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American Hardware Manufacturers Association v. Reed Elsevier Inc.

July 23, 2009

AMERICAN HARDWARE MANUFACTURERS ASSOCIATION, PLAINTIFF,
v.
REED ELSEVIER INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Blanche M. Manning United States District Judge

MEMORANDUM AND ORDER

In 2003 plaintiff American Hardware Manufacturers Association (the "Association") filed suit against defendants Reed Elsevier, Inc., and two of its divisions, Reed Exhibitions and Association Expositions & Services (collectively "Reed") and Freeman Decorating Co. and Freeman Decorating Services, Inc. (collectively "Freeman"), stemming from an agreement it had with Reed to sponsor the National Hardware Show (the "Show"), a trade show held in Chicago until 2003. Freeman served as the general contractor for the Show. Before the court is a motion by the Association, William Farrell, and Timothy Farrell (collectively, "AHMA") to bar the rebuttal report and testimony of Freeman's expert. Unsurprisingly, Freeman objects and also asks for an award of the attorney's fees and costs it incurred in responding to the motion. For the following reasons, AHMA's motion to bar is granted and Freeman's request for fees and costs is denied.

I. Background

A. Facts

AHMA's initial complaint included three counts against Freeman, two of which (Count II, alleging violations of the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA"), and Count VI, alleging unjust enrichment) were dismissed in 2004. See Mem. Op. and Order, Dec. 28, 2004, Docket No. 61. As a result, the only claim remaining against Freeman is for civil conspiracy under Illinois law. AHMA's fraud and civil conspiracy claims against Reed remain.*fn1

AHMA's second amended complaint ("SAC") alleges that both Freeman and Reed engaged in a "deceptive course of conduct" for the purpose of defrauding AHMA and obtaining monetary benefits. See SAC at ¶¶ 103-104, 111. The essence of the allegations is that, pursuant to a 1998 contract between Reed and Freeman, Reed hired Freeman as its general contractor for the annual Show through 2006 (later extended to 2009), in exchange for undisclosed kickbacks, free goods, and services from Freeman to Reed. See id. at ¶¶ 54-55. In order to recoup the money it paid to Reed, Freeman allegedly engaged in "cost-shifting," whereby it charged Show exhibitors more for certain items, and Reed allegedly "permitted and/or directed" Freeman to engage in this practice. See id. at ¶ 59. According to AHMA, the cost-shifting was a primary reason that exhibitor participation in the Show declined between 2001 and 2003. See id. at ¶ 45. AHMA further alleges that Freeman and Reed did not disclose their arrangement to it.

B. The Dueling Expert Reports: Litvak (AHMA) and Elson (Freeman)

In the motion presently before the court, AHMA seeks to bar the rebuttal report and testimony of Freeman's expert, Craig T. Elson, arguing that the report misstates the law of civil conspiracy and will thus not assist the trier of fact as required under Fed. R. Evid. 702. The court's consideration of the propriety of Elson's report begins with a recap of the report to which he is responding. That report, by AHMA's expert Jeff Litvak, states that AHMA asked him to:

1) review and analyze documentation and related testimony involving Reed's accounting and financial reporting practices relating to payments made by Freeman to Reed . . . ; 2) Review and analyze related documentation and testimony in conjunction with Reed's actions during the time of the Freeman payments; 3) Calculate damages, if any, related to the payments from Freeman to Reed and Reed's profits from the Show over the relevant time period; and 4) Render an expert report.

Expert Report of I. Jeff Litvak, p. 1 ("Litvak report").

Litvak, a certified public accountant, focuses almost entirely on Reed's accounting practices and concludes that Reed should have recorded and reported the kickbacks and in-kind contributions from Freeman as revenue. According to Litvak, if Reed had done so, it would have owed AHMA a percentage of that revenue pursuant to Reed's contract with AHMA. Litvak then analyzes various Reed employees' explanations as to why these payments were not reported as revenue and discusses certain accounting principles. He concludes that the financial statements Reed provided to AHMA as required by their contract were "inaccurate, incomplete, and materially misleading." Id. at 67. Finally, he quantifies the damages and disgorged profits that Reed allegedly owes AHMA as a result of the allegedly improper payments and in-kind contributions.

Elson's rebuttal report contains two principal components: (1) a detailed evaluation of Litvak's report and (2) an analysis of whether Freeman's behavior harmed AHMA given the rates Freeman charged and other factors that purportedly contributed to the decline of exhibitor participation in the Show. Elson's thesis is that Litvak's report is flawed because it fails to assess whether the defendants, and Freeman in particular, caused the economic harm AHMA allegedly suffered. Elson uses this causation argument to refute Litvak's assessment of AHMA's damages, but does not dispute Litvak's numbers or methodology.

II. AHMA's Motion to Bar

For the following reasons, the court finds that Elson's report does not misstate the law, as AHMA contends. Nevertheless, the court finds Elson's report must be barred for two other reasons: it is neither a proper rebuttal to Litvak's report ...


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