16-3413-cv (L)
Washington v. Kellwood Company
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED
BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A
COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held
at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New
York, on the 2nd day of November, two thousand seventeen.
PRESENT: JOHN M. WALKER, JR.,
REENA RAGGI,
PETER W. HALL,
Circuit Judges.
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DARYL K. WASHINGTON, SUNDAY PLAYERS,
INC.,
Plaintiffs-Appellants-Cross-Appellees,
v. Nos. 16-3413-cv
16-3664-cv
KELLWOOD COMPANY,
Defendant-Appellee-Cross-Appellant.
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APPEARING FOR APPELLANT: DOUGLAS CAWLEY, McKool Smith, P.C.,
Dallas, Texas (Lauren Fornarotto, McKool
Smith, P.C., New York, New York; Meredith
Elkins, McKool Smith, P.C., Dallas, Texas;
Aubrey “Nick” Pittman, The Pittman Law Firm,
P.C., Dallas, Texas, on the brief).
APPEARING FOR APPELLEE: JAMES M. HIRSCHHORN (Mark S. Olinsky,
Kenneth R. Schachter, Katherine M. Lieb, on
the brief), Sills Cummis & Gross, P.C., New
York, New York.
1
Appeal from a judgment of the United States District Court for the Southern
District of New York (Sarah Netburn, Magistrate Judge).*
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment entered on September 30, 2016, is AFFIRMED.
Plaintiffs Daryl K. Washington and Sunday Players, Inc. (collectively, “SP”) sued
defendant Kellwood Company (“Kellwood”) for breach of a November 2003 license
agreement (the “License Agreement”), pursuant to which Kellwood became the exclusive
manufacturer, licensee, and promoter of SP’s athletic compression wear products. SP
here appeals from the entry of a $1.00 judgment notwithstanding a jury award of $4.35
million and from the denial of a new trial on damages.1 Kellwood cross-appeals from
the liability judgment. We assume the parties’ familiarity with the facts and record of
prior proceedings, which we reference only as necessary to explain our decision to
affirm.
1. Kellwood’s Liability Challenge
In challenging the liability judgment, Kellwood faults the district court’s
(1) evidentiary rulings, and (2) determination that Kellwood was not absolved of its
*
The parties consented to proceed before a magistrate judge for all purposes pursuant to
28 U.S.C. § 636(c)(1).
1
The district court initially granted SP a new trial on lost-business-value damages, but
granted judgment notwithstanding the verdict when SP failed to proffer evidence that
would establish such damages.
2
marketing obligations to SP by the License Agreement provision tying marketing outlays
to total sales of SP products.2
a. Evidentiary Rulings
Kellwood contends that the district court erred in (1) allowing a former SP
marketing employee to give lay opinion testimony on the reasonableness of Kellwood’s
marketing efforts, and (2) excluding evidence of the profitability of Kellwood’s
performance-apparel division. We review both rulings for abuse of discretion, see
United States v. Natal, 849 F.3d 530, 534 (2d Cir. 2017); United States ex rel. Feldman v.
Van Gorp, 697 F.3d 78, 93 (2d Cir. 2012), which is not evident here.
The brief lay opinion testimony of a former SP employee was “rationally based on
[his] perception” from the time of his SP employment. See Fed. R. Evid. 701(a). In
any event, such testimony was harmless given concessions from Kellwood’s witnesses
that no marketing efforts were conducted. See Bank of China, N.Y. Branch v. NBM
LLC, 359 F.3d 171, 183 (2d Cir. 2004) (holding that lay witness testimony arguably
based on specialized knowledge reviewed only for harmless error). No different
conclusion is warranted because SP’s counsel in summation referred to the witness as an
“expert” in marketing because the district court promptly gave a curative instruction,
which the jury is presumed to have followed. See, e.g., United States v. Agrawal, 726
F.3d 235, 258 (2d Cir. 2013).
2
We need not address Kellwood’s argument that the district court abused its discretion
in excluding an Under Armour commercial, as the evidence was offered only as to
damages, an issue on which we affirm the district court’s nominal judgment in
Kellwood’s favor.
