The opinion of the court was delivered by: Magistrate Judge Nan R. Nolan
MEMORANDUM OPINION AND ORDER
This case arises out of a disintegrating business relationship between the two co-owners of the copyrights in a play called Late Nite Catechism ("LNC"), who also jointly own a corporation, Quade/Donovan Entertainment, Inc. ("QDE"). Plaintiff/Counter-Defendant Maripat Donovan ("Donovan") has brought claims for accounting, breach of fiduciary duty and to remove Defendant Victoria Quade ("Quade") as an officer of QDE. Defendants/Counter-Plaintiffs Quade and QDE filed counterclaims for breach of contract, deprivation of copyright revenues, diversion of corporate opportunity, tortious interference with contract, and an accounting. By consent, the Court conducted a bench trial on all remaining issues from April 25, 2011 to April 29, 2011. Certain pre-trial motions and trial issues remain pending, which the Court initially addresses below. This constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a).
I. Remaining Pre-Trial Motions and Trial Issues
A. Plaintiff's Motion to Dismiss Amended Counterclaim (Doc. 242)
Donovan has moved to dismiss Defendants' second amended counterclaim pursuant to Rule 12(b)(6), arguing that Counts I-III and V of the counterclaim fail to state a claim upon which relief may be granted.*fn1 Donovan's motion to dismiss is primarily based on her belief that Defendants improperly seek joint recovery under each count in the second amended counterclaim. Donovan's motion (doc. 242) is granted in part and denied in part to the extent described below.
With regard to Count I for breach of contract, Donovan argues that QDE has no basis for making a claim under the purported written partnership agreement between Donovan and Quade. Donovan asserts that no facts have been pled to establish that QDE was a signatory to the document or has any rights under it.*fn2 Donovan argues that Count II for deprivation of copyright revenues fails to state a claim as to QDE because the complaint fails to allege that QDE has any interest in any copyright. As to Count III for diversion of corporate opportunity, Donovan complains that there is no allegation explaining how both Quade individually and QDE jointly own a corporate opportunity which would entitle them to joint recovery under this count. Donovan asserts that there is no basis for Quade individually to claim damages for diversion of a corporate opportunity. With regard to Count V for an accounting, Donovan similarly claims that no facts are pled which establish a joint right to an accounting by Quade and QDE on all four remaining counts of the counterclaim.
In response to Donovan's motion, Defendants fail to directly address the precise issue of whether they jointly intended to pursue all four remaining counts in the second amended counterclaim against Donovan. Defendants assert that Donovan is taking an overly technical reading of the counts in the counterclaim. Defendants explain that the amount of Quade's damages under the theories of breach of contract (Count I) and diversion of corporate opportunity (Count III) is the same: Quade is entitled to half of the profits earned by Donovan that should have been shared with Quade. Donovan will either pay half of the profits she made directly to Quade or she will pay all of the profits she made to QDE, of which Quade and Donovan will each get half as 50% shareholders. Defendants asset that the same is true for Count II (deprivation of copyright revenues) and Count V (accounting). Defendants say: "If the money is going to be paid directly to Quade, then she is entitled to the accounting. If money is going to be paid to QDE, then the corporation is entitled to the accounting." Doc. 256 at 2, n.2. Defendants emphasize that the end result is the same and it does not matter that the counts are jointly brought by both parties in the second amended counterclaim.
A motion under Rule 12(b)(6) challenges the sufficiency of the complaint or counterclaim. Rule 8(a) requires a pleading that states a claim for relief to contain a "short and plain statement" of the claim, the basis for federal jurisdiction, and a demand for the relief sought. Rule 8(e) instructs courts that "[p]leadings must be construed so as to do justice." Fed. R. Civ. P. 8(e). The Supreme Court has cautioned that "[t]he Federal Rules reject the approach that pleading is a game of skill in which one misstep by counsel may be decisive to the outcome and accept the principle that the purpose of pleading is to facilitate a proper decision on the merits." Conley v. Gibson, 355 U.S. 41, 48 (1957); Luckett v. Rent-A-Center, Inc., 53 F.3d 871, 873 (7th Cir. 1995) (stating "[d]istrict judges must heed the message of Rule 8: the pleading stage in not the occasion for technicalities."). "One objective of Rule 8 is to decide cases fairly on their merits, not debate finer points of pleading where opponents have fair notice of the claim or defense." Bausch v. Stryker Corp., 630 F.3d 546, 562 (7th Cir. 2010) (citing Fed. R. Civ. P. 8 (e)).
