Page 25 - Economic Damages Calculation

performed by the expert to assess the reliability of the projections. The court similarly looked to the per-
son who prepared the projections, the process that the person went through to develop the projections,
and the work, if any, that the expert performed to test the projections in order to assess whether it was
reasonable for the expert to rely on the information.

Victory Records, Inc. v. Virgin Records Am., Inc.

The plaintiffs filed an action against the defendant, accusing the defendant of tortiously interfering with
the plaintiffs’ multi-album recording, publishing, and merchandising contract with the musical group
Hawthorne Heights. fn 11 The plaintiffs claimed that had the defendant not interfered, the sales of Haw-
thorne Heights’ second and third albums would have been substantially higher, and the group would
have released a fourth album. Based upon calculations prepared by Hawthorne Heights’ expert, the
plaintiffs sought millions of dollars in compensatory damages, and $25 million in punitive damages.

In preparing his calculations, among other things, the plaintiffs’ expert relied on the number of units of
the second Hawthorne Heights album that the plaintiffs shipped. This assumption was the starting point
to estimate lost profits, and the third and fourth album sales were dependent on this factor. In evaluating
this assumption, which was central to the damage claim, the court noted the following:

While [the expert’s] methodology may be opaque in certain respects, one aspect is crystal clear:
the starting point for the lost profits analysis for the second album, and thus for the third and
fourth albums, is [the expert’s] assumption that [the Plaintiffs] shipped the correct number of
units for the second album — in other words, his assumption that [the Plaintiffs’] internal sales
projections were correct. As noted above, when an expert premises his opinions on an assump-
tion, the assumption must be reliable. fn 12

Beyond the question of reliability, the court also considered the source of the projections, looking to a
number of cases from the Seventh Circuit that held that an assumption based on the internal projections
of the expert's client lacks the reliability demanded by FRE 702. fn 13 Specifically, the court cited the fol-
lowing cases:

• Zenith Elecs. Corp. v. WH-TV Broad. Corp., 395 F.3d 416, 420 (7th Cir. 2005), which held that a
party's "internal projections ... rest on its say-so rather than a statistical analysis," and "represent
hopes rather than the results of scientific analysis."

• ZF Meritor LLC v. Eaton Corp., 646 F. Supp. 2d 663, 667 (D. Del. 2009), in which the testimo-
ny of an expert was excluded on the grounds that the expert "did not apply his own assumptions,
based upon his expertise, to any financial data in order to project" the party's future performance,

fn 11 Victory Records, Inc. v. Virgin Records Am., Inc., 2011 U.S. Dist. LEXIS 10337 (N.D. Ill. Feb. 3, 2011).

fn 12 Id. at *2.

fn 13 The following paragraph format is different than the actual text of the opinion for presentation purposes.

© 2020, Association of International Certified Professional Accountants 23