Opinion ID: 169778
Heading Depth: 4
Heading Rank: 2

Heading: The Amount of the Benefit

Text: W e next consider whether there was sufficient evidence for the jury to determine the amount of damages. The primary witness on this issue was TenBrook, Cartel’s damages expert. Thus, we must first address the trial court’s decision that TenBrook’s testimony was unreliable and therefore inadmissible. The admission at trial of expert testimony is governed by Rule 702 of the Federal Rules of Evidence. 12 Champagne M etals v. Ken-M ac M etals, Inc., 458 F.3d 1073, 1078 (10th Cir. 2006). The rule requires a district court to exercise its 12 Rule 702 provides: If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or 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 opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and m ethods, and (3) the witness has applied the principles and methods reliably to the facts of the case. -25- “gatekeeper function to ‘ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable.’” United States v. Gabaldon, 389 F.3d 1090, 1098 (10th Cir. 2004) (quoting Daubert, 509 U.S. at 589). The district court must “assess the reasoning and methodology underlying the expert’s opinion, and determine whether it is both scientifically valid and applicable to a particular set of facts.” Dodge v. Cotter Corp., 328 F.3d 1212, 1221 (10th Cir. 2003). W hether the district court applied the proper legal test in admitting an expert’s testimony is reviewed de novo. Id. at 1223. However, the ultimate decision to admit or exclude expert testimony under Daubert is reviewed for abuse of discretion. Champagne M etals, 458 F.3d at 1079. The district court’s decision will be overturned only if “it is arbitrary, capricious, whimsical or manifestly unreasonable or when we are convinced that the district court made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances.” Id. (quotations omitted). Our review of TenBrook’s testimony is controlled by Daubert v. M errell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) and Kumho Tire Co., Ltd. v. Carm ichael, 526 U.S. 137 (1999). A s mentioned above, Daubert requires a trial judge to “ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable.” 509 U.S. at 589. Kumho instructs that the “gatekeeping” requirement set forth in Daubert “applies not only to testimony -26- based on ‘scientific’ knowledge, but also to testimony based on ‘technical’ and ‘other specialized’ knowledge.” 526 U.S. at 141 (citation omitted). The court’s purpose “is to make certain that an expert, whether basing testimony upon professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.” Id. at 152. As an example of a useful factor in a situation where the witness’ expertise is based purely on experience, the Supreme Court suggested inquiring “whether [the expert’s] preparation is of a kind that others in the field would recognize as acceptable.” Id. at 151. Here, there is no doubt the district court employed the correct legal test. Consequently, the only question is whether the trial court abused its discretion in discarding TenBrook’s testimony after trial. Cartel proceeded to trial with TenBrook’s third expert report in which he based his damages calculation on a theory of unjust enrichment, also described as disgorgement or ill-gotten gains. He calculated 94% of the total number of BPO s purchased by the Bank for each year from 2001 through 2004 reflected the number which would have been purchased from all national vendors during that time. The four-year term was based on Coats’ estimate of the time period necessary for the Bank to develop a usable national BPO database. TenBrook then testified that 35% of the total national vendor BPOs w as attributable to Cartel but for the misappropriated trade secrets. However, in reaching his estimate of Cartel’s damages, TenBrook failed to apply the 35% reduction -27- attributable to Cartel. Instead, he multiplied the total number of national vendor B PO s by $95.00 — the amount he assumed represented the value of the BPOs sold by the Bank to third party institutions. For his final calculation, TenBrook multiplied the resulting amount by the net profit margin of Ocwen Advisors as reported in the SEC filings of Ocwen Financial Corporation. He concluded the Bank benefitted by $7,487,000. In its Order granting a new trial on damages, the district court recognized TenBrook’s failure to apply the 35% reduction could be easily recalculated, and therefore was not fatal to his testimony. However, the district court determined TenBrook’s testimony contained a number of speculative premises and invalid assumptions. Primarily, it found fault with (a) TenBrook’s reliance on Ocwen Advisors’ net profit percentage reported for the totality of all Ocwen A dvisors’ product lines, as opposed to the net profitability of the BPO line alone, and (b) TenBrook’s use of a four-year term for replicating a viable national BPO database.
