Faulkner et al v. Arista Records LLC
Filing
204
OPINION AND ORDER. For the reasons in this Opinion and Order: (1) Defendant's Motion to Exclude the Expert Report of Wayne C. Coleman [dkt. no. 189] is GRANTED with regard to Mr. Coleman's opinions on the status of Arista's records, th e release-based damages estimate, and the interpolation damages estimate and DENIED with regard to the minimum royalties owed damages estimate; (2) Plaintiffs' Motion to Exclude the Expert Report of Tom Nilsen [dkt. no. 187] is DENIED with regar d to the minimum royalties owed damages estimate; and (3) the Court need not decide Plaintiffs' Motion to Exclude the Expert Report of Tom Nilsen [dkt. no. 187] on the subjects of Arista's records, the release-based estimate, or the interpo lation estimate because it is moot in light of (1). So ordered. re: 189 MOTION in Limine to Exclude the Expert Testimony of Wayne C. Coleman filed by Arista Records LLC, 187 MOTION in Limine to Exclude the Expert Testimony of Tom Nilsen filed by Alan Longmuir, Stuart Wood, Leslie McKeown, Eric Faulkner, Derek Longmuir, Duncan Faure. (Signed by Judge Loretta A. Preska on 9/15/2014) (rjm)
USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: 9/15/2014
UNITED STATES DISTRICT COURT
UNITED STATES OF NEW COURT
SOUTHERN DISTRICT DISTRICTYORK
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------x
-----------------------------------------------------------x
ERIC In re FANNIE MAE 2008FAURE,
FAULKNER, DUNCAN SECURITIES
: :
07 CIV. 2318
08 Civ. 7831 (PAC)(LAP)
ALAN LITIGATION DEREK LONGMUIR,
LONGMUIR,
: :
09 MD 2013 (PAC)
LESLIE MCKEOWN AND STUART WOOD,
: :
OPINION & ORDER
: :
OPINION & ORDER
PLAINTIFFS,
:
-----------------------------------------------------------x
:
-AGAINST:
:
ARISTA RECORDS LLC,
:
HONORABLE PAUL A. CROTTY, United States District Judge:
:
DEFENDANT.
:
-----------------------------------X
BACKGROUND1
Loretta A. Preska, Chief United States District Judge:
The early years of this decade saw a boom in home financing which was fueled, among
Plaintiffs Eric Faulkner, Duncan Faure, Alan Longmuir,
other things, by low interest rates and lax credit conditions. New lending instruments, such as
and Stuart Wood, former members of the Bay City Rollers,
subprime mortgages (high credit risk loans) and Alt-A mortgages (low-documentation loans)
(together “Plaintiffs” or “BCR”) brought this action alleging
kept the boom going. Borrowers played a role too; they took on unmanageable risks on the
non-payment of tens of millions of dollars in unpaid royalties
assumption that the market would continue to rise and that refinancing options would always be
from their record company, defendant Arista Records LLC
available in the future. Lending discipline was lacking in the system. Mortgage originators did
(“Defendant” or “Arista”) pursuant to a 1981 agreement. The
not hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
Complaint alleged four separate counts of breach of contract,
originators sold their loans into the secondary mortgage market, often as securitized packages
breach of fiduciary duty, constructive trust, and an accounting.
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
See Complaint [dkt. no. 1]. Plaintiffs requested the ability to
But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
produce experts to testify on the calculation of royalties due
and home prices began to fall. In light of the changing housing market, banks modified their
to the complexity of royalty accounting in the music business.
lending practices and became unwilling to refinance home mortgages without refinancing.
[Dkt no. 176]. To help prove Plaintiffs allegations that
millions of dollars of royalties were owed to them and that
1
Unless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.
Arista’s records could not be relied upon to calculate such
royalties, Plaintiffs propose the testimony of Wayne C. Coleman.
1
1
In support of its defense that Arista’s records are usable,
Defendant offers the rebuttal expert testimony of Tom Nilsen.
Currently before the Court are the parties’ Daubert
motions wherein Defendant seeks to exclude the testimony of Mr.
Coleman [dkt. no. 189], a Certified Public Accountant and
president of Financial Services Team, Inc. and The Royalty
Compliance Organization (“RCO”).
On September 12, 2013,
Defendant filed under seal its Memorandum of Law in Support of
Defendant’s Motion to Exclude the Expert Report of Wayne C.
Coleman (“Defendant’s Brief” or “Def. Br.”).
On October 11,
2013 Plaintiffs filed under seal their Memorandum of Law in
Opposition to Defendant’s Motion to Exclude the Expert Report of
Wayne C. Coleman (“Plaintiffs’ Opposition” or “Pl. Opp.”).
On
October 30, 2013, Defendant filed under seal its Reply
Memorandum of Law in Support of Defendant’s Motion to Exclude
the Testimony of Wayne C. Coleman (“Defendant’s Reply” or “Def.
Reply.”).
Plaintiffs seek to exclude the rebuttal testimony of
Tom Nilsen, an accountant and partner in charge of the royalty
examination group of Gelfand, Rennert & Feldman, LLP.
On
September 12, 2013, Plaintiffs filed under seal their Memorandum
of Law in Support of Plaintiffs’ Motion to Exclude the Testimony
of Tom Nilsen (“Plaintiffs’ Brief” or “Pl. Br.”).
2
On October
11, 2013, Defendant filed under seal its Memorandum of Law in
Opposition to Plaintiffs’ Motion to Exclude the Testimony of Tom
Nilsen (“Defendant’s Opposition” or “Def. Opp.”).
On October
30, 2013, Plaintiffs filed under seal their Reply Memorandum of
Law in Support of Plaintiffs’ Motion to Exclude the Testimony of
Tom Nilsen (“Plaintiffs’ Reply” or “Pl. Reply.”).
I.
BACKGROUND
A. The Reports
1. The Expert Report of Wayne Coleman1
Wayne Coleman is the founder and co-owner of Royalty
Compliance Organization, a firm that provides auditing, royalty
examination, valuation, expert witness, and other related
services.
(Declaration of Wayne C. Coleman in Support of
Plaintiffs’ Opposition to Defendant’s Motion to Exclude the
Expert Testimony of Wayne Coleman (“Coleman Decl.”) ¶ 1.
He has
performed or supervised thousands of examinations and testified
as an expert 36 times.
Coleman Decl. ¶¶ 4-7.
Mr. Coleman
initially conducted a facial review of the royalty records to
determine their consistency and attempted to test the royalty
records against source information such as the domestic sales
data from the company’s accounting system and reports from
foreign sales affiliates and licensees.
1
(“Coleman Rept.”)
3
Coleman Rept. at 11-16;
Transcript of the Deposition of Wayne C. Coleman (“Coleman Tr.”)
at 66:23-67:13.
Mr. Coleman analyzed Arista’s royalty records
for the purpose of determining their overall reliability.
Coleman Tr. at 68:14-69:10, 83:19-23, 98:24-99:4, 125:23-126:14;
Coleman Rept. at 4-11.
Upon a facial review of documents provided to Mr.
Coleman by Arista, Mr. Coleman concludes that Arista’s records
are “abysmal” and failed the first test of overall reliability.
Coleman Rept. at 16, 86.
Mr. Coleman states that Arista’s
records fail his facial review for consistency, particularly
because of an absence of royalty reports over extended periods
of time.
Id. at 4-5.
Despite a provision in certain agreements
that required Arista to provide semi-annual royalty accountings
to Plaintiffs, Arista failed to provide such accountings over
the course of several years.
Id. at 3.
The most extreme
example is an eleven year stretch between documents concerning
royalties due as of December 31, 1982 and documents concerning
royalties due as of December 31, 1994. Id. at 4.
Mr. Coleman
indicated that the internal royalty recordkeeping of Arista does
not indicate that these documents were appropriately provided to
Plaintiffs.
Id. at 5.
This lack of royalty reporting does not
mean no documents were produced by Arista during these time
periods.
Mr. Coleman indicated that record producers received
4
reports during the time period and many internal reports show
sales and other royalty figures.
Id. at 6.
In Mr. Coleman’s
professional opinion, these internal reports do not remedy the
“information deficiency of the accounting record.”
Id. at 7.
Mr. Coleman opines that even where royalty reports were
provided, the level of detail is “generally far below minimum
industry standard for valid royalty statement or account.”
