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Capital Concepts, Inc. v. The Mountain Corp.

United States District Court, W.D. Virginia, Charlottesville Division

March 29, 2013

CAPITAL CONCEPTS, INC., doing business as BCREATIVE, INC., Plaintiff,
v.
THE MOUNTAIN CORPORATION, ET AL., Defendants

For Capital Concepts, Inc., doing business as bCreative, Inc., Plaintiff: Patrick C. Asplin, Richard C. Armstrong, LENHART OBENSHAIN PC, CHARLOTTESVILLE, VA.

For The Mountain Corporation, Mountain Retail, LLC, Defendants: Arnold Rosenblatt, PRO HAC VICE, Cook, Little, Rosenblatt & Manson, PLLC, Manchester, NH; Daniel J. Bourque, PRO HAC VICE, BOURQUE & ASSOCIATES, P.A., MANCHESTER, NH; Bryan Douglas Wright, WILLIAMS MULLEN CLARK & DOBBINS, CHARLOTTESVILLE, VA.

OPINION

Page 662

NORMAN K. MOON, UNITED STATES DISTRICT JUDGE.

MEMORANDUM OPINION

Presently before me is Plaintiff's [1] motion, filed under seal, styled as a " Motion to Exclude Defendants' Expert Report and Expert Testimony and Motion in Limine to Preclude Defendants, The Mountain Corporation ('The Mountain') and Mountain Retail, LLC ('Mountain Retail'), from Adducing Evidence Regarding Profitability." For the reasons and to the extent stated herein, Plaintiff's motion (docket no. 45) will be granted. [2]

I.

The facts in this case are set forth at some length in my memorandum opinion and order denying Defendants' motions for summary judgment, [3] and I will not restate

Page 663

them here. Suffice it to say that The Mountain is a manufacturer, distributor, and seller of t-shirts throughout the United States. Mountain Retail, which is owned by The Mountain, sells t-shirts manufactured by The Mountain. Pursuant to a license agreement, Plaintiff provided The Mountain with 32 shirt designs. Plaintiff obtained copyright registrations for 19 of the designs. The Mountain placed these designs on t-shirts, which Defendants sold throughout the United States as part of a line of t-shirts called " Mountain Life." The complaint in this matter alleges that, when the license agreement ended, Defendants continued to manufacture, distribute, and sell t-shirts bearing Plaintiff's designs and text, including Plaintiff's copyrighted designs.

II.

A.

Plaintiff's instant motion was filed under seal pursuant to a stipulated protective order (docket no. 25) and an order (docket no. 44) granting a motion seeking leave to file the instant motion under seal. Given Plaintiff's concerns for complying with the terms of the protective order, I will discuss only in general, non-confidential terms Defendants' business and financial information that has been disclosed in the briefing of the instant motions. [4]

B.

1.

Defendants designated Andrea Burke, The Mountain's controller, as their corporate designee under Rule 30(b)(6) of the Federal Rules of Civil Procedure to testify regarding financial topics, including the revenues and profits Defendants earned from their sales of the allegedly infringing t-shirts. According to Ms. Burke, The Mountain tracks revenues by large product categories, e.g., long-sleeved t-shirts as

Page 664

a whole. The Mountain does not track gross or net profitability of individual t-shirts, and it does not detail expenses at the large product category level. Instead, it applies an average " cost" incurred for all products to determine the profits derived from a specific category of t-shirts.

The Mountain imposed this same approach in calculating profits for the allegedly infringing t-shirts. To determined the net profits from those revenues, The Mountain grouped a variety of specified and unspecified direct and indirect costs together, and then applied those costs to the allegedly infringing t-shirts. These costs included ink, general payroll, specific payroll for three employees involved in the production of Mountain Life t-shirts, " other payroll," " shipping/packing/picking payroll," rent, utilities, administrative expenses, shipping supplies, and " additional costs of goods sold not captured above."

