CASE REPORT – July 2022

Rebath LLC v. HD Sols. LLC, 2022 U.S. Dist. LEXIS 119997, Case No. CV-19-04873-PHX-JJT (Distr. Ariz.), Decided July 7, 2022

The Court largely denied franchisor plaintiff and counter-defendant ReBath LLC’s motion to exclude the expert testimony of franchisee defendant and counter-plaintiff HD Solutions, LLC’s (“HDS”) damages expert.          

Factual and Procedural Overview

The case involves a contract dispute between ReBath, a franchisor of bathroom remodeling services, and HDS, a former ReBath franchisee in the San Antonio area.  From 2007 to June 2019, HDS sold ReBath products and did business as “ReBath of San Antonio.”  Pursuant to the franchise agreement, HDS used “RB Direct,” a marketing and database software, to store and develop a list of prospective and existing customers. This list included each person’s name, address, details about sales, financial information, and how they discovered HDS.  

In 2018, the relationship between franchisor and franchisee began to sour.  Pursuant to the arbitration provision in the franchise agreement, the parties went to arbitration.  The arbitrator granted franchisee HDS the right to terminate the franchise agreement.  In the final award, the arbitrator specified that, upon termination, franchisor ReBath was to “divest” itself of HDS’s customer data and, on receipt of that data, HDS was to remove ReBath’s marks from all materials and property.  HDS elected to terminate the franchise agreement.  ReBath then provided HDS with its customer data, and HDS began to rebrand its business as “Legacy Bath & Kitchen.” 

Disputes arose, with both parties claiming that the other was not complying with the arbitrator’s award. ReBath initiated litigation and HDS counterclaimed.  In this action, ReBath alleges that HDS failed to disassociate itself from ReBath by, among other things, using the ReBath’s mark on business cards, trucks, uniforms, its website, and various communication channels. ReBath has asserted Lanham Act claims for trademark infringement, along with related state law claims. In its counterclaim, HDS asserts a claim for misappropriation of trade secrets under the Federal Defend Trade Secrets Act, alleging that ReBath illegally retained a copy of its customer data and provided it to ReBath’s new franchisee in San Antonio, Texas Design.

HDS retained Joseph W. Lesovitz to calculate damages on its counterclaim and to rebut ReBath’s expert, Mr. Cook.  ReBath moved to exclude Lesovitz’s opinions set forth in his reports, arguing that the methodology underlying his calculation of HDS’s lost profits was flawed, that he was mistaken as to facts throughout his opinion, and that his rebuttal report misunderstood the law.

Legal Analysis

Overview of FRE Rule 702 and Daubert.

Under Federal Rules of Evidence, Rule 702, an expert may testify on the basis of their “scientific, technical, or other specialized knowledge” if it “will help the trier of fact to understand the evidence,” provided the testimony rests on “sufficient facts or data” and “reliable principles and methods,” and “the witness has reliably applied the principles and methods to the facts of the case.” Citing to Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 589, 592 (1993), the Court noted that the trial judge acts as the “gatekeeper” of expert witness testimony by engaging in a two-part analysis: (1) the trial judge must determine that the proposed expert witness testimony is based on scientific, technical, or other specialized knowledge, and (2) the trial court must ensure that the proposed testimony is relevant—that it will assist the trier of fact to understand or determine a fact in issue. Evidence is relevant if it has any tendency to make a fact more or less probable than it would be without the evidence and the fact is of consequence in determining the action. (Citing to Fed. R. Evid. 401.)  Under Daubert, the focus must be solely on principles and methodology and not on the conclusions generated.  The Court cited to Daubert for the admonition that vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.  The Court further noted that disputes as to the credentials, methodology, or bases for an expert’s opinion, generally go to the weight, not the admissibility, of an expert’s testimony.

Lesovitz’s Expert Testimony on Lost Profits and Disgorgement.

ReBath first challenged Lesovitz’s conclusions about characteristics in the new franchisee Texas Design’s customer data that, Lesovitz opined, indicated Texas Design had accessed HDS’s data. 

Lesovitz’s methodology was as follows: if Lesovitz identified a person in Texas Design’s customer database that had any of the following characteristics relating to HDS, he considered them to have originated from HDS: (1) bearing the same name as a person in HDS’s data, (2) bearing the same address as a person in HDS’s data, (3) having “appointment source” information indicating that the person in Texas Design’ data found the company through a channel associated with HDS, or (4) having an “appointment taker” that had never worked for Texas Design and was associated with HDS. Lesovitz considered all people he identified using the “appointment source” and “appointment taker” characteristics to have originated from HDS, even where that person did not have a match in HDS’s data.  Lesovitz then tallied Texas Design’s sales relating to the identified records to calculate HDS’s total lost revenue and made two damages estimates: (1) total lost profits and (2) disgorgement damages.  

