RMD, LLC v. Nitto Americas, Inc. et al

Filing 405

MEMORANDUM AND ORDER denying 318 Defendants' Motion to Strike Plaintiff's Expert Marc Vianello ; granting in part and denying in part 320 Defendants' Motion to Strike and Exclude the Supplemental Report ; granting in part and denyi ng in part 326 Plaintiff's Motion to Strike and Exclude the Testimony and Opinions of Dr. Pflaum and Dr. McCollister; denying 343 Plaintiff's Motion to Strike ; granting 353 Defendants' Motion to Exceed Page Limit. Signed by District Judge Julie A. Robinson on 11/5/2012. (pp)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

RMD, LLC,
Plaintiff,
v.
NITTO AMERICAS, INC., et al.,
Defendants.

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No. 09-2056-JAR-DJW

MEMORANDUM AND ORDER
Before the Court are the parties’ motions to exclude certain expert testimony and reports:
1) Defendants’ Motion to Strike Plaintiff’s Expert Marc Vianello (Doc. 318); (2) Defendants’
Motion to Strike and Exclude the “Supplemental” Report of Plaintiff’s Expert Witness (Doc.
320);1 and 3) Plaintiff’s Motion to Strike and Exclude the Testimony and Opinions of Dr.
Christopher Pflaum and Dr. George McCollister (Doc 326). The Court held a hearing on
September 5, 2012, at which time it heard arguments from counsel. After carefully considering
the submissions and statements of the parties, the Court is prepared to rule. For the reasons
explained in detail below, both parties’ motions are granted in part, and denied in part.
I.

Background
This case involves the rights and obligations of each of the parties relating to a

Distributorship Agreement (“the Agreement”) entered into between the parties on June 9, 2003.

1

Consistent with the history and tone of these proceedings, Plaintiff moves to strike Defendants’ motions as
exceeding the page limit by one page and not complying with the local rules because they filed two separate
objections to Vianello’s report and supplemental report (Doc. 343); Defendants respond with a Motion for leave to
exceed the page limit (Doc. 353). The Court finds the parties’ tactics a waste of judicial resources, especially on the
eve of trial, and hopes that going forward, the parties will put their gamesmanship aside and focus on the issues at
hand. That said, Plaintiff’s motion is denied and Defendants’ motion is granted.

Plaintiff RMD, LLC (“RMD” or “Plaintiff”) brings this lawsuit against Defendants Nitto
Americas, Inc. and Permacel, Inc. (“Defendants”) alleging breach of contract, fraudulent
inducement, fraudulent/negligent misrepresentation and fraudulent concealment. Defendants
have filed a counterclaim alleging breach of contract for non-payment of goods delivered, and
have asserted eighteen affirmative defenses.
On March 27, 2012, the Court denied in part Defendants’ Motion for Summary Judgment
on all of Plaintiff’s claims, granted Defendants’ motion with respect to the issue of expiration of
the Agreement and denied with respect to all remaining claims and affirmative defenses.2 The
Court also denied Plaintiff’s Motion for Partial Summary Judgment with respect to Plaintiff’s
breach of contract claim. The Court rejected Plaintiff’s argument that the evidence at the
preliminary injunction hearing as well as statements and rulings of the Court established
Defendants breached the Agreement, explaining that Defendants’ acknowledgment that some
Exclusive Product ended up in the automotive aftermarket was not a statement of admission or
acknowledgment that the Agreement was breached and the Court did not so rule at the
preliminary injunction hearing.3 Likewise, the Court rejected Defendants’ request that the Court
determine as a matter of law that there had been no direct sale in violation of the Exclusivity
Provision of the Agreement, that direct sales require knowledge of Defendants, and that there is
no evidence of solicitation in violation of the Agreement, explaining that Plaintiff has presented
evidence that Exclusive Product ended up in the automotive aftermarket both during the initial
term of the Agreement and thereafter, that Defendants knew or should have known the product

2

Doc. 278.

3

Id. at 26-27.

2

would end up in the automotive aftermarket, or at least, did not take steps to ensure that the
product did not end up in the hands of competing retailers and distributors, and that there was an
attempted circumvention of the Agreement.4 The Court emphasized that these material facts
were vigorously disputed by Defendants, and that the parties clearly have a fundamental
disagreement about what is required under the Agreement and how the product ended up in the
aftermarket.5
As the Court’s ruling on expiration of the Agreement potentially impacted Plaintiff’s
claim for damages, it also denied the parties’ pending Daubert motions without prejudice to
renew or supplement by the June 15, 2012 deadline set out in the Amended Scheduling Order.6
Specifically, in reaching his opinion related to the projection of future lost profits, Plaintiff’s
expert, Marc Vianello, assumes that RMD has not terminated the Agreement and the Agreement
remains viable into the indefinite future. These projected future lost profits are forecast over a
seventy (70) year period and total more than $2.4 million. The Court noted that
Defendants’ motion challenging the admissibility of Plaintiff’s expert testimony focused on the
reliability of Vianello; if the Court’s summary judgment ruling impacts the relevance of his
testimony, it would also impact the rebuttal witness opinions as well as Vianello’s supplemental
report. Accordingly, in the interest of judicial economy, the Court denied the pending motions
regarding expert testimony without prejudice to renew and supplement to address the impact of
the Court’s ruling that the Agreement expired without renewal on June 30, 2008.

