NORMAN K. MOON, District Judge.
Presently before me is Plaintiff's
The facts in this case are set forth at some length in my memorandum opinion and order denying Defendants' motions for summary judgment,
Plaintiff's instant motion was filed under seal pursuant to a stipulated protective order (docket no. 25) and an order (docket no. 44) granting a motion seeking leave to file the instant motion under seal. Given Plaintiff's concerns for complying with the terms of the protective order, I will discuss only in general, non-confidential terms Defendants' business and financial information that has been disclosed in the briefing of the instant motions.
Defendants designated Andrea Burke, The Mountain's controller, as their corporate designee under Rule 30(b)(6) of the Federal Rules of Civil Procedure to testify regarding financial topics, including the revenues and profits Defendants earned from their sales of the allegedly infringing t-shirts. According to Ms. Burke, The Mountain tracks revenues by large product categories, e.g., long-sleeved t-shirts as
The Mountain imposed this same approach in calculating profits for the allegedly infringing t-shirts. To determined the net profits from those revenues, The Mountain grouped a variety of specified and unspecified direct and indirect costs together, and then applied those costs to the allegedly infringing t-shirts. These costs included ink, general payroll, specific payroll for three employees involved in the production of Mountain Life t-shirts, "other payroll," "shipping/packing/picking payroll," rent, utilities, administrative expenses, shipping supplies, and "additional costs of goods sold not captured above."
The Mountain did not determine whether any of these costs were actually related to the production of the allegedly infringing t-shirts, or actually increased as a result of their production. Instead, The Mountain simply allocated a percentage of "all of the costs that are associated with producing a Mountain Life shirt" specifically to the allegedly infringing t-shirts, without regard to whether those expenses were of actual assistance in their production, distribution, or sale. Ms. Burke testified that, despite applying these expenses to the allegedly infringing t-shirts, there is no direct evidence that they constitute direct costs or that any of the indirect costs allocated to the allegedly infringing t-shirts were actually incurred as a result of the production and sale of those products.
Defendants have designated Richard Maloney, CPA, ABV, as an expert witness. Mr. Maloney produced an expert report dated May 30, 2012, setting forth his opinions regarding the gross profits and net profits generated by Defendants from their sale of the allegedly infringing t-shirts. Mr. Maloney rejected Ms. Burke's approach, in part, instead calculating The Mountain's net profits "per category of shirt," e.g., "Wal-Mart," "Mountain Life," and "Other Mountain," that are even broader than Ms. Burke's categories. The allegedly infringing t-shirts are a subset of the "Mountain Life" category of t-shirts, but, as Mr. Maloney reported, "The Mountain does not calculate expenses for the subset."
Neither did Mr. Maloney. Instead, he allocated to each category of t-shirt The Mountain's indirect cost of goods sold and its administrative expenses as a percentage of the total, regardless of whether those costs and expenses were incurred as a result of the production, distribution, or sale of the allegedly infringing t-shirts. More specifically, Mr. Maloney first determined the "direct costs of goods sold" for each category of t-shirts sold by Defendants, including the "Mountain Life" category, which includes the allegedly infringing t-shirts. Presumably, these "direct costs" include, for example, the cost of blank white t-shirts, dyes, and inks. However, Mr. Maloney made no independent determination regarding what costs were included within "direct costs of goods sold." Rather, Mr. Maloney relied solely upon a schedule provided by Ms. Burke, which he attached as an exhibit to his report, but his report does not analyze or explain what costs have been included in his "direct costs of goods sold" regarding the "Mountain Life" category of t-shirts. The exhibit indicates that Defendants were
Thus, relying on the summary information provided by The Mountain, Mr. Maloney's calculation of The Mountain's gross profits from the sale of t-shirts with the "Mountain Life" category is based on his determination of revenues earned from such sales less the amount of direct costs of goods sold and his allocation of "indirect costs." Recognizing that it was not possible to allocate Defendants' overhead and general and administrative expenses to each category of t-shirts sold by Defendants, Mr. Maloney determined which of those expenses were not applicable to the "Wal-Mart" category of t-shirts on a percentage of sales basis. Based on the information provided by Mountain (in the exhibit previously mentioned), he separately calculated the sales commissions paid by The Mountain regarding the "Mountain Life" category of t-shirts (although sales commissions are typically classified as a general and administrative expense). But Defendants only produced information concerning total commissions paid regarding the "Mountain Life" category as a whole, and have not shown that any commissions were paid regarding the allegedly infringing t-shirts, which form a subset, not the whole, of the "Mountain Life" category.
