractual obligations but proceeded despite those obligations.

    Based on these allegations, CellMark brought several claims, including breach of fiduciary duty, breach of restrictive covenants, violations of the Kentucky Uniform Trade Secrets Act and the Defend Trade Secrets Act, and civil conspiracy.

    CellMark retained Jay R. Cunningham to offer expert testimony on its damages. Defendant Rob Webster and the Fortex Defendants (Fortex Americas, LLC, Dinah Bowman, and Göran Sohl) filed respective motions to exclude the testimony of testimony of Cunningham.

    Accounting Expert Witness

    Jay Ryan Cunningham has more than 20 years of accounting and finance experience as a consultant in litigation, investigative and other business dispute matters.

    He has managed or assisted on engagements providing advisory services to clients in a wide variety of disputes and performing a variety of damage analyses. He has also managed or assisted in special investigations related to accounting restatements, fraud, and other inappropriate business practices.

    Cunningham is a graduate of Murray State University, Kentucky, with a B.S.B. degree in accounting and an M.P.Acc. degree.

    Want to know more about the challenges Jay Cunningham has faced? Get the full details with our Challenge Study report.

    Discussion by the Court

    A. Cunningham’s disgorgement analysis must be excluded because it is unhelpful

    CellMark believed it was entitled to disgorgement as a remedy for Webster’s alleged misconduct. To quantify this remedy, CellMark had Cunningham analyze the amount Webster should allegedly disgorge. To do so, Cunningham added up figures from a CellMark payroll spreadsheet.

    Webster argued that Cunningham’s disgorgement analysis was merely “basic math” and should be excluded because it was not beyond the ken of common knowledge.

    The parties agreed that Cunningham performed basic math to analyze the amount of disgorgement allegedly available. The Court therefore concluded that Cunningham’s opinions on disgorgement “should be excluded on such grounds.”

    B. Cunningham’s overall lost-profits methodology is not fatally flawed

    Webster contended that Cunningham failed to follow “a reliable methodology” because Cunningham “did not consider the other factors that could have caused CellMark’s losses, making his opinion unreliable and inadmissible.” The Fortex Defendants primarily contended that Cunningham’s methodology relied too much on CellMark’s “management’s belief, not on an analysis of CellMark’s” financial data, and also failed to consider “whether industry trends or market conditions could have impacted sales.”

    While these may be reasons to criticize Cunningham’s analysis, they are not valid grounds for excluding all of Cunningham’s lost-profits testimony.

    It is also true that Cunningham adopted a particularly rosy view of how things would have supposedly turned out for CellMark had the alleged misconduct not occurred—and did so based primarily on information provided to him by CellMark. But Cunningham is entitled to that optimistic perspective so long as it is based on evidence and not clearly contradicted by the evidence.

    The Court cannot say that Cunningham’s entire lost-profits analysis is so “clearly contradicted” by the evidence in this case that it must be excluded merely because he believed that CellMark’s historical performance would have continued undisturbed but for the alleged conduct of Webster and the Fortex Defendants.

    In sum, Cunningham’s overall methodology is not so defective or unreliable as to render all of his testimony about lost profits completely excludable.

    C. Cunningham’s invention of an unsupported seven-month “transition period” is improper and should be excluded

    While Cunningham’s overall methodology is not fatally flawed, one element of his analysis is. Webster and the Fortex Defendants asserted that when Cunningham tacked on a seven-month “transition period” to the damages period for each CellMark customer, he impermissibly relied on baseless speculation.

    When Cunningham’s report discussed the time period he used to analyze lost profits, he noted that he “included an additional seven-month transition period” for every customer because he believed Webster’s year-long non-compete period would, in turn, cause an additional “reasonable delay” before Webster could successfully solicit customers. Cunningham’s choice of a seven-month period, he asserted, was “based upon an estimated average time to solicit and onboard customers, as well as order and receive associated product.”

    But Cunningham cited no evidence in support of this “estimated average”—he did not, for example, consult industry data to establish a range for how long it might reasonably take a player in the market to develop a relationship with a customer currently being serviced by another supplier or how long it would generally take to build up an inventory to service such clients.

    Cunningham’s seven-month transition period is the product of bare speculation. Cunningham himself tacitly acknowledged this: When questioned at his deposition about his basis for the transition period, Cunningham testified that the “seven-month period is an assumption,” that he did not “have data that suggests . . . how long does it take to get that customer,” and that there was no other data point that he could point to that would back up his choice to assume a seven-month transition period—or any other quantified time period, for that matter.

    D. The Court will not exclude Cunningham’s opinions on lost profits related to Camelot / Integrity

    Webster and the Fortex Defendants next argued that Cunningham’s analysis of lost profits relating to Camelot / Integrity is fatally defective because it is likewise too speculative.