Id.
at 3.
Next, Mr. Coleman calls attention to unexplained
errors in the documents which casts doubt on the reliability of
Arista’s accounting records.
Id. at 3-4.
Specifically, he
identified the following inconsistencies and concerns:
The existence of an account summary document that
contained a balance forward of $1,016,281.78, which
has been crossed out by hand and is not reflected in
earlier or later reports.
Summary reports for the same time period contained
different ending balances.
Id. at 17.
Id. at 19.
A balance forward adjustment, which decreased the
amount owed to Plaintiffs, was not transparently
explained or sufficiently supported.
5
Id. at 20.
Arista’s documents misapply price categories such as
“budget,” “full price,” and “mid-price.”
Id. at 22-
24.
Arista’s documents inconsistently categorize income
from synch licenses and are missing certain licensing
income.
Id. at 24-34.
There are various discrepancies regarding ancillary
income, for example, that Arista’s witnesses did not
agree on what was included in the ancillary income
category, which consists, on average of over half the
total reported royalties from 1984-2010.
Id. at 34-
38; 67-68.
Mr. Coleman states that the pattern of reported
royalties is not consistent with the over 600 rereleases of Plaintiff’s music or with industry trends,
such as the advent of compact discs.
Id. 44-50; 60-
61.
The high percentage of reported domestic digital sales
indicates to Mr. Coleman that much higher foreign
digital amounts should have been reported.
Id.
at
53.
The royalty documents from the 2000s applied incorrect
royalty rates by deducting a 25% packaging charge for
6
CDs per the 1975 Agreement.
Mr. Coleman argues a 10%
deduction should have been applied because a CD is a
disc album and no CD amendment has been added. Id. at
56-59.
Various documents indicate to Mr. Coleman that there
were problems with delays in the processing of sales,
various inconsistent peaks in sales and incomplete
reporting and recognition of both foreign and domestic
sales and earnings, and accounting discrepancies for
compilations.
Id. at 64-69.
The second step of Mr. Coleman’s verification analysis
was to compare the Arista records with the source information
upon which the records are based.
Mr. Coleman states that any
underlying sales documentation provided by Arista is “as (or
more) incomplete and unreliable than the various other
documents.”
Id. at 72; see also Pl.’s Opp. At 3.
Accordingly,
Mr. Coleman could not complete the second step in his analysis.
Based on his belief that Arista’s records were wholly unreliable
and unable to be tested against the source documents, Mr.
Coleman proposes three alternative methodologies to construct
the amount of royalties owed Plaintiffs.
First, Mr. Coleman
proposes a minimum royalty amount owed based upon the available
records.
Though Mr. Coleman argues that the accounting records
maintained by Arista are incomplete and “entirely inadequate
7
with respect to industry-accepted standards,” he finds that this
calculation totals $8,141,213, a “substantial
underrepresentation of the royalties properly due to the
[Plaintiffs].”
Id. at 73-76.
As an alternative calculation, Mr. Coleman proposes a
release-based method which uses identified releases to assess
the number of sales.
Id. at 79.
In constructing this estimate
Mr. Coleman supplemented the sales records received from Arista
with his own analysis of sales numbers and retail prices.
He
used sales awards for charted albums, the Bay City Rollers
discography, public sources, and websites such as
www.billboard.com, www.lescharts.com and various other websites.
Id. at 80.
Mr. Coleman calculated the amounts due using $9.98
as the average album price and $1.00 as the average single
price, prices determined by reviewing pricing data and from his
own research.
He included a 10% packaging deduction, except for
digital sales where he deducted nothing for packing.
Mr. Coleman applied a 12.2% royalty rate, which
represented an average rate, to 90% of the estimated retail
price as per the agreement.
Mr. Coleman added 48% for ancillary
income from 1984 through 2012 based on Arista’s data, 30%
ancillary income from 1978 through 1983, and 10% ancillary
income from 1975 through 1977.
Id. at 80-81.
8
Based on this
analysis, Mr. Coleman’s release-based assessment indicates
royalties due Plaintiffs of $11,425,473.
Mr. Coleman added
interest, calculated at the statutory rate of 9%, of
$29,510,419, for a total of $40,935,892, owed under his releasebased calculation.
Mr. Coleman notes again that this
calculation under-represents the royalties owed Plaintiffs.
Id.
at 81-82.
Finally, Mr. Coleman proposes an interpolation
assessment of royalties due Plaintiffs.
He argues that
“[u]nless and until [Plaintiffs] are afforded an opportunity to
assess the royalties actually owed using detailed sales and
other royalty records- which is not possible using the current
set of documents produced by Arista- some form of estimation
will be necessary to reasonably assess the amounts of royalties
due.”
Id. at 85.
Because Mr. Coleman believes the release-
based estimate is under-representative of actual earnings, he
presented the interpolation method based on his “experience in
the industry, [Plaintiffs’] success and popular profile, the
history of the music industry, and expected sales pattern over
time of a band such as [Plaintiffs’].”
Id. 85-86.
Mr. Coleman
used assessments based upon certifications and documented
releases for 1975-1977 as the “left” endpoint for the
interpolation.
He used the “reported royalties of the Sony
9
documents as adjusted for expected audit amounts and identified
royalty rate errors as the ‘right’ endpoints.”
Id. at 86-93.
He then determined an “exponential decay function,” which shows
an initial sharp decrease tapering off in time, using “standard
curve-fitting techniques.”
Id. 93-94.
Mr. Coleman notes that
he based the sales estimate for the period of 1975-1977 on
certifications, chart rankings, and other public information
because such information was abundant for the time period and
thus reasonably could be used for the assessment.
Id. at 94.
Mr. Coleman assumed that the royalties reportable on
sales from 1975 through 1978 are reportable 50% in the year of
release, 40% in the second year after release, and 10% in the
third year.
Id.
He found not only that Arista’s records for
the period between 1977 and 2004 to be “wholly inadequate”
regarding verifiable releases, sales, and royalties, but that
the public record of this information was “notably deficient” as
well.
His conclusions are based upon the fact that he cannot
find overseas sales data from public sources and does not
believe Arista’s records to be reliable in that respect.
95.
Id. at
After 2004, when Sony took over Arista and its record
management, the records “offer some objective standard for
measuring royalties due for those periods.”
Id.
Mr. Coleman,
therefore, used these figures, corrected for errors he
10
identified,2 as the baseline amount for the time period post2004.
Id.
Based on the certifications and chart rankings in
the mid-1970s, Mr. Coleman determined that the royalties owed
from 1979 through 2012 amount to $32.8 million and $112.7
million with the interest rate applied.
Id. at 98.
Mr. Coleman expects to testify that Arista did not
comply with its contractual obligation to provide regular
royalty statements and render payments for accrued royalties.
Additionally, he plans to testify that Arista’s produced
documents are inherently unreliable and cannot be used in
determining the actual royalty income due Plaintiffs.
Mr.
Coleman plans to explain his three methods for calculation of
royalties and present his calculations of royalties owed to the
jury.
Id. at 100.
2. The Rebuttal Report of Expert Tom Nilsen3
Mr. Nilsen has been in the music industry for more
than 30 years and he has worked on behalf of both artists and
record companies.
Nilsen Rept. 1-2, Nilsen Rept., Ex. 1.
2
He
Such corrections include adjusting the Sony royalties for a 1976 un-resolved
audit that “would have at least settled for 50% of the claims,” reducing the
packaging percentage to 10% because there was no CD amendment added
(required for Sony to take 25%), an adjustment in digital sales, which
according to Mr. Coleman’s research are considered licensing and thus should
have been paid at 50%, rather than at the physical sales royalty rates, and
adding back in a deducted recording fee of $103,000, which was inappropriate
because Plaintiffs are not recording new music and with interest amounts to
$163,255.
3
(“Nilsen Rept.”)
11
has worked for two major record companies, including as a
manager in the domestic royalty accounting department of CBS
Records and as a senior vice president of business affairs
administration at PolyGram Records, Inc.
Id. at 1-2.
He has
worked at Gelfand, Rennert & Feldman LLP for the last 12 years
representing artists, publishers, and other royaltors in royalty
examinations.
Id.
He has conducted or overseen hundreds of
royalty examinations on behalf of a variety of parties, artists,
and record companies alike.
