Opinion ID: 615991
Heading Depth: 2
Heading Rank: 1

Heading: Mark Zeytoonjian's Affidavit and TMI's Connecticut Franchise Act Claim Against Echo

Text: The district court characterized portions of Mark Zeytoonjian's affidavit as expert testimony under Federal Rule of Evidence 702, and struck those portions as inadmissible because TMI had not disclosed Zeytoonjian as an expert witness. TMI argues that Zeytoonjian's testimony should have been characterized as lay opinion testimony under Rule 701, not as expert testimony under Rule 702. As such, the court erred in striking portions of the affidavit. We review the district court's classification of a witness as lay or expert de novo. Compania Administradora de Recuperacion de Activos Administradora de Fondos de Inversion Sociedad Anonima v. Titan Int'l, Inc., 533 F.3d 555, 559 (7th Cir.2008). Rule 701 requires that lay testimony be limited to those opinions or inferences which are (a) rationally based on the perception of the witness, (b) helpful to a clear understanding of the witness' testimony or the determination of a fact in issue, and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702. The final requirement is designed to eliminate the risk that the reliability requirements set forth in Rule 702 will be evaded through the simple expedient of proffering an expert in lay witness clothing. Fed.R.Evid. 701, Advisory Comm. Notes, 2000 Amendment. The stricken portions of Zeytoonjian's affidavit are integral to TMI's Connecticut Franchise Act claim against Echo. Therefore, a slight detour to discuss the Connecticut statute is appropriate. The Connecticut Franchise Act prohibits franchisors from terminat[ing], cancel[ing] or fail[ing] to renew a franchise, except for good cause. Conn. Gen.Stat. § 42-133f(a). The Act defines a franchise as an oral or written agreement or arrangement in which: (1) a franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor,... and (2) the operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate.... Conn. Gen.Stat. § 42-133e(b). The district court did not address the first requirement. Rather, it granted summary judgment in favor of Echo on the ground that TMI had failed to set forth sufficient evidence to create a triable issue of fact regarding the second statutory requirement for establishing a franchisethat TMI is substantially associated with Echo's trademark, trade name or other commercial name or symbol. Courts have construed the Act's substantially associated provision as requiring a plaintiff to show that most, if not all, of its business derives from association with the defendant in order to establish the existence of a franchise. Rudel Mach. Co., Inc. v. Giddings & Lewis, Inc., 68 F.Supp.2d 118, 124-28 (D.Conn.1999). See also Contractors Home Appliance, Inc. v. Clarke Distrib. Corp., 196 F.Supp.2d 174, 180 (D.Conn.2002) (while the Connecticut Franchise Act does not require that a putative franchisee carry exclusively franchisor-trademarked products, a showing that the putative franchisor's products account `for most or all of [the franchisee's] business' is required) (citation omitted). The most or all language has its origins in a Second Circuit decision interpreting the Act, Grand Light and Supply Co., Inc. v. Honeywell, Inc., 771 F.2d 672 (2d Cir. 1985). In Grand Light, the Second Circuit explained: The purpose of the statute was to prevent a franchisor from taking unfair advantage of the relative economic weakness of the franchisee.... In the ordinary franchise situation, typically involving an exclusive relationship, termination by the franchisor could result in economic disaster for the franchisee. Where the franchisee is completely dependent on the public's confidence in the franchised product for most or all of his business, abrupt severance of the franchise tie, without good cause and without sufficient notice, could spell ruination. Id. at 677 (emphasis added). Based on the most or all formulation, courts have found that a franchise existed only where at least half of the plaintiff's business resulted from its relationship with the defendant. See B & E Juices, Inc. v. Energy Brands, Inc., No. 3:07 CV 1321, 2007 WL 3124903, at  (D.Conn. Oct. 25, 2007) (no substantial association where sales constituted 40% of the distributor's business); Rudel, 68 F.Supp.2d at 124-28 (concluding that plaintiff failed to establish franchise where sales of defendant's products constituted approximately 41% of plaintiff's business and the gross profit attributable to sales of defendant's products was approximately 40%); Dittman & Greer, Inc. v. Chromalox, Inc., No. 3:09 CV 1147, 2009 WL 3254481, at  (D.Conn. Oct. 6, 2009) (evidence that defendant's products accounted for 42% percent of plaintiff's total sales and 33-34% of plaintiff's gross profits not sufficient to establish a franchise relationship); Hartford Elec. Supp. Co. v. Allen-Bradley Co., Inc., 250 Conn. 334, 736 A.2d 824, 837 (1999) (finding franchise relationship where half of plaintiff's gross annual sales were attributable to relationship with defendant). Unlike the federal courts cited above, however, Connecticut state courts have not weighed in on whether 50% is a strict cut off. Turning back to the affidavit, the stricken portions are aimed at establishing that more than 50% of TMI's sales and gross profits resulted from its business with Echo. In its summary judgment motion, Echo relied on sales and gross profit figures demonstrating that less than 50% of TMI's business was with Echo; Zeytoonjian sought to discredit those figures. First, Zeytoonjian stated that because TMI's Sprinkler House division had not been profitable, its sales and gross profits figures should not be considered in determining TMI's sales and gross profits. He provided no further explanation for that conclusion. Second, Zeytoonjian stated that a portion of TMI's freight costs and a portion of dealer rebates must be deducted from the gross profits attributable to Echo. Third, Zeytoonjian opined that sales attributable to Bear Cat, a