Fiteq Inc v. Venture Corporation et al

Filing 350


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1 2 3 UNITED STATES DISTRICT COURT 4 NORTHERN DISTRICT OF CALIFORNIA 5 SAN JOSE DIVISION 6 7 FITEQ INC, Case No. 13-cv-01946-BLF Plaintiff, 8 v. 9 10 VENTURE CORPORATION, et al., Defendants. [Re: ECF 305] 11 United States District Court Northern District of California ORDER GRANTING MOTION TO EXCLUDE TESTIMONY ABOUT FITEQ'S ALLEGED LOST PROFITS AND VALUATION 12 In theory, Plaintiff is on the cusp of developing a payment card that “looks and feels like a 13 14 traditional credit card, but has embedded electronics and a battery, and generates, with each swipe, 15 a unique [code]” to combat fraud. See ECF 220-2, Pl.’s Supplemental Rule 26(a)(1) Damages 16 Disclosure (“Fourth Disclosure”) at 24. In reality, the card does not exist. Plaintiff alleges that this 17 failure is Defendants’ fault and seeks five types of damages as a result, including up to $78 million 18 in lost profits and $167.5 million in valuation-related damages. Having professed to the Court and Defendants that all damages would be calculated by 19 20 experts, Plaintiff now offers exclusively lay opinion regarding its lost profits and valuation. As a 21 result, and in light of Plaintiff’s lack of a business track record, Defendants move to exclude (1) 22 testimony by Joan Ziegler, Plaintiff’s CEO, and Bill Carson, Plaintiff’s CFO since October 2014, 23 part-time consultant since October 2012, and board member since 2008, regarding lost profits and 24 valuation damages, (2) the underlying lost profits and valuation models, and (3) documents and 25 other material Plaintiff failed to disclose. For the reasons set forth below, the Court GRANTS Defendants’ motion. 26 27 28 I. BACKGROUND Lost profit damages are an essential part of this case. In Plaintiff’s own words, “[l]ost 1 [p]rofits [h]ave [b]een [p]rominent in [t]his [c]ase [f]rom the [o]utset.” ECF 215, Pl.’s Status 2 Update at 4. As expected, damages are also a contentious part of this case. This motion is not the first opportunity that Plaintiff has had to convince the Court and 3 4 Defendants that its lost profits and valuation-based damages are admissible. Defendants first 5 moved to exclude evidence of Plaintiff’s lost profits and valuation damages on December 8, 6 2014. See ECF 165, Dec. 8, 2014 Defs.’ Mot. to Exclude (“First Mot.”). That time, Defendants 7 argued that Plaintiff had failed to adequately disclose computations of the damages pursuant to 8 Rule 26. Id. at 13-16. As detailed below, the Court agreed with Defendants, but allowed Plaintiff 9 to supplement its disclosures rather than exclude proof of damages entirely. See ECF 194, Order Denying Defs.’ Mot. to Exclude (“First Exclusion Order”) at 1, 3. Since that Order, the parties 11 United States District Court Northern District of California 10 have filed at least seven updates, disputes, and/or clarifications regarding damages.1 12 A. First Motion to Exclude 13 Throughout fact discovery, Plaintiff professed that damages would be the subject of expert 14 opinions. At her August 22, 2014 deposition, for example, Ms. Ziegler responded to a question 15 about the nature of damages by testifying, “I rely on outside counsel—and outside counsel uses 16 experts in this area, Econ One, that really do the analysis that really know how to appropriately 17 assess what our damages are.” ECF 165-1, Aug. 22, 2014 Ziegler Dep., First. Mot. Exh. 1 at 94- 18 95. However, Plaintiff’s damages experts, Jill Kennedy and Jeffrey Leitzinger, relied on Ms. 19 Zeigler and Mr. Carson’s $300 million valuation as the basis for maximum damages calculations. 20 ECF 220-2, Fourth Disclosure at 1; see also ECF 305-5, Kennedy Dep., Mot. Exh. 7 at 22-23; 21 ECF 306-13, Leitzinger Dep., Mot. Exh. 9 at 120, 122. At his deposition, Mr. Leitzinger testified 22 that he was not asked to value FiTeq and that he has no opinion about the reasonableness of the 23 valuation. Leitzinger Dep. at 120, 122. This was surprising insofar as Plaintiff had previously made clear that neither Ms. Ziegler 24 25 1 26 27 28 See, e.g., Joint Report Regarding a Proposed Re-Opening of Fact Discovery (“Joint Report”), ECF 214; Pl.’s Report on Venture’s “Discovery Plan” (“Pl.’s First Report”), ECF 215; Defs.’ Report Regarding Discovery and Deadlines, ECF 220; Pl.’s Response to Defs.’ Report, ECF 221; Letter from Pl.’s Counsel re Supplemental Discovery, ECF 252; Pl.’s Further Status Report on Discovery and Trial Schedule, ECF 255; and Defs.’ Report Regarding Discovery and Scheduling Issues, ECF 256. 