Sunday, September 05, 2010

Expert testimony on damages and materiality

LG Electronics U.S.A., Inc. v. Whirlpool Corp., 2010 WL 3397358 (N.D. Ill.)

Previous reporting in this case that is exploring the increasing role of materiality in false advertising cases.

Whirlpool moved to exclude LG’s damages expert Mohan Rao and portions of the rebuttal expert report of LG’s marketing expert, Yoram Wind. The court denied the first motion and granted/denied in part the second. The underlying case involves Whirlpool’s alleged false advertising for its steam dryers. (Or are they steam dryers?) The question is basically what consumers think “steam” means in this context; Whirlpool’s dryers produce the thing that Whirlpool calls steam differently than most other steam washers/dryers: they use a mist of cold water sprayed into a warm dryer drum.

Dr. Rao opined that, as a result of Whirlpool's false and misleading claims, LG lost profits are approximately $33.3 million and Whirlpool's gains are approximately $25.4 million. The court rejected Whirlpool’s Daubert motion. I’m just going to discuss of a couple of Whirlpool’s objections; the court rejected them all.

Whirlpool argued that Rao wrongly assumed causation, but he relied on Whirlpool documents showing that consumers’ preference for steam is a key sales driver, and that consumers recognized a distinction between hot steam and cold vapor, preferring steam dryers to steam washers by a 2 to 1 margin, and steam washers to misting dryers by a 2 to 1 margin. (Whirlpool changed the name of the dryer from Myst to Steam, apparently convinced by this internal research.) Whirlpool argued that these internal documents were unrelated to actual sales. It further argued that its internal surveys didn’t meet Shari Diamond’s standards (as incorporated in the FJC manual on surveys) for consumer perception evidence. But LG wasn’t offering the surveys as evidence of consumer perception; rather they were part of the basis on which Rao relied to form his opinions on damages. Criticisms of the surveys were a matter for cross-examination and contrary evidence. Rao didn’t need to run his own surveys. He used an appropriate methodology, and the court found it significant that he relied on Whirlpool’s documents rather than LG’s; LG also planned to establish the factual assertions on which he relied through other witnesses. So the validity of his testimony on causation was for the finder of fact.

Whirlpool argued that Rao ignored the presence of other competitors in the market. To the contrary, Rao took them into account, but assumed that they were also advertising falsely (with the exception of Kenmore, which began to license steam dryers from LG). This is a factual claim that may be challenged in front of the jury. I’m not sure how this works, exactly—for purposes of calculating damages, should we assume that other competitors aren’t advertising falsely? Doesn’t that overcompensate LG, assuming it sued each one independently and won? But the court said that the jury could decide what ought to be factored out.

Rao also calculated damages based on a price erosion theory: consumers are willing to pay a price premium for a steam dryer, but Whirlpool’s presence in the market meant that LG didn’t get the price premium on the steam dryer, which it did for its steam washer. There was no fatal flaw there. Whirlpool argued that Rao failed to consider the effect of the price premium on consumer demand, but he stated that he had analyzed price elasticity and concluded that demand would be unaffected, because the relevant consumers are feature- rather than price-sensitive. Thus, when there’s no competitor, there’s no price elasticity; only when Whirlpool entered the market did price elasticity become relevant. Another matter for cross-examination.

Finally, Whirlpool challenged Rao’s inclusion of washer sales in his calculations. He assumed that consumers typically buy washers and dryers in pairs. An independent marketing research firm’s data showed that this happens 88% of the time, while LG’s own data showed 95% and Whirlpool’s showed 98%, while sales data for the Duet Steam Dryer/Washer showed rates of 99.8% and above (depending on the color). Rao used the lower number in his calculations. Whirlpool’s own witness said that, if there was no steam dryer available to match the Whirlpool Steam Washer for a period, sales of the Washer would also suffer. The fact that Rao didn’t run his own survey but relied on Whirlpool’s data is an issue for cross-examination.

Dr. Wind was a consumer survey expert with substantial background in marketing research. He was offered as a rebuttal expert, but the court found that his opinion on the materiality of steam went beyond rebuttal of Whirlpool’s survey. Whirlpool’s expert assumed that the Whirlpool dryer creates steam, and surveyed whether the implied claim that the Whirlpool Duet Steam Dryer injects hot vapor onto clothes had any impact on consumers' purchase decisions. He concluded that it didn’t, because there was no statistical difference between Whirlpool’s actual ad and a control ad that explicitly added the language stating that a mist of water is injected and is heated after it is sprayed into the dryer drum. Thus, his opinion focused on the materiality of how steam is created, not whether steam is created. The court found that Wind’s opinion didn’t contradict or rebut Whirlpool’s expert’s opinion, but rather opined on the materiality of whether steam is created.

So, as I understand this, LG’s argument is something like: consumers want steam, but don’t necessarily have a firm idea of how steam is created. If you use the word “steam,” they focus on that, even though they don’t think that Whirlpool’s process is as valuable if you don’t use the word steam. And, just as crucially, Whirlpool doesn’t use the process that everybody agrees makes steam. So the underlying question, which is as much normative as it is empirical, is how much room an advertiser should have to try to stretch a definition on the theory that the resulting product is equally satisfactory to the consumer. This is precisely analogous to much debate over geographic indications: if sparkling wine from California tastes just like champagne, isn’t it champagne? Trademark has been relatively unforgiving here, and false advertising has traditionally been the same (there’s a classic case about the meaning of “gelatin” that is pretty much on point; see also, e.g., FTC v. Colgate-Palmolive Co., 380 U.S. 374, 389 (1965)), but cases like this indicate that it is getting harder to stop an advertiser from taking the Humpty Dumpty point of view. The question is, which is to be master.

The court noted that the parties raised the issue of whether expert testimony is necessary to establish materiality, and cited a number of cases to show that courts don’t require this.

Anyway, the court will be the one to instruct the jury on materiality, not Wind; Wind will not offer a legal opinion on materiality at trial. He was also not qualified to give a technical opinion that the Whirlpool dryer does not create steam, but he could make this factual assumption when rendering his opinion; LG still bears the burden of establishing the fact at trial.

Wind’s opinion about consumer confusion was admissible; it was based on Whirpool’s studies and documents, and offered as rebuttal to the conclusions of one of Whirlpool’s experts that responses to less-leading open-ended questions showed no evidence of confusion about the way in which a Whirlpool dryer creates steam. Given his level of experience with market studies and consumer surveys, it was acceptable for him to rely on Whirlpool’s documents.

Finally, Whirlpool challenged Wind’s analysis of consumer feedback videos produced at (and after) the close of discovery. The consumers gave detailed feedback on the steam cycle. The court granted LG’s request to take discovery and have Wind opine on them. Wind did a content analysis and opined that "while 46% of the respondents had a positive evaluation of the steam feature on the dryer, 37% had a negative assessment of the steam feature and 17% had” a mixed assessment. He opined that significant dissatisfaction existed with the steam feature. Thus, Whirlpool’s claim that its use of the term “steam” was justified by the fact that it delivered the benefits associated with steam was not true for those consumer segments. (Notice how this ties in to the normative/empirical question I raised above: what does it mean to provide “steam”?)

Whirlpool challenged the admissibility of these opinions, since Wind wasn’t qualified to assess the dryers’ performance. But Wind relied on his expertise in marketing and consumer research. Coding errors were grounds for cross-examination, not exclusion.

No comments: