Antitrust Law Daily Wrap Up, ADVERTISING—EDNC: Expert Testimony Partially Excluded on Both Sides of False Advertising Action, (Apr 4, 2013)

By John W. Arden, J.D., LL.M.

The federal district court in New Bern, North Carolina has partially excluded reports and testimony by experts for both plaintiffs and defendants in a Lanham Act false advertising, state unfair trade practices, and defamation action regarding software products for operators of self-storage facilities (SMD Software, Inc. v. EMove, Inc., March 29, 2013, Flanagan, L.).

SMD Software, Inc. and SiteLink Software, LLC brought an action against U-Haul International, Inc. and two subsidiaries (EMove, Inc. and A&M Associates), arising out of alleged misrepresentations about "SiteLink" software made on comparison charts in advertising brochures for WebSelfStorage, a competing software program. Versions of the charts were published in 2004, 2005, and 2008.

The plaintiffs contended that U-Haul owned WebSelfStorage, and A&M Associates produced the advertising materials at issue. They collaborated with affiliated company EMove in the defamatory advertisement, the plaintiffs alleged.

On April 18, 2011, each side filed two motions, seeking to exclude the reports and testimony of the other side’s proffered expert witnesses under Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993). In response to the defendants’ Daubert motion, the plaintiffs’ experts filed affidavits further discussing their qualifications and opinions.

Rule 702 of the Federal Rules of Evidence provides that expert testimony is appropriate when it "will assist the trier of fact to understand the evidence or to determine a fact in issue." It further provides that a witness qualified as an expert may be permitted to testify where "(1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts in the case." Courts have distilled the requirements to two crucial inquires: whether the proposed expert’s testimony is relevant and whether it is reliable.

Reports by plaintiffs’ experts. Plaintiffs’ expert Dr. Putsis, a professor of marketing at the University of North Carolina Kenan-Flagler Business School, conducted a survey purporting to determine the impact of the comparison charts. Based on the survey, he concluded that the representations in the 2008 comparison chart caused plaintiffs to lose a specific percentage of market share. Defendants argued that Putsis’s opinions were based on flawed or speculative assumptions and were not supported by evidence in the record.

The survey purported to determine how many potential customers who would have purchased plaintiffs’ software did not because of the 2008 comparison chart. It presented respondents with a neutral comparison table detailing the pricing and features of 15 hypothetical unnamed self-storage management software programs. Based on the preferences given by the survey respondents, Putsis concluded that the allegedly false representations resulted in the plaintiffs’ losing a specific percentage of the market share.

"Putsis’ survey—which forces respondents to choose based solely on information contained in a table—can only be said to accurately show what percentage of those who read the 2008 comparison change were thereby led not to purchase plaintiffs’ software if those customers made a decision based solely on the comparison chart," the court found. "This is a dubious proposition."

The survey used the chart as an objective and trustworthy comparison table, whereas it appeared near the back of EMove’ advertising brochures and was clearly advertising material, which is often viewed with skepticism. Furthermore, the survey did not allow respondents to opt out or say they would like more information before making a purchasing decision. Contrary to the plaintiffs’ contention, the expert report on the survey was not limited to the issue of materiality. It purported to show causation and the quantum of damages.

Since the survey forced respondents to make purchasing decisions based upon a neutral-looking chart and assumed that customers would make their purchasing decision based on the representations in an advertising brochure alone, the report and testimony was excluded.

Another expert proffered by the plaintiffs’—Dr. Didow—was engaged to evaluate the damages resulting from the use of the comparison charts and to offer his opinion on the veracity of the charts. He opined that defendants did not comply with advertising standards in substantiating their claims and that many of the claims made on the charts were false. Since Didow was not an expert on plaintiffs’ software or on the operation of the self-storage industry, his opinion as to the veracity of the claims made in the comparison charts was excluded.

Didow’s education and experience in conducting econometric studies made him qualified to render an expert opinion on damages, the court found. The assumptions he made in determining damages were not shown to be unreliable. However, an alternative damage calculation included in his report—multiplying the number of customers plaintiffs purportedly lost by defendants’ annual revenue per customers—was unreliable and excluded. Didow admitted by not all customers lost by the plaintiffs would become customers of the defendants and the Lanham Act referred to profits, not revenues.

Reports by defendants’ experts. The defendants put forward as their expert Mr. Litton, a self-storage management consultant with more than 30 years experience in the industry. Plaintiffs moved to exclude the reports and testimony of Litton, arguing that he was unqualified to offer opinions on the veracity of the representations in the comparison charts, on whether customers would have relied on those charts in making a software purchasing decision, and on the validity of Didow’s damages analysis. Defendants maintained that Litton was properly qualified to provide opinions based on his extensive experience in the self-storage industry.

The court found that Litton was qualified to offer opinions on the veracity of the comparison charts, since he has used the plaintiffs’ products in two facilities he has operated since 2005 and in auditing 15 other facilities. As a consultant, he has helped many clients configure the plaintiffs’ software after purchasing it. He has even conducted private seminars advising storage owners and managers on how to configure their software to comply with legislative changes. Litton was also qualified to offer his opinion on the veracity of the pricing information in the charts, since he twice purchased SiteLink PC products for his facilities.

According to the court, Litton was qualified to offer opinions on the impact of the charts on consumers, based on his extensive experience. However, he was not qualified to offer opinions on Didow’s damage calculations because his experience was limited to the self-storage industry, not the software industry—the industry the plaintiffs were in. These aspects of his opinions were excluded by the court.

Another expert for the defendants was Dr. Bays, an emeritus professor of economics at East Carolina University. Opinions offered by Dr. Bays to rebut the analysis of Dr. Didow were excluded to the extent that they critiqued the underlying assumptions regarding the veracity of the comparison charts. However, he was allowed to provide an opinion that Didow did not consider some factors that may have impacted Didow’s analysis.

The court granted plaintiffs’ motion to exclude opinions of Litton and Bays that allegedly were not disclosed in their reports concerning: (1) the unreliability of Putsis’ survey based on SkilCheck’s administration, (2) Didow’s regression analysis, and (3) Bay’s and Litton’s discussions of their qualifications in affidavits filed with the court. Since the court excluded the report, testimony, and survey of Dr. Putsis, any issues with respect to the administration of the survey had become moot.

Other opinions and objections by Bay that were not included in his report could not be excluded on an allegation of surprise. The court concluded that plaintiffs could not credibly claim to be very surprised by Bay’s opinions finding fault with Didow’s analysis where Litton had already expressed them.

The case is No. 5:08-CV-403-FL.

Attorneys: Luther Donald Starling, Jr. (Daughtry, Woodward, Lawrence & Starling) for SMD Software, Inc. Christopher A. Page (Young, Moore & Henderson) for Emove, Inc.

Companies: SMD Software, Inc.; EMove, Inc.; U-Haul International, Inc.

Cases: Advertising NorthCarolinaNews