2 1 nor Mr. Carson had knowledge of the valuation or lost profits estimates. At earlier stages of the 2 litigation, Ms. Ziegler had testified, “We have not done [a] valuation of FiTeq.” Ziegler Dep. at 3 141. Similarly, in its initial Rule 26(a)(1) disclosure at the close of fact discovery on October 17, 4 2014, Plaintiff had stated, “At present . . . no actual computation of damages exists.” ECF 165-1, 5 Initial Disclosure, First Mot. Exh. 5 at 5. And, at his deposition on August 18, 2014, Mr. Carson 6 had testified that the number of cards Plaintiff would have sold had manufacturing succeeded in 7 2011 was “[p]retty speculative,” that Plaintiff had no written damages calculation, and that he 8 “d[id]n’t know” the damages number. ECF 165-2, Aug. 18 2014 Carson Dep., First Mot. Exh. 11 9 at 239, 242-43. In addition, Mr. Carson testified that he did not have a spreadsheet for lost sales and lost revenue and that Plaintiff had “not quantified” lost opportunities. Id. at 244-45. He 11 United States District Court Northern District of California 10 testified that Plaintiff’s value was between “$3 and $500 million” but offered no computations to 12 support the claim. Id. at 87. 13 On November 21, 2014—more than a month after the fact discovery cut-off and on the 14 same day as the expert disclosures—Plaintiff also served a supplemental fact discovery 15 disclosure, in which its damages estimate ballooned from $40 million to $77.5–$286.2 million. 16 ECF 165-3, Second Supplemental Disclosure, First Mot. Exh. 16 at 8. No calculations were 17 provided to support these numbers. For the first time, Plaintiff noted that it “expects to present 18 testimony from its officers and employees” on lost profits and valuation. Id. at 8-10. 19 Two weeks later, on December 5, 2014, Plaintiff served a third supplemental fact 20 disclosure that offered the first sign of calculations in the form of three one-page summary charts. 21 ECF 165-3, Third Supplemental Disclosure, First Mot. Exh. 17 at Exhs. A-C. The charts listed 22 revenue and cost projections, each comprised of three individual components, but offered no 23 description of how the numbers were calculated. Id. 24 Reviewing this record on Defendants’ First Motion to Exclude, the Court agreed with 25 Defendants that Plaintiff’s damages disclosures were inadequate. See First Exclusion Order at 1. 26 At the hearing, the Court noted that, in light of Ms. Ziegler and Mr. Carson’s deposition 27 testimony, it would be shocking if Plaintiff were able to lay the foundation for these individuals 28 to testify regarding lost profits. See ECF 305-6, First Mot. Hearing Transcr., Mot. Exh. 13 at 4. 3 1 However, because of Plaintiff’s potential to cure the defect and the unlikelihood of disruption to 2 the trial, the Court gave Plaintiff the opportunity to supplement its computation disclosures. First 3 Exclusion Order at 1, 3. On February 24, 2015, Plaintiff expressed that the Court’s finding was 4 “fair[] enough” and agreed that “no party should have to deal with a black box on damages 5 calculations.” See ECF 215, Pl.’s First Report at 1. 6 B. Supplemental Damages Disclosure 7 On January 29, 2015, Plaintiff served Defendants with its supplemental damages 8 calculation. See ECF 214, Joint Report at 1; see also Fourth Disclosure. This document outlined 9 five components of Plaintiff’s damages and focused on lost profits and valuation. Defendants then had follow-up depositions with Ms. Ziegler and Mr. Carson on May 21 and 22, 2015 11 United States District Court Northern District of California 10 regarding the calculations.2 12 1. Lost Profits 13 Plaintiff intends to seek $18 to $78 million in lost profits. Mot. at 2. These numbers reflect 14 hypothetical sales of four types of cards and related authenticating software, all still in 15 development, from 2012 to 2014. Id. at 2; see also Fourth Disclosure at 13. Plaintiff’s calculation 16 is based on 1) card sales projections, based on projections Defendants submitted to Singapore’s 17 Economic Development Board (“EDB”) in order to obtain a multi-million dollar grant, 2) a per- 18 card license rate of $1.25 with an assumed card life of two years and reissue rate of 80 percent, 3) 19 revenue of $1,000,000 per 5 million cards sold for the back-end authenticating mainframe 20 software, and 4) expenses. Fourth Disclosure at 15-18. Plaintiff claims that, to arrive at these numbers, Mr. Carson and Ms. Ziegler used “the 21 22 same financial projection model that is utilized by FiTeq for years as a regular part of its business 23 operation to forecast profits.” Id. at 12. As Mr. Carson explained in his first deposition, the model 24 had not been used to project backwards to calculate lost profits until litigation began. Carson Dep. 25 at 244. 26 2 27 28 The transcripts of the lost profits and valuation depositions combine the testimony of Ms. Ziegler and Mr. Carson and do not identify which individual is speaking. Based on context and the parties’ representations at the hearing on this motion, the Court has made its best determination of which witness is speaking in the discussion that follows. 