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:
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
In this action, the Frazier Parties alleged that the Eagle Air Parties lacked probable cause to sue them for defamation and other similar claims in an underlying lawsuit that concluded in 2020 (the “Underlying Action”). The Frazier Parties claimed that the Underlying Action damaged Sentinel’s existing or prospective client relationships, resulting in lost profits of at least several million dollars.
Defendants Eagle Air Med Corporation and Valley Med Flight, Inc. filed a motion to exclude the testimony of proposed expert witness Dr. Ronald Luke, who was retained by Plaintiffs Jeffrey Frazier and Sentinel Air Medical Alliance, LLC under Fed. R. Evid. 702.
Economics Expert Witness
Ronald T. Luke has developed Research & Planning Consultants as an inter-disciplinary firm providing economic, financial, and public policy studies. As President and owner, he supervises RPC’s professional staff and maintains high standards for the firm’s work products. Also, he has been accepted as an expert in economics, socioeconomic impact analysis, and policy analysis by state and federal courts, and state administrative agencies.
To begin with, Defendants’ motion primarily addressed the reliability of Luke’s expert testimony and did not challenge the qualifications of Luke. Defendants argued that (1) “Luke’s opinions regarding Sentinel’s lost profits damages are unreliable and inadmissible under Rule 702[,]” and (2) “any opinion [Luke] might try to offer on the litigation-related damages would be unhelpful and inadmissible.”
Also, Defendants argued that “Luke’s lost profit opinions rests on unreasonable assumptions that are unsupported by the record” and “Luke failed to properly account for other factors that might affect the amount and existence of Sentinel’s alleged lost profits.” According to Defendants, Luke did not use a discount rate that accounted for certain risk factors in his calculations that other experts use in similar analyses, and he used a ten-year time period for his calculations.
The Court held that the fact that Luke’s opinion and analysis take into account facts that are still in dispute does not justify exclusion of his expert testimony and report.
As for the litigation expense damages, Defendants sought to exclude Luke’s inclusion of the litigation expense damages because he did not calculate, analyze, or offer expert opinion related to these damages. There is no indication in the report that Luke himself calculated the litigation expense damages; rather, he merely included the previously calculated litigation expenses in his lost profits analysis based on the other information in the record. Defendants did not dispute that there is evidence in the record supporting the litigation expenses. Therefore, Defendants did not provide grounds for the exclusion of litigation expenses in Luke’s report at that point.
The Court reviewed Luke’s expert report and found that he had a reasonable basis for reaching his conclusions regarding Sentinel’s lost profits damages.
Held
The Court denied Defendants’ motion to exclude the testimony of Plaintiffs’ proposed expert Ronald Luke.
Key Takeaway:
Exclusion is not warranted just because Luke’s opinion and analysis take into account facts that are still in dispute
Luke’s inclusion of the litigation expense damages was not excluded due to evidence in the record supporting the litigation expenses.
Plaintiff American Northwest Distributors Inc. (“ANW”) was the Washington distributor of Four Roses bourbon, produced by Defendant Four Roses Distillery LLC (“Four Roses”), for about five years from 2015-2020. In 2020, after a pattern of late payments from ANW, Four Roses terminated the distribution agreement and switched to a competitor, Young’s Market Company, LLC (“Young’s Market”). ANW went to arbitration with Young’s Market, as provided for in Washington’s statutes regulating liquor distribution, and the arbitrator awarded ANW what she found to be the fair market value of ANW’s lost distribution rights.
After the arbitration, ANW sued Four Roses, claiming Four Roses had breached the parties’ contract and interfered with ANW’s other business relationships, causing ANW damages beyond what it received from Young’s Market in arbitration. Four Roses counterclaimed for invoices ANW had never paid.
ANW has retained Neil Beaton to analyze and determine the damages it has incurred as the result of Four Roses’ wrongful termination of ANW’s distribution agreement.