Counts I (breach of contract) and II (deprivation of copyright revenues) of the counterclaim purport to be brought by both Quade and QDE, but Defendants have not demonstrated that Counts I and II state a claim as to QDE. However, other language in the second amended counterclaim can be read to cure this problem as to QDE with regard to Counts I and II. As to Count I, paragraphs 93 and 94 clearly allege that Donovan has breached the partnership agreement by failing to share control and benefits related to derivative works with Quade and that only Quade has been damaged by Donovan's breaches of the partnership agreement. Similarly, Count II is clear that Quade was deprived of her rightful copyright revenues and has been damaged by Donovan's deprivation of copyright revenues. Doc. 240 at ¶¶ 97, 98. At this stage of the litigation, the Court is unwilling to place form over substance and require Defendants to amend their counterclaim to take out references to QDE in Counts I and II. Given the inexact wording in the counterclaim, the Court construes Counts I and II as excluding QDE from consideration. QDE will not be able to recover under Counts I and II of the second amended counterclaim.
In Count III for diversion of corporate opportunity, Defendants allege that Donovan has never accounted to nor paid any money to Quade and QDE for any revenues generated in connection with Donovan's productions or licensing of Donovan's LNC sequels. Doc. 240 at ¶¶ 106, 107. An officer's or director's usurpation of a corporate opportunity breaches a duty owed to the corporation, not the individual shareholders, who may only share in the corporation's recovery from the officer or director. In re Marriage of Schweihs, 650 N.E.2d 569, 577 (Ill. App. 1995). Thus, Donovan is probably correct that the right of recovery under Count III of the counterclaim belongs to QDE and not Quade as an individual shareholder. Donovan's motion to dismiss the diversion of corporate opportunity count against Quade is granted.
Defendants' final count for an accounting alleges that "Quade and QDE are entitled to an accounting from Donovan and any and all business owned or controlled by her for all revenues generated and all expenses incurred in connection with all the foregoing." Doc. 240 at ¶ 120. Whether Defendants are entitled to an accounting will be determined consistent with the Court's construction of the second amended counterclaim herein.
In the last paragraph of her motion to dismiss, Donovan alleges that a conflict exists between the interests of Quade and QDE and suggests that it is impermissible for the "same attorneys to represent two parties whose interests are not fully aligned in seeking the identical recovery." Doc. 242 at 3. Donovan contends that "Quade directs the litigation and has an obvious interest in directing the recovery to herself, rather than to the corporation which is alleged to be half owned by Donovan." Id.*fn3
Donovan's argument is unpersuasive. As Defendants explain, the amount of money Quade seeks to recover is the same regardless of whether Donovan pays half of the profits due directly to Quade if she prevails under Count I and/or Count II or whether Donovan pays all of the profits due to QDE if it prevails under Count III, half of which would get distributed to Quade as a 50% shareholder in the corporation. Under this circumstance, the interests of Quade and QDE are not adverse or incompatible. Counts I through III of the second amended counterclaim seek identical damages for the same alleged wrongful act under differing theories of recovery, i.e., breach of contract, deprivation of copyright revenues, and diversion of corporate opportunity. Quade has an adequate interest in vigorously litigating Count III because she will receive an indirect benefit as a 50% shareholder from any corporate recovery, which in this case is the exact same direct benefit she would receive under Counts I or II. Defendants are free to plead all three theories of recovery, but Defendants cannot recover more than once for the same injury or damages. Cange v. Stotler and Co., Inc., 826 F.2d 581, 585 n.2 (7th Cir. 1987) (stating "[o]f course multiple recoveries for the same injury will not be allowed but plaintiff can pursue in the district court his multiple theories entitling him to recover.").