4 1 2. Valuation 2 Plaintiff also intends to seek between $18.8 and $167.5 million in valuation-related 3 damages. Mot. at 2-3. The minimum is derived from Plaintiff’s “book value” of $0.50, leading to a 4 $31 million valuation, and Defendants do not seek to exclude testimony based on this number. Id. 5 at 3. The maximum is based on a $300 million valuation determined by Ms. Ziegler and Mr. 6 Carson, and is challenged in Defendants’ motion. Id. at 3; see also Fourth Disclosure at 28. 7 Ms. Ziegler and Mr. Carson derive this number in two ways: first, qualitatively, through 8 the selling price and valuations of comparable companies, see Fourth Disclosure at 28-30, and, 9 second, quantitatively, based on 5 years of Plaintiff’s hypothetical lost profits, see ECF 306-3, 10 Rule 30(b)(6) Valuation Dep., Mot. Exh. 2 at 133, 144. United States District Court Northern District of California 11 Defendants now seek to exclude the lost profit and valuation numbers on two grounds: 12 testimony by Ms. Zeigler and Mr. Carson about the numbers would go far beyond admissible 13 Rule 701 lay opinion testimony and the numbers are too speculative as a matter of law. 14 15 16 II. DISCUSSION A. Rule 701 Plaintiff intends to introduce the lost profits number through the lay opinion testimony of 17 Ms. Ziegler and Mr. Carson, but Defendants argue that such testimony would be impermissible 18 under Rule 701 as it extends beyond their personal knowledge into the realm of expert witness 19 testimony. Mot. at 8-11. 20 Ms. Ziegler has been CEO since FiTeq’s founding and she also ran its predecessor, 21 PrivaSys, for close to a decade before. Mr. Carson, on the other hand, joined FiTeq full-time in 22 late 2014, having served as a board member since 2008, and having come on as a part-time 23 consultant in October 2012. Notwithstanding the detail with which Plaintiff describes Mr. 24 Carson’s career prior to joining FiTeq, Plaintiff offers neither him nor Ms. Ziegler as an expert. 25 Defendants are correct to draw a line between lay and expert witness testimony. “Lay 26 witness testimony is governed by Rule 701, which limits opinions to those ‘rationally based on the 27 perception of the witness.’ Rule 702, on the other hand, governs admission of expert opinion 28 testimony concerning ‘specialized knowledge.’” United States v. Figueroa-Lopez, 125 F.3d 1241, 5 1 1246 (9th Cir. 1997) (citing Fed. R. Evid. 701). Rule 701 “expressly excludes lay opinion 2 testimony ‘based on scientific, technical, or other specialized knowledge within the scope of Rule 3 702.’” Synthes USA, LLC v. Spinal Kinetics, Inc., No. C-09-01201 RMW, 2011 WL 11709387, at 4 *10 (N.D. Cal. Aug. 19, 2011) (citing Fed. R. Evid. 701(c)). 5 Defendants suggest that models extrapolating profits and valuation for a hypothetical product fall into the expert category. Mot at 8-11. Plaintiff responds that Rule 701 contemplates 7 testimony by business owners and officers regarding lost profits because of their particularized 8 knowledge of the topics. Opp. at 7. The advisory committee notes to the 2000 amendments to Rule 9 701 provide that “courts have permitted the owner or officer of a business to testify to the value or 10 projected profits of the business, without the necessity of qualifying the witness as an accountant, 11 United States District Court Northern District of California 6 appraiser, or similar expert.” Fed. R. Evid. 701, Advisory Committee’s Notes ¶ 4 (2000). Such 12 opinion testimony is admitted “because of the particularized knowledge that the witness has by 13 virtue of his or her position in the business.” Id. Plaintiff argues that, under this exception, the 14 witnesses—and Ms. Ziegler especially—should be able to testify regarding lost profits and 15 valuation. Opp. at 7. 16 1. Lost Profits 17 Under Plaintiff’s business owner exception argument, the components of the lost profits 18 calculation would require Ms. Ziegler and Mr. Carson to have particularized knowledge of: the 19 card sales projections, the assumed per-card license of $1.25, the assumed card life of two years 20 and reissue rate of 80 percent, revenue of $1,000,000 per every 5 million cards sold for the 21 Authenticator and the associated annual 20 percent software maintenance fee, and expenses based 22 on, among other things, research and development, legal fees, and the cost of operations. See 23 Fourth Disclosure at 15-18. 24 Plaintiff points to four cases in which a trial court allowed a lay witness—owner, investor, 25 and/or board member—to testify regarding lost profits and valuation. First, Plaintiff relies on 26 Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153 (3d Cir. 1993), in which the Third Circuit held 27 that the district court had not abused its discretion in allowing a business owner to offer his 28 opinion regarding future profits based on his experience selling 117 franchise contracts, as well as 6 projections he had developed with an accounting firm when he had been planning to take the 2 company public. Id. at 1174-75. Similarly, in Lativafter Liquidating Trust v. Clear Channel 3 Communications, Inc., 345 Fed. App’x. 46 (6th Cir. 2009), the Sixth Circuit determined that the 4 district court had not abused its discretion by allowing an investor and board member to testify 5 under Rule 701 about valuation based on “the revenue [the defendant] had been generating for [the 6 plaintiff].” 