Id. at 1.
Mr. Nilsen’s expert report addresses the main opinions
offered in Mr. Coleman’s report: (1) That Arista’s records are
“abysmal” and “useless”; (2) that the “minimum royalty amount
owed” to Plaintiffs is $2.9 million ($8.1 million with
interest); (3) that available sales and royalties data should be
ignored when determining whether additional royalties are owed
to Plaintiffs, and, instead, a release-based estimate produces a
reasonable estimate of royalties due to Plaintiffs ($11.4
million and $40.9 million with interest); and (4) the
interpolation method represents an even more accurate estimate
($32.8 million and $112.7 million with interest).
Regarding Mr. Coleman’s opinion that Arista’s records
are “abysmal” and “useless” Mr. Nilsen opines:
“Collectively,
the voluminous royalties and sales data I reviewed provide
12
support for [Plaintiffs’] earnings as reported by Arista.
In my
review of available documentation, I have found the sales
information printed over the decades to be internally
consistent, and consistent with the royalties reported.”
22.
Id. at
In coming to that opinion, Mr. Nilsen undertook an analysis
of available royalty statements to determine whether a statement
history could be constructed using documents produced by the
parties in this litigation.
Id. at 5.
In doing this Mr.
Nilsen, was able to “recreate a comprehensive and detailed
statement summary of accountings and payments from Arista to the
Bay City Rollers and their representatives for the 38 year
period spanning July 1, 1974 to June 30, 2012.”
Id. 5-10.
This
statement history was attached to his report as Exhibit 3.
Mr. Nilsen’s analysis allowed him to confirm that
Arista has accounted for nearly $5.5 million in BCR royalties
earnings since the mid-1970s (consisting of $4.4 million that
Arista paid BCR or their representatives from the mid-1970s)
through 1997 and almost $1 million in royalties from 1997 to the
present that Arista is holding.
Id. at 9.
Mr. Nilsen further
explains that this analysis shows that with the exception of an
18-month period between July 1, 1980 and December 31, 1981,
statements provided by Arista contain a sufficient level of
detail to show earnings and deductions for Plaintiffs from July
13
1, 1974 through June 30, 2012.
Id. at 10-11.
For the missing
18-month period, Mr. Nilsen analyzed the governing agreements,
historical sales data, and available artist and producer
statements, and determined that the opening balance on the
royalty statement for the next available period is accurate.
Id. at 11-13.
Next, Mr. Nilsen examined available historical
documentation, including public information about Plaintiffs, to
determine whether this information supported or refuted his
analysis, contradicting Mr. Coleman’s claim that there is no
detailed information regarding the sales of Plaintiffs’ music.
Id. 13-15.
Mr. Nilsen found that, for example, “Ancillary
Income” reported on BCR royalty statements from 1983 through
2003 reflects royalties from foreign and club sales and this
documentation provides detailed sales information for BCR
products in over 50 countries over this 20-year period.
14-18.
Id. at
Mr. Nilsen’s review of public information about BCR also
lends support to his view that the career arc of BCR explains
why there was a substantial decline in royalties in the 1980s,
not because Arista’s records are insufficient.
29.
Nilsen Rept. 24-
In performing this analysis, Mr. Nilsen determined that the
available materials show that Arista tracked and accrued
royalties even for periods where a royalty statement may not
14
have been rendered.
Because Arista tracked this information, it
can be used to evaluate royalties owed even for periods when
statements or payments were not issued.
Id. at 13.
After establishing this baseline, Mr. Nilsen conducted
point-by-point analyses of Mr. Coleman’s opinion that Arista’s
records must be ignored.
In his view none of those grounds
seriously calls into question Arista’s record-keeping.
56-57.
Id. at
Mr. Nilsen analyzed available data to address Mr.
Coleman’s claims that Arista’s records are inadequate because
they do not reflect trends he would expect to see.
42.
Id. at 29-
For example, Mr. Nilsen’s analysis indicated that over
$700,000 of the $1.3 million in royalties earned by BCR between
July 1, 1983 and December 31, 2010 relates to the sale of
foreign releases, directly addressing concerns about the records
raised by Mr. Coleman.
31.
See Coleman Rept. at 43; Nilsen Rept. at
Mr. Nilsen explained the royalty increases from 2003 and
2004 with information that one-time occurrences such as license
fees for the use of BCR recordings in a film and advertising
campaign and the release of a BCR greatest hits album in foreign
markets were responsible for such increases.
35-37.
Nilsen Rept. at
Mr. Nilsen opines that many of the items Mr. Coleman
cites in his position that Arista’s records are unreliable are
issues that routinely arise in audits of all major labels and
15
should not be grounds for ignoring available historical records.
Nilsen Rept. at 56-76.
Mr. Nilsen addressed Mr. Coleman’s minimum royalty
amounts owed measure of royalties by reviewing in detail Mr.
Coleman’s opinion and the bases for that opinion.
the data, documentation, and governing agreements.
at 18, 76-82.
He analyzed
Nilsen Rept.
Mr. Nilsen noted that more than 70% of Mr.
Coleman’s figure for this award is based upon assumptions about
audit claims made during the mid-1970s, without analysis to
support the two claimed audit amounts.
Mr. Nilsen noted that in
an audit the record company is not tasked with presenting a
supported settlement, an artist is tasked with presenting a
supported claim, something not done by Mr. Coleman on behalf of
Plaintiffs.
Further he corrected Mr. Coleman’s calculation of
the amount of royalties Arista has on hold, adding $18,000,
indicated that Mr. Coleman has not explained his claim for
significant upward adjustments of royalty rates for CD and
Digital sales under the governing agreements, addressed amounts
of recording costs and a $10,000 credit to BCR in royalties, and
finally, deducted approximately $28,000 in royalties from 2003
that Mr. Nilsen determined reflected a double-payment.
18, 80-82.
16
Id. at
Regarding the release-based method and the
interpolation method, Mr. Nilsen has two threshold opinions: (1)
the methods ignore almost all available historical documentation
and data concerning Plaintiffs’ royalties (Id. at 83-85); (2)
the approaches are founded on assumptions that he views to be
baseless and are riddled with errors and therefore would not be
accepted in the music industry (Id. at 85-103, 104-19).
With respect to the release-based estimate, Mr. Nilsen
analyzed Mr. Coleman’s assumptions about key items such as
retail price, royalty rate, and unit sales in view of the
relevant agreements, available historical data, and publically
available information and opined that such a methodology could
not produce a reasonable estimate of royalties.
For example:
For 75% of the sales claimed by Mr. Coleman, Mr. Nilsen
states that the release-based estimate assumes a price that
is 25% to 42% higher than the price at which those products
sold.
Id. at 87-88.
Mr. Coleman’s assumed uniform 12.2% royalty rate is in
contrast with the governing agreement, which sets different
rates for different recordings and applies lower royalty
rates for foreign sales.
Id. at 80-90.
Mr. Nilsen identifies certain products assumed by Mr.
Coleman to include royalty-bearing sound recordings and
17
products unquestionably not covered by Plaintiffs’
agreements with Arista.
Id. at 96, Ex. 7.
Mr. Nilsen opines that Mr. Coleman’s assumption that each
compilation contained ten tracks, one being a BCR track, is
significantly inflated.
Id. at 99-100, Ex. 8.
Concerning the interpolation method, Mr. Nilsen presents
numerous reasons why music sales do not follow the patterns
captured in the interpolation’s mathematical formula.
Id. at
104-10.
II.
DISCUSSION
A. Legal Standard
The admissibility of expert testimony is governed by
Federal Rule of Evidence 702, which provides:
If scientific, technical, or other specialized
knowledge will assist the trier of fact to
understand the evidence or to determine a fact
in issue, a witness qualified as an expert by
knowledge, skill, experience, training, or
education, may testify thereto in the form of
an opinion or otherwise, 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.
Fed. R. Evid. 702.
In order for the expert opinion to be admissible, the
witness “must be qualified as an expert, the testimony must be
18
reliable, and the testimony must assist the trier of fact.” In
re Fosamax Prods. Liab. Litig., 645 F. Supp. 2d 164, 172
(S.D.N.Y. 2009).
