Opinion
Civil Action No. 02-2632-CM.
March 31, 2005
MEMORANDUM AND ORDER
On December 18, 2002, plaintiff Robert J. Pound brought several claims against several defendants regarding the sale and distribution of a pesticide called Black Knight. Following several summary judgment motions, plaintiff's only remaining claim alleges that defendants' sale and distribution of Black Knight violated the Lanham Act, 15 U.S.C. § 1125(a). Pending before the court is defendant Airosol's Motion to Exclude the Testimony of Constance L. Ward (Doc. 210), Chad Brown, Robyn Markland, Pro Exotics, Inc. and Pro Exotics Reptiles, Inc.'s ("Separate Defendants") Motion for Leave to File Separate Defendants' Motion to Exclude the Testimony of Constance L. Ward (Doc. 283) and Separate Defendants' Motion to Exclude the Testimony of Constance L. Ward (Doc. 285).
Ms. Ward changed her last name to Ochs during the course of her engagement with Airosol. Therefore, any references to Ms. Ward or Ms. Ochs refer to the same person.
I. Background
Plaintiff owns a reptile business called Pro Products, Inc. In September 2000, plaintiff patented and began selling Provent-a-Mite, a product designed to treat and eradicate ectoparasites such as mites on reptiles. Airosol manufactured, advertised, distributed, and sold the pesticide Black Knight. Black Knight is a direct competitor of Provent-a-Mite, as both products were sold to reptile enthusiasts for use on reptile ectoparasites. Separate Defendants breed and sell live reptiles, as well as sell reptile supplies through the Pro Exotics, Inc. storefront and website. Brown and Markland, named as individual defendants, are the owner and day-to-day manager of the business, respectively.
Plaintiff has proffered testimony from Constance L. Ward to "analyze facts for purposes of quantifying Airosol's profits and damages, if any, suffered by the Plaintiff as a result of the Defendants' actions." (Ward Report at pp. 1 3). Ms. Ward is a Certified Public Accountant with over twenty years of experience in public accounting. In addition, Ms. Ward is accredited in Business Valuation, a Certified Fraud Examiner, and a Certified Valuation Analyst. Using the "yardstick" approach, Ms. Ward estimated plaintiff's loss from defendants' sale of Black Knight by assuming a one-to-one sales loss by plaintiff. In other words, Ms. Ward assumed that, from 2000 through February 2004, each can of Black Knight sold by defendants amounts to a loss of the sale of two cans of Provent-a-Mite to plaintiff. The summary of Ms. Ward's expert report concluded the following: (1) plaintiff sustained economic damages of $232,011 in lost business profits from 2000 to February 2004; (2) Airosol earned at least an estimated $30,804 to $52,744 in profits from 2000 to February 2004 on the sale of Black Knight for reptile use; (3) Airosol earned at least an estimated $912,436 in profits from October 1996 to February 2005 on all sales of Black Knight; and (4) Pro Exotics earned $4,703 in profits from 2000 to 2002 on sales of Black Knight. Defendants primarily take issue with Ms. Ward's estimation of plaintiff's lost profits.
Ms. Ward applied the yardstick approach by volume. Each can of Black Knight contains twelve ounces, while each can of Provent-a-Mite contains six ounces. Therefore, Ms. Ward treated each can of Black Knight as the equivalent of two cans of Provent-a-Mite.
II. Standard
Plaintiff has proffered testimony from Ms. Ward regarding the value of plaintiff's damages, calculated primarily for its Lanham Act claim against defendants. Section 43(a) of the Lanham Act allows for liability "by any person who believes that he or she is or is likely to be damaged by such act." 15 U.S.C. § 1125(a). The Tenth Circuit has interpreted this portion of the Lanham Act to require an injury by the plaintiff. Sally Beauty Co., Inc. v. Beautyco, Inc., 304 F.3d 964, 980 (10th Cir. 2002). Recovery for false advertising violations are governed by 15 U.S.C. § 1117, which provides for the recovery of "defendant's profits, any damages sustained by the plaintiff, and the costs of the action." 15 U.S.C. § 1117(a).
On March 10, 2004, this court granted plaintiff's Motion for Partial Summary Judgment against Airosol and Separate Defendants finding that, as a matter of law, these defendants' sale and distribution of Black Knight violated the Clean Air Act pursuant to 42 U.S.C. §§ 7413(b) and 7406(a). Accordingly, plaintiff argues that Ms. Ward can also testify as to the penalties available to plaintiff for defendants' violations of the Clean Air Act. However, the penalty provisions of the Clean Air Act involve complicated analysis of several different factors, including the "economic benefit component" and "gravity component" of the penalty for the Clean Air Act violations. See Clean Air Act Stationary Source Civil Penalty Policy, available at http://www.epa.gov/compliance/resources/policies/civil/caa/ stationary/penpol.pdf. Ms. Ward does not purport to have expertise in this area. Thus, the court is unwilling to entertain Ms. Ward as an expert in Clean Air Act penalties.