company acquired by Echo in 2006, should be included in the total sales figure of Echo products. Finally, he maintained that the commissions TMI received from Echo for sales of Echo products by Home Depot should be included in TMI's gross profits figure for Echo products, and that the Home Depot sales related to those commissions should be included in TMI's gross sales figure of Echo products. The district court excluded those opinions on the ground that a layperson without knowledge of accounting principles could not arrive at the conclusions Zeytoonjian drew in his affidavit. For example, with respect to Zeytoonjian's assertions regarding Home Depot, the district court reasoned that only an accounting expert could say whether commissions for facilitating a third party's purchase of a supplier's products directly from the supplier should be included in the distributor's total sales figure for that supplier. TMI disputes these exclusions and contends that Zeytoonjian simply testified as to factual statements of which he had personal knowledge as TMI's president. As the advisory committee notes to Rule 701 explain, a business owner or officer is allowed to testify to the value or projected profits of the business, without [being qualified] as an accountant, appraiser, or similar expert where that testimony is based on the particularized knowledge that the witness has by virtue of his or her position in the business. Fed.R.Evid. 701 Advisory Comm. Notes, 2000 Amendment; see also Titan Int'l, 533 F.3d at 560; Von der Ruhr v. Immtech Int'l, Inc., 570 F.3d 858, 862 (7th Cir.2009) (In the realm of lost profits, lay opinion testimony is allowed in limited circumstances where the witness bases his opinion on particularized knowledge he possesses due to his position within the company.). Zeytoonjian's affidavit attacks both Echo's gross profit analysis and gross sales analysis. We will begin with Zeytoonjian's discussion of the Sprinkler House division. The district court correctly excluded Zeytoonjian's opinion regarding the inclusion of the Sprinkler House's profits. Regardless of whether that opinion constitutes expert testimony, it must be stricken because it rest[s] on [nothing more than Zeytoonjian's] say-so rather than a statistical analysis, or any other analysis for that matter. See Zenith Elecs. Corp. v. WH-TV Broad. Corp., 395 F.3d 416, 419-20 (7th Cir.2005) (both expert and lay testimony is inadmissible where it consists of unsupported inferences from raw data). Because Zeytoonjian's opinion that the Sprinkler House division should be disregarded is supported by nothing but his ipse dixit, it was properly excluded. Including the Sprinkler House division's sales and gross profits figures in TMI's overall calculations proves fatal to TMI's gross profit analysis. When these figures are added, even accepting the reminder of Zeytoonjian's opinions (e.g., including Bear Cat revenues and Home Depot commissions in the profit attributable to Echo), business with Echo results in less than 50% of TMI's total gross profits in every relevant year. The figures range from 34.41% to 41.37%. Turning now to the gross sales analysis, if Zeytoonjian's opinion regarding the inclusion of the Home Depot sales numbers in TMI's sales of Echo products is accepted, Echo products account for over 50% of TMI's total sales. The district court concluded that only an accounting expert could say whether the Home Depot sales should be included in TMI's total sales figure for Echo. However, given Zeytoonjian's role as TMI President and Secretary, he could likely assess the appropriateness of including those sales. Even so, in light of the Act's purpose, it makes little sense to include the Home Depot sales figures in TMI's sales of Echo products, as TMI did not benefit from the full sales price on those products. [2] Instead, TMI received a smaller commission on those sales. Therefore, the inclusion of the full sales numbers overstates the impact of a termination on TMI's bottom line. It makes more sense to include only the commission figure in determining the amount of Echo sales by TMI, as that is the amount of money TMI will lose as a result of the termination. If only the commissions, and not the full sales numbers, are included in TMI's sales of Echo products, Echo products account for less than 50% of TMI's total sales. In the relevant years, the figures range from 29.95% to 34.97%. Apart from the discussion of profits and sales, TMI argues that the fact that it went out of business alone establishes the existence of the requisite substantial association. In Hartford, the Connecticut Supreme Court suggested that the likely result of a disassociation of the parties may be an appropriate consideration in determining how dependent, or associated, the franchisee is on its franchisor and its commercial symbols. 736 A.2d at 839. The court noted that some federal courts had looked at such considerations, and noted that [i]n the present case, termination of the parties' agreement would result in the plaintiff losing one half of its gross annual sales of $20 million, and that the trial court [had] found that such an action would cause the plaintiff's entire business to fail. Id. No court, however, has relied solely on the fact that a company went out of business to conclude that a franchise relationship existed. More importantly, TMI's current claim that the Echo termination caused it to go out of business is inconsistent with its position below that [t]he loss of Echo was not the death knell to [TMI] because it could have survived absent a dire economy. Similarly, TMI also stated it failed only because Fred Zeytoonjian [TMI's CEO] failed to invest $1.4 million only because of a dire economy. Accordingly, we affirm the district court's grant of summary judgment in Echo's favor on TMI's Connecticut Franchise Act claim. As demonstrated above, TMI failed to show that more than 50% of its business resulted from its relationship with Echo, and thus failed to establish the requisite franchise relationship.