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Iconics, Inc. v. Massaro

United States District Court, D. Massachusetts

July 19, 2017

ICONICS, INC. Plaintiff,



         Before me are motions to disqualify experts, which I now take up and resolve as prelude to resolving defendants' motion for summary judgment which I will address in a separate Memorandum.

         Defendants Simone Massaro, BaxEnergy GmbH, Christopher Volpe, BaxEnergy Italia, and Vento Industries have moved [Dkt. No. 541] to disqualify Jimmy Pappas and to strike his expert report. Plaintiff Iconics in turn has moved to exclude the testimony of Arthur Zatarain [Dkt. No. 538] in its entirety and the report of Bradford Kullberg [Dkt. No. 546] in part.

         In considering these motions, I perform a gatekeeping role through which I determine whether the expert testimony offered by these witnesses is sufficiently reliable to be introduced into evidence. United States v. Mooney, 315 F.3d 54, 62 (1st Cir. 2002). Under Federal Rule of Evidence 702:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if: (a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (b) the testimony is based on sufficient facts or data; (c) the testimony is the product of reliable principles and methods; and (d) the expert has reliably applied the principles and methods to the facts of the case.

         I may consider a variety of factors when deciding whether to admit an expert's testimony, including:

(1) whether the theory or technique can be and has been tested; (2) whether the technique has been subject to peer review and publication; (3) the technique's known or potential rate of error; and (4) the level of the theory or technique's acceptance within the relevant discipline.

Mooney, 315 F.3d at 62 (citing Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 593-94 (1993)). Once it is established that an expert's testimony “rests upon good grounds based on what is known, ” however, I should allow the evidence to be presented to the jury and “be tested by the adversarial process.” Milward v. Acuity Specialty Products Group, Inc., 639 F.3d 11, 15 (1st Cir. 2011) (internal quotation and citation omitted).

         I. JIMMY PAPPAS

         Jimmy Pappas is a forensic accountant serving as Iconics' damage expert. His opinion assumes liability has been established and then estimates the amount of damages due in four categories: the intellectual property claims (taken together), breach of contract damages, Digital Millennium Copyright Act Damages (“DMCA”) statutory damages, and attorneys' fees and costs in the related state and bankruptcy court proceedings.

         A. Qualifications

         As a threshold matter, defendants seek to exclude Pappas as an expert for being unqualified to opine on the subject matter. Pappas is a managing director in the forensic services practice of PricewaterhouseCoopers. He is a certified public accountant and certified fraud examiner with experience in valuing damages related to fraud, breach of contract, and misappropriation of assets. As defendants point out, however, Pappas does not have experience providing valuations of intellectual property in the context of litigation.

         Given Pappas's theory of valuation, such a gap in his experience does not render his opinions unreliable. Although Pappas has not negotiated licenses or sales of intellectual property, his opinion is not based on those approaches. His approach focuses on forensic accounting, valuations of companies and investor contributions more broadly, and the calculation of profits. These are subjects where he has the specialized skill sufficient to serve as an expert witness.

         B. Intellectual Property Claims

         Pappas provides two estimates of the damages owed for the intellectual property claims based on two different calculation methods.

         The primary method he advances is a novel one he calls the “unwitting investment” method.[1] Using this method, Pappas opines that because Iconics owns the intellectual property Massaro allegedly brought to BaxEnergy in return for a 49 percent stake in the company, Iconics should be viewed as an investor, albeit unwittingly, in BaxEnergy. Pappas estimates the value of that investment at approximately $8 million. Defendants argue that this “unwitting investment” method does not reflect the current law and therefore would not reliably assist the jury in calculating the appropriate measure of damages. They do not contest Pappas's calculations; they contest only his underlying approaches.