Airosol has moved to exclude Ms. Ward's testimony on the grounds that it does not meet the requirements for admission of expert testimony set forth in Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993).
Rule 702 provides:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.
Under this rule, the court examines whether the expert is initially qualified to give the opinion proposed and whether the opinion expressed meets the requirements of Daubert, in that it "rests on a reliable foundation and is relevant to the task at hand." 509 U.S. at 591. This evaluation, commonly referred to as the court's "gate-keeping" function, extends not only to scientific testimony, but also to technical and other specialized testimony. See Kumho Tire. Co., Ltd. v. Carmichael, 526 U.S. 137 (1999).
The trial court must also determine whether the expert's opinion is "based on facts that enable the expert to express a reasonably accurate conclusion as opposed to conjecture or speculation [but] absolute certainty is not required." Kieffer v. Weston Land, Inc., 90 F.3d 1496, 1499 (10th Cir. 1996) (quoting Jones v. Otis Elevator Co., 861 F.2d 655, 662 (11th Cir. 1988)). "[T]he `touchstone' of admissibility is helpfulness to the trier of fact." Werth v. Makita Elec. Works, Ltd., 950 F.2d 643, 648 (10th Cir. 1991).
II. Analysis
A. Separate Defendants' Motions
On July 16, 2004, Airosol filed a Motion to Exclude the Expert Testimony of Constance L. Ward. On March 18, 2005, Separate Defendants filed a Motion for Leave to File Separate Defendants' Motion to Exclude the Testimony of Constance L. Ward (Doc. 283). On the same day, Separate Defendants also filed a Motion to Exclude the Testimony of Constance L. Ward (Doc. 285), in which Separate Defendants request that they be allowed to join Airosol in its Motion to Exclude by adopting and incorporating by reference the arguments and authorities contained in Airosol's Motion and Memorandum in Support thereof. Plaintiff has not yet responded to these motions. However, in the interests of judicial economy, the court grants Separate Defendants' Leave to File and Motion to Exclude.
B. Motions to Exclude Expert Witness
The first issue before the court is whether plaintiff must prove actual damages sustained as a result of defendants' alleged Lanham Act violation, or whether he may estimate his damages. In support of its argument that plaintiff must prove actual damages, defendants argue that the court should follow McGinley v. Franklin Sports, Inc., in which the District of Kansas held that:
"[a] useful, but non-exclusive, way for a patentee to prove entitlement to lost profits is provided by the four-factor Panduit test, which `requires that the patentee establish: (1) demand for the patented product; (2) absence of acceptable non-infringing substitutes; (3) manufacturing and marketing capabilities to exploit the demand; and (4) the amount of the profit it would have made."192 F. Supp. 2d 1214, 1218 (D. Kan. 2002) (quoting Tate Access Floors, Inc., v. Maxcess Tech., Inc., 222 F.3d 958, 971 (Fed. Cir. 2000) (quoting Rite-Hite Corp., v. Kelley Co., Inc., 56 F.3d 1538, 1545 (Fed. Cir. 1999) (citing Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978)))). Alternatively, defendants urge the court to apply the four-factor test from Eckel Industries Inc. v. Primary Bank, a District of New Hampshire case, which held:
The First Circuit has delineated four rules that apply to the award of monetary damages under the Lanham Act. "These are: 1) a plaintiff seeking damages must prove actual harm, such as the diversion of sales to the defendant; 2) a plaintiff seeking an accounting of defendant's profits must show that the products directly compete, such that defendant's profits would have gone to plaintiff if there was no violation; 3) the general rule of direct competition is loosened if the defendant acted fraudulently or palmed off inferior goods, such that actual harm is presumed; and 4) where defendant's inequitable conduct warrants bypassing the usual rule of actual harm, damages may be assessed on an unjust enrichment or deterrence theory."26 F. Supp. 2d 313, 316-17 (D.N.H. 1998) (quoting Aktiebolaget Electrolux v. Armatron Int'l, Inc., 999 F.2d 1, 5 (1st Cir. 1993) (quoting Camel Hair and Cashmere Inst. v. Assoc. Dry Goods Corp., 799 F.2d 6, 12 (1st Cir. 1986))).