The Mountain did not determine whether any of these costs were actually related to the production of the allegedly infringing t-shirts, or actually increased as a result of their production. Instead, The Mountain simply allocated a percentage of " all of the costs that are associated with producing a Mountain Life shirt" specifically to the allegedly infringing t-shirts, without regard to whether those expenses were of actual assistance in their production, distribution, or sale. Ms. Burke testified that, despite applying these expenses to the allegedly infringing t-shirts, there is no direct evidence that they constitute direct costs or that any of the indirect costs allocated to the allegedly infringing t-shirts were actually incurred as a result of the production and sale of those products. [5]

2.

Defendants have designated Richard Maloney, CPA, ABV, as an expert witness. Mr. Maloney produced an expert report dated May 30, 2012, setting forth his opinions regarding the gross profits and net profits generated by Defendants from their sale of the allegedly infringing t-shirts. Mr. Maloney rejected Ms. Burke's approach, in part, instead calculating The Mountain's net profits " per category of shirt," e.g., " Wal-Mart," " Mountain Life," and " Other Mountain," that are even broader than Ms. Burke's categories. The allegedly infringing t-shirts are a subset of the " Mountain Life" category of t-shirts, but, as Mr. Maloney reported, " The Mountain does not calculate expenses for the subset."

Neither did Mr. Maloney. Instead, he allocated to each category of t-shirt The Mountain's indirect cost of goods sold and its administrative expenses as a percentage of the total, regardless of whether those costs and expenses were incurred as a result of the production, distribution, or sale of the allegedly infringing t-shirts. More specifically, Mr. Maloney first determined the " direct costs of goods sold" for each category of t-shirts sold by Defendants, including the " Mountain Life" category, which includes the allegedly infringing t-shirts. Presumably, these " direct costs" include, for example, the cost of blank white t-shirts, dyes, and inks. However, Mr. Maloney made no independent determination regarding what costs were included within " direct costs of goods sold." Rather, Mr. Maloney relied solely upon a schedule provided by Ms. Burke, which he attached as an exhibit to his report, but his report does not analyze or explain what costs have been included in his " direct costs of goods sold" regarding the " Mountain Life" category of t-shirts. The exhibit indicates that Defendants were

Page 665

unable to allocate all of their direct costs of goods shown on their financial statements to a particular category of t-shirts, which resulted in an " All - not able to separate" category of costs. In his report, Mr. Maloney categorized these costs as " indirect costs" and allocated a portion to each category of t-shirt on a percentage of sales basis, i.e., based on the percentage of revenues represented by each category of t-shirts to the total revenues earned by Defendants from all sales of t-shirts.

Thus, relying on the summary information provided by The Mountain, Mr. Maloney's calculation of The Mountain's gross profits from the sale of t-shirts with the " Mountain Life" category is based on his determination of revenues earned from such sales less the amount of direct costs of goods sold and his allocation of " indirect costs." Recognizing that it was not possible to allocate Defendants' overhead and general and administrative expenses to each category of t-shirts sold by Defendants, Mr. Maloney determined which of those expenses were not applicable to the " Wal-Mart" category of t-shirts on a percentage of sales basis. Based on the information provided by Mountain (in the exhibit previously mentioned), he separately calculated the sales commissions paid by The Mountain regarding the " Mountain Life" category of t-shirts (although sales commissions are typically classified as a general and administrative expense). But Defendants only produced information concerning total commissions paid regarding the " Mountain Life" category as a whole, and have not shown that any commissions were paid regarding the allegedly infringing t-shirts, which form a subset, not the whole, of the " Mountain Life" category.

To arrive at his determination of Defendants' net profits, Mr. Maloney subtracted (from his gross profit calculations) his calculations regarding the overhead, general, and administrative expenses relating to the " Mountain Life" line. He did not separately calculate Defendants' revenues, gross profits, or net profits for the allegedly infringing t-shirts. Instead, he determined The Mountain's revenues, gross profits, and net profits for all of 2009 (rather than just the relevant period from May 31 to December 31, 2009), 2010, and 2011 from its sales of all " Mountain Life" t-shirts. He then allocated such numbers to the allegedly infringing t-shirts on a proportional basis. Additionally, he does not address any sales of the ...


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