Four Roses filed a motion to exclude ANW’s expert witness, Neil J. Beaton. Four Roses first argued that Beaton’s testimony regarding ANW’s lost profits is inadmissible because ANW cannot recover those profits as a matter of law, so that any testimony on this issue is “not helpful to the trier of fact.” The Court held that ANW may seek such recovery under common law contract claims and Four Roses’ argument on this point is unpersuasive. Four Roses also contended that Beaton’s testimony is a “rehash” of the damages he attested to in arbitration. While there may be overlap in Beaton’s financial figures, there are genuine disputes between the parties as to how that impacts the damages analysis in this case.
Business Valuation Expert Witness
Neil Beaton is a Managing Director with Alvarez & Marsal Valuation Services in Seattle. He specializes in the valuation of public and privately held businesses and intangible assets for purposes of litigation support (lost profits claims, marriage dissolutions and others), acquisitions, sales, buy-sell agreements, ESOPs, incentive stock options and estate planning and taxation. He also performs economic analysis for personal injury claims, wrongful termination and wrongful death actions.
Four Roses also questioned the reliability of Beaton’s financial projections, asserting that they are overly optimistic and lack “reasonable certainty.” The Court held that while Beaton’s projections may be “optimistic,” that does not make his testimony unreliable if he lays an acceptable foundation for those calculations.
Beaton has disclosed his assumptions and methodology for projecting lost profits, and Four Roses has not shown that those methods lack a reliable basis in the knowledge and experience of Beaton’s discipline. Four Roses can challenge Beaton’s approach at trial, but his choice of assumptions does not render his testimony inadmissible—only more or less persuasive when evaluated as a whole.
The judge at arbitration took a similar approach, recognizing that Beaton held undeniable expertise in business valuation—but the assumptions upon which he applied that expertise did not lead to a persuasive conclusion.
As the judge at arbitration recognized, business valuation “is as much an art as a science.” Four Roses did not challenge Beaton’s methods—it questioned the growth assumptions and discretionary factors that were necessary to financial projections and challenged the figures he arrived at.
Beaton’s convoyed sales estimate relied on the assumption that Four Roses’ conduct interfered with ANW’s sales relationships. Beaton’s testimony regarding “convoyed sales,” however, is no longer relevant, even if it could be considered reliable (an issue the Court need not decide). Beaton opines that ANW’s sales of Four Roses products motivated its customers to buy more products overall—such that Four Roses’ termination negatively impacted these purchases. In light of the Court’s determination, however, that Four Roses did not tortiously interfere with ANW’s other business relationships, Beaton’s “convoyed sales” testimony is no longer relevant and will be excluded.
Held
In conclusion, the Court denied Four Roses’ motion to strike the testimony of Neil J. Beaton as to testimony regarding lost profits and other damages and granted it as to testimony regarding ANW’s loss of “convoyed sales.”
Key Takeaway:
The Court has “broad latitude” in determining an expert’s reliability and finds no reason to question the reliability or relevance of Beaton’s testimony on lost profits under Rule 702. Moreover, Beaton has disclosed his assumptions and methodology for projecting lost profits, and Four Roses has not shown that those methods lack a reliable basis in the knowledge and experience of Beaton’s discipline.
Case Details:
Case Caption:
American Northwest Distributors Inc V. Four Roses Distillery Llc
Docket Number:
2:22cv1265
Court:
United States District Court for the Western District of Washington
Judge Joshua Wolson of Delaware District Court noted that, “Economists love assumptions. One joke recites that a physicist, a chemist, and an economist find themselves on a desert island with a single can of food. The physicist offers to calculate the force needed to use a coconut to open the can. The chemist offers to make a solution that will eat through the can’s top. The economist tells them they are making it too complicated and just to assume a can opener.”
Economic assumptions are very crucial when it comes to assessing patent damages, especially the one which assumes that both the infringer and patent holder participated willingly in negotiating a license right before the infringement began. Yet some participants are more willing than others in this hypothetical negotiation.