4

Id.

5

Id.

6

Doc. 279.

3

None of the expert reports were subsequently amended or supplemented. The parties
timely renewed all three motions.
II.

Standard
The Court incorporates the factual background set forth in its summary judgment order

(Doc. 278) to the extent it is relevant to the instant motions. The Court has broad discretion in
deciding whether to admit expert testimony.7 Fed. R. Evid. 702 provides that a witness who is
qualified by knowledge, skill, experience, training or education may testify in the form of
opinion or otherwise as to scientific, technical or other specialized knowledge if such testimony
will assist the trier of fact to understand the evidence or to determine a fact in issue, “if (1) the
testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable
principles and methods, and (3) the witness has applied the principles and methods reliably to the
facts of the case.”8
The proponent of expert testimony must show “a grounding in the methods and
procedures of science which must be based on actual knowledge and not subjective belief or
unaccepted speculation.”9 In order to determine whether an expert opinion is admissible, the
Court performs a two-step analysis. “[A] district court must [first] determine if the expert’s
proffered testimony . . . has ‘a reliable basis in the knowledge and experience of his
discipline.’”10 Second, the district court must further inquire into whether the proposed

7

Kieffer v. Weston Land, Inc., 90 F.3d 1496, 1499 (10th Cir. 1996) (citation omitted).

8

Fed. R. Evid. 702.

9

Mitchell v. Gencorp Inc., 165 F.3d 778, 780 (10th Cir. 1999).

10
Norris v. Baxter Healthcare Corp., 397 F.3d 878, 884 (10th Cir. 2005) (quoting Daubert v. Merrell Dow
Pharm., Inc., 509 U.S. 579, 592 (1993)).

4

testimony is sufficiently “relevant to the task at hand.”11 An expert opinion “must be based on
facts which enable [him] to express a reasonably accurate conclusion as opposed to conjecture or
speculation . . . absolute certainty is not required.”12 And it is not necessary to prove that the
expert is “indisputably correct,” but only that the “method employed by the expert in reaching
the conclusion is scientifically sound and that the opinion is based on facts which satisfy Rule
702’s reliability requirements.”13
Daubert sets forth a non-exhaustive list of four factors that the trial court may consider
when conducting its inquiry under Rule 702: (1) whether the theory used can be and has been
tested; (2) whether it has been subjected to peer review and publication; (3) the known or
potential rate of error; and (4) general acceptance in the scientific community.14 But “the
gatekeeping inquiry must be tied to the facts of a particular case.”15
It is within the discretion of the trial court to determine how to perform its gatekeeping
function under Daubert.16 The most common method for fulfilling this function is a Daubert
hearing, although such a process is not specifically mandated.17 In this case, the parties
requested and were granted a hearing on these motions, where they opted to limit their
presentation to oral argument; no witnesses testified, nor was any evidence admitted. The Court

11

Id. (quoting Daubert, 509 U.S. at 597).

12

Dodge v. Cotter Corp., 328 F.3d 1212, 1222 (10th Cir. 2003).

13

Id.

14

Daubert, 509 U.S. at 593–94.

15

Kumho Tire Co. v. Carmichael, 526 U.S. 137, 150 (1999) (internal quotations omitted).

16

Goebel v. Denver & Rio Grande W. R.R., 215 F.3d 1083, 1087 (10th Cir. 2000).

17

Id.

5

has carefully reviewed the exhibits filed with the motions and believes this review is sufficient to
render a decision.
III.

Discussion
Defendants raise several challenges to the admissibility of Vianello’s initial expert report.

Specifically, Defendants contend that Vianello’s report is inadmissible on the grounds that 1) it
is not consistent with the Court’s Order concluding that the Agreement expired June 30, 2008; 2)
it is unreliable because it is based on invalid assumptions; 3) his methodology is flawed because
he assumes causation; 4) he is not qualified to render an opinion on lost profits using the
unreliable Crystal Ball and Holt-Winter statistical computer program; and 5) his opinions rely in
part on opinions that are inadmissible hearsay. Defendants also move to strike Vianello’s
supplemental opinion as an improper rebuttal. Plaintiffs move to strike Defendants’ rebuttal
report on the grounds that the report is an improper rebuttal, the experts’ opinions regarding the
statistical significance of Plaintiff’s damages do not assist the trier of fact and because neither
expert is qualified to proffer an accounting methodology or opinion. The Court addresses each
objection, although not necessarily in the order set out by the parties, as the arguments are
intertwined and overlap.
A.