To arrive at his determination of Defendants' net profits, Mr. Maloney subtracted (from his gross profit calculations) his calculations regarding the overhead, general, and administrative expenses relating to the "Mountain Life" line. He did not separately calculate Defendants' revenues, gross profits, or net profits for the allegedly infringing t-shirts. Instead, he determined The Mountain's revenues, gross profits, and net profits for all of 2009 (rather than just the relevant period from May 31 to December 31, 2009), 2010, and 2011 from its sales of all "Mountain Life" t-shirts. He then allocated such numbers to the allegedly infringing t-shirts on a proportional basis. Additionally, he does not address any sales of the allegedly infringing t-shirts by Mountain Retail and the gross and net profits earned by Defendants from Mountain Retail's sales of the allegedly infringing t-shirts.
Mr. Maloney testified that he has never previously served as an expert in a copyright infringement or intellectual property infringement case, and that, in determining Defendants' profits from the production and sale of the allegedly infringing t-shirts, he did not perform any research to determine how such profits should be determined in a copyright infringement case. He further stated the following:
As previously noted, Mr. Maloney later generated a supplemental expert report, which Defendants served on Plaintiff on November 6, 2012. In his supplemental report, he continues to adopt the same positions, methodologies, and allocations that he posed in his initial expert report and to which he attested in deposition. His calculations of the revenues and the net profits earned by Defendants from their sale of allegedly infringing t-shirts in 2009, 2010, and 2011 remains unchanged from his initial expert report. For 2012, he uses the revenue figure generated by
Mr. Maloney's supplemental report clarifies that his report covers only sales of allegedly infringing t-shirts by The Mountain, and that representatives of The Mountain will separately address the profitability of such sales by Mountain Retail.
Plaintiff contends that, aside from irregular and discontinuous summary documents, which purportedly support the calculations performed by Ms. Burke, Defendants have not provided any evidence to support their calculations of direct or indirect costs. According to Plaintiff, underlying information and data to support these reports, such as invoices, was not produced, and Defendants have not produced any information documenting that they have incurred the direct costs of goods sold, the indirect costs, or the overhead expenses and commissions that Mr. Maloney allocated to the allegedly infringing t-shirts.
According to Ms. Burke, all t-shirt orders, together with the charges and costs underlying those orders, are reflected by invoices. The Mountain keeps and maintains copies of these invoices, which show the orders and price charged per shirt, royalty data, the purchaser of the shirt, discounts, shipping costs, additional charges for printing, and other data that would enable a more-accurate calculation of Defendants' direct and indirect costs incurred by the production, distribution, and sale of the allegedly infringing t-shirts. Ms. Burke acknowledged that, to determine the accuracy of the financial reports upon which she and Mr. Maloney relied, she would need to examine the "detail" within the invoices.
Plaintiff states that it asked Defendants, in discovery, to produce all documents reflecting the total number of t-shirts Defendants sold, all documents reflecting total revenues for those t-shirts, and all documents reflecting the profits from those t-shirts. Orders and price charged per shirt, royalty data, discounts, and shipping and printing costs, as reflected by Defendants' invoices, fall squarely within those requests. Yet, according to Plaintiff, Defendants have produced none of this information. Plaintiff adds that it asked Defendants to describe their methodology used in calculating profits, identifying each item of cost and expense deducted from the amount of revenues, but that, instead of responding to the interrogatory, Defendants pointed to the financial reports that allocate costs as a percentage of the business's expense, and not to documents showing actual costs incurred.
