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LG Electronics U.S.A., Inc. v. Whirlpool Corp.

August 24, 2010


The opinion of the court was delivered by: Amy J. St. Eve, District Court Judge


Defendant Whirlpool Corporation ("Whirlpool") has moved to exclude (i) the expert testimony and opinions of Plaintiff LG Electronics U.S.A., Inc.'s ("LG") damages expert, Mohan Rao, Ph.D., and (ii) portions of the rebuttal expert report and a video expert report of LG's marketing expert, Dr. Yoram (Jerry) Wind. For the reasons discussed below, the Court (i) denies Whirlpool's motion to exclude Dr. Rao's testimony and opinions, and (ii) grants in part, denies in part, and denies in part as moot Whirlpool's motion to exclude Dr. Wind's testimony and opinions.


LG sued Whirlpool for false advertising in violation of Section 43(a) the Lanham Act, 15 U.S.C. § 1125(a), regarding its steam dryers. LG asserts both literal and implied falsity theories under the Lanham Act. The focus of LG's claim is that Whirlpool uses the word "steam" in its advertisements and in the name of its Duet(r) Steam Dryer, and that such use is literally false and misleading because the Duet(r) Steam Dryer does not truly use steam, but instead uses a mist of cold water sprayed into a warm dryer drum. Trial is scheduled to commence in this case on October 4, 2010.


In anticipation of trial, Whirlpool challenges the admissibility of Dr. Rao's expert opinions and testimony pursuant to Rules 402, 403 and 702 of the Federal Rules of Evidence and Daubert v. Merrell Dow Pharm., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed. 2d 469 (1993), and Dr. Wind's expert opinions and testimony pursuant to Rule702 and Daubert. Federal Rule of Evidence 702 provides that "[i]f 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 opinion or otherwise." Fed. R. Evid. 702. Rule 702 "also requires that: (1) the testimony must be based upon sufficient facts or data; (2) it must be the product of reliable principles and methods; and (3) the witness must have applied the principles and methods reliably to the facts of the case." Happel v. Walmart Stores, Inc., 602F.3d 820, 824 (7th Cir. 2010). It requires that the district court serve as a "'gate-keeper' who determines whether proffered expert testimony is reliable and relevant before accepting a witness as an expert." Winters v. Fru-Con Inc., 498 F.3d 734, 741-42 (7th Cir. 2007) (quoting Autotech Tech. Ltd. P'ship v., 471 F.3d 745, 749 (7th Cir. 2006)). The purpose of the court's gate-keeping function 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 Co. v. Carmichael, 526 U.S. 137, 152, 119 S.Ct. 1167, 143 L.Ed. 2d 238 (1999).

In assessing whether an expert's testimony is reliable, Daubert lists a number of considerations - including testing, peer review, error rates, and acceptability in the relevant scientific community. Daubert, 509 U.S. at 593-94. The Supreme Court, however, has clearly stated that "the test of reliability is flexible, and Daubert'slist of specific factors neither necessarily nor exclusively applies to all experts or in every case." Kumho, 526 U.S. at 141, 119 S.Ct. 1167 (internal quotation omitted). This is especially true when the expert's opinions are non-scientific in nature and do not follow traditional scientific testing. "[T]he test for reliability for nonscientific experts is 'flexible' and . . . Daubert'slist of specific factors neither necessarily nor exclusively applies to all experts or in every case." United States v. Romero, 189 F.3d 576, 584 (7th Cir. 1999) (quoting Kumho Tire, 536 U.S. at 141.) "Rather the law grants a district court the same broad latitude when it decides how to determine reliability as it enjoys in respect to its ultimate reliability determination." Kuhmo Tire, 536 U.S. at 142 (emphasis in original).

In addition, the 2000 Advisory Committee's Notes to Rule 702 suggest additional criteria for gauging expert reliability, including whether: (1) "maintenance standards and controls" exist; (2) the testimony relates to "matters growing naturally and directly out of research they have conducted independent of the litigation," or developed "expressly for purposes of testifying"; (3) "the expert has unjustifiably extrapolated from an accepted premise to an unfounded conclusion"; (4) "the expert has adequately accounted for obvious alternative explanations"; (5) "the expert is being as careful as he would be in his regular professional work outside his paid litigation consulting"; and (6) "the field of expertise claimed by the expert is known to reach reliable results for the type of opinion the expert would give." Fuesting v. Zimmer, Inc., 421 F.3d 528, 535 (7th Cir. 2005) (citations omitted), vacated in part on other grounds, 448 F.3d 936 (7th Cir. 2000) (quoting Fed. R. Evid. 702 advisory committee's note (2000)). See also American Honda Motor Co., Inc. v. Allen, 600 F.3d 813, 817 (7th Cir. 2010). "The proponent of the expert bears the burden of demonstrating that the expert's testimony would satisfy the Daubert standard" by a preponderance of the evidence. Lewis v. CITGO Petroleum Corp., 561 F.3d 698, 705 (7th Cir. 2009).

