Page 19 - Acertaining Economic Damages Calculation

expert made absolutely no effort to evaluate the reasonability of the growth rates used, either by re-
searching literature on growth of non-profits in general or investigating the plaintiff in particular.

Fail-Safe, L.L.C. v. A.O. Smith Corp., 744 F. Supp. 2d 870 (E.D. Wis. 2010)

Fail-Safe, LLC is a manufacturer of anti-entrapment devices for artificial pool drains. A.O. Smith manu-
factures motors for pool and spa pumps and was also involved in developing anti-entrapment technolo-
gy. Over the course of several years the parties held various meetings to discuss the incorporation of
Fail-Safe’s technology into pumps manufactured by A.O. Smith. However, the relationship was never
reduced to a formal agreement or acknowledgment of intellectual property rights. After discussions be-
tween the parties ceased, A.O. Smith introduced two motors that Fail-Safe alleged contained its trade se-
crets. In turn, Fail-Safe filed suit for misappropriation of trade secrets and unjust enrichment.

In support of its claim for damages, Fail-Safe submitted two expert reports: one by an expert who per-
formed analyses of the pool and spa market to develop a "market estimation model" of the potential fu-
ture sales of motors allegedly incorporating the misappropriated trade secrets (the "infringing units") and
another by an expert who, using the potential future sales derived by the first expert, proffered an opin-
ion on the unjust enrichment damages. A.O. Smith, in turn, submitted a Daubert motion to preclude the
testimony of both experts on the basis that the proposed testimony regarding unjust enrichment damages
was unreliable and that references to potential future sales of the infringing units did not assist the trier
of fact. In evaluating the motion, the district court provided an extensive analysis of both expert opin-
ions, ultimately deciding to preclude both from providing any testimony with respect to the future sales
of the infringing units.

With respect to the expert retained to estimate future sales, the district court first focused on issues sur-
rounding the sufficiency of the data relied upon, noting the following:

• The data that was used to project how many infringing units would be launched upon commer-
cialization and how quickly those units would be adopted into the market was extremely suspect.
The starting point for how many units A.O. Smith expected to sell was based upon a single, un-
dated PowerPoint slide that stated how many units the company expected to have in the first year
and a half. The expert, however, did not independently analyze the market potential and underly-
ing data that A.O. Smith used to develop the estimate, rendering the reliance on the data unrelia-
ble.

• The expert did not scrutinize the assumptions employed by A.O. Smith with respect to how
quickly the infringing units would grow on the market. Again, the expert relied upon the same
PowerPoint document that provided unit sales information but did not provide any explanation,
other than some broad reasons for why the infringing units would be successful, to support the
projected growth rate for unit sales. In the district court’s view, the expert looked at the numbers
projected by A.O. Smith and then declared without any true analysis that the early projections
were correct, all of which was a "black box" outside of the view of the court.

• Fail-Safe missed the point when it argued that expert reliance on an opposing party’s internal
documents to construct a damage model is widely accepted. The issue is not whether relying on
internal documents is appropriate but, rather, whether the reliance on the documents is accompa-
nied by a reasoned methodology. Although Fail-Safe cited Amigo Broad. L.P. v. Spanish Broad.
Sys., Inc., 2006 WL 5503872 (W.D. Tex. April 21, 2006), which, in turn, cited Primrose Operat-
ing Co. v. National Am. Ins. Co., 382 F.3d 546 (5th Circ. 2004), for the proposition that ques-
tions related to the bases and sources of expert opinion are a question of weight, rather than ad-

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