    CellMark responded by citing documentary evidence indicating that CellMark sold products to Camelot before its bankruptcy and sold products to Integrity in 2024 through a former Camelot representative that Integrity retained after Camelot was acquired by Integrity, thereby laying a foundation for Cunningham’s assumption of CellMark’s continued sales.

    This is a close call. On the one hand, it seems tenuous to assume a company that acquired a CellMark customer after its bankruptcy would continue to purchase products from CellMark as though nothing had changed. Indeed, the document Cunningham cites for the proposition that CellMark expected future business with Integrity via Webster plainly did not reflect any firm purchasing commitment from Integrity. On the other hand, there is evidence that Integrity continued to purchase products from CellMark via the relationship Webster fostered with Camelot’s representative (whom Integrity kept on board) after Integrity acquired Camelot and that there was an ongoing relationship with CellMark. And there is evidence that Fortex made large volumes of sales shortly thereafter. Bearing in mind that there is thumb on the scale in favor of admitting expert testimony, the Court is reluctant to exclude Cunningham’s testimony about lost profits relating to Camelot / Integrity.

    Therefore, the Court will not exclude Cunningham’s testimony relating to Camelot / Integrity.

    E. No other theories that would justify partial exclusion

    Webster and the Fortex Defendants raised a series of additional arguments for partial exclusion of Cunningham’s opinions.

    First, the Defendants took issue with Cunningham’s unique damages period for Multi-Color Corporation. There is a factual dispute about whether CellMark would, in fact, have renewed its exclusivity agreement with Asia Pulp and Paper and continued on as an exclusive supplier for Multi-Color Corporation’s needs for months after Webster’s departure. Cunningham is therefore allowed to assume that CellMark would have done so. But the Defendants are equally allowed to contest the veracity of the facts underlying his assumption and to vigorously cross-examine Cunningham to determine the effect on his analysis if the jury does not credit CellMark’s evidence.

    Second, Webster raised the issue of inflation, suggesting that Cunningham’s assumption of a 3.5% yearly price increase benefitting CellMark was unsupportable in light of “market data showing an industry in decline.” The Court concluded that the issue of whether Cunningham’s assumptions about inflation and market conditions were too optimistic is better addressed through cross-examination than outright exclusion.

    Third, Webster contended that “Cunningham attributes customer sales declines to Webster” even though “CellMark’s corporate representative admitted there is no evidence implicating Webster.” Of course, this entire dispute is about whether Webster diverted business away from CellMark. Arguments rooted in factual disputes over what the evidence does and does not show and the related effects on an expert’s output are properly resolved through cross-examination—not wholesale exclusion.

    Finally, Webster contended that Cunningham went beyond the scope of his expertise by offering certain statements about “industry customs and standards” in the paper industry. The Court did not find this argument convincing.

    The Court concluded that Cunningham should be allowed to testify about what he understands are paper industry norms and how they inform his analysis of CellMark’s lost profits.

    Held

    • The Court granted in part and denied in part Webster’s motion to exclude the testimony of Jay Cunningham.
    • The Court granted in part and denied in part the Fortex Defendants’ motion to exclude the testimony of Jay Cunningham.

    Key Takeaway

    Expert testimony “should be excluded if it is based on ‘unrealistic assumptions’” or “unsupported speculation.” Cunningham’s arbitrary seven-month “transition period” relied on both. This is a prime example of the sort of baseless testimony that courts may properly exclude. Cunningham may not testify at trial as to any “transition period” following the term of Webster’s non-compete period.

    Please refer to the blog previously published about this case:

    Accounting Experts’ Testimony on Exclusivity Agreement Limited

    Case Details:

    Case Caption: Cellmark, Inc. V. Webster
    Docket Number: 2:24cv181
    Court Name: United States District Court, Kentucky Eastern
    Order Date: May 29, 2026
  • Accounting Expert Witness’ Disgorgement Analysis Using Full Absorption Method Admitted

    Accounting Expert Witness’ Disgorgement Analysis Using Full Absorption Method Admitted

    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

    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.

    Want to know more about the challenges Jerome B. Schmitt has faced? Get the full details with our Challenge Study report. 

    Discussion by the Court

    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:

    1. He assumed that the appropriate time frame for the disgorgement analysis spanned from July 1, 2017, to December 31, 2020.
    2. He applied the “full absorption” method and determined that certain costs qualified as appropriate deductions  for purposes of calculating the profits subject to disgorgement.
    3. 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.
    4. 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:

    1. 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.
    2. 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.
    3. 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:

    Case Details:

    Case caption: Multiple Energy Techs., LLC v. Under Armour, Inc.
    Docket Number: 2:20cv664
    Court: United States District Court for the Western District of Pennsylvania
    Dated: January 13, 2025
  • 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.

    Held

    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