3
As for the exclusion of evidence that Kellwood’s performance-apparel division
was profitable, we identify no abuse of discretion because that evidence was proffered
only to rebut the argument that Kellwood had attempted to purchase SP, which was of
tangential relevance to the reasonableness of Kellwood’s marketing efforts.
b. Denial of Judgment as a Matter of Law
Kellwood argues that, as a matter of law, it had no marketing obligations to SP
because the License Agreement limited its marketing expenditures based on SP’s net
sales, which were minimal. We review a district court’s denial of a Fed. R. Civ. P.
50(b) motion de novo, applying the “same standard as the district court,” and granting
judgment only if the evidence, “viewed in the light most favorable to the nonmoving
party,” demonstrates that judgment for the movant was the only conclusion that
reasonable persons could have reached. Morse v. Fusto, 804 F.3d 538, 546 (2d Cir.
2015). Like the district court, we conclude that Kellwood was not entitled to judgment
on that basis.
Under New York law, which the License Agreement identifies as controlling,
exclusive license agreements generally require, whether expressly or impliedly, the
licensee to use reasonable efforts to market the licensor’s products. See, e.g.,
Contemporary Mission, Inc. v. Famous Music Corp., 557 F.2d 918, 923–24 (2d Cir.
1977); Zilg v. Prentice-Hall, Inc., 717 F.2d 671, 680–82 (2d Cir. 1983). The License
Agreement here is consistent with this requirement. See App’x 2992 (“Licensee shall
promote the Licensed Products and exploit this Agreement granted herein as provided in
Schedule A, Item 10.”). No different conclusion is warranted by Schedule A, Item 10 of
4
the License Agreement, which states that Kellwood “shall expend an amount equal to
three percent (3%) of Net Sales of the License[d] Products towards marketing.” Id.
2999. That clause identifies the minimum marketing expenditures to which Kellwood
was obligated, and says nothing of the efforts it was required to employ in promoting
SP’s products. Indeed, this Circuit has squarely rejected the proposition that “technical
compliance” with such “spending and appointment requirements” satisfies the exclusive
licensee’s obligation to make “reasonable efforts” to promote the licensor’s products.
Contemporary Mission, Inc. v. Famous Music Corp., 557 F.2d at 923. As for the
sufficiency of the liability evidence, we are satisfied upon our independent review of the
record that the jury had a legally sufficient basis to conclude that Kellwood failed
adequately to market SP’s products.
Accordingly, we identify no error in the denial of Kellwood’s motion for judgment
as a matter of law on liability.
2. SP’s Damages Challenges
In challenging the district court’s vacatur of the jury’s $4.35 million damages
award, SP disputes the exclusion at trial of methodologies employed by its damages
expert. SP also faults the district court’s denial of a new damages trial, and its award of
$1 nominal damages.
a. Exclusion of Damages Testimony
We review decisions to exclude an expert methodology only for abuse of
discretion, see In re Pfizer Inc. Sec. Litig., 819 F.3d 642, 658 (2d Cir. 2016), and identify
none here. The district court acted within its discretion in excluding the expert’s
5
“market forecast” methodology as speculative, as it was premised only on the
impressions of an MTV employee, and an MTV projection commissioned in anticipation
of a potential commercial for SP.3 The same conclusion obtains as to SP’s efforts to
introduce the projections and surveys themselves.
Nor did the district court abuse its discretion in precluding the expert from
testifying as to SP’s lost business value as of January 2007, as the contract was breached
in 2005, and New York law requires that the value of an income-producing asset be
calculated on the date of the breach. See Sharma v. Skaarup Ship Mgmt. Corp., 916
F.2d 820, 826 (2d Cir. 1990).
