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The Smart Marketing Group, Inc. v. Publications International, Ltd.

United States District Court, N.D. Illinois, Eastern Division

February 18, 2014

THE SMART MARKETING GROUP, INC. Plaintiff,
v.
PUBLICATIONS INTERNATIONAL, LTD., Defendant.

OPINION AND ORDER

SARA L. ELLIS, District Judge.

Plaintiff The Smart Marketing Group, Inc. ("SMG") filed suit against Publications International, Ltd. ("PIL"). The case proceeded to trial on SMG's breach of contract claim. The jury returned a verdict for SMG, awarding it $5, 612, 500.00 in damages. PIL appealed the damages award only, which the Seventh Circuit vacated and remanded to this Court for a new trial limited to damages only. Smart Mktg. Grp. Inc. v. Publ'ns Int'l, Ltd., 624 F.3d 824 (7th Cir. 2010). PIL now seeks to exclude the testimony of David Nolte, who SMG designated as its damages expert after expert discovery was reopened on remand. For the following reasons, PIL's motion in limine [344] is denied.

BACKGROUND

David Nolte is a certified public accountant and the founder of Fulcrum Financial Inquiry LLP, a financial consulting firm. Nolte has been retained as a damages expert and been deposed with regard to his damages opinions over 500 times. He has testified in approximately 200 trial or arbitration proceedings with respect to calculating lost profits or other types of economic damages.

SMG has proffered Nolte as its expert on the amount of lost profits it suffered as a result of PIL's breach of the parties' October 2003 contract. Nolte has opined that SMG suffered $4.7 million in lost profits. To reach this number, Nolte relied on (1) the 558 dealer contracts that SMG sold from March 5, 2003 through November 18, 2003; (2) the pro forma sales projections that SMG presented to PIL during their negotiations of the October 2003 contract (the "Management Projections"); (3) a 75% contract renewal rate based on the testimony of Walter Dickinson; and (4) an annual default rate of 2.2% derived from annual financial reports of Autobytel, Inc., a company that sells marketing services to automobile dealers.

In considering the historical figures, Nolte analyzed the dealer contracts SMG sold prior to November 18, 2003, when the October 2003 contract was terminated. He determined their average length, fees, and the rate of sales per month. Although he included the entire period over which SMG sold Leads & Listings contracts to determine the average rate sold per month for those contracts, in calculating the average rate of Approved contracts sold per month, Nolte limited his consideration to the period from March 31, 2003 to August 4, 2003, excluding the sale of three contracts in August and September 2003 that he termed "outlying." Nolte Rep. at 4.

The Management Projections that Nolte used estimated that SMG would sell 130 to 135 contracts monthly, with 30 to 35 of them being Approved contracts and 100 being Leads & Listings contracts. According to Nolte's report, these Management Projections were presented by SMG to PIL and then incorporated by PIL into its contract proposals to SMG. To test the reasonableness of the Management Projections, Nolte used the historical figures and Autobytel's experience as comparisons. He noted that at the times when the Approved contracts were sold, the rate of sale he calculated (29.5 new contracts per month) approached the Management Projections (32.5 new contracts per month). He found similar results for the Leads & Listings program, as the historical rate of sale he calculated (95.1 new contracts per month) approached the Management Projections (100 new contracts per month). Nolte also found Autobytel's revenue growth to ratify the Management Projections.

To arrive at his final number, Nolte estimated that SMG would have earned 32% in commissions for every dollar of PIL sales, for a total of $9.9 million in gross revenue. He then calculated SMG's profit rate to be 30.7% of commissions, based largely on Autobytel's financial statements. From this, Nolte estimated SMG's variable costs to be $4.9 million and also deducted the $300, 000 that PIL already paid SMG, resulting in his $4.7 million estimate of lost profits.

LEGAL STANDARD

The admissibility of expert opinion testimony is governed by Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993). See Bielskis v. Louisville Ladder, Inc., 663 F.3d 887, 893 (7th Cir. 2011). Rule 702 provides that a witness qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of opinion or otherwise provided that "(a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (b) the testimony is based on sufficient facts or data; (c) the testimony is the product of reliable principles and methods; and (d) the expert has reliably applied the principles and methods to the facts of the case." Fed.R.Evid. 702. To admit expert testimony under this rule, the Court must determine that (1) the witness is qualified, (2) the expert's methodology is reliable, and (3) the testimony will assist the trier of fact to understand the evidence or to determine a fact in issue. Myers v. Ill. Cent. R.R. Co., 629 F.3d 639, 644 (7th Cir. 2010). The Rule 702 inquiry "is a flexible one, " however. Daubert, 509 U.S. at 594. "Determinations on admissibility should not supplant the adversarial process; shaky' expert testimony may be admissible, assailable by its opponents through cross-examination." Gayton v. McCoy, 593 F.3d 610, 616 (7th Cir. 2010). The proponent of the testimony bears the burden of proving that the proffered testimony meets these requirements, and the Seventh Circuit grants the district court "wide latitude in performing its gate-keeping function." Bielskis, 663 F.3d at 894.

ANALYSIS

I. Nolte's Qualifications

PIL makes a cursory argument that Nolte is not qualified to offer an opinion as to lost profits. It cites to the fact that Nolte did not consult any texts on lost profits in forming his opinion and that at his deposition he was unfamiliar with two texts addressing lost profits and could not name any approaches to estimating lost profits. But Nolte referred to at least one damages-related publication in preparing his report, see Nolte Rep. at 1 (listing Dunn on Damages Issue 2 (Spring 2011)), and he discussed various approaches to estimating lost profits during his deposition, see Nolte Dep. 149:11-155:10. PIL also cites to the fact that Nolte's opinion has been excluded from evidence in three federal cases. This alone does not automatically render him unqualified, particularly where SMG can point to at least as many instances of his testimony being accepted by a federal court. Nolte's education and experience demonstrate that he is qualified ...


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