A copyright infringer "is liable for ... the copyright owner's actual damages and any additional profits of the infringer...." 17 U.S.C. § 504(a)(1). "In establishing the infringer's profits, the copyright owner is required to present proof only of the infringer's gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work." 17 U.S.C. § 504(b).
Section "504 creates an initial presumption that the infringer's `profits ... attributable to the infringement' are equal
"If the infringer wishes to establish that its operating expenses are deductible expenses, it has the `burden of proving that each item of general expense contributed to the production of the infringing items, and of further offering a fair and acceptable formula for allocating a given portion of overhead to the particular infringing items in issue.'" Thomas M. Gilbert Architects, P.C. v. Accent Builders and Developers, LLC, 377 Fed.Appx. 303, 310 (4th Cir.2010) (quoting In Design v. K-Mart Apparel Corp., 13 F.3d 559, 565-66 (2nd Cir.1994)); see also 3 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 14.03[B] (1993). A defendant cannot rely on general categories, such as "general and administrative costs," without also showing what specific costs are actually included in those categories and how those costs actually contributed to the infringing products. Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 772 F.2d 505, 516 (9th Cir.1985).
In sum, "a deduction for overhead is only permitted when `the infringer can demonstrate it was of actual assistance in the production, distribution, or sale of the infringing product.'" Alexander v. Chesapeake, Potomac & Tidewater Books, Inc., 60 F.Supp.2d 544, 550 (E.D.Va.1999) (quoting Kamar International, Inc. v. Russ Berrie & Co., 752 F.2d 1326, 1331 (9th Cir.1984)); see also Victor Stanley, Inc. v. Creative Pipe, Inc., Civil Action No. 8:06-cv-02662,
As previously reviewed, Defendants have failed to disclose information necessary to accurately calculate either direct or indirect costs related to the production and sale of the allegedly infringing t-shirts. Defendants have failed, for example, to produce any invoices showing sales of allegedly infringing t-shirts, any invoices showing commissions paid to sales representatives regarding allegedly infringing t-shirts, or any invoices showing the purchase of t-shirts or inks used to produce the allegedly infringing products.
In other words, without providing the jury — or, for that matter, Plaintiff — with reliable and accurate information that could be used to determine profits, Defendants would nonetheless ask the jury to speculate about the profits earned from the allegedly infringing t-shirts. Defendants have not met their burden of producing sufficient evidence of their direct costs, and to the extent the deficient evidence is based upon and asks for speculation, it must be excluded.
At trial, Defendants will be permitted to adduce, if possible, properly admissible evidence based on the limited documents Defendants have provided, but Mr. Maloney is excluded from testifying regarding such matters. As I have observed, Mr. Maloney relied solely upon information provided to him by Ms. Burke, and his report is devoid of any analysis concerning the determination of direct costs and the amounts thereof. It would be inappropriate to permit Mr. Maloney to opine that Defendants' direct costs are reasonable when he has made no such determination on his own, but has simply relied upon and re-published information provided to him in summary format by
Defendants have failed to adduce any information or data to support their assertions of commissions paid regarding the allegedly infringing t-shirts, or their alleged related overhead expenses. Having failed to provide this information in discovery, Defendants cannot claim at trial that they should be entitled to deduct unsupported claims for commissions and overhead expenses. Instead of undertaking the incremental cost analysis necessary to determine whether Defendants' claimed costs and expenses were actually increased by the production and sale of the allegedly infringing t-shirts, Defendants have simply applied an across-the-board average encompassing their entire business, and not just expenses that actually assisted in the production, distribution, and sale of the allegedly infringing t-shirts. Persuasive authority from within this circuit compels me to find that such evidence is insufficient to allow a jury to derive profits from this scheme.
