Comparables, & Causation
Victory Records, Inc. v. Virgin Records America, Inc., 2011 WL 382743 (N.D. Ill.)(Feb. 3, 2011)
The plaintiff sought millions of dollars (and $25 million in punitive damages) for the defendant’s alleged interference with its multi-album record- ing, publishing, and merchandising contract with the rock band Hawthorne Heights. Prior to trial, the defendant challenged the plaintiff’s damages expert, a music industry accountant, under the
daubert standard.
In particular, the expert proposed to testify regarding the profits that the plaintiff allegedly lost on the band’s second and third albums (which were released), and the band’s fourth
Victory Records, Inc. V. Virgin Records America, Inc. unreleased album. To calculate lost profits, the
expert used the “before and after” methodology, comparing what the plaintiff’s sales would have been absent the alleged interference, as well as the “yardstick” analysis, which looks to profits produced by industry comparables. Under both methods, the expert’s assumptions must rest on “adequate bases” and “cannot be the product of mere speculation,” the federal district court observed.
Expert relied on internal projections. Under
his “before and after” approach, the expert began with the numbers of the second album that the plaintiff shipped to stores, added the number of downloaded tracks (for a total of approximately 1.09 million units), and then applied the rate of return that the first album earned (8.4%). The 1.09 million sales figure reflected the low end of the expert’s sales projections for the second album; he also calculated a median and high end based on sales by another, comparable, rock band (Paramore). To determine projected sales for the third and fourth albums, the expert reduced the second album’s projected sales by 25% and 35%, respectively.
‘While [the expert’s] methodology may be opaque in certain respects,” the court said, “one aspect is crystal clear: the starting point for [his] lost profits analysis . . . is [the expert’s] assumption that . . . [the plaintiff’s] internal sales projections were correct.” When a party’s inter- nal projections rest on its “say-so” rather than statistical analysis, they are unreliable under
daubert, the court held, citing cases that have
excluded an expert when he did not indepen- dently verify the data and assumptions under- lying the client’s financial projections. “This is particularly so where, as here, the proposed expert offered no basis in the two-page narrative portion of his expert report or at his deposition for concluding that [the plaintiff’s] projections provide an acceptable foundation.” Although a lay witness might present the same internal pro- jections under Rule 701 of the Federal Rules of Evidence, such projections may not be delivered by a witness with the “gloss of expertise” under Rule 702, the court held.
Further, the expert’s opinion suffered because his yardstick methodology rested on a single com- parable—the rock band Paramore. The expert’s report did not even attempt to establish that a sample size of one was an appropriate yard- stick among experts in his field. “Exacerbating matters,” the court said, the expert selected the single band based not on his experience but on the plaintiff’s recommendation. Even though the expert asked the plaintiff for “as much detail as possible” regarding its recommendation, the plain- tiff’s brief email response (“same demographics, fans, started at the same time; Paramore is THE band to compare with”) provided a “rather paltry foundation,” the court found, insufficient to meet the reliability requirements of Rule 702.
Ignorance is no excuse. Finally, the expert
failed to consider alternative explanations for the second album’s drop in sales. This decline was “so substantial,” his report said, that it could not be explained by general marketing or industry trends, but “only” by the defendant’s actions.
The evidence showed, however, that the plain- tiff so wanted the second album to eclipse sales of another band that it issued a so-called “Manifesto” characterizing the competition as a battle between rock and hip-hop. It also emailed its “street teams” to hide copies of the competi- tor’s CDs in music stores. The Manifesto fell flat among potential consumers, who perceived it as racist. The street tactics email led to substantial negative controversy for the rock band—to the extent that the band sued the plaintiff for its “out- rageous” conduct in an effort to terminate their relationship.
The expert was unaware of these incidents when preparing his report—but the court did not excuse him for failing to evaluate whether they might have caused the second album to underperform, in addition to or instead of the defendant’s alleged actions. “Given this significant gap in [the expert’s] knowledge and analysis, he cannot testify with the reliability demanded by Rule 702,” the court held, and excluded the expert’s evidence in its entirety.