An expert may be qualified to render opinions based on experience alone. "In certain fields, experience is the predominant, if not the sole basis for a great deal of reliable expert testimony." Advisory Committee Notes to Rule 702. The Seventh Circuit has repeatedly stated that "genuine expertise may be based on experience or training." United States v. Conn., 297 F.3d 548, 556 (7th Cir. 2002), quoting Tyus v. Urban Search Mgmt., 102 F.3d 256, 263 (7th Cir. 1996). "[W]hile extensive academic and practical expertise in an area is certainly sufficient to qualify a potential witness as an expert, Rule 702 specifically contemplates the admission of testimony by experts whose knowledge is based on experience." Trustees of Chicago Painters and Decorators Pension, Health and Welfare, and Deferred Sav. Plan Trust Funds v. Royal Intern. Drywall and Decorating, Inc., 493 F.3d 782, 787-88 (7th Cir. 2007) (citations and quotations omitted). As such, courts "consider a proposed expert's full range of practical experience as well as academic or technical training when determining whether that expert is qualified to render an opinion in a given area." Id. (quoting Smith v. Ford Motor Co., 215 F.3d 713, 718 (7th Cir. 2000)).


I. Dr. Rao

Whirlpool seeks to exclude Dr. Rao's opinions in their entirety because they are unreliable. LG claims that all of Whirlpool's arguments go to the weight of Dr. Rao's testimony, not its admissibility. The Court held a Daubert hearing on June 28, 2010 and July 8, 2010. During the hearing, Dr. Rao testified for approximately a day and a half. For the following reasons, the Court denies Whirlpool's motion to exclude the testimony and opinions of Dr. Rao.

A. Dr. Rao and His Opinions

Dr. Rao has a B.S. in engineering from the University of Michigan, a pre-doctoral fellowship from Harvard University, and a Ph.D. from the University of Colorado. He currently is an adjunct professor in the Department of Industrial Engineering and Management Sciences at the McCormick School of Engineering and Applied Sciences at Northwestern University where he teaches finance. Dr. Rao is also the Managing Director at LECG. He is a member of the American Economic Association, the Licensing Executives Society, and the IEEE. In addition, Dr. Rao served as the chair of the Valuation and Taxation Committee of the Licensing Executives Society, a professional organization for intellectual property valuation and transactions. He also teaches courses in intellectual property valuation to executives at LES.

Dr. Rao is the author of a chapter on econometrics in the context of damages analysis in the Litigation Services handbook. Dr. Rao specializes in intellectual property and antitrust economics. He previously has testified as an expert in more than thirty cases, including approximately six false advertising cases in which he has testified as a damages expert.

Winston & Strawn, counsel for LG, retained Dr. Rao to "evaluate certain economic and financial issues in this litigation related to LG's claims against Whirlpool." (Supplemental Expert Report of Mohan Rao, Ph.D. ("Rao Report") at 2.) In essence, Dr. Rao is a damages expert. Dr. Rao states in his Report that: "LG lost sales and, in turn, profits as a result of Whirlpool's false and misleading claims regarding its steam dryers." (Id. at 4.) As of March 2009, Dr. Rao opines that LG has lost a total of approximately $33.3 million in profits as a result of Whirlpool's false advertising of its steam dryers, broken down as follows:

* Lost profits of approximately $10.8 million for lost sales of LG steam dryers and $10.4 million for lost sales of LG steam washers between December 2007 and March 2009; and

* Lost profits of approximately $12.1 million due to price erosion on LG steam dryers during the same period.

(Id. at 4.) He further opines that Whirlpool has gained approximately $25.4 million in profits as a result of its false and misleading advertising of steam dryers during this same time period. (Id. at 5.) According to Dr. Rao, Whirlpool's profits as a result of its conduct on its sales of steam dryers is $12.9 million and on its sales of steam washers is $12.5 million.

In total, Dr. Rao opined that, as a result of Whirlpool's false and misleading claims, LG's lost profits are approximately $33.3 million and Whirlpool's gains are approximately $25.4 million.