B. Plaintiff's Motion in Limine to Exclude Two Donovan Letters (Doc. 196)
Donovan moved pursuant to Federal Rules of Evidence 401 and 403 to exclude evidence or argument at trial regarding two handwritten letters dated June 27, 1995 and July 9, 1995 from Donovan to Quade. Donovan contends that the letters are irrelevant to the issue of whether she in fact signed the written partnership agreement. Donovan also argues that the letters should be excluded under Rule 403 because they indicate that Donovan was receiving therapy in 1995 and contain very personal statements related to the parties' intimate relationship that will embarrass her and may unfairly prejudice her before the trier of fact. Defendants respond that the June 27, 1995 letter is relevant to the authorship of LNC and because it refers to a discussion about writing a sequel to LNC. Defendants argue that the second letter dated July 9, 1995 is relevant because Donovan expresses her intent to sign a partnership agreement with Quade. The Court agrees with Donovan that the relevance of the letters is arguable. However, in the context of a bench trial, Donovan's arguments are better directed toward the weight of the evidence, not admissibility. Donovan's motion is denied. The handwritten letters are admissible, and the Court will assign them the appropriate weight, if any.
C. Plaintiff's Motion to Modify Amended Pre-Trial Order to Add Exhibit (Doc. 232)
Donovan moves to modify the Amended Pre-Trial Order to identify the Award of Arbitrator and Decision in Quade v. Entertainment Events, Case No. 12 140 Y 00169 07 (New York 2011) as an additional exhibit. Donovan's motion (doc. 232) is granted and the Court will consider the arbitration award and decision to the extent they are relevant.
D. Defendants' Rule 408 Objection (Doc. 244)
During the examination of Quade on April 25, 2011, Donovan's counsel asked Quade about an offer sent via email to the officers of Entertainment Events, Inc. ("Entertainment Events") in 2003. In that email, Quade offered that Entertainment Events pay Quade 2% of the gross box office receipts from Entertainment Events' production of Donovan's LNC sequels. Defendants objected under Federal Rule of Evidence 408(a) on the grounds that the questioning was directed to the content of settlement negotiations and was being offered to prove the amount of a disputed claim.
Federal Rule of Evidence 408 provides:
(a) Prohibited uses. -- Evidence of the following is not admissible on behalf of any party, when offered to prove liability for, invalidity of, or amount of a claim that was disputed as to validity or amount, or to impeach through a prior inconsistent statement or contradiction:
(1) furnishing or offering or promising to furnish--or accepting or offering or promising to accept--a valuable consideration in compromising or attempting to compromise the claim; and
(2) conduct or statements made in compromise negotiations regarding the claim, except when offered in a criminal case and the negotiations related to a claim by a public office or agency in the exercise of regulatory, investigative, or enforcement authority.
(b) Permitted uses. -- This rule does not require exclusion if the evidence is offered for purposes not prohibited by subdivision (a). Examples of permissible purposes include proving a witness's bias or prejudice; negating a contention of undue delay; and proving an effort to obstruct a criminal investigation or prosecution.
Fed. R. Evid. 408. The primary purpose behind Rule 408 is to encourage settlement negotiations, which might be chilled if offers of compromise may be used later as admissions of liability. Zurich American Ins. Co. v. Watts Indus., Inc., 417 F.3d 682, 689 (7th Cir. 2005). The rule is not an absolute ban on all evidence regarding settlement negotiations. Courts have admitted evidence of offers or agreements to compromise for purposes other than liability, such as to show bias or prejudice of a witness; rebuttal; impeachment; to show knowledge or intent; to show a continuing course of reckless conduct; and to prove estoppel. Id.; Bankcard America, Inc. v. Universal Bancard Sys., Inc., 203 F.3d 477, 484 (7th Cir. 2000). In deciding whether evidence should be excluded under Rule 408, "courts must consider the spirit and purpose of the rule and decide whether the need for the settlement evidence outweighs the potentially chilling effect on future settlement negotiations." Zurich, 417 F.3d at 689.
Quade explains that in the fall of 2003, a dispute arose between Quade, Donovan and Entertainment Events after Quade discovered that Entertainment Events acquired the rights to Donovan's LNC sequels without including Quade in the deal. According to Quade, the dispute concerned whether, and for what amount, Quade was entitled to author royalties from Entertainment Events' productions of Donovan's LNC sequels. Quade says that the first paragraph of the October 6, 2003 email she wrote to Tim Flaherty and John Pratt of Entertainment Events shows that this was an ongoing negotiation ("This is the letter you have been requesting from me") and that Quade had retained an attorney ("I have been consulting an attorney . . ."). Quade argues that the last paragraph of the October 6, 2003 email establishes that this was a compromise that contemplated further attorney involvement ("These percentages are so low that I really hope no bargaining needs to be done, and we can wrap this up very quickly. If you like, I'll even have my lawyer draft an agreement that includes these terms."). Finally, Quade contends that an email dated November 4, 2003 from Quade to both Donovan and Entertainment Events shows that the dispute involved all three parties ("I'd like to finalize an agreement over the sequel and then let the two of us move on with our lives.").
Donovan responds that Rule 408 does not apply to Quade's communications with Entertainment Events in October 2003 regarding author royalties on potential LNC sequels because (1) there was no claim or dispute between Quade and Entertainment Events in October 2003; (2) the subject matter of the communication was unrelated to the claim in this case against Donovan; and (3) settlement negotiation evidence can be offered for purposes other than liability. With regard to the later, Donovan says that the challenged communication is offered to show that in 2003, Quade did not assert that she was entitled to 50% of royalties on Donovan's LNC sequels under the written partnership agreement as she contends in this lawsuit. Rather, Quade proposed that she be paid a 2% underlying rights payment for Donovan's LNC sequels.
Rule 408 does not bar evidence that certain statements were not made during compromise negotiations or that an adversary never advance the construction of the contract she now urges during attempts to settle a dispute. Wright & Miller, Federal Practice and Procedure: Evidence § 5308, at 239 (1980) (stating that "[r]ead literally, Rule 408 would not seem to prohibit evidence that an offer of compromise was not made or that certain statements were not made during negotiations. Nor does there seem any strong reasons for departing from the literal interpretation."); Sunstar, Inc. v. Alberto-Culver Co., 2004 WL 1899927, at *23 (N.D. Ill. Aug. 23, 2004); see also Winchester Packaging, Inc. v. Mobil Chemical Co., 14 F.3d 316, 319-21 (7th Cir. 1994) (holding trial judge did not abuse his discretion under Rule 408 in excluding correspondence which did not include an interpretation of the contract advanced by plaintiff at trial but noting that "the question [was] so close that had the judge admitted it we would uphold that ruling as readily."). Here, the challenged evidence can be offered for the limited purpose of showing that Quade did not take the position in the fall of 2003 when the issue of author royalties from Donovan's LNC sequels arose that she was entitled to 50% of royalties under a written partnership agreement she had with Donovan. The purpose in admitting Quade's failure to take such a position is to prove Quade's intent under the written partnership agreement with respect to individually authored LNC sequels. This a permissible purpose and does not violate Rule 408's purpose of encouraging settlements. Bankcard America, 203 F.3d at 484 (noting courts have admitted evidence of offers or agreements to compromise for purposes of showing knowledge and intent). The email is not being admitted to prove the amount of a reasonable underlying rights royalty rate.
E. Collateral Estoppel (Doc. 253)
In her Memorandum in Support of Application of Collateral Estoppel (doc. 253), Donovan argues that the Quade/EEI arbitration decision precludes Quade from arguing in support of her diversion of corporate opportunity counterclaim that she and QDE own any right to produce LNC sequels outside of a 50 mile radius of downtown Chicago and that Quade's Sequels featuring "Mother Superior" are not LNC sequels under the doctrine of collateral estoppel. In 2007, Quade initiated arbitration proceedings against Entertainment Events. On February 22, 2011, the arbitrator issued an eight-page decision concluding, among other things, that Quade's production of her LNC sequels outside the Chicago radius was and is likely to conflict with Entertainment's use of its right as provided in paragraph 10.1 of the 1995 agreement between Donovan and Quade and Entertainment Events. Pl's Exh. 33 at ¶ II(F). Paragraph 10.1 is "a negative covenant prohibiting the Authors from presenting live stage performances of LNC or 'any play featuring the character 'Sister' that is reasonably likely to conflict with [Entertainment Events'] use of its right in [LNC],' outside the Chicago radius while [Entertainment Events'] rights in LNC remain in effect." Id. That paragraph gave Entertainment Events the right to prohibit Quade from producing LNC sequels outside of the Chicago radius, but did not grant Entertainment Events its own rights to produce LNC sequels.