Marc Vianello

Plaintiff’s damages expert submitted his initial report on July 26, 2010.18 Vianello is a
Certified Public Accountant (“CPA”) licensed in the States of Kansas, Missouri and Iowa. He
has been a CPA since 1977. The American Institute of Certified Public Accountants has
accredited him in business valuation (his ABV credential) and has certified him in financial

18

Doc. 319, Ex. 1.

6

forensics (his CFF credential). Vianello is the managing member of an accounting firm. He has
testified as an expert witness with regard to business valuation and damages in other federal and
state court matters.
Vianello opines that RMD has suffered damages totaling $2,690,122.00 as a result of
Defendants’ breach of the Agreement, broken down into six categories:
1) 2004-2009 Sales infringement:
2) Lack of Most Favored Nation Pricing:
3) Historical diminished sales volumes
2008-2010
4) Present value of future diminished
sales 2010- 2080
5) Obsolescence of packaging:
6) Accounts receivable balance:

$
$

216,651.00
84,754.00
$

260,681.00

$
$

2,226,621.00
15,865.00
(114,450.00)
____________________
$
2,690,122.00

Category one is Vianello’s calculation of damages attributable to Defendants’ sale of
Exclusive Product to “the infringers,” Soundown from 2004 to 2009, and dB Acoustical from
2007 to 2008. Category two is the calculation attributable to Plaintiff not receiving the most
competitive prices under Most Favored Nation prices in 2007 and 2008, and compares the
various products purchased by Plaintiff to the prices charged by Defendants for products
purchased by Soundown and dB Acoustical. Vianello also opined that Plaintiff experienced a
diminished volume of historical sales beyond the sales lost directly to Soundown and dB
Acoustical and more likely than not, will experience diminished future sales growth. He
attributes these diminished sales volumes to the requirements that Plaintiff prepay its purchases
of Exclusive Products and the sales growth that would have come by adding the infringer’s
customers to Plaintiff’s customer base. Category three forecasts Plaintiff’s historical diminished
sales volumes and category four reduces Plaintiff’s future diminished sales growth damages to
7

present value. Category five calculates Plaintiff’s damages incurred by the obsolescence of the
packaging used for Exclusive Products. Finally, category six is the accounts receivable balance
for money owed Defendant for past purchases by Plaintiff.
After Defendants disclosed their rebuttal expert report,19 Plaintiff served a supplemental
expert witness report dated June 9, 2011.20 Vianello states that counsel for RMD “asked that I
supplement my Expert Report with my observations regarding the Expert Report of [Defendants’
Experts] dated April 26, 2011.” The supplemental report includes as an exhibit a report from Dr.
Paul Koch, an associate of Vianello, who has not been designated as an expert witness in this
case. At Vianello’s request, Koch analyzed the data in the rebuttal expert report and tested
Vianello’s theory by using the rebuttal experts’ preferred ARIMA statistical tool in order to
confirm the reasonableness of his opinion, resulting in less than $2500 difference in total
damages.
1.

Supplemental Report

The Court will first address the admissibility of the supplemental report, as it impacts its
ruling on Vianello’s initial report. Defendants ask the Court to determine whether the report,
including Koch’s report appended thereto, is a supplemental or rebuttal report and, if the latter,
whether Fed. R. Civ. P. 37(c) sanctions are appropriate.
A party’s expert witness is allowed to “supplement” his report under Rule 26(e)(1)(A) if
the party learns that the report is “incomplete or incorrect, and if the additional corrective

19

Doc. 327, Ex. 1.

20

Doc. 321, Ex. 1.

8

information” has not yet been produced.21 Defendants argue that because the supplemental
report makes no attempt to correct any misleading or false information, it is a rebuttal, and is
untimely and improper. Moreover, Defendants urge that RMD is trying to bolster Vianello’s
testimony with Koch’s report, even though he has not been designated as an expert and will not
be called to testify at trial. Accordingly, Defendant argues that per Rule 37(c)(1), the Court
should strike and exclude the untimely report and order RMD to pay Defendants’ attorney’s fees
incurred from this motion. That Rule states that when a party fails to comply with the timing
requirements under Rule 26(a), then “the party is not allowed to use that information or witness
to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially
justified or is harmless.”22 The Tenth Circuit has held that four factors should guide the district
court’s discretion: 1) the prejudice or surprise to the party against whom the testimony is offered;
2) the ability of the party to cure the prejudice; 3) the extent to which introducing such testimony
would disrupt the trial and 4) the moving party’s bad faith or willfulness.23
The Court agrees with Defendants that the report is a rebuttal report. Indeed, Vianello’s
opening line of the report stated the purpose is to respond with his observations regarding
Defendants’ expert report, and is organized by sub-headings that correspond to the numbered
paragraphs in Defendants’ expert report, critiquing it paragraph by paragraph. As discussed
below, however, the Court grants Plaintiff’s Motion to strike the majority of Defendants’ expert

21

Fed. R. Civ. P. 26(e)(1)(A).