“Courts within the Second Circuit have liberally
construed expert qualification requirements.” In re Methyl
Tertiary Butyl Ether (“MTBE”) Prods. Liab. Litig., MDL No. 1358
(SAS), 2008 WL 1971538, at *5 (S.D.N.Y. May 7, 2008) (internal
quotation marks omitted).
“A witness’s qualifications ‘can only
be determined by comparing the area in which the witness has
superior knowledge, skill, experience, or education with the
subject matter of the witness’s testimony.’” In re Fosamax, 645
F. Supp. 2d at 172 (quoting Carroll v. Otis Elevator Co., 896
F.2d 210, 212 (7th Cir. 1990)).
The Advisory Committee’s note to Rule 702 explains
that the Rule was amended to include the three reliability-based
requirements in response to Daubert v. Merrell Dow
Pharmaceuticals, Inc., 509 U.S. 579 (1993) and its progeny,
Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999), and General
Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997). See Fed. R. Evid.
702 advisory committee’s note.
In Daubert, the Supreme Court
interpreted Rule 702 to require district courts to act as
gatekeepers by ensuring that expert scientific testimony “both
rests on a reliable foundation and is relevant to the task at
19
hand.”
509 U.S. at 597.
This requires “a preliminary
assessment of whether the reasoning or methodology underlying
the testimony is scientifically valid and of whether that
reasoning or methodology properly can be applied to the facts in
issue.” Id. at 592-93; see also Kumho Tire, 526 U.S. 137
(holding gate keeping function applies to all expert testimony,
whether based on scientific, technical or other specialized
knowledge).
To be scientifically valid, the subject of expert
testimony must rest on “good grounds, based on what is known.”
Daubert, 509 U.S. at 590 (internal quotation marks omitted).
In
Daubert, the Court set forth a non-exclusive list of factors
that district courts might consider in gauging the reliability
of scientific testimony. Id. at 593-95.
These factors include:
(1) whether the theory has been tested; (2) whether the theory
has been subjected to peer review and publication; (3) the known
or potential rate of error and whether standards and controls
exist and have been maintained with respect to the technique;
and (4) the general acceptance of the methodology in the
scientific community. Id.
“Whether some or all of these factors
apply in a particular case depends on the facts, the expert’s
particular expertise, and the subject of his testimony.” In re
Fosamax, 645 F. Supp. 2d at 173 (citing Kumho Tire, 526 U.S. at
138).
A district court has broad discretion both in determining
20
the relevant factors to be employed in assessing reliability and
in determining whether that testimony is in fact reliable. Kumho
Tire, 526 U.S. at 153; Zuchowicz v. United States, 140 F.3d 381,
386 (2d Cir. 1998).
Weighing whether the expert testimony assists the
trier of fact goes primarily to relevance. Daubert, 509 U.S. at
591.
Relevance can be expressed as a question of “fit”-“whether
expert testimony proffered in the case is sufficiently tied to
the facts of the case that it will aid the jury in resolving a
factual dispute.” Id. (citing United States v. Downing, 753 F.2d
1224, 1242 (3d Cir. 1985)). In addition, expert testimony is not
helpful if it simply addresses “‘lay matters which a jury is
capable of understanding and deciding without the expert’s
help.’” United States v. Mulder, 273 F.3d 91, 101 (2d Cir. 2001)
(quoting United States v. Castillo, 924 F.2d 1227, 1232 (2d Cir.
1991)).
Finally, the testimony is not helpful if it “usurp[s]
either the role of the trial judge in instructing the jury as to
the applicable law or the role of the jury in applying that law
to the facts before it.”
United States v. Duncan, 42 F.3d 97,
101 (2d Cir. 1994) (quoting United States v. Bilzerian, 926 F.2d
1285, 1294 (2d Cir. 1991)).
“In deciding whether a step in an expert’s analysis is
unreliable, the district court should undertake a rigorous
examination of the facts on which the expert relies, the method
21
by which the expert draws an opinion from those facts, and how
the expert applies the facts and methods to the case at hand.”
Amorgianos v. Nat’l R.R. Passenger Corp., 303 F.3d 256, 267 (2d
Cir. 2002).
However, in accordance with the liberal
admissibility standards of the Federal Rules of Evidence, only
serious flaws in reasoning or methodology will warrant
exclusion. Id.
“As long as an expert’s scientific testimony
rests upon ‘good grounds, based on what is known,’ it should be
tested by the adversary process--competing expert testimony and
active cross-examination--rather than excluded from jurors’
scrutiny for fear that they will not grasp its complexities or
satisfactorily weigh its inadequacies.” Ruiz-Troche v. Pepsi
Cola of Puerto Rico Bottling Co., 161 F.3d 77, 85 (1st Cir.
1998) (quoting Daubert, 509 U.S. at 596); see also Amorgianos,
303 F.3d at 267.
If an expert’s testimony lies within “the
range where experts might reasonably differ,” the jury, and not
the trial court, should “decide among the conflicting views of
different experts.” Kumho Tire, 526 U.S. at 153.
“The Daubert analysis focuses on the principles and
methodology underlying an expert’s testimony, not on the
expert’s conclusions. In re Fosamax, 645 F. Supp. 2d at 173-74
(citing Daubert, 509 U.S. at 595).
However, the Supreme Court
in Joiner recognized that “conclusions and methodology are not
entirely distinct from one another.” 522 U.S. at 146.
22
Therefore, “[a] court may conclude that there is simply too
great an analytical gap between the data and the opinion
proffered.” Id. (stating that “nothing in either Daubert or the
Federal Rules of Evidence requir[es] the admission of opinion
evidence connected to existing data only by the ipse dixit of
the expert.”)
The ultimate object of the court’s gate-keeping
role under Rule 702 is to “make certain that an expert, whether
basing testimony upon professional studies or personal
experience, employs in the courtroom the same level of
intellectual rigor that characterizes the practice of an expert
in the relevant field.” Kumho Tire, 526 U.S. at 152.
“The
flexible Daubert inquiry gives the district court the discretion
needed to ensure that the courtroom door remains closed to junk
science while admitting reliable expert testimony that will
assist the trier of fact.” Amorgianos, 303 F.3d at 267.
Finally, like all evidence, expert testimony may be excluded
under Rule 403 if its “probative value is substantially
outweighed by the danger of unfair prejudice, confusion of the
issues or misleading the jury, or by considerations of undue
delay, waste of time, or needless presentation of cumulative
evidence.” Fed. R. Evid. 403.
23
B. Analysis
To support their argument that Arista’s records are
not suitable for use in determining royalties owed Plaintiffs
and therefore alternative proposed methods of calculation should
be used, Plaintiffs have put forth a music industry expert to
opine that after reviewing the records, the facts conclusively
prove that proposition.
To support their argument that Mr.
Coleman’s analysis is flawed and Arista’s records are
appropriate for use, Arista has put forth a music industry
expert to contradict Mr. Coleman’s findings.
As will be
discussed below, the Court finds that Mr. Coleman is qualified
to testify about his opinions on the status of Arista’s records,
the minimum royalties owed damages estimate, and the releasebased damages estimate.
Nevertheless, the Court finds that Mr.
Coleman did not utilize reliable methods in arriving at his
conclusions regarding Arista’s records and the release based
damages estimate. The Court also finds that Mr. Coleman is not
qualified to testify on the interpolation method of calculating
royalties.
The Court finds that Mr. Nilsen is qualified to give
rebuttal testimony regarding the minimum damages owed estimate.
Accordingly, Arista’s motion to exclude the testimony of Mr.
Coleman is granted in part and denied in part. The Court will
not decide the portions of Plaintiffs’ motion to exclude the
24
testimony of Mr. Nilsen regarding Arista’s records, the releasebased estimate, and the interpolation estimate, but the motion
is denied as it pertains to the minimum royalties owed estimate.
1. Supplemental Declarations
As an initial matter, the Court must address the
supplemental declarations filed by Plaintiffs after expert
discovery had concluded.
Plaintiffs submitted two different
declarations, the Declaration of Wayne C. Coleman (“Coleman
Decl.”)
and the declaration of Darla Crain (“Crain Decl.”) in
support of Plaintiffs’ Opposition.
These declarations are in
conflict with this Court’s February 22, 2013 Order [dkt. no.
178] denying Plaintiffs’ request to provide the testimony of two
experts.
This Court ordered that Plaintiffs may provide one
expert only to testify on the matter of royalties owed.