345 Fed. App’x at 50. In Pet Food Express Ltd. v. Royal Canin USA, Inc., No. C-09- 7 1483-EMC, 2011 WL 6140874, at *11-12 (N.D. Cal. Dec. 8, 2011), the plaintiff’s executives were 8 allowed to testify about future projections as Rule 701 witnesses based on their past sales 9 experience at the plaintiff company. Plaintiff also relies on Robinson v. Watts Detective Agency, 10 Inc., 685 F.2d 729, 739 (1st Cir. 1982), where the court allowed the company president to testify 11 United States District Court Northern District of California 1 based on his 30 year history with the company—over which period he had also been the majority 12 or near-majority stockholder—and his “intimate familiarity” with the business. 13 Plaintiff argues that the same result is appropriate here because Plaintiff collaborated with 14 Defendants to develop the sales projections that, it argues, serve as the foundation for the lost 15 profits model. In addition, Plaintiff argues that the numbers are based on Requests for Proposals 16 and contracts. Opp. at 9. Defendants respond that these cases are inapposite because each involved 17 a company with a history of relevant revenue-generating operations and a witness with knowledge 18 of that history. Reply at 1. In addition, Defendants argue that Plaintiff’s emphasis on the sales 19 projections Defendants shared with outside funders is misplaced because Plaintiff’s lost profits 20 model incorporates other material assumptions and calculations for which Defendants had no 21 input or oversight. Id. at 3. 22 The Court agrees with Defendants. Plaintiff has failed to provide any case in which the 23 business owner exception has been applied where the product at issue has never been sold and the 24 business owner has no experience selling similar products. Unlike the business owner in Lightning 25 Lube, who relied on actual revenue and on numbers he had developed pre-litigation for other 26 purposes, the executives here have no actual contracts to support their estimates and rely on a 27 model they created for litigation. Similarly, in contrast to the investor in Latifavter and the 28 executives in Pet Food Express and Robinson, Plaintiff’s executives have neither past revenue nor 7 past sales experience regarding certified cards to which to compare their projections. In other 2 words, because the product has never been sold, whatever business Ms. Ziegler and Mr. Carson 3 may have particularized knowledge of cannot be the business reflected in the lost profits model. 4 Their deposition testimony highlights this knowledge gap. In her second deposition, Ms. 5 Ziegler explains each of the assumptions underlying the model and admits that many come from 6 outside sources. For example, Ms. Ziegler relied upon industry personnel for the 80 percent 7 reissue rate. See ECF 306-7, Rule 30(b)(6) Lost Profits Dep., Mot. Exh. 5 at 95. Similarly, the 8 source of the 20 percent Authenticator maintenance fee was a “customer ha[ving] said that the 20 9 percent [fee] is the [fee] that they’re accustomed to.” Id. at 147. While Ms. Ziegler may have 10 contacts in the credit card industry who can help her fill in the assumptions of the lost profits 11 United States District Court Northern District of California 1 model, these contacts do not amount to “particularized knowledge” that she has “by virtue of her 12 position in the business.” 13 The licensing and maintenance fees are similarly beyond Ms. Ziegler’s personal 14 experience. While the licensing fee came from RFPs and RFQs, not one of these is an actual, 15 binding contract because “no one would sign a contract without a certified product.” Id. at 92. And 16 no bank or issuer has ever purchased an Authenticator or related maintenance “[b]ecause we 17 needed the certified card.” Id. at 173. Thus, the lost profits model relies on hypotheticals that 18 neither Ms. Ziegler nor Mr. Carson experienced. 