The Plaintiff, Wirtgen America, Inc. possessed patents that provided it with a competitive edge over one of its main rivals, the Defendant, Caterpillar, Inc. Wirtgen claimed that Caterpillar had been involved in the manufacture, use, sale, and/or importation of specific road milling machines within the United States. These machines were claimed to incorporate Wirtgen’s patented technology, thus infringing the Asserted Patents.
Wirtgen had asserted nearly 20 claims across 7 patents, all related to road construction equipment-primarily cold planers- but they covered a range of varied features. The ‘309 Patent disclosed road building machines capable of adjusting the machine’s height relative to the frame or chassis. Similarly, the ‘530 and ‘972 Patents disclosed road construction machines equipped with a drum, adjustable ground supports, and lifting sensors. The ‘641 Patent disclosed a method for working ground surfaces with a milling drum, including raising the drum off the ground. Furthermore, the ‘788 and ‘474 Patents disclosed road construction machines that are height-adjustable for milling depth or slope. Lastly, the ‘268 Patent disclosed aspects of the drive train in a road construction machine.
Wirtgen presented the expert testimony of Pallavi Seth, who provided an estimation of a reasonable royalty that Caterpillar would have paid to Wirtgen if they had engaged in a hypothetical negotiation before the first alleged infringement. Seth supported his estimate by referencing evidence indicating Wirtgen’s reluctance to license its patents to Caterpillar, even under favorable terms, citing Wirtgen’s history of not licensing its patents to Caterpillar in the past.
Seth utilized a willing licensor/willing licensee framework to estimate the highest amount that would ensure Caterpillar found the agreement profitable (otherwise known as Caterpillar’s maximum willingness to pay or “MWP”) and the lowest amount that would ensure Wirtgen found the agreement profitable (otherwise known as Wirtgen’s minimum willingness to accept or “MWA”). He defined Caterpillar’s MWP as the expected incremental profits earned from utilizing the Asserted Patents, and Wirtgen’s MWA as the profits it anticipates to lose should Caterpillar practice the Asserted Patents. The difference between Wirtgen’s MWA and Caterpillar’s MWP equaled the “joint surplus value” in Seth’s analysis.
Wirtgen’s MWA was determined to be its lost profits resulting from infringement. These lost profits consisted of both potential sales of machines as well as sales of spare and replacement parts associated with those machines, which Wirtgen would have had the opportunity to make if Caterpillar had not allegedly infringed the Asserted Patents.
Seth suggests that the joint surplus value may not entirely relate to the Asserted Patents, so she apportioned it to isolate the incremental value contributions of those patents to the accused products. She apportioned the joint surplus value using an apportionment rate derived from a count of family-level forward patent citations. The Rubinstein bargaining model is a framework used to analyze bargaining situations between two parties over the division of a surplus using which she divided the apportioned joint surplus value between the parties. Finally, she calculated damages by adding Wirtgen’s split of the apportioned joint surplus value to Wirtgen’s MWA. Wirtgen’s MWA accounted for approximately 95% of her total damages figure.
Seth asserted that the method for calculating Wirtgen’s MWA would remain consistent regardless of which patents the jury found Caterpillar infringed, although the actual amount of the MWA might vary due to different patents being in effect at different times. However, she acknowledged during her deposition that she did not conduct any patent-by-patent apportionment while calculating the MWA.
The Defendant filed a motion to exclude the testimony of Pallavi Seth deeming her reasonable royalty analysis deficient.
Intellectual Property Valuation Expert Witness
Dr. Pallavi Seth is a Principal at The Brattle Group, Inc. and serves as the Co-Chair of Brattle’s Intellectual Property practice. With a Ph.D. in Economics from Boston College and an B.A. in Economics and Mathematics, magna cum laude, from Mount Holyoke College. Her expertise lies in applying economic principles to intricate business litigation matters and public policy, particularly in the realm of intellectual property. Seth’s professional experience at Brattle, an international consulting firm specializing in business consulting and litigation support, underscores her proficiency in this domain.