         Both Massachusetts trade secrets law and federal copyright law authorize damages based on theories of disgorgement and unjust enrichment. Bruce v. Weekly World News, Inc., 310 F.3d 25, 28 (1st Cir. 2002) (“A plaintiff who establishes copyright infringement is entitled to recover (1) actual damages, which consist of all income and profits lost as a consequence of the infringement; and (2) any nonduplicative profits earned by the defendant as a consequence of the copyright infringement, see 17 U.S.C. § 504(b)”); Jet Spray Cooler, Inc. v. Crampton, 385 N.E.2d 1349, 1356 (Mass. 1979) (“The measure of damages in cases involving business torts such as the misappropriation of trade secrets entitles a plaintiff to recover full compensation for his lost profits and requires a defendant to surrender the profits which he realized from his tortious conduct.”).

         In order to establish defendants' unjust profits, plaintiffs must “‘do more initially than toss up an undifferentiated gross revenue number; the revenue stream must bear a legally significant relationship to the infringement.'” Real View, LLC. v. 20-20 Techs., Inc., 811 F.Supp.2d 553, 560-61 (D. Mass. 2011) (quoting Polar Bear Prods., Inc. v. Timex Corp., 384 F.3d 700, 711 (9th Cir. 2004)). But, “[o]nce the plaintiffs demonstrate that the defendants have made profits from sales of products incorporating the misappropriated trade secrets, the burden shifts to the defendants to demonstrate the portion of their profits which is not attributable to the trade secrets.” See Jet Spray Cooler, 385 N.E.2d at 1359 n.14.

         Pappas's “unwitting investment” theory of damages cannot be accepted as a reliable methodology here for calculating damages in this instance. The approach strays from the traditional lost profits theory of damages under trade secrets and copyright unjust enrichment law towards a property-based conception of liability in which misappropriation of intellectual property provides the victim with the equivalent of an equity share in the misappropriator's enterprise. Neither Pappas nor plaintiff's counsel have identified any case that uses such an approach. Rather, plaintiff simply invokes the Supreme Judicial Court's reminder that while “traditional lost profits analysis as a measure of damages may not be an adequate model” in all trade secret cases “other theories of damages may . . . be ripe for testing in our courts.” Lightlab Imaging, Inc. v. Axsun Techs., Inc., 13 N.E.3d 604, 614 (Mass. 2014).

         In Lightlab, the court sought to protect companies, in particular start-up companies, that fall victim to trade secret misappropriation before they have yet to show a profit. Id. The court recognized that strict application of the lost profits measure for damages could bar these companies from recovery and therefore the court indicated that a company facing that dilemma should be allowed to present alternative theories of damages. Id. (“Such businesses often operate for years without profit. This fact should not render them ‘damage proof.'”). Unlike the hypothetical companies addressed in Lightlab, it appears Iconics could have relied on a traditional method to capture the damages at issue fully, and indeed has offered a profit disgorgement analysis for at least some of its claims. I therefore see no basis to employ a novel and untested theory of liability under these circumstances and will strike Pappas's testimony regarding the unwitting investment theory.

         C. Contract Damages

         Defendants seek to exclude Pappas's testimony concerning contract damages on two grounds. First, they argue that his testimony addresses claims not properly remaining in the case. Second, they argue that his calculations include damages that were not foreseeable, in derogation of contract law. These objections are not the proper focus of a Daubert inquiry. They are legal arguments against the plaintiff's theory of the case and the predicate factual proof to support an expert opinion. I have not foreclosed contractual claims and it is premature to address the availability of expert testimony regarding resultant damages until the underlying evidence regarding that matter is adduced. I will not strike Pappas's testimony on these grounds.

         D. DMCA Damages

         Similarly, defendants' objection to Pappas's DMCA damages testimony falls outside the scope of a Daubert challenge. Defendants have legal disagreements with plaintiff over what constitutes an individual DMCA violation. This is an important legal question which remains unsettled in this circuit and in this case. Plaintiff asserts that there were 282 violations; defendants counter that the number of violations, if any, should be in the single digits. In creating his expert report, however, Pappas permissibly accepted plaintiff's legal interpretation and calculated damages for 282 violations. To be sure, all Pappas did to calculate DMCA damages was multiply the number of violations by the statutory range for damages. Even if his testimony here serves a limited need, it is reliable and will not be excluded if the factual predicates for DMCA violations are established.[2]

         II. ...

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