How closely does a business have to resemble a comparator to produce a yardstick analysis that meets the Daubert requirements? Judging from a recent federal court decision, the answer is “not that closely.”
Hopes dashed: The creator of a new brand, Sunday Players, wanted to conquer the compression apparel market and made a licensing deal with the defendant, a large manufacturer, marketer, and seller of private labels and brands. Compression apparel has become big due to the rising success of the Under Armour brand. In the parties’ dealings, the defendant allegedly told the plaintiff that MTV was interested in partnering with Sunday Players and that an MTV promotion would result in hundreds of millions of dollars in product sales. Ultimately, the promo deal with MTV did not materialize.
The defendant abandoned the partnership, saying it was unable to make a single sale even though it pitched the Sunday Players brand to some 18 large retailers and spent about $220,000 in marketing. The plaintiff sued on several legal theories, including breach of contract, asking for damages in excess of $50 million. Both parties retained experts and filed pretrial motions to exclude the opposing testimony.
Comparable to market leader? One of the ways in which the plaintiff’s expert calculated damages was by developing a yardstick analysis that used Under Armour as the point of comparison. He justified his choice of benchmark by noting that, at the relevant period, Under Armour had executed a promotion agreement with ESPN—a development that illustrated the growth potential in the market and brought to mind the joint venture efforts between the plaintiff and the defendant toward the never-executed promotion agreement with MTV. Also, at the relevant period, Under Armour, like the plaintiff, focused on selling compression sportswear and was then in “its early startup period.” And, MTV, like ESPN, had a significant geographical reach and cultural influence. The plaintiff anticipated that the way in which Under Armour was marketed might parallel the marketing strategy for Sunday Players had the defendant realized the promotional agreement with MTV.
The defendant claimed the analysis was unreliable, stating: “Under Armour and Sunday Players are so dissimilar as to render [the expert’s] selection of Under Armour laughable.” Whereas Under Armour for a long time has dominated the market, Sunday Players merchandise has had a woeful performance record.
The court admitted the testimony. Under Daubert, “[e]xpert testimony should not be rejected simply because the conclusions reached by the witness seem subjectively improbable,” the court said. Even if the expert’s claim that Sunday Players could have had a success similar to that of Under Armour seemed an improbable conclusion, the expert provided reasons for arriving at that conclusion and a methodology to support it. The court noted there was no bright-line test for yardstick analyses. “Reliability,” the court said, was a “flexible” concept and no one set of factors applied to all experts in every case.
Takeaway: The court rebuffed the defendant’s proposition that the standard for a reliable yardstick analysis was set in Celebrity Cruises Inc. v. Essef Corp. Moreover, the court said, to the extent that Celebrity Cruises spelled out what a reliable yardstick analysis was, the expert’s analysis met the test in that the benchmark company was “similar to [plaintiff] in material respects.”
An extended discussion of Washington v. Kellwood Co., 2015 U.S. Dist. LEXIS 63457 (April 21, 2015), will appear in the August edition of Business Valuation Update; the court’s opinion is available at BVLaw. Celebrity Cruises Inc. v. Essef Corp., 2007 U.S. Dist. LEXIS 3653, is available at BVLaw.