Discussion by the Court
A reasonable royalty, on the other hand, is often “based upon a hypothetical negotiation between the patentee and the infringer when the infringement began.” Nonetheless, “given the great financial incentive parties have to exploit the inherent imprecision in patent valuation, courts must be proactive to ensure that the testimony presented—using whatever methodology—is sufficiently reliable to support a damages award.” Apportionment requires that “a patentee must take care to seek only those damages attributable to the infringing features.” The Federal Circuit requires that “to be admissible, all expert damages opinions must separate the value of the allegedly infringing features from the value of all other features.”
The entire market value rule “is a narrow exception” to the rule of apportionment. It states that if it can be shown that the patented feature drives the demand for an entire multi-component product, a patentee may be awarded damages as a percentage of revenues or profits attributable to the entire product.”
The Court acknowledged that a patent owner, having prevailed on liability, may receive a reasonable royalty or lost profits, but not both for the same infringing units.
The Court observed that Seth failed to properly apportion her reasonable royalty analysis as required by law. She combined Wirtgen’s MWA with the joint surplus value in order to calculate the royalty payment, but only apportioned the joint surplus value, neglecting to apportion Wirtgen’s MWA/lost profits. Consequently, she set a 95% of her damages figure in a way that included the value of all the other features in the machines. This approach was deemed impermissible for not invoking the entire market value rule.
In her reasonable royalty calculation, Seth was allowed to consider the profits on sales Wirtgen might lose by granting a license, with lost profits potentially playing a significant role in determining the ultimate reasonable royalty figure. However, Seth’s approach to lost profits posed a problem because it did not isolate the value of the allegedly infringing features from the value of all other features. Therefore, the issue stemmed from Seth’s use of unapportioned lost profits.
Seth’s apportionment approach was considered inconsistent even in comparison to the cases cited by Wirtgen. Typically, when a expert conducts a lost profit analysis as per the factors outlined in Panduit Corp. v.Stahlin Bros. Fibre Works, 575 F.2d 1152, 1156 (6th Cir. 1978), and then incorporates that analysis into the reasonable royalty rate calculation, it may naturally address apportionment concerns. Alternatively, an examination of licenses to comparable technology could also serve to address this issue.
The Court further observed that Seth did not utilize the Panduit factors to determine her lost profits figure, nor could she rely on comparable licenses due to Wirtgen’s lack of prior patent licensing. While it was acceptable that she did not use the Panduit factors or comparable licenses, in their absence, she was required to find another suitable method to apportion her damage award considering the specifics of this case.
Seth attempted to address the requirement for apportionment through her analysis of Georgia-Pacific’s Factor 13, as mentioned in the case Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), but her attempt was deemed inadequate. While she acknowledged the rule of apportionment in her analysis, noting that the Accused Product as a whole incorporated value from other patents, know-how, human capital, and raw materials, in addition to the value contributed by the technology embodied by the Asserted Patents, she only passingly suggested that the sales data she relied on already accounts for apportionment. However, without a more thorough analysis, it remained unclear how machine sales data could account for apportionment. Wirtgen’s counsel was unable to provide a satisfactory explanation during the hearing. Merely mentioning apportionment in discussing the thirteenth Georgia-Pacific factor did not ensure that Seth properly apportioned her damages, nor did it render her analysis admissible.
Caterpillar conducted an analysis of several of Wirtgen’s patents around the time of the hypothetical negotiation. For some patents, Caterpillar concluded that it had no workaround, causing significant harm to its market position due to its inability to provide the patented technology. However, for the ‘309 Patent, Caterpillar determined it could develop a workaround in a shorter time frame and at a relatively low cost. Seth’s approach, assuming Wirtgen’s MWA to be its lost profits and setting it as a damages floor, failed to consider that patents like the ‘309 Patent were less valuable to Caterpillar. Apportionment could have addressed this issue.