In response, Defendants do not dispute that the arbitrator determined that Quade and Donovan did not have the right to produce LNC sequels in Entertainment Events' territory. Defendants also do not dispute that Quade could not produce her LNC sequels outside the 50-mile Chicago radius without Entertainment Events' consent. It is further undisputed that Quade's Sequels, including her "Mother Superior" plays, are LNC sequels. Doc. 264 at 3 n.2. In light of these uncontested facts, Donovan's collateral estoppel arguments that the arbitrator's award establishes that Quade and QDE do not own the right to produce LNC sequels outside the 50 mile radius of downtown Chicago and that Quade's "Mother Superior" plays are LNC sequels are essentially moot. Notwithstanding the mootness of the collateral estoppel issue, Donovan and Defendants dispute whether the arbitrator's decision has preclusive effect on QDE's claim for diversion of corporate opportunity. Given the Court's finding below that the production and licensing of individually authored LNC sequels was not a corporate opportunity, it need not reach this disputed issue.
F. Defendants' Motion to Bar Expert Testimony of David L. Garfinkle (Doc. 257)
Defendants move to bar the expert testimony of David L. Garfinkle ("Garfinkle"), an attorney in the entertainment industry, who was retained to testify regarding a reasonable underlying rights payment for the use of the character "Sister" in LNC sequels. Defendants' motion (doc. 257) is denied.
Prior to trial, Defendants moved to strike Garfinkle's expert report for failing to meet Rule 26(a)(2)(B) and the requirements of Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) and to bar Garfinkle's testimony at trial. Doc. 199. The Court agreed that Garfinkle's report was deficient under Rule 26(a)(2)(B) but gave Donovan a chance to cure the deficiencies by paying the reasonable attorneys' fees associated with Defendants' counsel deposing Garfinkle to find out the reasons for his opinion. Doc. 229 at 3. Donovan's counsel conducted the deposition of Garfinkle at their office on the Saturday of Easter weekend, two days before trial. Defendants' counsel declined to attend Garfinkle's deposition before trial and when given an opportunity during the trial. Tr. 142-49. Defendants also declined to offer their own expert to testify about a reasonable royalty rate for underlying rights owners.
Defendants challenge Garfinkle's qualifications and the reliability of his opinion. Federal Rule of Evidence 702 governs the admissibility of expert testimony, as does the Supreme Court's Daubert decision. Rule 702 provides that:
If 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 an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.
Fed. R. Evid. 702. Daubert explains that the Federal Rules of Evidence "assign to the trial judge the task of ensuring that an expert's testimony both rests on a reliable foundation and is relevant to the task at hand." Daubert, 509 U.S. at 597. This "gatekeeping" role "applies not only to testimony based on 'scientific' knowledge, but also to testimony based on 'technical' and 'other specialized' knowledge." Kumho Tire Company, Ltd. v. Carmichael, 526 U.S. 137, 141 (1999). The purpose of the gatekeeping requirement "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." Id. at 152. Donovan bears the burden of demonstrating that Garfinkle's testimony satisfies the Daubert standard. Lewis v. CITGO Petroleum Corp., 561 F.3d 698, 705 (7th Cir. 2009). While Daubert's requirements of reliability and relevancy apply in a bench trial, "the usual concerns of the rule--keeping unreliable expert testimony from the jury--are not present in such a setting." Metavante Corp. v. Emigrant Sav. Bank, 619 F.3d 748, 760 (7th Cir. 2010).
Defendants first contest Garfinkle's qualifications. Rule 702 provides that "a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify" as to matters involving "scientific, technical, or other specialized knowledge." Fed. R. Evid. 702. Garfinkle is an attorney who has practiced entertainment law in the intellectual property departments of large and small law firms since 1988. Garfinkle Dep. at 4, 9, 19-20. In 1994, Garfinkle founded his own entertainment law firm. Id. at 20. Garfinkle's educational background includes an undergraduate degree from Duke University and a law degree from Boston University Law School. Id. Garfinkle has represented clients in the theater, film, television, music, publishing, and advertising industries. Id. at 5. Garfinkle has personal experience drafting or overseeing the drafting of rights acquisitions agreements for theater, including deals for theater producers acquiring underlying rights from original authors. Id. at 6. Garfinkle has also produced theatrical works and is the CEO of a theater production company that now produces the Broadway play Spiderman and a musical version of the movie Ghost, and that produced the musical The Immigrant. Id. at 7-9. As a producer, Garfinkle is responsible for, among other things, acquiring the underlying rights from the original authors. Id. at 10. The Court finds that Garfinkle's extensive practical experience in the entertainment industry as an attorney and theater producer qualifies him as an expert on the issue of a standard royalty rate for underlying rights owners in the theater industry.