22

Fed. R. Civ. P. 37(c)(1).

23

Woodworker’s Supply, Inc. v. Principal Mut. Life Ins. Co., 170 F.3d 985, 993 (10th Cir. 1999).

9

rebuttal report,24 making the majority of Defendants’ request to strike the supplemental report
moot. Dr. Koch will not be permitted to testify at trial, nor will Vianello be permitted to testify
about the results of his test. As discussed below, however, the Court will consider Dr. Koch’s
report for the limited purpose of its Daubert analysis of whether Vianello’s methodology in his
initial report can be tested.
To the extent the rebuttal experts testify about Vianello’s underlying facts and
assumptions, however, the Court will allow him to offer rebuttal testimony. Such evidence,
which is akin to that offered on redirect after cross-examination, presents no surprise or
prejudice to Defendants, as Vianello has been deposed and there will be no disruption to trial.
2.

Initial Report

a.

Impact of Court’s Ruling on Termination of Agreement

Defendants urge the Court to strike Vianello’s testimony in its entirety because he did not
supplement or adjust his initial report to take into account the Court’s ruling on termination of
the Agreement, and thus his testimony cannot be helpful to a jury. The Agreement has two
provisions relative to the Court’s ruling that it expired on June 30, 2008 and the issue of
damages: 1) the “exclusive distributorship” provisions under the initial term of the Agreement,
which expired June 30, 2008; and 2) the “non-solicitation” provisions of the Agreement, which
were in effect during the term of the Agreement and continued for five years after termination,
expiring on June 30, 2013.25 The exclusivity provision states that RMD will act as “exclusive
distributor of the Exclusive Products in the Exclusive Market” and that Defendants “shall not

24

See supra Section III.B at 20-22.

25

See Doc. 278 at 7-8.

10

directly or indirectly sell the Exclusive Products in the Territory in the Exclusive Market and
shall refer to RMD all inquiries received from customers or potential customers in the Territory
regarding the same,” and further, that Defendants will not “sell or distribute, directly or
indirectly, the Exclusive Products to any entity or person (other than RMD) under circumstances
where Permacel knows or has reason to believe that such sale will result in a breach of RMD’s
exclusive rights under this Agreement.” The non-solicitation provision prohibits Defendants
from soliciting “any customer or active prospective customer of RMD who/which was a
customer of RMD at any time during the term of this Agreement.” Defendants argue that this
provision has no bearing on Plaintiff’s alleged damages because Plaintiff has no evidence that
Defendants solicited any customer of RMD at any time during the term of the Agreement, and
that none of Vianello’s testimony or expert opinion as to damages is based on violations of the
non-solicitation provision. Instead, Vianello’s report is based on the assumption “that the
Distributorship Agreement remains viable into the indefinite future,” and thus all of Plaintiff’s
damages for categories one, three and four are based on the exclusive distributorship provisions
that stem from sales to Soundown and dB Acoustical, who were never customers of Plaintiff.
Thus, Defendants argue, the cut-off date for Plaintiff’s damages is the expiration of the
Agreement, or June 30, 2008.
While Defendants are correct that the ruling on termination impacts Vianello’s report, it
does not disqualify him from testifying under Daubert. As Plaintiff points out, there are multiple
ways to breach the Agreement, both during and after the initial term. Vianello assumed a breach
of the Agreement for purposes of making his damage calculation; he did not differentiate
between a breach under the exclusivity provision or the non-solicitation provision. Although the

11

Agreement terminated June 30, 2008, breach of the Agreement may continue for five years past
that date under the non-solicitation clause. Thus, the Court agrees with Plaintiff that the effect
of its Order is to place an additional burden on it to prove to the jury whether there was a breach
of the exclusivity provision, the non-solicitation provision, or both, either during the term of the
Agreement or five years thereafter. Defendants argue that there is no evidence of breach of the
non-solicitation clause, which does not apply to dB Accoustical and Sundown because they were
never customers of Plaintiff, who counters that those companies are clearly prospective
customers that entered into sales relationships with Defendants during the term of the
Agreement. The Court previously denied the parties’ cross-motions for summary judgment on
the breach of contract claim and declines to revisit the issue in the context of a Daubert analysis.
While it appears that Plaintiff’s position is weak with respect to breach of the non-solicitation
clause, that determination is left for trial.
Moreover, the Court agrees that Defendants’ interpretation of the Court’s ruling is that
damages only occur with the actions causing the breach. The Court’s Order on termination does
not prohibit Vianello from projecting future damages that are a result of the breaches that have
already occurred during the exclusivity or non-solicitation time frame of the Agreement, which
may persist beyond the date of the actual breach. Thus, Defendants’ argument that categories
one through four should be reduced to the extent they include damages that occurred after June
30, 2008 is overruled at this time; and, although the damages from obsolescence in packaging
occurred in 2009, they are consequential damages that would not be precluded because they
were incurred after June 2008.
The greatest impact from the Court’s ruling appears to be on Vianello’s calculation of the