Wirtgen’s counsel defended Seth’s work by asserting that she conducted a hypothetical negotiation of Wirtgen’s entire patent portfolio. However, this approach was flawed because the portfolio consisted of unrelated patents covering different features of the machines. Furthermore, the hypothetical negotiation should have only included patents that the jury found infringed, rather than the entire portfolio. Seth’s approach thus raised the possibility of awarding damages for features that the jury did not find to be infringing.
A failure to apportion impacts admissibility, not weight. If Wirtgen prevails on liability, it will be entitled only to a damage award which captures “the value of what was taken” meaning the patented technology. Given that 95% of Seth’s damages figure consists of unapportioned lost profits, admitting this evidence risked skewing the damages horizon for the jury.
Wirtgen proposed the possibility of Seth still being able to testify. However, the Court stated that it hadn’t received Seth’s revised expert report nor had it been able to fully analyze the excerpts provided to assess the merits of Wirtgen’s request. Consequently, the Court did not outright reject the possibility of Seth testifying on matters not addressed in the current opinion, but it also did not explicitly approve it.
The Court concluded that Seth’s assumption that Wirtgen would have been a reluctant licensor, while reasonable, led her to award Wirtgen all of its lost profits without determining if any particular patented technology justified such a recovery. This failure to apportion and ensure that Wirtgen would only receive the benefit of its patented technologies in her damages analysis resulted in her analysis violating governing Federal Circuit precedent and requiring exclusion. Wirtgen was instructed to disclose any parts of Seth’s opinion it believed could withstand this analysis to Caterpillar promptly, with any remaining disputes to be resolved at the final pretrial conference.
Held
The Court granted the Defendant Caterpillar, Inc.’s Motion to Exclude Certain Expert Testimony of Pallavi Seth’s damages opinion. Further the Court asserted that Wirtgen must disclose to Caterpillar which parts of Seth’s expert report it intends to offer at trial by February 6, 2023, at 3 p.m. EST. Any disputes may be raised at the final pretrial conference on February 8, 2024, after the parties meet and confer.
The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.
Key Takeaways
Wirtgen’s expert, Pallavi Seth, estimated a reasonable royalty that Caterpillar would have paid to Wirtgen in a hypothetical negotiation, supported by evidence of Wirtgen’s reluctance to license its patents. However, Seth’s failure to adequately apportion the damages, particularly in considering lost profits, raised significant concerns. She attributed a substantial portion of the damages to Wirtgen’s lost profits without ensuring whether or not they were specifically related to the patented technologies. The Court observed that Seth’s approach violated governing Federal Circuit precedent, necessitating the exclusion of her testimony. Seth’s reliance on a hypothetical negotiation involving Wirtgen’s entire patent portfolio, rather than just the patents found to be infringed, further complicated the issue. Without proper apportionment, admitting the damages analysis risked biasing the jury’s assessment.
Hayward Industries, Inc. (the Plaintiff), a company in the pool industry, filed a complaint against competitors (the Defendants) over the sale of aftermarket replacement salt cells for use in Plaintiff’s chlorine generator systems. Chlorine generators, also known as “salt cell systems,” convert dissolved salt into chlorine to sanitize pools. Chlorine generator systems replace the need for liquid or tablet chlorine. The salt cell has a limited use life and is replaced by inserting a new salt cell into the overall system when the prior cell is exhausted. Hayward manufactures and sells pool chlorination systems, and the dispute centers around the Defendants’ alleged violations of the Lanham Act and other claims. The Plaintiff contends that the Defendants’ advertising is misleading and creates confusion among customers, making them believe that the aftermarket products are actually Hayward’s.
The Plaintiff presented Juli Saitz’s expert report in the legal proceedings to bolster their damage claims, particularly focusing on her assessment of lost profits the Plaintiff is entitled to. Saitz conducted an analysis of the relevant market, characterizing it as a two-party market. This characterization suggested that Hayward, the Plaintiff, would have secured sales of replacement salt cells if not for the Defendants’ alleged false advertising and trademark infringement.
