A Manhattan judge wrongly refused to allow a manufacturer and distributor of Polo Ralph Lauren-branded handbags to present key expert testimony in a lawsuit over the clothing maker’s decision to discontinue one of its trademarks, a unanimous appeals panel has ruled.
The Appellate Division, First Department, ruled on Oct. 18 in Wathne Imports v PRL USA, 603250/05, that the expert, who used sales figures from handbag maker Coach Inc. to estimate the profits lost by the plaintiff, Wathne Imports, should be allowed to make his case to a jury, which could evaluate his credibility.
The decision, written by Justice David Saxe (See Profile) and joined by Justices Angela Mazzarelli (See Profile), Leland DeGrasse (See Profile), Rosalyn Richter (See Profile) and Sheila Abdus-Salaam (See Profile), reversed a March 6 decision by Manhattan Supreme Court Justice Charles Ramos (See Profile).
In 1999, Wathne entered into an agreement with Polo under which Wathne was granted the exclusive right to manufacture and sell handbags in the U.S. bearing any of several Polo trademarks, including Polo Sport, according to the opinion. The exclusive license was to extend through 2007.
In 2001, according to Wathne’s lawsuit, Polo discontinued the use of the Polo Sport mark, which Wathne alleges breached the licensing agreement.
To estimate the profits it lost because of the discontinued trademark, Wathne called on Glenn Newman, a partner at accounting firm ParenteBeard, as an expert witness.
Newman took the sales of Polo Sport bags from 1998 through 2000 as a baseline. He then extrapolated the likely future growth in Polo Sport handbag sales, had the trademark not been discontinued, from sales figures provided by Coach and J. Tod’s, the only two handbag companies that publicly reported their sales since 2000. Newman estimated that sales of Polo Sport handbags would have grown 25 percent per year from 2001 to 2007, and estimated Wathne’s lost profits at $82.6 million.
Polo moved in limine to preclude the expert testimony. It argued that the claimed lost profits were unrealistic in light of Wathne’s actual profits in the proceeding years and were based on “aggressive and speculative” assumptions.
Ramos granted the motion to the extent of barring testimony using Coach sales figures. He said that Coach could not be compared to Wathne because Coach manufactured bags under its own name and sold them through its own stores. Ramos also ruled that Wathne’s expert could not use international sales as the basis of his estimates. Wathne appealed.
The appeals panel said that Newman should be allowed to present his estimates at trial.
“The perceived flaws in plaintiff’s expert’s analysis are relevant to the weight a jury should give to the expert’s report and testimony; they do not present sufficient grounds for ruling that analysis inadmissible,” Saxe wrote. “Newman’s analysis and conclusions should be challenged through cross-examination; the jury must decide whether or not his methodology was appropriate. As the United States Supreme Court said in Daubert v. Merrell Dow Pharms., 509 US 579, 596 (1993), ‘Vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attaching shaky but admissible evidence.’”
Saxe also said that any method of estimating lost profits would be at least somewhat speculative because “a degree of uncertainty is to be expected in assessing lost profits.”
He quoted the Southern District’s 1999 decision in ESPN v. Office of Commr. of Baseball, 76 F.Supp.2d 416, 418, which held that when “the existence of damage is certain, and the only uncertainty is as to its amount, the plaintiff will not be denied recovery of substantial damages.” That decision held that a plaintiff must show “a stable foundation for a reasonable estimate” of such damages, Saxe said, which Wathne had done.
“Newman’s use of sales of Coach handbags in his methodology was not without foundation; therefore, his analysis should not have been dismissed as a matter of law,” he wrote. “Contrary to the trial court’s conclusion, we view the rate of growth experienced in the fashion handbag market during the period in question as related to a calculation of plaintiff’s lost profits.”
Saxe added, “Newman’s effort to anticipate the expected growth rate in sales of Polo Sport handbags may have contained an element of ‘improvisation.’ However, Newman did not equate the Polo Sport’s with Coach’s success or profit levels; he merely used Coach’s handbag sales as a tool to evaluate how well that broad category of product sold during the relevant period. The validity of this approach may be challenged at trial, but by holding that it was incorrect as a matter of law, the trial court unduly interfered with the approximation that was required due to the lack of more exact comparables.”
Thomas Morrison of Manatt Phelps & Phillips and Bruce Turkle of Phillips Nizer, who represented Wathne, could not be reached for comment.
John Callagy of Kelley Drye & Warren, who represented Polo, also could not be reached.
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