After
multiple letters submitted on the topic, the Court stated
“[t]here is no reason set out why the parties should incur the
additional expense of two experts for the purpose of estimating
royalties. . . .Plaintiffs may proceed with one expert.”
no. 178].
[Dkt.
Although expert discovery in this case closed June
10, 2013, with the completion of expert depositions, Plaintiffs
proffered two declarations containing new opinions to support
their expert testimony four months later.
25
[dkt. no. 177].
In their declarations, Mr. Coleman and Ms. Crain
attempt to explain some of the issues Mr. Nilsen addressed in
his rebuttal report.
Mr. Coleman and Ms. Crain explain the
methodology of the interpolation and release-based methods of
royalty calculation.
Coleman Decl. ¶ 14-35; Crain Decl. 5-17.
Ms. Crain describes the application of the interpolation method
in detail, explaining the curve-fitting technique known as an
exponential decay curve.
Crain Decl. ¶¶ 9-12.
Additionally,
Mr. Coleman provides additional information that supports his
opinion that Arista’s records are “abysmal”.
He notes that he
subsequently reviewed the documents Arista highlighted in their
moving papers as having been produced but simply ignored, such
as “royalty statement backup, foreign sales information,
reporting from foreign territories, and producer statements”
(Def. Motion at 7) and determined that they are not “source”
documents and therefore cannot be used to verify Arista’s
historical records.
Coleman Decl. ¶ 43.
Under Rule 26(a)(2)(B) of the Federal Rules of Civil
Procedure expert testimony must be accompanied by a written
report which shall contain, inter alia, “a complete statement of
all opinions the witness will express and the basis and reasons
for them,” “the data or other information considered by the
witness in forming them,” and “any exhibits that will be used to
26
summarize or support them.”
Parties are required to make these
disclosures “at the times and in the sequence that the court
orders.” Fed.R.Civ.P. 26(a)(2)(C).
Rule 26(e) provides that
“[a] party who has made a disclosure under Rule 26(a) . . . must
supplement or correct its disclosure . . . if the party learns
that in some material respect the disclosure . . . is incomplete
or incorrect.”
Rule 37(c)(1) states that if a party fails to
abide by these requirements, “the party is not allowed to use
that information . . . to supply evidence on a motion, at a
hearing, or at a trial, unless the failure was substantially
justified or is harmless.” The Second Circuit has interpreted
the language in Rule 37(c)(1) to allow for preclusion of the
supplemental expert declarations where there is “no substantial
justification and the failure to disclose is not harmless.”
Design Strategy, Inc. v. Davis, 469 F.3d 284, 294 (2d Cir.
2006).
Nevertheless, “experts are not free to continually
bolster, strengthen, or improve their reports by endlessly
researching the issues they already opined upon, or to
continually supplement their opinions.”
Cedar Petrochemicals,
Inc. v. Dongbu Hannong Chem. Co., Ltd., 769 F. Supp. 2d 269, 278
(S.D.N.Y. 2011) (internal citations and quotations omitted).
Under Rule 26, an expert’s report that does not rely on “any
27
information that was previously unknown or unavailable to him,”
should not be considered a supplemental report.
Id.
Because
preclusion of an expert may be a harsh sanction, the courts must
consider four factors in assessing whether preclusion is
appropriate: (1) the explanation for the delay in providing the
evidence; (2) the importance of the new evidence; (3) the
potential prejudice to the opposing party; and (4) whether a
continuance is more appropriate.
See id.; Point Prods. A.G. v.
Sony Music Entm't, Inc., 93 CIV. 4001 (NRB), 2004 WL 345551, *9
(S.D.N.Y. Feb. 23, 2004).
Finally, under Rule 26, supplemental expert evidence
offered after the close of discovery should not be admitted
where it “expound[s] a wholly new and complex approach designed
to fill a significant and logical gap in the first report,”
because doing so “would eviscerate the purpose of the expert
disclosure rules.”
Id.
Nevertheless, “to the extent that an
expert affidavit is within the scope of the initial expert
report, it is properly submitted in conjunction with dispositive
motions even outside the time frame for expert discovery.”
Cedar Petrochemicals, 769 F. Supp. 2d at 279.
Mr. Coleman’s declaration provides additional
information on a variety of issues raised in his expert report
and Defendant’s Motion.
He provides details on his own
28
qualifications (Coleman Decl. ¶¶ 3-7), Arista’s audits (¶¶ 813), the interpolation and release-based methods of calculating
royalties (¶¶ 14-32), the development of his 12.2% average
royalty rate (¶¶ 33-35), his observations on the weaker than
expected foreign sales during the 1980s (¶¶ 36-38), Mr. Nilsen’s
review of Plaintiffs’ product list (¶¶ 39-40), the 20% bump in
royalties (¶¶ 41-42), and the voluminous documents produced by
Arista and referenced in Declaration of Gary Wade Leak in
Support of Arista Records LLC’s Motion to Exclude Expert
Testimony (“Leak Decl.”) (¶ 43).
All of these topics were
covered in varying levels of detail in Mr. Coleman’s initial
expert report.
It cannot be said that this evidence represents
“a wholly new and complex approach” to his first report, he has
been deposed on these topics so the risk of prejudice is low,
and the additional evidence would be useful to the trier of fact
and this Court.
Accordingly, this Court will not strike Mr.
Coleman’s declaration.
Ms. Crain’s declaration consists primarily of expert
opinions about the development and accuracy of the interpolation
model.
Crain Decl. ¶¶ 5-14.
Ms. Crain helped put together the
formula for the interpolation model using an exponential decay
curve, apparently a methodology used in most of Ms. Crain and
Mr. Coleman’s analyses for valuation or audits.
29
Id. ¶¶ 9.
Ms.
Crain explains that this formula is common among scientists and
mathematicians.
Id. ¶ 10.
Ms. Crain provides explanations for
the choice of endpoints, how best to construct a “smooth,
reliable curve,” and her opinion that the model accurately
represents the estimated royalties owed Plaintiffs.
13.
Id. ¶¶ 11-
These opinions are offered to supplement Mr. Coleman’s
incomplete knowledge of the interpolation model of royalties
that he recommends in his expert opinion.
As explained more
fully below, Mr. Coleman relied on Ms. Crain and her team to
determine the methodology used as she is an expert in math and
computer science.
Coleman Tr. at 42:17-21.
First, the parties have had sufficient time to conduct
expert discovery, and Plaintiffs offer no explanation for the
delay in providing the evidence offered by Ms. Crain.
Additionally, the parties requested and were granted a brief
extension of ten days to complete their expert discovery.
no 183].
[Dkt.
Plaintiffs did not submit additional requests for
extensions in discovery.
Subsequently submitting new expert
opinions after the close of discovery violates the Federal Rules
of Civil Procedure.
Rather than refute this principle,
Plaintiffs state that the supplemental declarations “focus upon
issues raised for the first time in Mr. Nilsen’s rebuttal report
and/or [Defendant’s Motion].”
Pl.s’ Opp at 2 n.2.
30
Second, the information offered in Ms. Crain’s
declaration is important to Mr. Coleman’s testimony regarding
the interpolation method of calculating royalties.
Nevertheless, the importance of the evidence must be balanced
against the third factor, the prejudice to Defendant as a result
of the admission of the new evidence.
Ms. Crain’s opinions
about the interpolation methodology in her declaration
constitute expert opinion on the subject.
The portions of the
Crain Declaration relating to the interpolation model are based
upon Ms. Crain’s specialized knowledge of the interpolation
method itself, the specific interpolation her team constructed,
and the formula that they used.
This cannot be categorized as
the personal knowledge of a lay witness.
The introduction of additional expert testimony, after
the close of expert discovery would unduly prejudice Defendants
who have not been awarded the opportunity to prepare a rebuttal
report or depose Ms. Crain regarding her opinions.
The
additional expert report is also prejudicial because of the
additional expense imposed on Defendant relating to a response.
Plaintiffs had the opportunity to follow proper procedures and
choose Ms. Crain as their expert, as it appears she would have
qualified, but Plaintiffs chose Mr. Coleman instead.
Because
the Court clearly stated that Plaintiffs would be allowed the
31
testimony of one expert, Plaintiffs may not circumvent that
order now by offering a supplemental declaration of what amounts
to expert opinion on the subject of interpolation following the
close of expert discovery.