The Defendants filed a Motion in Limine, pursuant to Federal Rules of Evidence 702, in order to exclude the testimony of the Plaintiff’s damages expert, Juli Saitz.
Accounting Expert Witness
Juli Saitz is a Certified Public Accountant with nearly 25 years of experience. She has been appointed as an expert in matters of forensic accounting on more than 20 occasions. Saitz has testified in both litigation and arbitration for disputed values in excess of $100 million. She has served as an expert in matters involving business divorces; shareholder disputes; fraud claims; breach of contract matters; patent, trademark, and copyright infringement; and royalty disputes.
Saitz has a background in commercial disputes and financial consulting services related to financial analysis, investigations, and damage analysis. She is experienced across a range of industries including entertainment, real estate, hospitality, food and beverage, consumer products, financial services, and manufacturing.
Discussion by the Court
Federal Rules of Evidence 702 requires that an expert’s opinion testimony be “based on sufficient facts or data” and must be “the product of reliable principles and methods.” Daubert, as was held in Sardis v. Overhead Door Corp., 10 F.4th 268, 281 (4th Cir. 2021), provides non-exhaustive “guideposts” to aid in the required analysis as to whether an expert’s testimony is reliable: (1) whether the expert’s theory or technique “can be (and has been) tested”; (2) whether the theory or technique has been subject to prior review and publication; (3) “the known or potential rate of error” inherent in the expert’s theory or technique; and (4) whether the expert’s methodology is generally accepted in his field of expertise.
The Defendants are seeking to exclude Saitz’s report, asserting three main arguments. Firstly, they claim that Saitz used a patent damages framework (the Panduit test) inappropriately for Lanham Act cases. Secondly, they argue that Saitz did not establish a connection between the Defendants’ alleged infringing conduct and the assumed transferred sales to Hayward, thus failing to show causation as required to support a lost profits award. Lastly, the Defendants assert that Saitz overlooked significant and undisputed evidence, including factors like pricing influencing consumer decisions, the market for the goods at issue—replacement salt cells for pool chlorination systems-not being a two-party structure as assumed, and issues related to Hayward’s supply chain disruptions and inventory during the relevant damages period.
The Court has rejected the Defendants’ motion. The challenges raised by the Defendants regarding Juli Saitz’s expert report were deemed as concerns about the weight of her testimony rather than its admissibility. The Court acknowledged that Saitz’s methodology, which had been employed by other courts, is acceptable in cases involving essentially a two-party market. The ruling suggests that the Defendants can contest Saitz’s methodologies during cross-examination concerning damages but doesn’t deem them grounds for excluding her testimony.
Held
The Court denied Defendants’ motion to exclude Saitz’s expert report and testimony from trial. As of now, the Court has not reached a verdict in this case, as there are still pending issues that await resolution.
Key Takeaways:
The key takeaways from the court proceedings on expert testimony are grounded in the Federal Rules of Evidence, particularly Rule 702, which mandates that expert opinions must be based on sufficient facts and reliable principles and methods. The Daubert standard, as elucidated in Sardis v. Overhead Door Corp., provides guiding criteria to evaluate the reliability of expert testimony, including whether the theory or technique is testable, has undergone prior review, the potential rate of error, and general acceptance in the field.
In this specific case, the Defendants sought to exclude the expert testimony of Juli Saitz, raising three primary objections. Firstly, they argued that Saitz improperly utilized a patent damages framework for Lanham Act cases. Secondly, they contended that Saitz failed to establish a connection between the alleged infringing conduct by the Defendants and the assumed transferred sales to Hayward, thereby lacking causation necessary for a lost profits award. Lastly, the Defendants asserted that Saitz overlooked crucial evidence, such as pricing influences on consumer decisions, the market structure not aligning with the assumed two-party framework, and issues related to Hayward’s supply chain disruptions.
