2nd Circuit supports nixing of lost profits based on unsuitable benchmark

BVWireIssue #183-2
December 13, 2017

Readers may remember the damages case that featured an upstart sportswear company whose founder claimed it could have been a major contender in the market “but for” the defendant’s breach. Recently, the 2nd Circuit rejected the plaintiffs’ efforts to revive a multimillion-dollar jury award that was based on a shaky yardstick analysis. After so many twists and turns, the latest ruling really may be the end of this litigation.

Yardstick analysis. The plaintiff and his company owned the “Sunday Players” (SP) brand. Hoping to break into the compression sportswear apparel market, they made an agreement with the defendant that required the latter to market SP’s products. The plaintiffs claimed MTV had expressed interest in partnering with SP to the defendant. An MTV promotion could have generated hundreds of millions in product sales. Nothing came of the MTV deal, and, in spring 2005, the defendant ended its relationship with the plaintiffs.

The plaintiffs sued, alleging the defendant breached its promise, and asked for damages in excess of $50 million. The plaintiffs’ expert based his damages calculation on two approaches: a yardstick analysis and a "Market Forecast Analysis.” The trial court excluded the latter in response to the defendant’s Daubert challenge. But the court admitted the yardstick analysis, which used the market leader, Under Armour, as a benchmark and posited that, but for the defendant’s wrongdoing, the plaintiffs’ revenues would have been 50% of Under Armour’s, at a time when Under Armour was at the top of its game.

A jury awarded the plaintiffs $4.35 million in lost profits or, in the alternative, $532,000 in lost business value. Post-trial, a different trial judge struck down the lost profits award, finding it lacked a sound basis. And, even though the judge initially allowed the plaintiffs to prove lost business value damages in a new trial, she changed her mind during pretrial proceedings, concluding the plaintiffs “had no intention of pursuing a realistic damages award.” After reviewing the plaintiffs’ damages evidence, the court excluded virtually all of it. “Accelerating the inevitable,” it decided to close the case by awarding the plaintiffs one dollar in nominal damages.

‘Not a reasonable comparator.’ Both parties appealed the findings with the 2nd Circuit Court of Appeals. The reviewing court affirmed the defendant’s liability as well as the trial court’s ruling that the plaintiffs had failed to present a plausible damages calculation.

“Under Armour was not a reasonable comparator,” the 2nd Circuit said. At the relevant time, Under Armour was an established business with annual sales of between $49.5 million and $195 million and it controlled about 80% of the relevant market. In sharp contrast, the plaintiffs’ company sold less than $200,000 in merchandise to a few small retailers and high school and college athletic teams. The expert’s claim that revenues were reasonably certain to increase from a few hundred thousand dollars to about $80 million in two years was completely unwarranted and could not create a legal basis for awarding future lost profits, the 2nd Circuit said. The trial court’s ruling to award the plaintiffs nominal damages was not error, the appeals court said.

A digest of Washington v. Kellwood Co., 2017 U.S. App. LEXIS 21871 (Nov. 2, 2017) (Kellwood IV), and the court’s opinion will be available soon at BVLaw.

Subscribers also have access to digests and court opinions for Washington v. Kellwood Co., 2015 U.S. Dist. LEXIS 63457 (April 21, 2015), as well as Washington v. Kellwood Co., 2016 U.S. Dist. LEXIS 92309 (July 15, 2016) (Kellwood II), and Washington v. Kellwood Co., 2016 U.S. Dist. LEXIS 136612 (Sept. 30, 2016) (Kellwood III).

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