The Court also strikes the portion of the Crain
Declaration addressing Arista’s criticisms as it constitutes
expert opinions on the subjects of the year after year
percentage decrease and Microsoft’s relationship with the
formulas employed.
Crain Decl. ¶¶ 15-17.
Plaintiffs’
explanation that the declaration is simply a response to issues
raised in Defendant’s motion and Mr. Nilsen’s rebuttal does not
change the fact that the declaration puts forth opinions by an
unoffered expert submitted after the close of expert discovery.
Allowing such opinion would be prejudicial to Defendants who
must address these opinions when a second expert was expressly
forbidden by this Court.
2. Mr. Coleman’s Testimony
This Court concludes that Mr. Coleman is qualified to
testify about the status of Arista’s records, the minimum
royalties owed estimate, and the release-based royalties
estimate based on a comparison of the area in which he has
“superior knowledge, skill, experience, or education” with the
subject matter of his proposed testimony.
32
See
In re Fosamax,
645 F.Supp. 2d at 172 (internal quotations and citations
omitted).
Mr. Coleman has performed royalty examinations in the
music industry for forty years.
Decl. ¶ 4.
Coleman Rept. at 1-2; Coleman
Mr. Coleman has conducted or supervised thousands of
royalty examinations and testified in court 36 times without
being excluded.
Coleman Decl. at ¶¶ 4-7.
The subject matter of
Mr. Coleman’s proposed testimony is the amount of royalties owed
Plaintiffs.
His area of expertise and his lengthy career in the
royalties examination industry indicate that he is qualified to
testify on the subject of the royalties owed Plaintiffs.
a. Arista’s Records
Mr. Coleman’s first step in his methodology was to
analyze the accuracy and completeness of Arista’s royalty
records to determine if they could be used to calculate the
royalties owed.
Arista does not dispute that this step was
necessary but instead argues that Mr. Coleman’s opinions about
Defendant’s records and his damages estimates are not reliable
and therefore may not be presented to the trier of fact.
Br. at 11-20.
Def.
The first opinion Mr. Coleman wishes to offer is
that Arista’s documents are “abysmal”, “gap-ridden”,
“meaningless”, and “woefully incomplete and wholly unreliable”
for use in reconstructing actual sales and actual royalty income
due.
Arista’s primary argument that this opinion should be
33
excluded is that Mr. Coleman did not review all of the relevant
records and therefore his opinion is not grounded in sufficient
facts and data and lacks sufficient indicia of reliability.
Def. Br. at 11-12.
Courts in this district have found that an expert
report lacked reliability where the expert did not review data
he believed to be unavailable, when the data was, in fact,
produced.
See Lippe v. Bairnco Corp., 288 B.R. 678, 694
(S.D.N.Y. 2003) aff'd, 99 F. App'x 274 (2d Cir. 2004); see also
Celebrity Cruises Inc. v. Essef Corp., 434 F. Supp. 2d 169, 182
(S.D.N.Y. 2006) (excluding damages expert who was not aware of
availability of “actual performance data” because she “declined
to incorporate their actual growth rates into her methodology”
once she became aware of data).
Mr. Coleman produced a 51-page
list of documents he considered in his review of Arista’s
records.
Coleman Rept. at Ex. F.
In his report, Mr. Coleman
opined that among other things, no foreign royalty data exists
(Coleman Rept. at 40), the documentation regarding ancillary
income is unusable (Id. at 9), and the producer royalty
statements and documents that may provide support for assessing
royalties owed an artist, were “gap-ridden” and therefore not
analyzed (Id. at 76).
34
Arista argues that the documents Mr. Coleman required
to verify the Arista royalty database such as “royalty statement
backup, foreign sales information [and] reporting from foreign
territories” were produced, were available, and that Mr. Coleman
simply did not review them.
Def. Br. at 12.
Indeed, documents
such as a 150,000-line spreadsheet with data reported by foreign
territories, were rejected out of hand (Coleman Rept. at 72-73;
Leak Decl. Ex. J; Pl. Opp. at 7), and voluminous historical
royalty and sales information was not reviewed. Coleman Tr. at
136:18-144:21; compare Leak Decl. Ex. C, E, G, H, K, M with
Coleman Report Ex. F.
As an explanation for his not considering
these documents highlighted in the Leak Declaration, Mr. Coleman
stated in his belated declaration that those reports all came
from the same royalties database and could not be counted on as
source documents to verify the accuracy and completeness of the
records:
“None of those documents are the type an auditor
would rely on to verify the accuracy and completeness
of documents. For example, there are no titles,
dates, nor a description of the system where this data
came from. It is not labeled to know if this data is
a subset of other data, complete periods, system it
comes from, etc.”
Coleman Decl.
¶ 43.
The reliability of this immediate rejection is called
into question by the fact that most of the documents have titles
35
(Leak Decl. Exs. A-D, F-H, J-M), all have dates, and at least
two categories reflect the system from which they were developed
(Leak Decl. ex. H, J).
The reliability of Mr. Coleman’s analysis is further
called into question by the fact that Mr. Coleman disclosed at
his deposition that he had failed to review all of the documents
produced by Arista in the course of preparing his expert report.
Mr. Coleman explained that he had not reviewed the documents
initially because of “lawyer error” and testified that his
subsequent review did not change his opinion of the state of
Arista’s records.
Coleman Tr. at 86:10-12.
He also admitted
that he had relied on Plaintiffs’ counsel to choose the specific
documents from Arista’s production for his review.
at 4; Coleman Tr. at 86:10-12.
Def. Motion
Mr. Coleman assumed he had been
given the entire production and did not know what percentage of
the entire production of Arista’s records he had actually
reviewed in preparing his report.
Coleman Tr. at 86:10-12.
Mr. Coleman’s testimony that his subsequent review of
the documents highlighted by Defendants did not change his
opinion does not cure the deficiencies in his methodology.
By
not confirming that the records he reviewed were representative
of Arista’s production, Mr. Coleman’s opinion that the records
were “abysmal”, among other things, is based on insufficient
36
facts and data.
See
E.E.O.C. v. Bloomberg L.P., Civ. No. 07-
8383 (LAP), 2010 WL 3466370, at *14 (S.D.N.Y. Aug. 31, 2010)
(exclusion of an expert is required where the expert makes “no
effort to ensure that the materials he reviewed were
representative”).
Finally, this Court finds Arista’s argument that Mr.
Coleman’s opinions about Arista’s records were set prior to his
review of the documents to be persuasive.
Def. Reply at 2.
Any background information that Mr. Coleman required to compare
the records to “source” documents could have been specifically
requested at the outset of expert discovery.
Mr. Coleman’s
refusal to ask for such evidence, his failure initially to
review of many categories of records, and his disregard of such
relevant records after his belated review indicate that his
methodology was aimed at achieving one result.
Such analysis is
unreliable, and therefore Mr. Coleman’s opinion about Arista’s
records must be excluded.
See E.E.O.C., 2010 WL 3466370, at *17
(“[t]o ignore contradictory testimony in order to arrive at a
desired conclusion highlights the unreliability of [an expert’s]
methodology.”)
b. Royalties Estimates
Next, Mr. Coleman seeks to opine on three alternative
damages estimates.
The first estimate, referred to as the
37
minimum royalties owed estimate, is based upon Arista’s records.
The estimate aggregates the sum of audit claims for the period
of 1975-1976, amounts conceded by Arista from July 1997 through
2003, January 2004 through December 2004, and 2005 through
present, amounts corrected for incorrect CD packaging and
digital licensing royalty rates, and disallowed recording costs.
Coleman Rept. at 74-75.
Mr. Coleman estimates these amounts as
totaling $8,141,213, with additional statutory interest.
75.
Id. at
Mr. Coleman notes that the amounts used to calculate this
estimate of damages are an underrepresentation of the royalties
properly due to the Rollers.
Id. at 75-76.
As Mr. Coleman’s qualifications have already been
established, we now turn to the reliability of Mr. Coleman’s
methodology and whether the opinion is helpful to the trier of
fact.
Arista argues that Mr. Coleman’s opinion is not reliable
because it includes the sum from the 1975 and 1976 audit
reports-documents about which he has no opinion on accuracythat he did not consider the impact of the 1981 Agreement which
released Arista from most audit claims and foreclosed his
attempts to adjust deductions for CD packaging and digital
royalty rates, and finally that his opinions on digital sales
and the royalty deduction were unsubstantiated.