Despite these challenges, the Court denied the Defendants’ motion, emphasizing that the concerns raised pertained to the weight of Saitz’s testimony rather than its admissibility. The Court acknowledged the acceptance of Saitz’s methodology in similar contexts and allowed the Defendants to challenge her methodologies during cross-examination. Saitz, with nearly 25 years of experience, brings expertise in forensic accounting and has been involved in diverse disputes, ranging from business divorces to intellectual property matters. The Court’s decision underscores the importance of cross-examination in scrutinizing expert testimony, granting the Defendants an opportunity to challenge Saitz’s methodologies and findings while allowing her testimony to remain admissible.
Case Details
Case Caption
Hayward Industries, Inc. V. Blueworks Corporation Et Al
Docket Number
3:20cv710
Court
United States District Court, North Carolina Western
This case involved a dispute over the admissibility of expert testimony regarding damages in a lawsuit filed by Innovative Solutions International, Inc. (“Plaintiff”) against multiple Defendants, including Houlihan Trading Company, Inc. and Pilgrim’s Pride Corporation (“Pilgrims”).
Pilgrims, a company involved in preparing and packaging chicken for resale, supplied chicken that went through several vendors before reaching Defendant Houlihan Trading Co., Inc., who then sold it to the Plaintiff. The Plaintiff used the chicken in various food products that were ultimately sold to Trader Joe’s. Following customer complaints about bones in the products, Trader Joe’s terminated its contract with the Plaintiff. Consequently, the Plaintiff initiated legal proceedings against several entities in the supply chain, including Houlihan and Pilgrims. The lawsuit was filed on the grounds of multiple breaches of warranty and contract, misrepresentation, negligence, and violations of consumer protection laws. To support its claim for damages, the Plaintiff sought the admission of expert testimony from Steven J. Kessler. However, Pilgrims petitioned the Court to exclude or limit Kessler’s expert testimony, citing Rule 702 and the Daubert v. Merrell Dow Pharmaceuticals case (509 U.S. 579, 1993).
Business Valuation Expert Witness
Steven J. Kessler, C.P.A., A.B.V., C.F.F., has significant experience in the valuation and analysis of economic damages for business and personal injury cases and contested economic damages litigation cases. He is a Certified Public Accountant. He earned professional certifications such as Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA) and Certified in Financial Forensics (CFF), among many others.
Discussions by the Court
Pilgrims initially argued for the exclusion of Kessler’s testimony, contending that his method of calculating profits did not adhere to a “generally accepted way.” The Court noted that Pilgrims incorrectly applied the Frye standard, emphasizing that it had been superseded by Federal Rule of Evidence 702 according to the Daubert decision. The Daubert standard represented a departure from the stringent “general acceptance” standard set by Frye, emphasizing that while general acceptance within a scientific community could be a relevant factor, Daubert aimed to establish a more flexible test for the admissibility of expert testimony. Daubert clarified that expert testimony must be both reliable and relevant to the trier of fact, with general acceptance of a methodology, being just one factor among others in the non-exhaustive list of considerations.
In the Daubert inquiry, Kessler’s methodology for establishing expert evidence was assessed. Kessler began by calculating the Plaintiff’s average sales growth rate, determining it to be slightly over 10% based on a seven-year period from 2013 through 2019. Next, he calculated the Plaintiff’s estimated lost profits for 2022 by using the 2019 sales volume as a base, applying the 10% annual growth rate, and factoring in the average selling price per pound for that year. In performing these calculations, Kessler employed actual figures for products sold, sales price, overhead costs, and other relevant variables for the relevant year. Lastly, Kessler utilized the annual growth rate and net loss in profits as inputs to calculate future lost profits for the subsequent 14 years. This projection involved applying the appropriate growth rate to the estimated lost profits amount.
According to Daubert, a proponent of expert testimony must provide a precise explanation of how conclusions were reached and reference objective sources to support reliability. Mere assertions of “universal acceptance” are insufficient; instead, the proponent must demonstrate in an objective manner that the chosen scientific method is reliable. Despite Pilgrims’ challenge to the reliability of Kessler’s report, which it claimed lacked evidence of widespread acceptance, the Court noted that Daubert’s focus is on reliability and relevance rather than general acceptance.
