The opinion of the court was delivered by: Judge Feinerman
MEMORANDUM OPINION AND ORDER
Plaintiffs Victory Records, Inc. and Another Victory, Inc. (together, "Victory") filed this diversity action against Defendant Virgin Records America, Inc., alleging that Virgin tortiously interfered with Victory's multi-album recording, publishing, and merchandising contract with the rock band Hawthorne Heights. But for Virgin's alleged interference, Victory claims, the sales of Hawthorne Heights's second and third albums would have been substantially higher than they actually were and Victory would have released a fourth Hawthorne Heights album to comparable success. Victory seeks several million dollars in compensatory damages and $25 million in punitive damages. Trial is set to commence on February 7, 2011.
Virgin has moved in limine to exclude the testimony of Victory's proposed damages expert, music industry accountant Bruce Kolbrenner. The court heard extensive argument at a hearing on January 6, 2011, and informed the parties at the pretrial conference of January 31, 2011, that the motion would be granted. This memorandum sets forth the grounds for granting the motion.
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. The rule 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., 602 F.3d 820, 824 (7th Cir. 2010); see also Daubert v. Merrell Dow Pharma., Inc., 509 U.S. 579 (1993). The district court serves as the "gate-keeper who determines whether proffered expert testimony is reliable and relevant before accepting a witness as an expert." Winters v. Fur-Con Inc., 498 F.3d 734, 741-42 (7th Cir. 2007) (citation and internal quotation marks omitted). The expert's proponent bears the burden of proving by a preponderance of the evidence that the testimony satisfies Rule 702. See Lewis v. CITGO Petroleum Corp., 561 F.3d 698, 705 (7th Cir. 2009).
Kolbrenner proposes to testify regarding the profits Victory allegedly lost on Hawthorne Heights's second and third albums, which Victory released, and on a fourth album the band was supposed to but did not release under Victory's label. As Victory explains (see Doc. 90 at 22-25), Kolbrenner calculated lost profits using the "before and after" methodology, which examines a plaintiff's past profits in estimating its future profits, and the "yardstick" methodology, which examines the profits of closely comparable businesses in estimating a plaintiff's future profits. See Park v. El Paso Bd. of Realtors, 764 F.2d 1053, 1068 (5th Cir. 1985). Both methodologies have been accepted in music industry tortious interference cases. See Slip-N-Slide, Inc. v. TVT Records, LLC, 2007 WL 3232274, at *11 (S.D. Fla. Oct. 31, 2007); TVT Records v. Island Def Jam Music Grp., 250 F. Supp. 2d 341, 350 (S.D.N.Y. 2003). That said, when an expert uses either or both methodologies, "[h]is assumptions and projections must rest on 'adequate bases,' and cannot be the product of mere speculation." Park, 764 F.2d at 1067 (internal quotation marks omitted); see also United States v. Brown, 7 F.3d 638, 652-53 (7th Cir. 1993) ("expert testimony [must] be rejected if it lacks an adequate basis in fact"). Accordingly, if the "principal assumptions" underlying Kolbrenner's opinions lack the reliability expected by experts in the field, his lost profits calculations do not satisfy Rule 702. Park, 764 F.2d at 1067; see also Junk v. Terminix Int'l Corp., ___ F.3d ___, 2010 WL 4978801, at *7 (8th Cir. Dec. 9, 2010) (affirming exclusion of expert testimony due, in part, to expert's "reliance on unfounded assumption in his comparative method"); Universal Church v. Geltzer, 463 F.3d 218, 226 (2d Cir. 2006) (reversing admission of expert testimony due, in part, to expert's unjustified assumption that debtor's "expenses were essentially the same each year").