Defendants next argue that Garfinkle's opinion was not based on sufficient facts or data and that it was not the product of reliable methods. Donovan counters that Defendants' concerns relate to the weight, not the admissibility of Garfinkle's testimony, and that Defendants waived their chance to attack Garfinkle's testimony through cross-examination by declining to attend his deposition.
Garfinkle's testimony was sufficiently reliable. In reaching his conclusion about a standard theater industry underlying rights payment, Garfinkle relied on his over 20 years of personal experience in the entertainment industry as an attorney and theater producer. Garfinkle Dep. at
13. In his deposition, Garfinkle stated that an underlying rights payment is a payment made or a royalty paid to the author of a piece of work on which another new work is based. Id. at 10. Garfinkle testified that the standard in the theater industry is that the underlying rights owner's royalties are a third of the amount paid to the author. Id. at 11, 12-13. Garfinkle gave several examples of theater deals where the underlying rights payment was a third of the author's payment: the Araca Group shows on Broadway; 9:00 to 5:00, a Broadway musical based on a movie; and MGM/UA theater deals from movies. Id. at 14-15. Garfinkle confirmed that his opinion regarding the standard royalty rate for underlying rights owners is generally accepted by others in the theater industry. Id. at 13; Kumho, 526 U.S. at 151 (stating "it will be at times useful to ask even a witness whose expertise is based purely on experience . . . whether his preparation is of a kind that others in the field would recognize as acceptable."). Garfinkle's experience is sufficiently reliable to develop an opinion about a theater industry standard royalty rate for underlying rights owners.
Without citing any authority, including any statement by an expert of their own, Defendants contend that Garfinkle's opinion is unreliable because his testimony focused on theater productions based on movies as opposed to sequels based on theatrical productions such as LNC. Defendants' challenge goes to the weight of Garfinkle's testimony, not its admissibility. The fact that some of Garfinkle's examples of the standard theater industry royalty rate for underlying rights owners were based on theater productions of movies is a proper subject for cross-examination and Defendants could have countered Garfinkle's examples with an expert of their own. Defendants also object that Garfinkle did not take into consideration any specific facts regarding LNC, including the fact that LNC and LNC sequels compete for the same audience; how much Donovan is paid by Entertainment Events to produce the derivative works including her consultant fee; and the fact that LNC sequels are often produced in offsite locations as opposed to on Broadway. These alleged shortcomings in Garfinkle's testimony are also proper subjects of cross-examination that go to the weight and not the admissibility of the testimony. Smith v. Ford Motor Co., 215 F.3d 713, 718 (7th Cir. 2000) (stating "[t]he soundness of the factual underpinnings of the expert's analysis and the correctness of the expert's conclusions based on that analysis are factual matters to be determined by the trier of fact.").
Garfinkle reliably applied his methodology and conclusion to the facts of the case. At his deposition, Garfinkle provided an example illustrating the one third formula as applied to the facts of this case. Garfinkle Dep. at 11. If the author of LNC2 received a royalty of 10% of box office receipts, the underlying authors (Donovan and Quade), would receive 3a% of box office receipts as underlying rights payments, which they would share according to their own agreement or if no agreement, share equally under copyright law as joint owners. Id.
In his report, Garfinkle opined that the underlying rights payment in this case would be between "one and three percent of 'gross weekly box receipts,' if there is no royalty rate paid, plus one and two percent of net profit." Doc. 258, Exh. A at 2. Defendants object to Garfinkle's reasonable underlying rights opinion in his report on the grounds that it "has a completely different basis" than his testimony that the standard theater industry underlying rights royalty rate is one third of the author's payment. Garfinkle's report and testimony are sufficiently consistent regarding the standard underlying rights royalty rate. At his deposition, Garfinkle clarified that his report's reference to one to three percent of gross weekly box office receipts as a reasonable underlying rights rate was based on what the author usually gets paid by the producer. Garfinkle Dep. at 16-17. Garfinkle explained that the author's share of a production is typically six percent of the gross weekly box office receipts but can be as high as eight, nine or even ten percent. Id. Garfinkle added that the author "can always negotiate a little bit one way or the other off of that, depending on the strength of the underlying material." Id. at 17. Therefore, if six percent of gross weekly box office receipts is paid to the author, a third of six percent results in two percent of gross weekly box office receipts being paid to the underlying rights owner. One third of nine percent of gross weekly box receipts to the author results in three percent of gross weekly box receipts being paid to the underlying rights owner. Garfinkle's testimony of an underlying royalty rate of a third of the author's payment is the same formula as his report's statement that a reasonable underlying rights royalty would be between one and three percent of gross weekly box receipts.