19 Furthermore, even where Ms. Ziegler and Mr. Carson could have relied on actual numbers 20 based on their experience—particularly for expenses—they chose hypotheticals. By the time they 21 were providing the disclosures and depositions, they could have updated the model to reflect real 22 numbers, such as the legal fees of outside counsel or utility costs. But, as Mr. Carson testified, 23 “[t]o build a model[,] we were not going to go . . . month by month, line by line and put actuals in 24 there.” Id. at 15. In a similar vein, the growth rates for 2014-2016, which Plaintiff has agreed to 25 exclude because of the inadequate disclosures discussed below, came from public statements by 26 Visa and MasterCard rather than the witnesses’ personal experience. Ms. Ziegler testified, “I did 27 not need to use PrivaSys because I had enough public statements [from external companies] to 28 build this.” Id. at 126. In other words, for most of the numbers and assumptions underlying the lost 8 1 profits model, Ms. Ziegler and Mr. Carson simply lack the requisite knowledge; where they could 2 have relied on their particularized knowledge, they chose not to. 3 Plaintiff’s attempt to argue that the model was used in its daily business operations is 4 equally unconvincing. As noted above, “no actual computation of damages exist[ed]” as of 5 October 2014. See Initial Disclosure at 5. Similarly, Mr. Carson testified that, as late as August 6 2014, no written damages calculation existed, the company had no spreadsheet for lost sales and 7 lost revenue, and Plaintiff had not quantified lost opportunities. Carson Dep. at 239, 242-43. At his 8 second deposition, Mr. Carson specifically testified that “obviously [the lost profits model] is not 9 the actual financial model or financial statements.” Rule 30(b)(6) Lost Profits Dep. at 45. He 10 United States District Court Northern District of California 11 reiterated, “This particular [model] is not used by FiTeq.” Id. at 45-46. In light of the record before it, the Court finds that an evidentiary hearing with Ms. Ziegler 12 and Mr. Carson is unnecessary to determine this motion. Moreover, neither party requested an 13 evidentiary hearing in their papers. As Defendants noted at the hearing, these witnesses are not 14 being offered as experts. Furthermore, their deposition testimony and Plaintiff’s Rule 26(a)(1) 15 disclosures make clear that they did not—and could not—have particularized knowledge of lost 16 profits from their experience leading FiTeq. Accordingly, Defendants’ motion to 17 exclude testimony by Ms. Ziegler and Mr. Carson regarding lost profits is GRANTED. 18 2. Valuation 19 Defendants similarly argue that neither Ms. Ziegler nor Mr. Carson is equipped to talk 20 about the purported $300 million valuation pursuant to Rule 701. Plaintiff again responds that the 21 Rule 701 business owner exception allows them to testify about valuation. 22 As Ms. Ziegler testified in her first deposition, as of August 2014, FiTeq had not been 23 valued. Since then, however, Plaintiff has developed both a qualitative and a quantitative 24 valuation. The Court considers each in turn. 25 The primary valuation is qualitative. Opp. at 6; see also Fourth Disclosure at 28-30. 26 Plaintiff intends to rely on Ms. Ziegler and Mr. Carson to “testify about comparable companies 27 that get bought, sold, and valued based on their technology.” Fourth Disclosure at 28. Defendants 28 argue that this is inadmissible under Rule 701 because Ms. Ziegler and Mr. Carson “rely on each 9 1 other’s opinions, and both rely on third-party reports about other companies and other hearsay.” 2 Mot. at 9. 3 While these witnesses—and Ms. Ziegler in particular—may have the requisite knowledge 4 from experience in the business to identify comparable competitors, neither is qualified to testify 5 about the valuation of those companies based on their own knowledge. When asked about 6 valuation at her second deposition, Ms. Ziegler consistently deferred to Mr. Carson. See, e.g., Rule 7 30(b)(6) Valuation Dep. at 18 (“So I think I’m relying on the reports that I received from Bill 8 Carson and our discussion related to our current financing”); id. at 34 (“Bill Carson, our CFO, is 9 the right person to address that question.”). And Mr. Carson relied on third party reports for his numbers—in particular, two publications to which he does not even subscribe, which came to him 11 United States District Court Northern District of California 10 by way of forwarded emails from Plaintiff’s lawyer, and discussions with bankers about 12 comparable deals. Id. at 74-76. Mr. Carson testified that he developed new expertise for this 13 particular valuation: “it was not specific about FiTeq, [but] I gathered information on how to use 14 their materials.” Id. at 75. Such reliance on third party materials, which requires expertise to 15 analyze and digest, is not in the realm of a lay witness. And expertise developed not “by virtue of 16 [the witness’] position in the business” cannot fit within the business owner exception. See Fed. R. 17 Evid. 701, Advisory Committee’s Notes ¶ 4 (2000). Plaintiff touts Mr. Carson’s significant 18 industry experience as a venture capitalist prior to joining FiTeq, see Rule 30(b)(6) Valuation Dep. 19 at 49, 62, 73, 76, but such experience, although relevant to qualifying a Rule 702 expert, cannot 20 replace the particularized business knowledge and experience that would be necessary to fall 21 within Rule 701’s business owner exception. 