In Victor Stanley, Inc., supra, 2011 WL 4596043, for example, the district court rejected the defendant's attempts to deduct operating expenses that included employee expenses (salaries, health insurance, workmen's compensation) and overhead (rent) because the defendant failed to show the extent to which its employees
Likewise, in Alexander, supra, 60 F.Supp.2d 544, the district court rejected the defendant's attempt to deduct overhead expenses where the defendant had failed to prove that those expenses were "of actual assistance in the production, distribution, or sale of the infringing product." Id. at 550 (citing Kamar, supra, 752 F.2d at 1332). Although the defendant presented evidence that overhead averaged $1.15 per book, the court held that, "before a defendant may deduct overhead, he has the burden of `proving that each item of general expense contributed to the production of the infringing items in issue.'" Id. (quoting In Design, supra, 13 F.3d at 565-66). The defendant could not deduct overhead where it had failed to present evidence that specifically attributed those expenses to the infringing products.
The same reasoning prevailed in Thomas M. Gilbert Architects, supra, 377 Fed. Appx. 303. There, "following GAAP," i.e., "generally accepted accounting principles," the defendant deducted the entirety of its operating expenses from its revenues of the two infringing products, including expenses that had "no relation to defendants' infringing acts." Id. at 310. The Fourth Circuit observed that "GAAP, however, is not the law here. There are likely many good reasons why the GAAP rules are as they are, but those reasons do not necessarily coincide with the reasons bearing on assessing damages for copyright violations." Id. The Fourth Circuit held that, "[b]ecause each item of deductible expense must contribute to the infringing products, at least some of defendants' operating expenses as calculated cannot be deducted from gross revenues," and the Court of Appeals agreed "with the district court that defendants simply failed to carry their burden of allocating that portion of their operating expenses attributable to the two units that were sold." Id. (emphasis added).
Here, too, The Mountain and Mountain Retail cannot carry their burden of showing that the "general and administrative expenses" they seek to deduct from revenues actually assisted in the production, distribution, or sale of the allegedly infringing t-shirts. Although Ms. Burke stated that it is "tough" for Defendants to determine net profits from revenues, this perceived difficulty does not lower the standard. See, e.g., JTH Tax, Inc. v. H & R Block Eastern Tax Servs., Inc., 245 F.Supp.2d 749, 752-53 (E.D.Va.2002) (that the defendant found it "impossible" to show that deductible expenses were attributable "solely" to infringing products did not relieve its burden of proof).
Mr. Maloney's approach for determining a purported average cost is not sufficient to carry the burden. See, e.g., Alexander, 60 F.Supp.2d at 550. The only expenses Defendants are entitled to deduct from revenues of the allegedly infringing t-shirts are those that they can show were actually increased by the production or sale of the t-shirts.
"If a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence." Fed.R.Civ.P. 37(c)(1). "Rule 37(c)(1) does not require a finding of bad faith or callous disregard of the discovery rules." Southern States Rack and Fixture, Inc. v. Sherwin-Williams Co., 318 F.3d 592, 596 (4th Cir.2003).
Here, the record reflects that Defendants failed to produce information responsive to Plaintiff's discovery requests, and which is necessary for an accurate calculation of profitability. Following Ms. Burke's deposition, Defendants had to have been aware that they were in possession of information, including invoices and sales commissions reports, that are relevant to and necessary for an accurate calculation of their profits from the sales of the allegedly infringing t-shirts. Apparently, Defendants chose not to produce the information, despite that fact that it was discoverable and within the scope of Plaintiff's discovery requests. Having failed to produce the underlying information and data in the discovery process, Defendants are now precluded from introducing additional heretofore undisclosed evidence concerning their profits.