Defendants next contend that Garfinkle's testimony of a theater industry standard underlying rights royalty rate is inadmissible because his testimony did not include a reference to the "net profits" term in his report and did not establish whether the "net profits" term in his report is applicable in this case. Donovan asserts that Garfinkle testified that the "net profits" portion of the standard formula applies when there are investors involved. Garfinkle Dep. at 17-18. Defendants are correct that no explanation exists for why Garfinkle included the "net profits" term in his report where this case does not involve investors. While Garfinkle and Donovan's counsel might have done a better job of providing an explanation for the purpose of including the "net profits" term in a non-investor case, that is not the test for admissibility. Again, Defendants' criticism of this portion of the expert report does not mandate exclusion of Garfinkle's testimony because it does not completely undermine the reliability of his testimony. This perceived weakness should have been addressed through cross-examination or presentation of contrary evidence. Freeland v. Enodis Corp., 540 F.3d 721, 738 (7th Cir. 2008) (noting that inconsistencies between defendant's expert's report and his deposition testimony was an issue of credibility).
Defendants argue that Garfinkle did not reliably apply the standard royalty rate to this case because he did not clarify what the phrase "if there is no royalty paid" in his report refers to. The Court is not persuaded that this shortcoming renders Garfinkle's opinion unreliable and inadmissible. Defendants have not described how the meaning of this phrase might affect the accuracy or reliability of Garfinkle's expert opinion. It is reasonable to assume that the phrase "if there is no royalty paid" likely means if the producer has not agreed to pay the underlying rights owner's royalties directly, then the reasonable underlying rights payment from the derivative author to the underlying author is between one and three percent of gross weekly box receipts. To the extent Defendants believed the phrase affected Garfinkle's determination, Defendants were free to explore the issue on cross-examination.
Defendants also assert that Garfinkle's opinion is unreliable because he did not make a specific finding regarding the strength of LNC. Garfinkle testified that the strength of the original work can affect the royalty rate the derivative author can negotiate with the producer, which in turn would affect the total amount of money the underlying rights owner receives. Garfinkle did not testify that the strength of the original work affects the one third percentage figure the original author receives as an underlying rights payment. In this case, Donovan received ten percent of the net adjusted gross box office receipts as a royalty for Entertainment Events' professional presentations of Donovan's Sequels, which is at the top of the scale identified by Garfinkle and accounts for the success of LNC. Defs' Exh. 29 § 5(a); Defs' Exh. 30 § 5(a); Tr. 189, 329.
1. Donovan is a resident of the State of California. Quade is a resident of the State of Illinois. QDE is an Illinois corporation jointly and equally owned by Quade and Donovan. Doc. 227, Exh. A, ¶¶ 1-3.
2. Donovan and Quade work in theater for a living. Donovan is a playwright, a producer, and an actress. Tr. 167. Quade is a playwright, a producer, and a director. Tr. 598.
3. In 1993, Donovan and Quade co-authored LNC, an audience-interactive comedic stage performance featuring a Roman Catholic nun named "Sister." Tr. 601-06; Doc. 227, Exh. A, ¶ 6. LNC brings audience members back to their memories of growing up Catholic and attending Catholic schools. Tr. 599.
4. LNC opened in Chicago, Illinois on May 29, 1993 at the Live Bait Theater. Tr. 606. The role of "Sister" in LNC was first played by Donovan. Doc. 227, Exh. A, ¶ 7. LNC was an immediate hit and received good reviews. Tr. 607. LNC has run continuously in Chicago since it opened. Tr. 632. Since 2000, LNC has run at the Royal George Theater in Chicago. Tr. 632.
5. Beginning in 1993 when they wrote LNC together, Donovan and Quade were business partners. Tr. 544-45.
6. On July 12, 1993, Donovan and Quade registered LNC as co-authors with the U.S. Copyright Office. Doc. 227, Exh. A, ¶ 4.
7. From 1993 to the formation of QDE in 2000, Donovan and Quade registered various copyrights in LNC as co-authors. Doc. 227, Exh. A, ¶ 5; Defs' Exhs. 23A-C, 23E-P.