12

duration of damages projected into the future. While the Court agrees that Vianello’s projection
of future damages for seventy years is untenable given its ruling on termination, this does not
render his report inadmissible under Daubert. Under Kansas law, “loss of profits resulting from
a breach of contract may be recovered as damages when such profits are proved with reasonable
certainty, and when they may reasonably be considered to have been within the contemplation of
the parties.”26 The evidence necessary or sufficient to establish lost future profits with
reasonable certainty depends largely on the circumstances of the case.27 While absolute certainty
is not required, the factfinder must be guided by a rational standard.28
In calculating the present value of Plaintiff’s future damages, Vianello made
assumptions based on RMD’s business records and testimony from McCarthy. Vianello took
into consideration RMD’s unknown equity value and thus discounted its future damages using
its estimated equity cost of capital, using a modified CAPM build-up method.29 When tested
with the ARIMA program, Vianello’s projections proved to be precise. Accordingly, the Court
finds that Vianello’s calculations are based on facts that allow him to express a “reasonably
accurate” conclusion and not based on pure speculation.30
In response to the Court’s suggestion at oral argument that damages could not extend
beyond five years from the termination date, or June 2013, Plaintiff responded that Vianello’s

26

CoreFirst Bank & Trust v. JHawker Capital, LLC, 282 P.3d 618, 631 (Kan. Ct. App. 2012) (quoting
Vickers v. Wichita State Univ., 518 P.2d 512, [618] (Kan. 1974)).
27

Id.

28

Olathe Mfg., Inc. v. Browning Mfg., 915 P.2d 86, 103-04 (Kan. 1996).

29

Doc. 235, Ex. 1 at 11-12.

30
See Fisherman Surgical Instruments, LLC v. Tri-Anim Health Servs., Inc., 502 F. Supp. 2d 1170, 1186 (D.
Kan. 2007) (excluding damages calculation based on an assumption for which “the record contains no evidence.”).

13

testimony includes analysis of the residual effects caused by recapturing the market share of
sales, which may extend beyond 2013. As counsel pointed out at oral argument, this calculation
assumes the whole world of potential breaches, and can be reduced accordingly depending on
how the evidence comes in at trial. In other words, although Vianello’s assumption that the
Agreement remains viable into the indefinite future is no longer valid, the report is structured so
that the jury may cut off and reduce future damages at any point. Accordingly, the Court’s
ruling on termination does not have a disqualifying impact on Vianello’s calculations that cannot
be adjusted as the evidence comes in at trial, with respect to the nature and timing of the breach,
as well as any residual long-term effects. Defendants’ motion to strike on these grounds is
overruled.31
b.

Diminished Sales Volumes

Although they do not contest Vianello’s qualifications in accounting, Defendants argue
that his calculations for damages categories three and four for diminished sales volume rely on
statistical and economic analyses that are outside his expertise. Alternatively, Defendants argue
that even if he were qualified, the methodologies that Vianello relied upon are unreliable and
were improperly applied.
In reaching his lost sales volume calculation, Vianello assumed that RMD experienced a
diminished volume of historical sales beyond the sales lost directly to the infringers Soundown
and dB Acoustics. Vianello based this assumption on testimony from McCarthy that RMD lost
customers because Defendants violated the exclusivity provision of the Agreement by selling

31

The Court strongly encourages Plaintiff to carefully consider how to structure the instructions and verdict
forms or special interrogatories in a manner to guide the jury in its determination without undue burden or confusion.

14

Exclusive Products to RMD competitors who deal in the Exclusive Market within the Territory,
citing as one example Design Engineering. McCarthy also described the loss of a series of RMD
customers in Southern California, New Mexico and Arizona in 2008. According to McCarthy,
RMD customers indicated that they purchased from competitor Second Skin, which was based in
Phoenix, Arizona, in 2008, which received its Exclusive Product via dB Acoustical. McCarthy
also testified that in April 2008, Defendants required RMD to prepay for Exclusive Products.
Based on this information and events, Vianello opined that RMD experienced a
diminished volume of historical sales beyond the sales lost directly to the infringers, and that
RMD will likely experience diminished future sales growth, attributable to 1) the prepayment
requirement and 2) the sales growth that would have come by adding the infringers’ customers to
RMD’s customer base, that is, the sales comprising category one damages. To estimate these
diminished sales, Vianello used a commercially available forecasting tool, Oracle’s Crystal Ball
Predictor (“Crystal Ball”) and the Holt-Winters method available from the Crystal Ball package,
a short-term moving average method used in production forecasting. Crystal Ball is described as
a spreadsheet-based application suite for predictive modeling, forecasting, simulation, and
optimization.32 Vianello describes the software as being used to formulate trends based on
historical data and allows the selection of a variety of accepted statistical trend methodologies to
predict future sales, including the Holt-Winters additive method.33 Vianello chose the HoltWinters “Additive Seasonal Smoothing” forecast model in this case, which produces
exponentially smoothed values of the level of the forecast, the trend of the forecast, and the

32

See http://www.oracle.com/us/products/middleware/bus-int/crystalball/index.html

33

Doc. 319, Ex. 1 at 7 n.24.