To determine projected sales for Hawthorne Heights's second album-that is, what the sales would have been absent Virgin's alleged tortious interference-Kolbrenner began with the units of the second album that Victory shipped to stores, added the number of digitally downloaded tracks, and applied the rate of return that Victory experienced on the first album. See Kolbrenner Report (Doc. 86-2) at 7 (projecting 1,089,318 in sales for the second album by adding 1,163,602 "gross units sold" to 25,610 "equivalent digital tracks," and then applying the .4 percent return rate from the first album); Kolbrenner Dep. (Doc. 86-4) at 175 (explaining that 1,163,602 "gross units sold" figure was the number of "units that [Victory] management provided to me which indicated the number of units that were shipped"); id. at 193 (agreeing that "the calculation of lost profits that [he] ha[s] provided for [the second album] was based upon units shipped"); id. at 202 (when asked whether, "to reach a projection for [the second album], you took the units shipped for that record, applied the return percentage from [the first album] to reach your number," Kolbrenner responded, "[i]n addition to equivalent [digitally downloaded] tracks that were added to it"); id. at 217 (agreeing that he applied "the return percentage" for the first album in projecting sales for the second album). That figure (1,089,318) reflected the low end of Kolbrenner's sales projections for the second album; Kolbrenner calculated the median and high ranges (1,500,000 and 2,000,000 units, respectively) based on the sales experience of Paramore, another rock band. See Kolbrenner Report (Doc. 86-2) at 5, 8-9 (which sets forth the low, median, and high ranges, but does not mention Paramore); Kolbrenner Dep. (Doc. 86-4) at 204 (explaining that he "looked at a comparison with Paramor[e], a comparative artist, who is in a similar genre, and was on an independent label, Fueled by Ramen, and took a look to see what happened in the second album."); id. at 211 (agreeing that "the sales results of Paramor[e] provided some foundation for [his] methodology in calculating low, median and high sales figures"). To determine projected sales for the third and fourth albums, Kolbrenner applied a 25 percent reduction and 33 percent reduction, respectively, to the projections for the second album. See Kolbrenner Report (Doc. 86-2) at 11-13, 15-17; Kolbrenner Dep. (Doc. 86-4) at 246-47. And to determine profit per projected unit for all three albums, Kolbrenner applied the per-unit profit ($3.21) from the first album as the low end, and increased that figure ten percent (to $3.53) and fifteen percent (to $3.69) for the mid and high ranges. See Kolbrenner Report (Doc. 86-2) at 5, 8-9, 11-13, 15-17; Kolbrenner Dep. (Doc. 86-4) at 217.
While Kolbrenner'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 Kolbrenner's assumption that Victory shipped the correct number of units for the second album-in other words, his assumption that Victory's internal sales projections were correct. As noted above, when an expert premises his opinions on an assumption, the assumption must be reliable. See Junk, 2010 WL 4978801, at *7; Universal Church, 463 F.3d at 226; Park, 764 F.2d at 1067-68. The Seventh Circuit has held, however, that an assumption based on the internal projections of the expert's sponsor lacks the reliability demanded by Rule 702. See Zenith Elecs. Corp. v. WH-TV Broad. Corp., 395 F.3d 416, 420 (7th Cir. 2005) (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"); see also ZF Meritor LLC v. Eaton Corp., 646 F. Supp. 2d 663, 667 (D. Del. 2009) (excluding testimony of expert who "did not apply his own assumptions, based upon his expertise, to any financial data in order to project" the party's future performance, but who instead "relied on" the party's own internal financial projections "without knowing . the validity of the underlying data and assumptions upon which the [projections] were based"). This is particularly so where, as here, the proposed expert offered no basis in the two-page narrative portion of his expert report (Doc. 86-2 at 7-8) or at his deposition (Docs. 86-3 & 86-4) for concluding that Victory's internal projections provide an acceptable foundation for an expert's opinion in his field. Thus, while opinion testimony regarding damages founded on a party's internal projections might be permissible when delivered by a lay witness under Federal Rule 701, see United States v. Valencia, 600 F.3d 389, 416 (5th Cir. 2010); Donlin v. Philips Lighting N. Am. Corp., 581 F.3d 73, 81 (3d Cir. 2009); DIJO, Inc. v. Hilton Hotels Corp., 351 F.3d 679, 687 (5th Cir. 2003); MCI Telecomms. Corp. v. Wanzer, 897 F.2d 703, 705-06 (4th Cir. 1990), it may not be delivered by a witness with the gloss of expertise under Rule 702.
