Plaintiff, the assignee of an expired Japanese patent, appealed in a breach-of-contract suit claiming damages from Defendant’s failure to maintain the patent on Plaintiff’s behalf. The district court granted Defendant’s motions to exclude the report of Plaintiff’s expert witness and for summary judgment, holding that Plaintiff failed to demonstrate with reasonable certainty the amount of lost profits from the breach of contract.
The only issue in this case concerns Defendant’s possible damages for its breach of contract when it failed to maintain Plaintiff’s Japanese patent.
The Japanese patent was for a riser sleeve that was unique in its employment of a “cold-box” manufacturing process, used in the foundry industry. Although Plaintiff’s “similar riser sleeve was covered by European and American patents and sold successfully in those regions, Plaintiff had no sales of related technology in Japan.”
Circuit judge wrote in his majority opinion for the Fifth Circuit that Rule 702 requires that an expert’s opinion be “based on sufficient facts or data.” As the Daubert Court articulated, the district court must concentrate “solely on principles and methodology, not on the conclusions that they generate.” However, “[a] district court is not required to admit expert testimony ‘that is connected to existing data only by the ipse dixit of the expert. A court may conclude, the judge explained, there’s too great an analytical gap between the data and the expert opinion.”
The district court found that the expert’s experience, education, and professional qualifications properly qualified him as an expert; however, it found that his calculations were based on fundamentally flawed data and impermissible methods. The expert determined the amount of lost profits, in part, from a marketing plan—produced by Plaintiff 15 years earlier and which covered only a five-year span—from which he extrapolated future lost profits without explaining his method or assumptions.
The Judge reasoned that for the expert to demonstrate lost profits to a reasonable certainty he would have required, at a minimum, the following data:
- The size of the Japanese riser sleeve market;
- Plaintiff’s market penetration;
- Plaintiff’s sales; and
- Plaintiff’s direct costs.
Without these basic, objective figures, any projection or calculation made by the expert of future lost profits would “too great an analytical leap.”
The Judge wrote that an expert may rely on otherwise inadmissible hearsay evidence in forming his opinion, provided the facts and data relied upon are of a type reasonably relied upon by experts in his field. However, the judge held that an expert’s wholesale adoption of Plaintiff’s estimates—without any evaluation of the bases for those estimates—goes beyond relying on facts or data. It rather “cloaks unexamined assumptions in the authority of expert analysis.”
Under state law, a plaintiff can recover lost profits if it can show that:
- profits were within the contemplation of the parties at the time the contract was made;
- the loss of the profits is the probable result of the breach of contract; and
- the profits are not remote and speculative and may be shown with reasonable certainty.
Ohio law requires only that evidence of lost profits be reasonable, not specific. However, the judge said that demonstrating
Plaintiff had no track record of riser-sleeve sales in Japan. The lack of any reliable track record subjects Plaintiff’s lost-profits calculations to stricter inquiry and increases the difficulty of determining a reasonably accurate figure for lost profits. Plaintiff took initial efforts to reintroduce their riser sleeves into Japan, but they still had almost no sales history and lacked hard data.
Plaintiff’s evidence sought to establish profits in the Japanese market based on an inapposite comparison with sales in Europe and North America. Such extrapolation, without more, the judge held, was insufficient to establish lost profits to a reasonable certainty.
In addition, Plaintiff failed to give basic data about the Japanese market needed to make reasonably certain projections of potential future profits. Without data on the size of the Japanese market or Plaintiff’s sales and direct costs, the Court said it would be virtually impossible to settle on a figure for Plaintiff’s lost profits.
Given the unreasonableness of the expert’s methods, the faulty and incomplete data upon which they were based, and the general unreliability of the evidence, the district court was found not to have abused its discretion in excluding the expert’s testimony.
The judgment was affirmed.
Ask Chemicals, LP v. Computer Packages, Inc., — Fed.Appx. —-, 2014 WL 6911574 (C.A.6 (Ohio) December 10, 2014)