22 The Court now turns to Plaintiff’s quantitative valuation model—a discounted cash flow 23 model prepared by Mr. Carson “[a]s a check” for the qualitative model. Opp. at 6. For this model, 24 Mr. Carson calculated the present value of the lost profits discussed above, but including the years 25 2015 and 2016. See Rule 30(b)(6) Valuation Dep. at 134, 144. Next, Mr. Carson attempted to 26 calculate FiTeq’s assumed cash flows for 2017 and beyond based on financial data about other 27 companies that he obtained from Duff & Phelps, Bank of America, and Merrill Lynch. Id. at 76- 28 108. Mr. Carson’s calculations produce a range of hypothetical valuations from $149 million to 10 1 $2.6 billion. ECF 306-18, Mot. Exh. 11 at Exh. E-1. As Plaintiff conceded at the hearing, this is not appropriate 701 testimony—particularly in 2 3 light of the fact that Mr. Carson did not even join FiTeq as CFO until October 2014. Mr. Carson 4 may have been able to qualify as an expert—or perhaps not, given his own testimony that he is 5 “not a valuation expert,” Rule 30(b)(6) Valuation Dep. at 118—but Plaintiff has not attempted to 6 introduce him as such. Given his lay witness status and limited experience with FiTeq, Mr. Carson 7 cannot testify about a valuation he derived by modeling discounted cash flows. Accordingly, 8 Defendants’ motion to exclude testimony by Ms. Ziegler and Mr. Carson regarding valuation is 9 GRANTED. B. Speculative Damages 10 In addition to the Rule 701 challenge, Defendants argue that the lost profits and $300 United States District Court Northern District of California 11 12 million valuation-related damages are too speculative as a matter of law to be admitted. Mot. at 3- 13 7. Plaintiff responds that it need only establish the lost profits and valuation with reasonable 14 certainty and that, by relying on the sales projections Defendants provided to the EDB, it meets 15 this standard. Opp. at 7-8. Plaintiff is correct that “reasonable certainty only is required, not absolute certainty.” 16 17 Sargon Enterprises, Inc. v. Univ. of S. Cal., 55 Cal. 4th 747, 753 (2012).3 At the same time, 18 “[b]ecause it is inherently difficult to accurately predict the future or to accurately reconstruct a 19 counterfactual past, it is appropriate that trial courts vigilantly exercise their gatekeeping function 20 when deciding whether to admit testimony that purports to prove such claims.” Id. at 781. To 21 recover lost profits, a plaintiff must establish both “their occurrence and extent” with reasonable 22 certainty. Id. at 773 (quoting Grupe v. Glick, 26 Cal. 2d 680, 693 (1945)). When considering lost business profits, California courts “have generally distinguished 23 24 between established and unestablished businesses.” Id. at 774. In established business cases, lost 25 profits “are generally recoverable” because “their occurrence and extent may be ascertained with 26 3 27 28 The parties rely on the “reasonable certainty” standard for both lost profits and valuation, though the cases they cite consider only lost profits. In this case, the valuation relies heavily on the lost profits. The Court assumes, without deciding, that the “reasonably certain” standard applies to both. 11 1 reasonable certainty from the past volume of business and other provable data.” Id. (quoting 2 Grupe, 26 Cal. 2d at 692). For unestablished business, on the other hand, lost profit damages are 3 not recoverable because they are “uncertain, contingent and speculative” unless “their nature and 4 occurrence can be shown by evidence of reasonable reliability.” Id. (quoting Grupe, 26 Cal. 2d at 5 692-93). 6 While both parties rely on Sargon for the applicable legal standard, Defendants additionally use it to support their argument that Plaintiff’s lost profits and valuation models are 8 too speculative to be admitted. In Sargon, the plaintiff developed, received FDA approval for, and 9 patented a new dental implant. Id. at 754. The plaintiff then contracted with the defendant to 10 clinically test the product. Id. At trial, the plaintiff established that, after initial success in the 11 United States District Court Northern District of California 7 clinical trials, the defendant failed to present proper reports as required by the parties’ contract. Id. 12 As a result of this breach, the plaintiff argued, its product failed. The plaintiff sought $200 million 13 to upwards of $1 billion in lost profits. 14 To establish its lost profits, the plaintiff relied on an expert who used a market share 15 analysis. Because the expert determined that the plaintiff would have become a market leader 16 based on his understanding of its innovativeness, he based his estimate on the profits of the 17 industry’s leading companies rather than the plaintiff’s actual net profits of $101,000. Id. at 769. 