Using the Yardstick Method to Estimate a Start-up’s Damages
The yardstick method, which bases economic damages on the performance of comparable “guideline” companies, is a tried-and-true approach for estimating damages, but, like other methods, it has its limits. For example, courts typically don’t favor it in cases involving a plaintiff that’s a start-up company. In one recent case, though, a federal district court did allow expert testimony that calculated damages for a start-up maker of compression sports apparel based on comparisons with the market leader.
Licensing Deal Falls Apart
The case, Washington v. Kellwood Co., involved the alleged breach of a licensing agreement.
In 2002, the plaintiffs created a brand of compression sports apparel and developed several licensing marks. The defendant told the plaintiffs that MTV, the television network, wanted to partner with them and would promote their brand, which would lead to hundreds of millions of dollars in product sales. Shortly thereafter, the plaintiffs entered an exclusive licensing agreement with the defendant to use the plaintiffs’ marks on various types of apparel and accessories.
The MTV deal was never finalized, and the defendant subsequently terminated its arrangements with the plaintiffs, including those under the licensing agreement. The plaintiffs sued the defendant under several theories, including breach of contract, and sought damages in excess of $50 million.
The defendant challenged the admissibility of the plaintiffs’ expert’s yardstick analysis, arguing that the guideline company used as a standard (or the yardstick) must be as “nearly identical” to the subject business as possible. The expert had used Under Armour, the well-established market leader in the compression sportswear industry, as the yardstick.
Yardstick Testimony Admitted
The court agreed that asserting that the success of the plaintiffs’ new company paralleled that of Under Armour might have been a seemingly improbable conclusion for an expert to reach. But the court pointed out that the expert had at least provided some explanation as to how he’d come to his conclusion and the methods that substantiated it.
The court also explained that the test of reliability is flexible — and that the factors courts apply to assess accounting methods don’t necessarily apply to all experts in every case. Moreover, “the selection of comparators will seldom approach the ‘utopian ideal’ of identifying the perfect clone.”
At any rate, the court found that the expert had more than satisfied the general minimum reliability standards. In particular, he had offered a number of bases upon which he built his comparison, including:
- The nature of Under Armour’s then-primary focus on the sale of compression sportswear,
- The similarities between the arrangements between Under Armour and the sports channel ESPN and those between the plaintiffs’ company, the defendant and MTV,
- The geographical reach and cultural influence of MTV,
- The defendant’s manufacturing capacity and industry relationships,
- The fact that Under Armour was in its early start-up stage during the period the expert had considered,
- The relevance of Under Armour’s experience as an illustration of the industry’s growth potential,
- The apparent belief of the defendant and MTV that the new company could have broken into the market with success, and
- The similarities between Under Armour’s marketing strategies and those anticipated for the new company — if the MTV deal had gone through.
The court also noted that the expert had examined a number of underlying documents, including various SEC financial disclosure statements for the defendant, MTV and Under Armour, and profit-and-loss statements for the defendant and Under Armour.
In the end, the expert’s yardstick testimony was admitted. The court left it to the defendant and its expert’s “robust efforts at trial” to call into question the weight the jury should give the testimony. (See “A matter of weight, not admissibility.”)
A Possible Outlier
Although this court allowed the expert to use the yardstick method to calculate a start-up company’s damages, neither experts nor attorneys should interpret this case to mean that guideline companies don’t need to be similar to the subject company in terms of, say, size, financial performance, market share or target markets served. Other courts have taken a more stringent approach.