BVR’s Economic Outlook for the Month
Consensus Economics, Inc., publisher of Consensus Forecasts - USA, forecasts real GDP to increase at a seasonally adjusted annual rate of 3.3% and 3.4% in the first and second quarter of 2011, respectively. Every month, Consensus Economics surveys a panel of 28 prominent U.S. economic and financial forecast- ers (the “forecasters”) for their predictions on a range of variables including future growth, inflation, current account and budget balances, and interest rates. The forecasters believe GDP will grow 3.1% in 2011 and 3.3% in 2012.
They forecast that personal consumption will increase at a rate of 2.7% and 3.0% in the first and second quarter of 2011, respectively. They expect personal consumption to increase 3.1% in 2011 and 2.9% in 2012.
The forecasters expect industrial production to increase at a rate of 4.8% in both the first and second quarter of 2011. They forecast that industrial production will increase 4.7% in 2011 and 4.2% in 2012.
Historical Economic Data 2004-2010 and Forecasts 2011-2019
HISToRICaL DaTa CoNSENSUS FoRECaSTS**
2016 -2019 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Real GDP* 3 .6 3 .1 2 .7 1 .9 0 .0 -2 .6 2 .8 3 .1 3 .3 3 .4 3 .1 2 .9 2 .6 Industrial Production* 2 .3 3 .2 2 .2 2 .7 -3 .3 -9 .3 5 .8 4 .7 4 .2 3 .6 3 .4 3 .1 2 .8 Personal Consumption* 3 .5 3 .4 2 .9 2 .4 -0 .3 -1 .2 1 .8 3 .1 2 .9 2 .7 2 .8 2 .7 2 .5 Real Business Investment* 6 .0 6 .7 7 .9 6 .7 0 .3 -17 .1 5 .6 9 .0 9 .1 7 .2 6 .1 5 .2 4 .2 Nominal Pre-Tax Profits* 24 .0 16 .8 10 .5 -6 .1 -16 .4 -0 .4 29 .4 6 .9 6 .1 6 .7 6 .4 5 .4 4 .9 Government Spending* 1 .4 0 .3 1 .4 1 .3 2 .8 1 .6 1 .0 0 .3 -0 .1 NA NA NA NA Consumer Prices* 2 .7 3 .4 3 .2 2 .8 3 .8 -0 .4 1 .6 2 .3 2 .0 2 .1 2 .1 2 .1 2 .3 Unemployment Rate 5 .6 5 .1 4 .6 4 .6 5 .8 9 .3 9 .6 8 .9 8 .3 NA NA NA NA Housing Starts (millions) 1 .956 2 .068 1 .801 1 .355 0 .906 0 .554 0 .587 0 .660 0 .900 NA NA NA NA
Source of historical data: U.S. Department of Commerce, U.S. Department of Labor, U.S. Census Bureau and The Federal Reserve Board. Source of forecasts: Consensus Forecasts - USA, March 14, 2011.
Notes:
*Numbers are based on percent change from preceding period. Consumer Prices are the percent change between annual averages. **Forecast numbers are based on percent change from preceding period (excludes Unemployement Rate and Housing Starts). Consumer Price Index information is the percent change between annual averages.
Real Business Investment is also known as Nonresidential Fixed Investment. Unemployement Rate is the annual average rate.
Personal Consumption includes spending on services, durable, and nondurable goods. Government Spending includes federal, state, and local government spending.
Every month, Consensus Economics surveys a panel of 28 prominent United States economic and financial forecasters for their predictions on a range of variables including future growth, inflation, current account and budget balances, and interest rates.
The forecasters believe the 3-Month Treasury Bill rate will be 0.2% at the end of the first and second quarter of 2011, and will increase to 0.3% at the end of 2011 and 1.7% at the end of 2012. They forecast that the 10-Year Treasury Bond yield will be 3.5% and 3.7% at the end of the first and second quarter of 2011, respectively. They believe the 10-Year Treasury Bond yield will rise to 4.0% at the end of 2011 and 4.5% at the end of 2012. They also believe consumer prices will rise at a rate of 3.8% and 2.2% in the first and second quarter, respec- tively. They expect consumer prices to increase 2.3% in 2011 and 2.0% in 2012. They expect producer prices to increase at a rate of 6.6% in the first quarter and 2.6% in the second. The forecasters project producer prices will rise 3.8% in 2011 and 1.7% in 2012.
The forecasters believe unemployment will average 9.1% in the first quarter of 2011 and 9.0% in the second. They believe unemployment will average 8.9% for all of 2011 and 8.3% for 2012.