15

seasonal adjustment to the forecast.34 According to Vianello, the Holt-Winters model is best for
data with trend and seasonality that does not increase over time, meaning that it reflects the
seasonal changes in the data without increasing the effects of seasonality over time.35
Vianello used the Holt-Winters methodology to forecast damages through 2010, then
extrapolated Plaintiff’s damages attributable to diminished future sales growth from June 2010
through 2080, or seventy years. In doing so, Vianello assumed constant amounts of increasing
sales and discounted the future values using its equity cost of capital, which he estimated to be
20.6%.
Vianello’s Qualifications
Defendants argue that instead of merely looking at historical data and calculating lost
profits, Vianelllo attempts to use a combination of principles in econometrics and statistics
generated by Crystal Ball, disciplines in which he is not qualified as an expert. Despite their
protests, Defendants argue, in effect, that only statisticians or econometricians are qualified to
run automated forecasting on Crystal Ball as to future lost profits and that only regression
analysis may be used. The Court disagrees.
Vianello’s accounting and business valuation experience qualify him to offer an opinion
on future lost profits. He has never held himself out as an expert in statistics, nor has he
proffered an opinion in the area of statistics or econometrics. Instead, Vianello used the Crystal
Ball and Holt-Winter program to indirectly forecast sales to predict the need for inventory as a
means to forecast lost profits, using assumptions based on standard accounting procedures. The

34

Id.

35

Id.

16

fact that Holt-Winter is a statistics program does not mean Vianello was not qualified to use it in
his calculations, as he essentially “plugged in” data to assist him in a process he would otherwise
undertake as an accountant. As Plaintiff points out, Defendants’ argument is analogous to
arguing Vianello is not qualified to use a computer because he cannot explain how a computer is
programmed. Accordingly, the Court finds that Vianello is qualified to render an opinion on
Plaintiff’s diminished historical and future sales.
Reliability
Citing standards for statistical analysis in federal court, Defendants also challenge
Vianello’s opinion as unreliable, arguing that he improperly applied the statistical
methodologies, that the Holt-Winters forecasting method cannot be tested for reliability and that
he should have used ARIMA, a statistical tool that uses regression analysis. Defendants’
rebuttal experts opine that Vianello’s report shows a “profound ignorance of regression
analysis,” and in their experience as statisticians, the method he selected has not been used to
estimate damages in litigation. Again, the Court disagrees. Defendants’ core disagreement
appears to be Vianello’s failure to use what they consider to be the best methodology to arrive at
his opinion. While the ARIMA program may be the preferred methodology by statisticians,
Defendants present no evidence that Holt-Winters is not an acceptable methodology used by
accountants in forecasting or why, in the context of forecasting sales and lost profits, a
regression analysis was required in this case. Indeed, proof to a statistical certainty is not the
standard for recovery in a breach of contract action.36

36

See CoreFirst Bank & Trust v. JHawker Capital, LLC, 282 P.2d 618, 631 (Kan. Ct. App. 2012) (“lost
profits resulting from a breach of contract may be recovered as damages when such profits are proved with
reasonable certainty, and when they may reasonably be considered to have been within the contemplation of the
parties.”); Rinehart v. Morton Bldgs., Inc., 240 P.3d 626, at *7 (Table) (Kan. Ct. App. 2010) (stating general

17

Likewise, while Defendants urge that Holt-Winters is not subject to testing from a
statistician’s point of view, there is no evidence that it is not subject to testing in the field of
accounting. In response to Defendants’ rebuttal report, Vianello tested the reasonableness of his
methodology by comparing it with the ARIMA statistical tool. Vianello had his associate, Dr.
Koch, use the ARIMA methodology on the same basis and with the same assumptions that were
used in the Holt-Winters analysis, producing a difference of $2500. Given that Vianello
projected lost sales out for seventy years, this difference would be even less in the likely event
that projection is reduced to a shorter time frame. Thus, the Court finds that the Holt-Winter
methodology can be tested by using other statistical methods. In so ruling, the Court stresses
that Dr. Koch will not be a witness at trial and Plaintiff may not use his test results to otherwise
bolster or support Vianello’s initial opinion on lost profits damages.
Moreover, while Defendants argue that Holt-Winters is not accepted in the statistical or
economic community as a valid regression analysis, Plaintiffs have offered evidence that HoltWinters has been an accepted model for predicting future sales for over fifty years.37 While
Vianello did project damages seventy years into the future, he used the Holt-Winters
methodology to forecast damages only through 2010, a relatively short period of time; after that,
he assumed constant amounts of increasing sales for purposes of his damage analysis, which
Defendants characterize as “basic arithmetic.”
Defendants also challenge most, if not all, of the underlying assumptions, facts and data

measure of damages for breach of contract as “such sum as [the jury] believe[s] will fairly and justly compensate the
plaintiff for the damages you believe he sustained as a direct result of the breach of contract by defendant.”) (citing
PIK Civ. 4th 124.16).
37

Hrg. Ex. 6.