Mr. Coleman
analyzed the documents produced by Arista and put together a
38
“minimum” estimate of damages owed.
The estimate included
several figures that Arista had conceded, and the rest come
directly from Arista’s document production.
Arista’s critique
that the royalty deduction was unsubstantiated is contradicted
by Mr. Coleman’s explanation that the parties’ agreement did not
allow for such a deduction and the fact that Arista’s own
expert, Tom Nilsen, applied the deduction as well.
Coleman
Rept. at 21; Nilsen Tr. at 141:21-25.
Arista’s objection to the use of the audit reports is
equally unpersuasive.
Mr. Coleman is not precluded from
providing an opinion that incorporates the audit numbers, even
where he has not reviewed all of the documents surrounding the
audit.
Mr. Coleman analyzed the documents produced, found no
evidence that the audits had been paid off, and, based on his
experience, determined how those audits would have been
resolved.
The admissibility standards of the Federal Rules of
Evidence warrant exclusion only in the case of serious flaws in
reasoning or methodology.
Amorgianos, 303 F.3d at 267.
Where
the experts can reasonably disagree on the testimony, the jury,
not the judge should decide among the opinions.
U.S. at 153.
reasoning.
Kumho Tire, 526
Here, there is no serious flaw in Mr. Coleman’s
Arista may disagree with his conclusions, i.e., the
calculation of estimated damages, but the introduction of its
39
own rebuttal expert is the appropriate course of action in cases
where experts can disagree on the conclusions.
Additionally, in
a case where the amount of royalties is at issue, an expert’s
view on the amount owed is certainly helpful to the trier of
fact.
The matter should be for the jury to determine after
considering all the testimony.
Accordingly, Arista’s motion to
exclude Mr. Coleman’s opinion on the minimum damages owed
estimate is denied.
Next, Arista seeks to exclude Mr. Coleman’s releasebased damages estimate.
The release-based estimate calculates
royalties based on known releases of Plaintiffs’ music.
Rept. at 79-85.
Coleman
Arista seeks to exclude this opinion because
the methodology is not reliable, it ignores actual sales data,
and the estimate was not reliably applied to the facts.
Br. at 17-18; Def. Reply at 6.
Def.
First, Arista argues that the
“fundamental defect” in Mr. Coleman’s use of the release-based
estimate is that it rejects Arista’s records in favor of
“unsupported speculative assumptions.”
Reply at 6.
Def. Br. at 17; Def.
Courts in this Circuit have excluded an expert who
calculated royalties based on the number of releases because
“projections” are inappropriate where the expert “had royalty
statements reflecting actual, not projected, sales.”
Robinson
v. Sanctuary Record Groups, Ltd., 542 F.Supp. 2d 284, 293
40
(S.D.N.Y. 2008).
In Robinson, the expert did not review all the
relevant documents produced.
In fact, the expert relied upon
lists created by Plaintiffs containing recordings relevant to
the calculation of damages.
Id. at 291.
The expert also did
not verify the advances and sales projections from the thirdparty license agreements with the third-parties, from whom they
were able to seek discovery and admitted that his calculations
contained “material errors such as double-counting.”
293.
Id. at
The court found the expert’s testimony was not reliable
noting that, “Plaintiffs’ explanation that they did not have
sufficient documentation to make accurate accounting does not by
some unknown alchemy convert unreliable evidence into reliable
evidence.”
Id.
Here, Mr. Coleman has disregarded the voluminous
production of historical sales and royalty records produced by
Arista.
As discussed above, Mr. Coleman opined that no foreign
royalty data exists but had not reviewed tens of thousands of
lines of detailed data reflecting decades of foreign royaltybearing sales (Nilsen Rept. at 14-18), did not review other key
documents (compare Leak Decl. Exs. C, E, G, H, K, M with Coleman
Rept. Ex. F; see also Coleman Tr. at 136:18-144:21), and
rejected documents without sufficient analysis, including a
41
150,000-line spreadsheet with data reported by foreign
territories (Coleman Rept. at 72-73; Leak Decl. Ex. J).
Plaintiffs’ explanation for ignoring Arista’s
historical records, explained in Mr. Coleman’s supplemental
declaration, is that the documents identified by Arista that Mr.
Coleman did not initially review are
“not of a type an auditor
would rely on to verify the accuracy and completeness of
documents.”
Coleman Decl. ¶ 43.
As discussed earlier, this
summary rejection was not reliable because the methodology
behind expert analysis should be made to produce results, not to
justify the results already reached.
See E.E.O.C. v. Bloomberg
L.P., Civ. No. 07-8383 (LAP), 2010 WL 3466370, at *17 (S.D.N.Y.
Aug, 31, 2010) (“To ignore contradictory testimony in order to
arrive at a desired conclusion highlights the unreliability of
[expert’s methodology.”)
The appearance that Mr. Coleman’s methodology is
result-oriented is underscored by Plaintiffs’ acknowledgement
that “no amount [sic] of answers [from Arista] could have
satisfied [Mr. Coleman].” Pl. Opp. at 8 n.7.
Additionally, Mr.
Coleman had every opportunity to locate such “source documents”
in order to verify Arista’s historical records for use in
calculating royalties or to compare the foreign royalty data
with the data reported by foreign territories.
42
Throughout the
extensive discovery and expert discovery in this case, Mr.
Coleman did not seek out further documents to verify the Arista
records.
In response, Mr. Coleman states that he has testified
regarding the release-based and interpolation method damages
estimate several times and this testimony has never been
excluded.
Coleman Decl. ¶¶ 6-7, 14-16.
In his report, Mr.
Coleman does not provide any details on the instances where he
testified about release-based damages.
In his supplemental
declaration, Mr. Coleman identifies two cases where plaintiffs
were awarded the amount he calculated based upon a release-based
calculation of unreported royalties.
He does not provide
details as to the royalty records in those cases or draw useful
comparisons to the facts of the instant case.
The fact that Mr.
Coleman has been permitted to testify in the past about this
royalties estimate alone does not shed any light on whether or
not such an estimate should be permitted here, under these
circumstances.
Various other problems plague Mr. Coleman’s releasebased estimate.
For example, Mr. Coleman uses a single royalty
rate he created based on assumptions that Plaintiffs’ recorded
eight albums under the agreement and that sales by Arista’s
licensees abroad were not significant.
43
Coleman Decl. ¶¶ 33-34;
Coleman Tr. at 169:20-170:21.
The 1975 Agreement set royalty
rates for albums recorded under it (Topper Decl., Ex. 8 ¶ 6(q)),
and Mr. Coleman does not explain why those rates were not used
to calculate estimated royalties.
Indeed, Mr. Coleman seemingly
admits that the average price he used overstates the price of
albums when most sales occurred.
Coleman Decl. ¶ 28.
The
myriad inconsistencies, result-driven methodology, and refusal
to use historical data or request documents needed to verify the
historical data indicates that Mr. Coleman’s release-based
damages estimate is unreliable as expert testimony and will not
be permitted.
Finally, the interpolation damages estimate uses a
mathematical model to calculate amounts owed between and among
reliable datapoints.
Mr. Coleman’s model used public data from
the 1970s and corrected Sony records after 2003 as the
endpoints.
Coleman Rept. at 93-95.
The model contained an
exponential decay curve fit model which was based on the
expectation that the Plaintiffs would experience an initial,
sharp decline in sales followed by a longer, gradual decline in
sales.
Coleman Decl. ¶ 22.
Because Mr. Coleman was not the sole designer of the
interpolation model he used, this Court must assess whether Mr.
Coleman is qualified to testify about interpolation.
44
As
discussed earlier, Ms. Crain’s supplemental declaration has been
stricken because she was an un-offered expert, and therefore her
testimony may not assist the jury in their understanding of the
interpolation method of damages.
An expert seeking to present
opinion testimony to a jury must be “qualified as an expert by
knowledge, skill, experience, training, or education.”
509 U.S. at 588 (quoting Fed.R.Evid. 702).
Daubert,
Mr. Coleman lacks
appropriate qualifications to present the interpolation method
to the jury.
Mr. Coleman has no expertise in mathematics.