As the non-disclosing party, Defendants carry the burden to show that their failure to provide the information requested in discovery was justified or harmless. Southern States, 318 F.3d at 596 (citing Wilson v. Bradlees of New England, Inc., 250 F.3d 10, 21 (1st Cir.2001)). But the preceding pages of this opinion show that Defendant cannot meet that burden. The failure to disclose evidence concerning profits has not been justified. That Defendants may not have been able to produce that information in a convenient manner does not relieve them of their responsibility to comply with the rules of discovery, and to produce the information necessary to support their own proof of profitability and for Plaintiff to perform its own calculation of recoverable damages. See, e.g., Wynn Oil Co. v. Am. Way Serv. Corp., 943 F.2d 595, 607 (6th Cir.1991) (plaintiff's efforts to ascertain defendant's profits were frustrated by defendant's insistence that its profits could not be readily determined; court held that "common sense" dictated that the burden of apportioning profits be placed on defendant).
Defendant's failure to disclose the requested information is not harmless, either. Plaintiff must simply accept the amounts of Defendants' claimed revenues, direct costs, indirect costs, and commissions without having been provided the information that Defendants' own financial designee, Ms. Burke, admitted is required to accurately determine Defendant's profitability. "`[R]ules of expert disclosure are designed to allow an opponent to examine an expert opinion for flaws and to develop counter-testimony through that party's own experts. Such was not possible here." Southern States, 318 F.3d at 598 (quoting district court opinion below).
Because Defendants' failure to disclose information necessary to perform a proper calculation of its profits is neither justified nor harmless, Defendants are prohibited from introducing additional, heretofore undisclosed evidence concerning profitability.
For the reasons and to the extent stated herein, Plaintiff's motion (docket no. 45) will be granted. An appropriate order accompanies this memorandum opinion.
In any event, I note that the protective order designated Defendants' business and financial information as "confidential," and in seeking leave to file the instant motion under seal, Plaintiff asserted that sealing its motion and accompanying memorandum was necessary to comply with the stipulations and the protective order and to protect Defendants' confidential business and financial information from unnecessary disclosure. Plaintiff's supplemental memorandum on its instant motion was likewise filed under seal.
However, Defendants' "Motion for Daubert Hearing Including Voir Dire of Defendants' Expert on Plaintiff Capital Concepts, Inc. d/b/a bCreative Inc.'s Motion to Exclude Defendants' Expert Report and Expert Testimony and Motion in Limine to Preclude Defendants from Adducing Evidence Regarding Profitability" (which, as I previously noted, see supra n. 2, is conjoined with the subject of the instant motion) and the correspondent briefing was not filed under seal. Additionally, I conducted a hearing on January 14, 2013, regarding, inter alia, these motions. As Defendants point out in the memorandum accompanying their motion, at that hearing, I "heard argument on bCreative's motion and the Mountain's opposition, including the methodology used by Mr. Maloney and the information provided by The Mountain to Mr. Maloney," and Defendants contend that, "[a]s... discussed at the hearing on the pending motion, Mr. Maloney, and to the extent she is providing calculations, Ms. Burke, properly used the methodology set forth by the Fourth Circuit (as well as other circuits) in calculating the Mountain's net profits attributable to the disputed shirts...."
Accordingly, the court found that the defendants had "not proven entitlement to any deduction with regard to overhead." Victor Stanley, Inc., 2011 WL 4596043, at *7.
Regarding the costs that Ms. Burke could not allocate, Mr. Maloney simply allocated a percentage of all costs incurred by Defendants to the allegedly infringing t-shirts. Defendants, however, are required to show that any expense they seek to deduct, including overhead, actually contributed to the production, distribution, or sales of the t-shirts. Alexander, 60 F.Supp.2d at 550. Allocating a percentage of these costs to every shirt, without making the requisite threshold inquiry, renders Mr. Maloney's opinions unreliable and unsupported. See, e.g., Star Broadcasting Inc. v. Reed Smith Ltd. Liability Partnership, Civil Action No. 1:08-cv-00616, 2009 WL 482833, at *8-10 (E.D.Va. Feb. 24, 2009). In sum, Mr. Maloney's opinion is simply an unsupported estimate of how certain of Defendants costs could be allocated to the allegedly infringing t-shirts.