The Court found Kessler’s methodology, as detailed in calculating the Plaintiff’s damages, to be both reliable and relevant. The method, involving the comparison of profits over benchmark periods before and after an alleged injury, is widely accepted across jurisdictions. The Court cited the “before and after” or “profit history” method, endorsed in cases such as Bigelow v. RKO Radio Pictures 327 U.S. 251 (1946). Despite Kessler not explicitly labeling his approach as such, the Court deemed it fundamentally the same as the endorsed methods.
In light of Daubert’s liberal approach, the Court found Kessler’s method reliable. Any disagreement with specific calculations could be addressed through cross-examination during trial, as per Daubert’s recommendation for challenging admissible evidence.
In the alternative, Pilgrims sought to exclude Kessler’s testimony, claiming faulty data. According to Federal Rule of Evidence 702(b), expert testimony must be based on sufficient facts. However, the emphasis of Rule 702(b) is not to allow the Court to exclude testimony based on a belief in one version of the facts over another. Pilgrims’ argument was deemed unsuccessful, as it essentially amounted to a disagreement about the underlying set of facts, which Rule 702(b) prevents from being a basis for exclusion.
Pilgrims’ additional argument contends that Kessler’s failure to include mitigation in his calculation of damages renders his testimony unreliable. Specifically, Pilgrims asserted that Kessler should have factored in Plaintiff’s potential profits to offset the damages outlined in his report. However, the Court disagrees with this stance, noting that although the failure to mitigate can be considered in a damage award, there is no authoritative basis for excluding testimony solely due to the omission of mitigation in the damages calculation. According to Daubert, Kessler’s decision not to include mitigation does not render his testimony unreliable or irrelevant, as the question of whether Plaintiff could have mitigated its damages is a matter of fact for the jury to determine.
Pilgrims challenged Kessler’s inclusion of a 15-year projected loss of profits, claiming insufficient basis for extending sales projections post-recall. However, Kessler’s report clarified that the projected loss of profits across a 15-year period aligned with the Plaintiff’s sales relationship with Trader Joe’s, which spanned 15 years. Court acknowledged Pilgrims concern that a longstanding business relationship didn’t guarantee future business but highlighted that such a guarantee wasn’t a requirement for the admissibility of the expert testimony.
Defendant challenged a crucial assumption in Kessler’s damages computation, specifically his exclusion of the year 2020 due to the COVID pandemic. Again, Pilgrim’s fails to explain why decisions made by an expert are anything more than questions of reasonableness best left for a jury to decide. Emphasizing the principles in Daubert, the Court asserted that once an expert meets the reliability threshold, questions regarding the weight of the testimony are within the jury’s purview, not the Court’s. In essence, the Court clarified that the reasonableness of Kessler’s assumptions in calculating damages is a matter for the jury to decide and does not constitute grounds for exclusion.
Held
The Court denied Defendant Pilgrims’ Pride Corporation’s motion to exclude or limit the expert testimony of Steven J. Kessler. The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.
Key Takeaways
This case demonstrates that under the Daubert standard that now governs the admissibility of expert testimony, the focus is on the reliability and relevance of the expert’s principles and methodology, not the rigorous “general acceptance” standard. While the Defendant argued that the methodology employed by Plaintiff’s expert, Steven Kessler’s wasn’t generally accepted, the Court found it satisfied Daubert because it was reliable and relevant. Where the expert meets the reliability threshold as explained in Daubert, questions regarding the weight to be accorded to the testimony are for the jury, not the Court. Secondly, the Court held that outright exclusion is not warranted if the expert does not include mitigation as part of his calculation of damages. Finally, opposing parties can challenge the facts underlying an expert’s assumptions through cross-examination rather than exclusion. Disagreements about the facts are not enough to exclude expert testimony as unreliable.
