New York District Court looks into the issue of whether or not the plaintiff’s expert witness can testify on lost profits for a new business in a recent case.

A new distributor of health supplements and its parent company filed an action in 2009 alleging (1) breach of contract; (2) violation of the Lanham Act based on unfair competition; (3) violation of the New York Franchise Sales Act (“NYFSA”), General Business Law §§ 681 et seq.; and other related claims arising out of an agreement between the supplement manufacturer to distribute health supplements to retail stores in Norway, Sweden, Denmark, and Finland.

The defendant supplement manufacturer answered the complaint and asserted counterclaims against the plaintiff for breach of the distribution contract and violation of the duty of good faith and fair dealing. In May 2013, the defense moved to exclude the testimony of the plaintiff’s economic damages expert with regard to the health supplement distributor’s “lost profits.” The plaintiff opposed the defense’s motion to exclude the damages expert and cross-moved to exclude the testimony of the defense’s forensic accountant and the manufacturer’s president, as rebuttal witnesses to the plaintiff’s expert submitted in support of the defense’s motion.

In June 2013, the plaintiff moved for partial summary judgment pursuant to Federal Rule of Civil Procedure 56 on the breach of contract claim in the amended complaint. The supplement manufacturer opposed the motion, and cross-moved for partial summary judgment to dismiss the plaintiff’s breach of contract claim and the NYFSA claim. As to the breach of contract claim, the defense asserted that the plaintiff failed to prove that it sustained legally recognizable damages, specifically lost profits, as a result of the alleged breach.

In November 2013, the District Court (i) granted in part and denied in part the supplement distributor’s motion for partial summary judgment on their breach of contract claim; and (ii) granted in part and denied in part the manufacturer’s cross motion for partial summary judgment dismissing plaintiff’s claims.

Judge Arthur D. Spatt of the United States District Court for the Eastern District of New York wrote that, as to the defense’s motion on the plaintiff’s expert witness, he was a university professor of marketing and business who was published in leading journals in the field. To calculate the plaintiff’s “lost profits,” the damages expert utilized existing sales data for what he claimed was a competing product line, who had previously announced would be replacing with comparable products from the distributor’s parent company. The plaintiff’s expert then applied assumptions based on the Life market share, which he drew in part from the testimony of the founder and former Chief Executive Officer of Life.

In the summary judgment decision, the District Court found that although the distributor lacked a track record of profits, lost profits could be based on the comparable sales of a competitor in the context of relatively similar new businesses. Further, the District Court emphasized that “[w]hether and to what extent competing products are comparable to the plaintiff’s products, or are a reliable indicator of profitability, cannot be decided at the summary judgment stage.” Consistent with this finding, the District Court denied the defense’s motion to exclude the testimony of the plaintiff’s expert on lost profits.

As to plaintiff’s motion, the defense’s expert was the current Managing Director in the forensic and litigation consulting practice of a global company. The defense expert composed a report detailing, in his view, the shortcomings of the plaintiff’s “lost profits” analysis, including its failure to consider, among other things, the distributor’s longstanding debt, prior lack of profits, and internal managerial and operational issues.

The president of the manufacturer had 25 years of experience working in the vitamin and dietary supplement industry. He critiqued the plaintiff’s expert’s analysis, including its failure to consider the distributor’s future competition, the pricing of products, and the marketing of products.

The District Court noted that “expert opinions which assess or critique another expert’s substantive testimony are relevant,” and cited Deutsch v. Novartis Pharm. Corp. (E.D.N.Y.2011) which quoted In re Cessna 208 Series Aircraft Prods. Liab. Litig., (D. Kan. 2009): “The expert reports of [defendant’s] experts primarily critique the methodology and scientific principles which plaintiffs’ experts use to arrive at their conclusions. Such evidence, which attacks the opposing expert’s substantive testimony, is proper rebuttal.”  Further, Judge Spatt wrote that in order to properly rebut the plaintiff’s testimony, the forensic accountant and president of the manufacturer didn’t need to provide an independent analysis of “lost profits.”

For the foregoing reasons, the District Court denied without prejudice the defendant’s motion to exclude the testimony of the plaintiff’s expert, and denied without prejudice the plaintiff’s motion to exclude the testimony of the defendant’s experts.

Nature’s Plus Nordic A/S v. Natural Organics, Inc., — F.Supp.2d —-, 2013 WL 6795162 (E.D.N.Y. Dec. 20, 2013).

By: Kurt Mattson, J.D., LLM

Kurt R. Mattson is the Director of Library Services and Continuing Education at Lionel Sawyer & Collins located in Reno and Las Vegas, Nevada