18 After an evidentiary hearing, the court excluded this testimony as too speculative. 19 On review, the California Supreme Court determined that the trial court “excluded the 20 expert testimony for proper reasons.” 778. The court considered the plaintiff an unestablished 21 business because, while the plaintiff had achieved profits in the past, it “had no track record of 22 being a global leader” as the lost profits estimate assumed. Id. at 778. And the court agreed that 23 the testimony was too speculative because the expert “did not base his lost profit estimates on a 24 market share [the plaintiff] had ever actually achieved.” Id. at 778. As a result, his “attempt to 25 predict the future was in no way grounded in the past.” Id. at 780. 26 In response, Plaintiff relies on Asahi Kasei Pharma Corporation v. Actelion Ltd., 222 Cal. 27 App. 4th 945. In Asahi, the plaintiff, a foreign drug manufacturer, contracted with a domestic 28 company to develop and commercialize its drug in North America and Europe. In the midst of this 12 1 partnership, another domestic biopharmaceutical company with a competing drug acquired all of 2 the stock of the commercializing company in order to discontinue the drug’s development. The 3 plaintiff sued the acquiring company for lost profits. 4 To show that the fact of lost profits was certain, the plaintiff relied on the reports of seven experts who agreed that its drug would have been approved by U.S. and European regulators on 6 the projected timeline. Id. at 970. In addition, the plaintiff presented evidence showing that the 7 defendant acquired the commercializing company specifically because it viewed the plaintiff as a 8 threat. Id. at 952. To show the amount of lost profits, the plaintiff hired an economic expert who 9 relied on revenue projections the commercializing company had prepared in order to negotiate its 10 sale price with the defendant. Id. at 973. Those projections were based in part on consultation with 11 United States District Court Northern District of California 5 experts and the use of market surveys. Id. And the expert independently verified the market 12 assumptions underlying the projections, while a medical expert supported the market share 13 projections. Id. at 974. 14 Reviewing the trial court’s decision to admit these lost profit estimates, the appellate court 15 held that the trial court had not abused its discretion even though the drug had not yet been 16 approved. “There is no rule prohibiting recovery of lost profits damages simply because regulatory 17 approval is a prerequisite to selling a product.” Id. at 971. The court found the defendants’ 18 challenge to the plaintiff’s offer of two estimates similarly unavailing because the expert provided 19 “two distinct estimates rather than a range and he specified the different assumptions on which 20 they were based, described the facts he relied on to make the different assumptions, and explained 21 precisely how the two figures were calculated.” Id. at 974. In addition, the court determined that 22 the case “does not fit neatly into the established business versus new business paradigm” because 23 the commercializing company “had a track record of obtaining FDA approval for and marketing a 24 [similar drug] and had a sales and marketing team already in place.” Id. at 975. Thus, the court 25 found it was appropriate to look to the company’s history as evidence of prior performance. 26 Having considered both cases, the Court finds that Plaintiff’s case here is weaker than the 27 ones presented in both Asahi and Sargon. Most significantly, in those cases, both plaintiffs relied 28 on experts—in Asahi, the plaintiff introduced at least seven medical experts and one economic 13 1 expert. Those experts opined that the plaintiff would have succeeded in getting the requisite 2 regulatory approval; Plaintiff provides no such evidence to support its assumed certification here. 3 The Asahi court relied on the expert testimony to find that the plaintiff had established the fact of 4 lost profits with reasonable certainty. As a result, the court was then able to consider whether the 5 amount of lost profits alleged had “some reasonable basis of computation of damages . . . even if 6 the result reached is an approximation.” Id. at 972-73 (citing Sargon, 55 Cal. 4th at 774-75). In 7 contrast, here, Plaintiff has failed to offer evidence that could establish the fact of lost profits with 8 reasonable certainty: unlike the Asahi plaintiff, Plaintiff has not offered evidence to show that its 9 card would get the certification required for profit. Even if Plaintiff could establish the fact of lost profits, it nevertheless fails to offer 11 United States District Court Northern District of California 10 evidence that could meet the reasonable certainty standard for amount. In contrast to