The court is unwilling to apply either of these tests for two reasons. First, neither the Panduit nor the Eckel tests are precedent in the Tenth Circuit in cases involving false advertising under the Lanham Act. To the contrary, both McGinley and Panduit are patent infringement cases. Defendants failed to cite, nor could the court find, a Tenth Circuit case which applied the Panduit test to a false advertising claim. Moreover, neither Eckel nor the cases it references have been applied in the Tenth Circuit.
Second, this court has previously ruled on this very issue in the instant case. In its February 17, 2005 Order (Doc. 274) granting in part and denying in part Airosol's and Separate Defendant's Motion for Summary Judgment, this court cited Brunswick Corp. v. Spinit Reel Co., a Tenth Circuit case which held that, where a Lanham Act violation "is of such a nature as to preclude exact ascertainment of the amount of damages, plaintiff may recover upon a showing of the extent of the damages as a matter of just and reasonable inference, although the result may be only an approximation," and, furthermore, that "evidence of the amount of damages may be circumstantial and inexact." 832 F.2d 513, 526 (10th Cir. 1987) (citing Eastman Kodak Co. v. S. Photo Materials Co., 273 U.S. 359, 379 (1927))). In addition, this court held that a one-to-one sales loss may provide "an upper range for an award of damages." Brunswick Corp., 832 F.2d at 526. As such, this court held that plaintiff is not required to prove actual damages to prevail on his Lanham Act claim, but may instead approximate his damages based on circumstantial or inexact information.
To clarify its previous ruling, the court notes that in Brunswick Corp., the Tenth Circuit requires plaintiff to initially prove the existence of actual damages to prevail on a Lanham Act claim by noting that the "[l]ikelihood of confusion is insufficient; to recover damages plaintiff must prove it has been damaged by actual consumer confusion or deception resulting from the violation." 832 F.2d at 525 (citing Schutt Mfg. Co. v. Riddell, Inc., 673 F.2d 202, 206 (7th Cir. 1982); Quabaug Rubber Co. v. Fabiano Shoe Co., Inc., 567 F.2d 154, 161-62 (1st Cir. 1977)). Therefore, to prevail on a Lanham Act claim, plaintiff must prove the existence of actual damages in the form of actual consumer confusion or deception. Plaintiff may prove actual consumer deception or confusion to the jury "by direct evidence, a diversion of sales or direct testimony from the public, or by circumstantial evidence such as consumer surveys." Id. (citing PPX Enters. Inc. v. Audiofidelity Enters., Inc., 818 F.2d 266, 271 (2d Cir. 1987); Schutt Mfg. Co., 673 F.2d at 206-07; Bangor Punta Operations, Inc. v. Universal Marine Co., Ltd., 543 F.2d 1107, 1110 (5th Cir. 1976)).
In this case, because the court already has declined to grant summary judgment on plaintiff's Lanham Act claim, the question of actual damages is best answered by a jury. Nevertheless, this question is irrelevant here, as the relevant motions in front of the court encompass only Ms. Ward's admissibility as an expert witness, and not whether plaintiff has proven all the necessary requirements to prevail on his Lanham Act claim.
Indeed, the court previously declined to grant summary judgment on plaintiff's Lanham Act claim, finding that the existence of plaintiff's damages as a result of defendants' alleged Lanham Act violations created a genuine issue of material fact to be decided by a jury.
If plaintiff prevails on his Lanham Act claim, the jury must next decide the amount of damages to award. Accordingly, the court is next faced with the issue of whether Ms. Ward is qualified to testify regarding the amount of damages allegedly suffered by plaintiff. Defendants argue that Ms. Ward's method of estimating plaintiff's lost profits is flawed. In her deposition, Ms. Ward stated that her calculation of Pound's lost profits was based on the "premise that Mr. Pound would have sold units of his product in the marketplace had the Airosol Company's product not been offered for sale for that use [and] took the actual product sold by Airosol in units and applied Mr. Pound's profit margins to those units to conclude what his lost profits would have been." To apply this premise, Ms. Ward uses the "yardstick" approach and assumes that, from the year 2000 through February 2004, each can of Black Knight sold by defendants amounts to a loss of the sale of two cans of Provent-a-Mite by plaintiff resulting in total lost profits of $232,011 for that period of time.