The district court found TenBrook’s reliance on Ocwen Advisors’ general net profit percentage, as opposed to the profitability of its BPO line, was improper. Cartel contends the consolidated net profit percentage was the best evidence available because Ocwen Advisors asserted it did not retain records allocating the profits within its product lines. Therefore, according to Cartel, it -28- could rely on the consolidated information in Ocwen Advisors’ SEC filings and the burden of proof apportioning any profit not attributable to misappropriation was Ocwen’s. 13 In W ynn Oil Company v. American W ay Service Corporation, the Sixth Circuit held the district court abused its discretion when it refused to aw ard damages in a trademark action because the plaintiff could not prove defendant’s profits with sufficient certainty. 943 F.2d 595, 607 (6th Cir. 1991). The plaintiff’s efforts to ascertain the defendant’s profits were frustrated by the defendant’s insistence that its profits from the infringement were commingled with other sales and flow-through money and therefore could not be provided in discovery. Based on “common sense” as w ell as statutory language, the court held the burden of apportioning profits should be placed on the defendants once the plaintiff has proved gains to the defendant from the infringement. Id. at 606. The same premise has been applied in copyright actions. Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1173 (1st Cir. 1994). In Data 13 The district court further determined Cartel did not establish profits could be made from the sale of BPOs because it did not present evidence of the profitability of other national vendors and Cartel, itself, lost money from 1999 through 2002. However, the damages theory was not the loss to Cartel, but the benefit to the Bank. The testimony of W illiam Erbey established the Bank bought BPOs for approximately $50.00 and sold them to third parties for anywhere between $90 and $125. (R. Vol. 9 at 3204-05.) He also affirmed the creation of a retail vendor database was a key part of the strategy to turn the new division into a profit center. (Id. at 3201-02.) Based on this testimony, the jury could reasonably infer the Bank made a net profit on the sale of B POs to third parties. -29- General, the First Circuit stated: In the context of [a copyright] infringer’s profits, the plaintiff must meet only a minimal burden of proof in order to trigger a rebuttable presumption that the defendant’s revenues are entirely attributable to the infringement; the burden then shifts to the defendant to demonstrate what portion of its revenues represent profits, and what portion of its profits are not traceable to the infringement. 36 F.3d at 1173; see also Bucklew v. Hawkins, 329 F.3d 923, 932 (7th Cir. 2003). Data General also recognized this principle has been applied in trade secrets actions: Citing 17 U.S.C. § 504(b) as persuasive authority, the M assachusetts Supreme Judicial Court has set forth the following rule for apportionment in trade secrets cases: Once a plaintiff demonstrates that a defendant made a profit from the sale of products produced by improper use of a trade secret, the burden shifts to the defendant to demonstrate those costs properly to be offset against its profit and the portion of its profit attributable to factors other than the trade secret. USM Corp. v. M arson Fastener Corp., 392 M ass. 334, 467 N.E.2d 1271, 1276 (1984). See also Jet Spray Cooler, Inc. v. Crampton, 377 M ass. 159, 385 N.E.2d 1349, 1358-59 n.14 (1979) (citing, inter alia, Sheldon v. M etro-G oldwyn Pictures Corp., 106 F.2d 45, 48 (2d Cir.1939), aff'd, 309 U.S. 390, 60 S.Ct. 681, 84 L.Ed. 825 (1940)). 36 F.3d at 1174, n.48. Comment (f) to the Restatement (Third) of Unfair Competition § 45 (1995) sets forth a similar burden of proof: The traditional form of restitutionary relief in an action for the appropriation of a trade secret is an accounting of the defendant's profits on sales attributable to the use of the trade secret. The general rules governing accountings of profits are applicable in trade secret actions. The plaintiff is entitled to recover the defendant’s net profits. The plaintiff has the burden of establishing the defendant's sales; the defendant has the burden of establishing any portion of the sales not attributable to the trade secret and any expenses to be deducted in determining net profits. -30- Ocwen Advisors does not refute that the burden of proof may shift. Rather, it argues the burden never shifted because Cartel did not present sufficient evidence of the fact a sale was made from the misappropriated information. As discussed above, the jury was given sufficient evidence to reasonably infer such profit and the parties do not dispute the fact that the Ocwen Advisors division reported net profits. Therefore, the district court erred in placing the onus on Cartel to provide specific net profits from the sale of BPOs. Ocwen Advisors is in the best position to rationally apportion its net profits between its product streams and the costs associated with its BPO business. Because the absence of evidence is directly attributable to Ocwen’s failure to provide the data, it was not unreasonable for TenBrook to apply the same profit ratio for all product lines to one product. See Electro-M iniature Corp. v. W endon Co., 771 F.2d 23, 27 (2d Cir. 1985) (“W here, as here, there is a clear showing of injury that is not susceptible to exact measurement because of the defendant’s conduct, the jury has some latitude to ‘make a just and reasonable estimate of damages based on relevant data.’” (quoting Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 264 (1946))).