B. Whirlpool's Challenges

Whirlpool raises seven separate challenges to the admissibility of Dr. Rao's opinions. Specifically, Whirlpool contends that his opinions are inadmissible on the grounds that Dr. Rao:

1) wrongly assumes causation; 2) improperly relies on pre-launch estimates of sales rather than actual sales figures; 3) ignores the presence of other competitors and excludes them from his damages analysis; 4) improperly includes profits of LG's Korean parent company in his analysis; 5) fails to consider price erosion; 6) ignores price sensitivity; and 7) improperly includes the sale of washers in his analysis. The Court will address each argument in turn.

1. Causation Between the Allegedly False Advertisements and LG's Damages

Whirlpool first argues that Dr. Rao's testimony is inadmissible because he simply assumes causation between the allegedly false advertisements at issue and Whirlpool's sales and LG's lost sales. It contends that Dr. Rao fails to determine whether any causal link exists between Whirlpool's false advertising and LG's lost profits. Dr. Rao, however, has demonstrated that his methodology is reliable.

In reaching his conclusions, Dr. Rao relied on several Whirlpool documents that show that consumers' preference for steam is a key driver of sales of Whirlpool's dryers. During the Daubert hearing, Dr. Rao explained the basis for this opinion by citing to a variety of internal Whirlpool surveys and reports. The Whirlpool documents reveal that Whirlpool sales associates believed that steam was a key driver of sales for LG and that Whirlpool sought to place a steam dryer in the market prior to LG. Dr. Rao also relied on Whirlpool documents that show that Whirlpool recognized a distinction between steam and mist, and that consumers recognized a distinction between hot steam and cold vapor. He also considered Whirlpool surveys demonstrating that consumers prefer steam dryers to steam washers by a 2 to 1 margin, and steam washers to misting dryers by a 2 to 1 margin. (Rao Report at ¶ 15.) After determining that consumers prefer steam and that they can distinguish between steam and mist, Dr. Rao also opined, again based on Whirlpool documents, that Whirlpool gained market share and LG lost market share when Whirlpool began selling its steam dryer. Accordingly, Dr. Rao opined that he established a causal link between Whirlpool's false advertising and the damages sustained by LG.

Whirlpool levels several criticisms at Dr. Rao's methodology. Whirlpool first argues that Dr. Rao is offering an opinion -- that Whirlpool believed that its decision to change its dryer name from mist to steam would result in a marked increase in sales -- based on his interpretation of Whirlpool's internal documents which are unrelated to actual sales. Whirlpool contends that the Court should strike Dr. Rao's opinions because he failed to address evidence related to Whirlpool's actual steam dryer sales and to conduct his own surveys regarding the value that consumers placed on the word "steam." Dr. Rao, however, testified that surveys after-the-fact of sales would not assist in his causation analysis because the point of sale is the relevant time period for evaluating the consumer's purchase preferences. Dr. Rao also explained that he did not need to conduct such studies because Whirlpool had already conducted studies that evaluated consumer preference for steam.

Whirlpool further criticizes Dr. Rao's reliance on Whirlpool's internal surveys, which it asserts did not directly address the incremental value that consumers attach to steam over mist. During the hearing, Whirlpool's counsel questioned Dr. Rao regarding his reliance on these internal Whirlpool surveys conducted prior to litigation. As noted above, Dr. Rao testified that he could quantify consumer preference for steam as compared to mist based on research that Whirlpool conducted and that he did not conduct his own surveys with regard to this information because Whirlpool had already conducted the relevant surveys. During this line of questioning, Whirlpool's counsel inquired as to whether Dr. Rao adhered to the guidelines established in Shari Seidman Diamond's Reference Guide on Survey Research.

Diamond's manual addresses survey methodology relating to surveys that parties present as evidence during litigation. Shari Seidman Diamond's Reference Guide on Survey Research, REFERENCE MANUAL ON SCIENTIFIC EVIDENCE (Federal Judicial Ctr 2d ed. 2000). The manual is "intended to assist judges in identifying, narrowing, and addressing issues bearing on the adequacy of surveys either offered as evidence or proposed as a method for developing information." (Diamond at 226.) The manual specifically states that "[a] routine use of surveys in federal courts occurs in Lanham Act cases, where the plaintiff alleges trademark infringement or claims that false advertising has confused or deceived consumers. The pivotal legal question in such cases virtually demands survey research because it centers on consumer perception (i.e., is the consumer likely to be confused about the source of a product, or does the advertisement imply an inaccurate message?)." (Diamond at 227.) With regard to Dr. Rao's opinions, however, LG is not offering the surveys conducted by or on behalf of Whirlpool and relied on by Dr. Rao as evidence of consumer perception. Instead, the surveys relied on by Dr. Rao form a limited portion of the documents he relied on in forming his opinions regarding damages. Moreover, it is well-established that "criticisms of surveys used in litigation are appropriate topics of cross-examination and contrary evidence to reduce the weight of the survey ...

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