8. On February 10, 1995, Donovan and Quade entered into a written agreement with Entertainment Events, a New York City production company, under which Entertainment Events was given the exclusive right to present LNC in all languages except French in certain venues outside of a fifty-mile radius of Chicago, Illinois in return for royalty payments to Donovan and
Quade. Defs' Exh. 25 at ¶ 2. The royalties were based on a percentage of the gross weekly box office receipts brought in by Entertainment Events' productions of LNC. Defs' Exh. 25 at ¶ 5.
9. Donovan and Quade were always paid equal royalties from Entertainment Events' productions of LNC. Tr. 612.
10. The parties understood at the time they signed the Entertainment Events Agreement in February 1995 that there might be a future play that featured the character "Sister" other than LNC. Tr. 254; Defs' Exh. 25, ¶ 10.1. Entertainment Events did not obtain any rights to any sequels to LNC in the original agreement with Donovan and Quade. Section 10.1 of the original agreement required Donovan and Quade to seek Entertainment Events' permission to produce any derivative plays of LNC in Entertainment Events' territory. Tr. 180; Defs' Exh. 25, ¶ 10.1.
11. In 1995, several individuals other than Donovan and Quade claimed they contributed to LNC and should share in the copyright. Tr. 171. Those individuals filed a lawsuit against Donovan and Quade. Tr. 171. Donovan testified that as a result of that lawsuit, Donovan and Quade's lawyer, Patsy Felch, recommended that Donovan and Quade prepare a written partnership agreement. Tr. 172, 261-63. Donovan testified that Attorney Felch drafted Defendants' Exhibit 24 ("the written partnership agreement") but made it look like Quade had written it. Tr. 263-64. Donovan stated that she and Quade intended to backdate the written partnership agreement and use it as a piece of evidence in the lawsuit. Tr. 264. Donovan disputes ever signing the written partnership agreement. Tr. 264. Donovan explained that the lawsuit settled, and the written partnership agreement was not shown to the other side or the court or thereafter used for any reason at any time. Tr. 173, 264.
12. Quade testified that the written partnership agreement was not created for purposes of litigation. Tr. 762. Quade stated that in 1995, when Attorney Felch heard that Quade was working on drafting the sequel More Late Nite Catechism, Felch recommended that Donovan and Quade enter into a written partnership agreement. Tr. 763. Quade testified that Attorney Felch drafted the written partnership agreement. Tr. 764. Quade testified that the written partnership agreement accurately reflects the business relationship she and Donovan had since 1993. Tr. 767.
13. The written partnership agreement states that Donovan and Quade have created LNC, a play called Room for Advancement, and a script for the television series Star Trek together as writing partners. Defs' Exh. 24. The partnership agreement recognizes that Donovan and Quade "may also, in the future, create other plays or scripts together, or revise the works we have already created." Defs' Exh. 24. The partnership agreement provides that Donovan and Quade will "share equally in the ownership of these works, and any characters created in these works"; will "have joint control over their use"; and "will share equally in any benefits or expenses related to the use or licensing of these works or the characters we have created." Defs' Exh. 24.
14. The written partnership agreement also states that it "does not pertain to any income that Vicki Quade or Maripat Donovan earn outside of our collaborative writing, or to any work that each of us does individually." Defs' Exh. 24.
15. In 1995, Donovan and Quade co-authored a sequel to LNC called More Late Nite Catechism. Tr. 617, 621.
16. Beginning in 1996 and continuing through 2000, Donovan and Quade filed business partnership income tax returns. Pl's Exh. 34; Tr. 477-78.
17. From 1995 through 1999, Entertainment Events produced LNC in cities such as Boston, New York, Philadelphia, Toronto, Seattle, Portland, and New Orleans. Donovan always opened the productions by playing the "Sister" character on stage. Tr. 272, 622. In addition to receiving her royalties as a playwright, Donovan was paid for being the actress in the productions in which she acted. Tr. 272-73, 625.
18. In 1999, Timothy J. Flaherty ("Flaherty") took over control of Entertainment Events. Tr. 623.
19. In 2000, Donovan's and Quade's tax accountant recommended that they establish a Subchapter S corporation to operate their ongoing business venture to minimize taxes and shield them from liabilities. Tr. 174, 433. ...