18

upon which Vianello based his calculations and opinion.38 “[T]he factual basis of an expert
opinion goes to the credibility of the testimony, not the admissibility, and it is up to the opposing
party to examine the factual basis for the opinion in cross-examination.”39 Such challenges
include but are not limited to the choices Vianello made with respect to his methodology and
calculations formulas, assumptions about market shares, pricing discounts and pricing
favoritism, the impact of prepayment requirements, and the impact of customer return rates.
These challenges go to weight not admissibility, and are proper subjects for cross-examination.
c.

Causation

Defendants further contend that Vianello’s methodology is flawed because he based his
opinions on assumptions of the very conclusions his testimony is intended to prove.
Specifically, Defendants contend that Vianello assumed that had the alleged wrongful sales not
been made, Plaintiff would have sold the same quantity of product at Plaintiff’s higher price to
the new customers.
Vianello is not a causation expert. His expert testimony relates only to damage
calculation, not to causation. Because this is a contract case, breach of the contract is the
causation for purposes of Vianello’s damages calculations—in other words, to recover lost
profits, a plaintiff must show that “but for” the alleged infringing sales, plaintiff would have sold
the product. Vianello assumed causation based on the evidence that was presented to him by
Plaintiff. For purposes of presenting his damage calculation methods, however, Vianello is

38

The Court notes that most of these challenges are presented in a multitude of “uncontroverted facts”
consisting of highly parsed portions of deposition testimony.
39
Paradigm Alliance, Inc. v. Celeritas Techs., LLC, No. 07-1121-EFM, 2009 WL 3855677, at *3 (D. Kan.
Nov. 17, 2009).

19

permitted to presume causation, which is a prerequisite to recovery that will have to be
established at trial by evidence other than Vianello’s testimony.40 The issue of whether a breach
occurred is clearly an element of Plaintiff’s case, which Plaintiff readily accepts the burden of
proof at trial. Vianello may show that his calculations are consistent with Plaintiff’s theory of
causation, and thus Defendants’ objection is overruled.
d.

Damage Categories One and Two

Defendants further challenge two categories of Vianello’s damage calculations as
unreliable. First, Defendants challenge the calculation for infringing sales in category one,
arguing that Vianello did not take into consideration the fact that Soundown and dB Acoustical
would have qualified as a distributor or master distributer, and thus given a thirty or forty percent
discount. Because Vianello overstated the damages, Defendants argue, his opinion fails to meet
the reliability requirement of Rule 702. Plaintiff responds that the decision to give a discount
rate is RMD’s choice, which was taken away when Defendants breached their obligations under
the agreement. Defendants’ arguments go to the weight and not the admissibility of Vianello’s
opinion, and they are free to cross-examine Vianello and McCarthy on the discount point.
With respect to the “most favored nation pricing” calculation in category two, Vianello
concluded that the average price per pound occasionally exceeded the price charged to
Soundown or dB Acoustical for a given product, and thus violated the Agreement, resulting in
overcharges of $84,754. Defendants’ rebuttal experts contend that Vianello failed to consider
product characteristics or quantities sold, and that his analysis ignores the difference in the

40

See CRST Van Expedited, Inc.v. J.B. Hunt Transport, Inc., Case No. CIV-04-0651-F, 2006 WL 2054646,
at *4 (W.D. Okla. July 24, 2006) (holding damages expert is entitled to show his calculations are consistent with
plaintiff’s theory of causation).

20

product backing and computes a fluctuating average price per pound due to a changing product
mix when product pricing was unchanged. Again, Defendants’ arguments go to the weight and
not the admissibility of Vianello’s opinion, and they are free to cross-examine him on this point.
Moreover, as discussed below, Defendants’ rebuttal experts are permitted to offer testimony on
the pricing issue.
B.

Drs. Pflaum and McCollister

Defendants did not designate a primary expert of their own, but instead designated Dr.
Christopher Pflaum and Dr. George McCollister of Spectrum Economics as rebuttal experts.
Both Pflaum and McCollister are experts in econometrics, a highly technical specialty within the
larger field of statistics. Their report dated April 26, 2011, challenges both Vianello’s
methodology and his assumptions regarding causation.41
“The proper function of rebuttal evidence is to contradict, impeach or defuse the impact
of the evidence offered by an adverse party.”42 Rebuttal expert testimony must address the
“same subject matter” identified by the initial expert.43 In other words, a rebuttal expert report is
not the proper place for presenting new arguments.44 The Court concludes that Drs. Pflaum and
McCollister’s report goes beyond the scope of a proper rebuttal witness.
First, the rebuttal experts question Vianello’s qualifications and argue that his
methodology does not meet the requirements of Daubert, taking exception to his use of Crystal

41

Doc. 327, Ex. 1.