Finally, the district court did not abuse its discretion in precluding the expert from
testifying about SP’s expected profits through January 2010. That theory—which
presumed that (1) the contract would have been profitable, (2) Kellwood would not have
breached it, and (3) the parties would have renewed it upon its January 2007
expiration—was both speculative and belied by the contract itself, which gave Kellwood
the unilateral right to decide whether to renew.
b. Motion for Judgment Notwithstanding the Jury Verdict
SP argues that the district court erred in granting judgment notwithstanding the
jury’s damages verdict on (1) SP’s expectation of lost future profits, and (2) the lost value
of SP’s business at the time Kellwood broke off its exclusive manufacturing and
marketing relationship with SP. As already discussed, we review the district court’s
3
Magistrate Judge Dolinger identified this evidentiary concern and excluded the
witness’s testimony prior to the case being reassigned to Magistrate Judge Netburn.
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decision on such a motion de novo, granting judgment only if there was but one verdict
that the jury could reasonably have reached. See Morse v. Fusto, 804 F.3d at 546.
Like the district court, we conclude that Kellwood was entitled to judgment as a matter of
law on SP’s damages claims.
1. Lost Future Profits
Under New York law, a plaintiff deprived of his entire stake in a business by a
contractual breach may sue either for lost future profits or the lost value of his business
on the date of breach. See Schonfeld v. Hilliard, 218 F.3d 164, 172, 175–76 (2d Cir.
2000). To prove lost profits, a plaintiff must demonstrate “both the existence and
amount of such damages with reasonable certainty.” Id. at 172. Although the damages
“need not be proven with mathematical precision, they must be capable of measurement
based upon known reliable factors without undue speculation.” Id. (internal quotation
marks omitted). “[E]vidence of lost profits from a new business venture receives
greater scrutiny because there is no track record upon which to base an estimate.” Id.
A new venture whose profits are “purely hypothetical” and that would require “untested”
sales to “hypothetical” consumers does not support a damages award. Id. at 173
(internal quotation marks omitted).
As the district court correctly observed, SP failed to proffer evidence from which
lost profits could be established with reasonable certainty. The sole profits calculations
presented to the jury were those of its expert, who testified that, had Kellwood reasonably
marketed SP’s products, SP’s 2005–2007 revenues would have been 50% of those of the
compression wear market leader, Under Armour, in 2002–2004. Under Armour was not
7
a reasonable comparator. At the time in question, Under Armour was an established
business with annual sales between $49.5 million and $195 million. Indeed, by the end
of 2002, it controlled approximately 80% of the market. By contrast, during the
two-year comparison period, SP was a small start-up, producing a product similar to
brand-name companies, but with no record of notable sales. Throughout its existence,
SP sold less than $200,000 in merchandise to only a few small retailers and high school
and college athletic teams. The expert’s testimony that SP’s revenues were reasonably
certain to increase from a few hundred thousand dollars to approximately $80,000,000 in
two years4 was so unfounded that it failed to establish any legal basis for awarding
lost-profits damages.
In urging otherwise, SP argues that its profits were made certain by Kellwood’s
manufacturing resources and MTV’s expressed willingness to produce a television
commercial. The argument fails because Kellwood’s capacity to produce SP’s
compression wear speaks not at all to whether consumers would purchase its products
over those of competitors. Further, undisputed trial evidence showed that MTV offered
Kellwood a draft agreement to run an SP commercial, but only if Kellwood, inter alia,
(1) paid a deposit, (2) agreed to pay MTV a 5–8% royalty on SP’s future sales, and
(3) demonstrated that more than $500,000 of SP’s products could be sold. SP failed to
show that it could meet this required sales threshold. Thus, assumptions that, but for
Kellwood’s breach, a commercial would have aired and consumers would have
purchased millions of dollars in SP’s products were “purely hypothetical.” Id. at 172.
4
Under the License Agreement, SP was entitled to a 5% royalty on sales of its products.
8
2. Lost Business Value Damages
Where lost future profits cannot be obtained, the “most accurate and immediate
measure of damages” of a nascent business is its “market value . . . at the time of breach.”
Id. at 176. Such estimates are “inherently less speculative” than an estimation of future
profits, as they may be measured by proof of “what a buyer is willing to pay for the
chance” that the business will produce substantial income. Id. at 177 (emphasis in
original). In proving such a claim, a plaintiff must nonetheless establish the value lost
by the business with “reasonable certainty.” Id.