Asahi, where 12 the plaintiff identified the commercializing company’s “track record of obtaining FDA approval 13 and marketing [a similar product],” Plaintiff has consistently failed to develop a certified card and 14 has never brought a similar product to market. Furthermore, the Asahi plaintiff relied on numbers 15 developed by the commercializing company for non-litigation purposes in consultation with 16 experts. In contrast, here, Plaintiff relies on a self-created model developed for this case, casting 17 18 doubt on its reliability. Plaintiff argues that the lost profit calculations are reasonably certain 19 because they are derived from a collaborative effort by the parties to project sales and because 20 Defendants spent money to work with Plaintiff after vetting the underlying projections. Opp. at 8. 21 But Defendants have the better of this argument. Defendants point to Mr. Carson’s deposition 22 testimony that the number of cards sold by today if Plaintiff had had a working card in 2011 is 23 “[p]retty speculative.” And Defendants argue that the projections were for worldwide sales, not 24 the U.S. sales for which Plaintiff now claims damages. Mot. at 6.4 Plaintiff does not challenge 25 these arguments and the characterizations are supported by Plaintiff’s Fourth Disclosure. See 26 27 28 4 The parties also consistently dispute who created the sales projections shared with the EDB. Because Plaintiff relies on so much more than the sales projections, this dispute is irrelevant to the Court’s determination and need not be resolved at this stage. 14 1 Fourth Disclosure at 8-9 (identifying other inputs into and assumptions for lost profits 2 calculation). Thus, key elements that supported the admissibility of lost profits in Asahi are not present. 3 4 Rather, the logic of Sargon, which upheld the inadmissibility of lost profits evidence, applies— 5 and with even fuller force. Plaintiff’s case for lost profit and valuation-based damages is in many 6 ways weaker than that of the plaintiff in Sargon. For example, while the Sargon plaintiff had a 7 proven product—approved by the FDA and patented—Plaintiff has yet to produce a certified card. 8 Similarly, while the Sargon plaintiff had some profits on which to base its claim, Plaintiff offers 9 none. Furthermore, as noted above, while the Sargon plaintiff relied on the testimony of an expert 10 who had been qualified to consider market evidence, Plaintiff relies on lay witnesses. Sargon is also instructive on Plaintiff’s argument that Defendants are seeking a “free pass” United States District Court Northern District of California 11 12 because it is their own failure that is blocking Plaintiff from alleging damages with certainty. See 13 Opp. at 2. Faced with the identical argument, the California Supreme Court concluded that 14 “[o]ther avenues might exist to show lost profits.” In other words, the Court is not penalizing 15 Plaintiff for Defendants’ breach; rather, the Court is considering Plaintiff’s own choices to bring 16 its damages case on the basis of a hypothetical model, not grounded in any provable data, through 17 lay witnesses. As a result, the Court finds this “free pass” argument unavailing. Accordingly, Defendants’ motion to exclude the underlying lost profit and valuation 18 19 models is GRANTED. C. New Documents 20 Finally, Defendants argue that Plaintiff produced new documents in violation of the 21 22 Court’s March 12, 2015 Order, which required Plaintiff to give Defendants a list of “previously- 23 produced” documents regarding valuation.5 Mot. at 11-12; see also ECF 233, Order Re 24 Supplemental Discovery; ECF 245, Mot. for Sanctions at 2-3. After Defendants moved to exclude 25 those documents, Plaintiff agreed to withdraw and not rely on them. See ECF 305-10, Mot. Exh. 26 27 28 5 The parties disagree on the amount of new documents. Defendants number them in the thousands, while Plaintiff points to 54 pages. The Court need not resolve this dispute as the precise number is irrelevant. 15 1 18. But Defendants assert that, at their depositions, Ms. Ziegler and Mr. Carson testified that they 2 relied on those documents in preparing their damages claims. As a result, Defendants now move to 3 exclude testimony based on this new evidence. Mot. at 11. 4 Plaintiff agrees that its witnesses cannot rely on the new documents at trial. Opp. at 12. 5 Accordingly, the Court GRANTS Defendants’ undisputed motion to exclude testimony based on 6 the new evidence. As the Court noted during the hearing, adhering to this order will require 7 vigilance by both parties. 8 9 10 United States District Court Northern District of California 11 IT IS SO ORDERED. Dated: February 22, 2016 ______________________________________ BETH LABSON FREEMAN United States District Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16

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