42

Peals v. Terre Haute Police Dept., 535 F.3d 621, 630 (7th Cir. 2008) (citation omitted).

43

Fed. R. Civ. P. 26(a)(2)(C)(ii).

44
1-800 Contacts, Inc. v. Lens.com, Inc., 755 F. Supp. 2d 1151, 1167 (D. Utah 2010); LaFlamme v.
Safeway, Inc., Case No. 09-cv-00514-ECR, 2010 WL 3522378, at *2 (D. Nev. Sept. 2, 2010) (quotations omitted).

21

Ball generally and Holt-Winters specifically because it is not a regression analysis, it cannot be
tested for significance of the measure of association, has no known error rate and has never been
used to estimate damages in litigation. The admissibility of Vianello’s expert testimony is an
issue of law in the gatekeeper province of this Court, which has determined that his opinion
passes Daubert muster, both in terms of his qualification as an expert in accounting and the
reliability of his methodology. Accordingly, the Court strikes the rebuttal report to the extent it
opines on the admissibility of Vianello’s report under Daubert.
Second, neither Pflaum nor McCollister proffers an opinion to rebut Vianello’s
accounting methodology or opinion. Although both are experts in econometrics, neither offers a
rebuttal opinion as to the actual damages suffered by Plaintiff, but only that they did not believe
Plaintiff’s damages were “statistically significant.” The rebuttal experts opine that Vianello
should have used the ARIMA statistical tool instead of Holt-Winters, and when they performed
regressions based on the same claimed actions of Defendants, the results were not statistically
significant in relation to Plaintiff’s sales—in other words, there is no evidence of causation.
However, Vianello is clearly not offered as an expert on causation, as he makes the assumption
that a breach or breaches of contract had occurred in formulating his damage calculations. The
purpose of a rebuttal opinion is just that—to rebut evidence offered by the adverse party. In this
case, Defendants’ experts cannot be considered rebuttal experts on the issue of causation because
their purpose is to contradict an anticipated portion of Plaintiff’s case in chief.45 Defendant seeks
to introduce rebuttal testimony to question the existence of a key element of Plaintiff’s

45

Id. at *3 (citing Morgan v. Comm. Union Assurance Cos., 606 F.2d 554, 555 (5th Cir. 1979)); Amos v.
Makita U.S.A., Case No. 09-cv-01304-GMN, 2011 WL 43092, at *2 (D. Nev. Jan. 3, 2011) (citing In re Apex Oil
Co., 958 F.2d 243, 245 (8th Cir. 1992)).

22

case—whether or not Defendants breached the Agreement, resulting in damages to Plaintiff.
Thus, Plaintiffs are correct that Defendants’ witnesses impermissibly seek to introduce new
testimony and opinions on causation. Accordingly, the Court will strike the rebuttal report to the
extent it opines that Vianello should have used the ARIMA methodology and the results of
Pflaum and McCollister’s tests using that report.
That said, some parts of Pflaum and McCollister’s report can fairly be deemed as
responding to/rebutting the conclusions of Vianello. Pflaum and McCollister reviewed and
critiqued Vianello’s report, challenging the evidence and assumptions upon which he relied.
Specifically, the rebuttal experts challenge Vianello’s claim of loss due to Defendants’
prepayment requirements,46 and his “most favored nation pricing” in category two.47
In situations like this, the appropriate course is to limit the proposed rebuttal expert’s
testimony rather than striking it altogether.48 Accordingly, the testimony of Dr. Pflaum and Dr.
McCollister as rebuttal witnesses is limited to their critique of Vianello’s opinion as set forth
above.
IT IS THEREFORE ORDERED BY THE COURT that Defendants’ Motion to Strike
Plaintiff’s Expert Marc Vianello (Doc. 318) is DENIED; Defendants’ Motion to Strike and
Exclude the Supplemental Report (Doc. 320) is GRANTED in part and DENIED in part;
IT IS FURTHER ORDERED that Plaintiff’s Motion to Strike and Exclude the
Testimony and Opinions of Dr. Pflaum and Dr. McCollister (Doc. 326) is GRANTED in part and

46

Id. at 18-20.

47

Id. at 21-23.

48
See, e.g., Noffsinger v. The Valspar Corp., Case No. 09 C 916, 2011 WL 9795, at *7 (N.D. Ill. Jan. 3,
2011) (citing cases).

23

DENIED in part.
IT IS FURTHER ORDERED that Plaintiff’s Motion to Strike (Doc. 343) is DENIED
and Defendants’ Motion to Exceed Page Limit (Doc. 353) is GRANTED.
IT IS SO ORDERED.
Dated: November 5, 2012
S/ Julie A. Robinson
JULIE A. ROBINSON
UNITED STATES DISTRICT JUDGE