As the district court correctly observed, SP’s expert’s $532,000
lost-business-value calculation fails with the $3.783 million lost-profits calculation, as
both were premised on the same “yardstick” comparison to Under Armour’s revenues.
Nor could such damages be proved, as in Schonfeld, by reference to a “price at which the
[business] would change hands between a willing buyer and a willing seller.” Id. at 178
(internal quotation marks omitted). Although Washington himself testified that
Kellwood had offered to purchase SP, no evidence was proffered to suggest the price at
which the business might have changed hands at that time.
3. Nominal Damages
SP argues that it was entitled to present alternative damages evidence at a new
trial, rather than to have judgment entered in a nominal amount. This is particularly so,
it contends, because the jury’s liability verdict established the fact of Kellwood’s breach.
See, e.g., id. at 182 (“[P]ursuant to the wrongdoer rule, where . . . the existence of damage
is certain, and the only uncertainty is as to its amount, . . . the burden of uncertainty as to
9
the amount of damage is upon the wrongdoer.”) (internal quotation marks omitted); see
also Lexington Prods. Ltd. v. BD Commc’ns, Inc., 677 F.2d 251, 254 (2d Cir. 1982)
(“Where the evidence shows such a clear and definite measure of damages, an award of
nominal damages cannot stand.”). We do not agree.
First, we have already concluded that SP failed to establish such damages as
would satisfy New York law’s requirement of reasonable certainty. Accordingly,
because we affirm the district court’s motion for judgment notwithstanding the verdict,
we need not authorize any retrial. Cf. Weisgram v. Marley Co., 528 U.S. 440, 457
(2000) (“[T]he authority of courts of appeals to direct the entry of judgment as a matter of
law extends to cases in which, on excision of testimony erroneously admitted, there
remains insufficient evidence to support the jury’s verdict.”); accord Amorgianos v. Nat’l
R.R. Passenger Corp., 303 F.3d 256, 267 (2d Cir. 2002). This is not a case, as in
Lexington Products, where nominal damages were unwarranted, as SP had no sales
history or contractual entitlements from which damages could reasonably be calculated.
See Lexington Prods. v. BD Commc’ns, Inc., 677 F.2d at 253–54.
Second, and in any event, SP failed to demonstrate an ability to proffer evidence
of damages with reasonable certainty for use at any new trial. Given the opportunity to
put forward such evidence, SP instead provided projections from Kellwood, MTV, and
Washington about what SP’s sales might have been, and of the value of other established
and proven clothing brands, with values in the range of hundreds of millions of dollars.
But we have already explained why such optimistic projections and valuations by
reference to name-brand companies failed to establish damages with reasonable certainty.
10
The cases SP cites for the proposition that its principals could testify to
expectations of future revenues are likewise inapposite, as they arose in the context of
established companies. Compare Securitron Magnalock Corp. v. Schnabolk, 65 F.3d
256, 265 (2d Cir. 1995) (deeming testimony regarding “flattening out” of profits
permissible against backdrop of sales “over a period of years”), and Lightning Lube, Inc.
v. Witco Corp., 4 F.3d 1153, 1174–77 (3d Cir. 1993) (deeming damages established with
reasonable certainty based on testimony from company owner, where company had
operational history, and performance had “surpassed” owner’s projections in past years),
with Von der Ruhr v. Immtech Int’l, Inc., 570 F.3d 858, 862–65 (7th Cir. 2009)
(explaining that it is a “difficult task . . . (1) to prove lost profits damages (2) in a
complex market (3) from a product that has never been sold (4) without [valid] expert
testimony”), and US Salt, Inc. v. Broken Arrow, Inc., 563 F.3d 687, 690 (8th Cir. 2009)
(rejecting testimony by company president where “record demonstrate[d] that [he] could
not identify any customer interested in buying . . . a specific amount of [the product] at a
specific price”).
Accordingly, we conclude that the district court did not err in granting Kellwood
judgment as a matter of law on SP’s damages claims, and in entering a nominal-damages
award of $1.00 in SP’s favor.
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3. Conclusion
We have considered the parties’ other arguments and conclude that they are
without merit. Accordingly, we AFFIRM the judgment of the district court.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk of Court
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