Cartel also claims the district court abused its discretion in excluding TenBrook’s testimony based on his assumption that it would take four years to develop a sufficient database. W e disagree. TenBrook testified he used the four-year span because it was his -31- assumption “that it would be roughly four years to come up w ith . . . a minimal database to do what [O cw en Advisors] wanted to do.” (R. Vol. 7 at 2580.) TenBrook stated he based this assumption on his discussions with Coats, which was further substantiated by Gilbert’s testimony regarding initial attempts to build Ocwen A dvisors’ database in 1999 through 2000. Thereafter, the follow ing crossexamination took place: Q. To put this in context, . . . is it not true you didn’t conduct any independent investigation to test the information you received from M r. Coats that it would have taken the Ocwen defendants four years to produce [a] minimal broker database. A. Y es, that’s true. I did not conduct an independent review. Q. So you did take the information he gave you at face value? A. Yes. Again, with the substantiating things I talked about. Q. But the information he gave you was the only basis for your inclusion of a four-year period in your calculations, right? A. Yes. Q. You have no independent knowledge, correct, as to how long it takes to develop a minimal broker database? A. No. (R . Vol. 7 at 2583.) TenBrook further conceded he did not know how many names it takes to create a minimum database, nor did he know how long it took Cartel to develop a minimum database. He did not ask Coats, who had started doing business with Ocwen shortly after opening Cartel’s doors, how he managed to do business prior -32- to the four years he suggested it w ould take to build a minimal broker list. Consequently, TenBrook had no basis for believing a four-year period was an appropriate span for his damage calculations. Cartel argues it presented other evidence to support this time-frame via the testimony of three national vendors (including Cartel) stating the building of a network “takes years.” (R. Vol. 7 at 2262-63, 2303-06, 2308.) Cartel also points to Gilbert’s testimony regarding the difficulty Ocwen Advisors had in its initial efforts. W hile this testimony may establish the difficulty of building a network, it does not provide any information regarding what is necessary for a minimal national database or the time it would have taken a company in 1999 to develop such a database. Cartel’s final justification is the fact TenBrook’s analysis was compiled on a yearly basis for four years and, therefore, the jury was free to determine whether one year w as an appropriate time span and award damages accordingly. Instead, the jury determined, as a factual matter, four years w as an appropriate time frame for damages. This argument misses the point. Assuming the jury could parse the damages from one to four years, it had no information with which it could ascertain whether one or four years was appropriate. The four-year time frame was merely Coats’ unsubstantiated suggestion contained and endorsed in TenBrook’s calculations. This is insufficient. See Champagne M etals, 458 F.3d at 1080, n.4 (“[I]t [is] not ‘manifestly unreasonable’ for the district court to -33- conclude that [the expert’s] opinions lacked foundation because they were based on ‘the self-serving statements of an interested party.’”). Consequently, we find no abuse of discretion in the district court’s determination that TenBrook’s testimony was speculative and inadmissible. Removing TenBrook’s testimony leaves Cartel without evidentiary support for the jury’s award of $4,900,000 in actual damages and in turn, eliminates a basis for the proper amount of punitive damages. See Colo. Rev. Stat. Ann. § 7-74-104(2) (exemplary damages awarded only after actual damages ascertained)