The expert testimony admitted in Slip-N-Slide Records and TVT Records does not suffer from this flaw. In neither case did the expert adopt the client's internal sales projections as his own; instead, the experts employed the "before and after" and "yardstick" methodologies to calculate the record company's projected future sales and, from there, lost profits. See Slip-N-Slide Records, 2007 WL 3232274, at *13 (album sales by comparable artists provided "a track record upon which an expert could base projections of sales of the [relevant] album"); TVT Records, 250 F. Supp. 2d at 349-50 ("While the Court agrees that [the relevant band's] presence in the marketplace at this time is quite limited, that of Ja Rule is, as [Defendant] itself argues elsewhere, quite extensive. Because Ja Rule is one of only three members of [the relevant band], it is reasonable to rely, as Kolbrenner does, on Ja Rule's popularity and the performance of his solo albums as a basis to project [the relevant band's] [a]lbum sales."). Accordingly, the Slip-N-Slide Records and TVT Records courts were justified in holding that the expert's sales projections, and the lost profit calculations derived therefrom, were sufficiently reliable under Rule 702. Compare 24/7 Records, Inc. v. Sony Music Entm't, Inc., 514 F. Supp. 2d 571, 575 (S.D.N.Y. 2007) (testimony excluded where expert did not "explain how he translated 24/7's financial solvency, successful exploitation of artists and music industry notoriety, and relationship with [other companies] into dollar figures"); Rondor Music Int'l Inc. v. TVT Records LLC, 2006 WL 5105272, at *3-5 (C.D. Cal. Aug. 21, 2006) (expert's reliance on band's "star power," "past success," and "overall marketing" efforts insufficient where she "did not have a statistical basis" for the sales projection).
Kolbrenner's damages opinion is deficient in a second, independent respect. As noted above, and as Victory acknowledges, "Kolbrenner applied the yardstick method by drawing upon the record sales of a comparable band, Paramor[e], on an independent label as one of the foundations for his methodology in calculating low, median and high sales figures." Doc. 90 at 22. Kolbrenner's "yardstick," then, rests on a single comparable. See 1/6/11 Tr. at 120, 133-34 (Victory's counsel concedes that Kolbrenner used one comparable, Paramore); Kolbrenner Dep.
(Doc. 86-4) at 204. Although "[d]etermining the minimum sample size from which reliable extrapolations can be made to the sampled population is tricky, . a sample size of one is rarely, if ever, sufficient." Am. Honda Motor Co., Inc. v. Allen, 600 F.3d 813, 818 (7th Cir. 2010) (internal quotation marks omitted); compare Slip-N-Slide Records, 2007 WL 3232274, at *13 (approving "yardstick" testimony where the expert "compared sales of eight other albums marketed and released by [the plaintiff recording company] of similar genre artist"). Nowhere does Kolbrenner or Victory even attempt to establish that a sample size of one band is an appropriate "yardstick" among recording industry experts for measuring future performance of another band.
Exacerbating matters, Kolbrenner selected Paramore based not on his own expertise or analysis, but at the direction of Anthony Brummel, Victory's CEO and owner. This fact, as well as the importance of Paramore to Kolbrenner's overall opinion, is clear from his deposition:
Q. Who made the determination that Pa[ramore] was a . group that you should look at as a comparable group?
A. I believe Tony did. Q. Okay. Did you at any point make suggestions as to bands that you thought should be considered as potential comparable artists?
A. No. Q. Okay. Was . a comparable artist analysis in your view necessary in order for you ...