Plaintiff defends Ms. Ward's methodology by arguing that a one-to-one sales loss assumption has been adopted by the Tenth Circuit, which stated that such an assumption may provide for "an upper range for an award of damages." Brunswick Corp., 832 F.2d at 526. However, the court notes that Brunswick did not categorically endorse the yardstick method as applicable in all lost profits estimations. Rather, Brunswick Corp. also stated that "[a]lthough the quantum of damages, as distinguished from entitlement, must be demonstrated with specificity, courts may engage in `some degree of speculation in computing the amount of damages, particularly when the inability to compute them is attributable to the defendant's wrongdoing.'" Id. (quoting PPX Enters. Inc., 818 F.2d at 271 (citations omitted) (quoting Burndy Corp. v. Teledyne Indus., Inc., 748 F.2d 767, 771 (2nd Cir. 1984))). Therefore, once the existence of actual damages is confirmed, a court may, at least to some degree, speculate as to the amount of actual damages. However, the court notes that the Tenth Circuit does not diminish the significance of actual damages. See Bishop v. Equinox Int'l. Corp., 154 F.3d 1220, 1223 (10th Cir. 1998) ("Notwithstanding the existence of these theories of recovery, we recognize that a finding of actual damage remains an important factor in determining whether an award of profits is appropriate.").
The court is unwilling to state that a one-to-one sales loss assumption is never a suitable damages calculation. To the contrary, the court can envision a situation in which a one-to-one sales loss might be appropriate, for instance, if the market in question contained only two competing and substantially similar products which had the same price per unit, similar distribution and supply capabilities, and similar marketing. However, these circumstances are not present here. Instead, Ms. Ward's one-to-one sales assumption is analogous to the expert admissibility analysis in First Savings Bank. There, the District of Kansas found plaintiff's expert witness's estimation of plaintiff's lost profits to be inadmissible, holding that the expert:
improperly attributed all losses to the defendants' allegedly illegal acts, despite the presence of other factors that could be significant to his analysis. The fact that Miller's estimates are based — without any evidentiary or even statistical support — on an assumption that defendants caused all declines suffered by plaintiff also infects his basic methodology. Miller admitted that it was an important part of his analysis to assure himself that there were not other factors that were responsible for declines in deposit levels at plaintiff's institution. But Miller admitted that the only such factor he considered was whether plaintiff's interest rates were comparable to those of other institutions in its marketplace.First Sav. Bank, F.S.B. v. U.S. Bancorp, 117 F. Supp. 2d 1078, 1084 (D. Kan. 2000) (citations omitted).
Plaintiff distinguishes First Savings Bank by arguing that Ms. Ward is not testifying as a market analyst. Although Ms. Ward was not retained as a market analyst, the court believes that some market analysis is necessary to accurately estimate plaintiff's lost profits in these circumstances. Because Ms. Ward did not conduct any analysis of the reptile market, she failed to consider the actual potential sales plaintiff might have acquired if Black Knight had not been on the market from 2000 through February 2004. Furthermore, Ms. Ward failed to consider the price differential of the two products. Black Knight sold for $.64 per ounce, while Provent-a-Mite sells retail for $3.33 per ounce and wholesale for $1.99 per ounce. Clearly, this significant difference in price would have deterred some Black Knight consumers from purchasing Provent-a-Mite.
Ms. Ward also failed to analyze alternative reptile pest control methods, such as liquid soap, Nix, No-Pest strips, Sevin Dust and Reptile Relief. Plaintiff responds by arguing that competition from "illegal" products, or products which are not approved by the EPA for use on reptiles, is not an appropriate consideration but fails to provide any legal support for this contention. The court agrees that to include in this analysis comparable products specifically marketed for reptile pest control but which are not approved by the EPA for reptile use would exasperate the very Lanham act violation plaintiff is asserting. However, at the same time, the court cannot ignore the market presence of household products not specifically labeled for reptile pest control when plaintiff admits such products are used by reptile owners. Additionally, as defendants point out, the product Reptile Relief was approved by the EPA for use on reptiles in March 2002, but Ms. Ward failed to account for this legal reptile pest control product subsequent to March 2002 in her estimation.
In sum, the court finds that Ms. Ward's assumption that each consumer who purchased a can of Black Knight for reptile use from 2000 through February 2004 would have instead purchased two cans of Provent-a-Mite for over five times the retail price by volume is not based upon sufficient facts or data, and therefore not be helpful to the trier of fact. For the foregoing reasons, the court excludes Ms. Ward's expert testimony.
IT IS THEREFORE ORDERED that Airosol's Motion to Exclude the Testimony of Constance L. Ward (Doc. 210), Separate Defendants' Motion for Leave to File Separate Defendants' Motion to Exclude the Testimony of Constance L. Ward (Doc. 283), and Separate Defendants' Motion to Exclude the Testimony of Constance L. Ward (Doc. 285) are granted.