ReBath argued that Lesovitz used deposition testimony to incorrectly conclude that Texas Design used HDS’s customer data to make sales, and, therefore, the report’s conclusions as a whole are unreliable. The Court rejected this argument, noting that Texas Design’s principle provided arguably conflicting testimony, testifying both that he started the customer database “absolutely from scratch,” and that if a prospect had spoken to somebody in the prior ReBath franchise, then there was a chance Texas Design saw that information.  In addition, the Court noted that Lesovitz based his conclusions not only on the deposition testimony but also on his analysis of shared characteristics of the data sets.  The Court concluded that Lesovitz may offer his opinions on lost profits, and that ReBath was free to challenge those opinions on cross-examination or by presenting contrary evidence.

The Court acknowledged that ReBath had raised colorable concerns about Lesovitz’s method of calculating HDS’s lost profits, in that Lesovitz first assumed that any person in Texas Design’s data with a characteristic (whether based on name, address, appointment source, or appointment taker) linked to a person in HDS’s data was the result of Texas Design’s exploitation of HDS’s data. And second, Lesovitz assumed that any sale made to such a person would not have occurred but for Texas Design’s exploitation of HDS’s data. Nonetheless, the Court found Lesovitz’s analysis admissible, noting that the expert used reliable principles and methods, stating that “[a]ssumptions are an unavoidable ingredient in financial models and ReBath has not attacked Mr. Lesovitz’s qualifications to make such assumptions.” 

ReBath also argued that Lesovitz’s analysis was unhelpful to the trier of fact, in that it did nothing more than note similar names, addresses, and other information in the two data sets.  The Court disagreed, stating that Lesovitz’s report compared and summarized 40,000 rows of data, concluding that such analysis will “certainly help the trier of fact to understand the evidence,” further concluding that “Lesovitz digests complex financial information and produces conclusions that are helpful.”

Finally, ReBath argued that Lesovitz’s opinion on disgorgement damages should be excluded because “a jury can do simple math and read.”  The Court agreed with the basic principle that if expert testimony merely goes to matters which the finder of fact is capable of understanding and deciding without the expert’s help, such testimony should be excluded. The Court found that the total disgorgement figure, which is merely ReBath’s royalty percentage rate multiplied by the total lost revenue figure, was simple math and therefore inadmissible. But the Court noted that the underlying lost revenue number was based on Lesovitz’s expert opinion, and (as discussed above) is admissible. 

ReBath’s Contention that Lesovitz Improperly Opined on Liability.

ReBath argued that Lesovitz’s opinions that Texas Design may have obtained sales by exploiting HDS’s data should be excluded because, in offering such opinions, he is opining on liability.  The Court rejected this argument, noting that Lesovitz is not proffered as a liability witness, and that Lesovitz necessarily had to identify which sales he believed resulted from Texas Design’s exploitation of HDS’s data to calculate damages. The Court further concluded that “ReBath’s liability depends on its legal right to use HDS’s customer data, not simply whether Texas Design (an entity that is not a party to this suit) obtained and used that data.” And the Court noted that “Lesovitz may opine about whether data was taken from HDS’s customer list based on his experience as a fraud examiner without reaching questions of law.”

Lesovitz’s Rebuttal Report. 

Lesovitz’s rebuttal report criticized Cook’s calculation of ReBath’s trademark infringement damages. First, Lesovitz took issue with the fact that Cook did not consider testimony by Texas Design’s principle, which Lesovitz asserted demonstrated Texas Design’s use of HDS’s data.  Second, Lesovitz criticized the report’s failure to establish a causal link between HDS’s alleged use of ReBath’s mark and actual harm suffered by ReBath. 

ReBath moved to exclude the rebuttal report on the basis that Lesovitz unfairly faulted Cook for not considering certain the deposition testimony of Texas Design’s principal, and that the rebuttal report misunderstood how damages are calculated under the Lanham Act.  On the issue of not considering the deposition testimony of Texas Design’s principal, ReBath pointed out that Cook’s report is dated two days before the deposition took place.  The Court rejected this argument.  The Court noted both that Cook could have considered other evidence in the record concerning Texas Design’s potential use of HDS’s data, and that Cook could have produced a supplemental report to address the deposition testimony.  The Court concluded that since Cook had done neither of these things, that Lesovitz’s criticisms logically advanced a material aspect of HDS’s case and are therefore helpful. 

As to ReBath’s arguments that Lesovitz misunderstood how damages are calculated under the Lanham Act, the Court agreed with ReBath.  Lesovitz criticized Cook’s report because the report failed to show that ReBath suffered actual harm caused by HDS.  The Court agreed that this criticism is based on a misunderstanding of the law and therefore will be excluded.  The Court noted that “[n]othing in the Lanham Act conditions an award of profits on plaintiff’s proof of harm.”  The Court then stated that any expert testimony inferring that such a showing is required may confuse the jury and is simply wrong.

David M. Greeley, Esq. of Greeley Thompson, LLP prepared this Case Report. Mr. Greeley’s practice focuses on representing franchisors and franchisees in disputes. He may be reached at dgreeley@greeleythompson.com.