(Coleman Tr. at 42:24-43:4).
He could not explain the formula
his staff used and whether that formula included a variable
other than time.
(Id. at 49:10-50:23).
He lacks familiarity
with other types of statistical curves used to model data and
could not address why one curve was preferable to another.
(Id.
at 43:5-21).
The reason for Mr. Coleman’s lack of direct, firsthand knowledge on the subject is as follows:
“I have relied
upon, again, my analyst and my partner who are experts in math
and computer science.
I rely from their expertise to determine
which one of those methodologies that we use.”
21).
(Id. at 42:17-
Mr. Coleman admittedly relied on another’s expertise to
produce his opinion on this subject.
Accordingly, his testimony
is excludable as “conduit testimony from an expert on a matter
45
outside his field of expertise.”
Malletier v. Dooney & Burke,
Inc., 525 F. Supp. 2d 666 (S.D.N.Y. 2007) (financial consultant
not allowed to testify regarding statistical analysis of sales
data); see also Dura Auto. Sys. Of Indiana v. CTS Corp., 285
F.3d 609, 612-14 (7th Cir. 2002) (excluding relied-upon expert
because he “exercise[d] professional judgment that is beyond
[his] ken” and “the soundness of the underlying expert judgment
is in issue.”).
Plaintiffs argue that the same cases cited by
Defendant specifically permit an expert like Mr. Coleman to rely
in part on the expertise of his partner, Ms. Crain.
15-17.
Pl. Opp. at
Indeed, an expert may rely on assistants or the opinions
of other experts in formulating their own expert opinions.
See
Dura, 285 F.3d at 612 (“[a]n expert witness is permitted to use
assistants in formulating his expert opinion, and normally they
need not themselves testify”) (internal citations omitted);
Malletier, 525 F. Supp. 2d at 664 (S.D.N.Y. 2007) (“[i]t is true
that experts are permitted to rely on opinions of other experts
to the extent that they are of the type that would be reasonably
relied upon by other experts in the field.”).
While these
propositions are generally true, a more complete reading of the
cases mandates the conclusion that Mr. Coleman is not qualified
to testify on the subject of the interpolation method.
46
In Dura, Judge Posner explained that assistants may be
relied upon by supervising experts because assistants may be
deposed prior to trial to determine if they performed their
tasks sufficiently and the expert can be deposed regarding his
or her supervision of the tasks.
Judge Posner continued:
“[a]nalysis becomes more complicated if the assistants aren’t
merely gofers or data gatherers but exercise professional
judgment that is beyond the expert’s ken.”
613.
Dura, 285 F.3d at
In Dura, the proposed expert’s assistants “did not merely
collect data for [the expert] to massage or apply concededly
appropriate techniques in a concededly appropriate manner, or
otherwise perform routine procedures, and that [the expert]
himself lack[ed] the necessary expertise to determine whether
the techniques were appropriately chosen and applied.”
615.
Id. at
The court found that the use of the specific models in the
circumstances “required a host of discretionary expert judgments
for the affiants, not [the expert] to make.”
Id.
In Malletier, the court found that the expert was not
qualified to testify on regression analysis because he was
relying on an analysis conducted by another individual and the
expert “admitted that he essentially had nothing to do with the
preparation of the regression analysis.”
664.
525 F. Supp. 2d at
The court went on to note that the expert could not give
47
his opinion relying completely on the regression analysis
because “the expert witness must in the end be giving his own
opinion.
He cannot simply be a conduit for the opinion of an
unproduced expert.” Id. (emphasis in original).4
Similarly here, Ms. Crain exercised far more
discretionary judgment than an assistant gathering data.
Ms.
Crain was the designer of the model, chose the endpoints, and
constructed the model based on her own expertise.
at 5-15.
Crain Decl.
Mr. Coleman did not supervise her work because, as
discussed supra, he did not have knowledge of the field.
Accordingly, Mr. Coleman is not qualified to testify as an
expert on the interpolation method of calculating royalties.
3. Mr. Nilsen’s Testimony
Mr. Nilsen prepared an expert report in response to the
opinions offered in Mr. Coleman's report.
The purpose of Mr.
Nilsen's being retained was for him to review and respond to Mr.
Coleman's expert report.
Mr. Nilsen has experience of more than
4
Plaintiffs also cite In re Bayou Grp., 439 B.R. 284, 331-32 (S.D.N.Y. 2010)
where the court allowed expert testimony where the expert was not experienced
in hedge fund analysis but had partners and associates with such expertise.
Plaintiffs’ citation is misleading because the court notes that the report
and its conclusions did not rely on hedge fund-specific accounting analysis.
The only portion of the report that involved a hedge-fund specific issue was
a legal issue on which the court had ruled and where the inclusion at issue
was industry standard. Here, the development of the interpolation model is
not standard in the industry. Ms. Crain created and developed what she
believed to be the appropriate interpolation model for these specific
circumstances.
48
30 years in the music industry managing royalty departments and
working for a music industry accountancy firm.
With this
experience in mind, the Court finds that Mr. Nilsen is qualified
to testify as an expert on the issues raised in Mr. Coleman's
report.
Mr. Nilsen's report and testimony is in response to
the opinions offered in Mr. Coleman's report and testimony.
Therefore, his opinions on Arista's records, the release-based
royalty estimate, and the interpolation method will not be
required because the Court has granted Defendant's motion
excluding Mr. Coleman's testimony on those subjects.
The Court
need not decide Plaintiffs’ motion to exclude the testimony of
Mr. Nilsen on the subjects of Arista’s records, the releasebased estimate, or the interpolation estimate.
Finally, the standard for a rebuttal expert witness is
the same as for any expert witness, though the expert’s
testimony should be to “explain, repel, counteract or disprove
evidence” presented by the expert to whom he or she is
responding.
See Marmo v. Tyson Fresh Meats, Inc., 457 F.3d 748,
759 (8th Cir. 2006).
Plaintiffs argue that Mr. Nilsen may not
rely on Arista’s records to determine the minimum royalties due
and that his calculation is not based on any industry-accepted
analysis.
Pl. Br. at 17.
Mr. Nilsen’s rebuttal to Mr.
49
Coleman’s minimum royalty amount owed was offered after a review
of each of the categories of monies Mr. Coleman claimed and a
determination as to whether the amount claimed was actually
owed.
Def. Opp. at 17.
This methodology was reliable, and the
analysis of Mr. Coleman’s opinion would be helpful to the jury.
Indeed, Plaintiffs do not seem to object to Mr. Nilsen’s
accounting of Mr. Coleman’s estimate but rather solely object to
the alternative calculation of $1,042,203.14.
Pl. Reply. at 7.
As discussed earlier, where the experts reasonably
disagree on the conclusions presented, the jury, not the judge
should decide among the opinions.
Kumho Tire, 526 U.S. at 153.
Here, there is no serious flaw in Mr. Nilsen’s analysis of Mr.
Coleman’s minimum damages owed estimate. Mr. Nilsen’s
calculation is based on his item by item review of Mr. Coleman’s
opinion and the bases for that opinion.
Def. Opp. at 9.
Any
disagreement about Mr. Nilsen’s opinion or the figure itself
certainly can and should be addressed on cross examination in
front of the jury.
Mr. Nilsen’s opinion on Mr. Coleman’s claim
for the minimum royalties owed is therefore permitted, and
Plaintiffs’ motion to exclude such testimony is denied.
III. CONCLUSION
For the foregoing reasons: (1) Defendant’s Motion to
Exclude the Expert Report of Wayne C. Coleman [dkt. no. 189] is
50
GRANTED with regard to Mr. Coleman’s opinions on the status of
Arista’s records, the release-based damages estimate, and the
interpolation damages estimate and DENIED with regard to the
minimum royalties owed damages estimate; (2) Plaintiffs’ Motion
to Exclude the Expert Report of Tom Nilsen [dkt. no. 187] is
DENIED with regard to the minimum royalties owed damages
estimate; and (3) the Court need not decide Plaintiffs’ Motion
to Exclude the Expert Report of Tom Nilsen [dkt. no. 187] on the
subjects of Arista’s records, the release-based estimate, or the
interpolation estimate because it is moot in light of (1).
SO ORDERED.
Dated:
New York, New York
September 15, 2014
_____________________________
UNITED STATES DISTRICT JUDGE
51
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?