Case in Point: The Danger of Dissimilar Comparables

Daryl K. Washington et al., v. Kellwood Company

The Washington v. Kellwood case is a good example of a plaintiff failing to apply the appropriate amount of review when selecting a proxy or yardstick. When using this approach to damages, particular care should be taken when selecting a proxy for a nascent business without a baseline history of revenues. Damages experts have leeway when selecting comparable firms to use as comparables in a yardstick approach. However, in this case the Court found that, selecting an established business with revenues exceeding the plaintiff’s revenues by a factor of 1,000 stretched the “reasonableness” requirements too far. Damages in litigation are not likely to get simpler anytime soon, and the Washington v. Kellwood case highlights the importance of carefully selecting a similar proxy firm(s) when using the yardstick approach to damages calculations. 

In the often complex world of damages calculations in litigation, attorneys and financial experts rarely, if ever, encounter the same set of circumstances twice. While this can contribute to the challenge and appeal of these professions, pitfalls in damages calculation approaches are ever-present. One such potential pitfall is the use of comparable companies as proxies or yardsticks for measurement of damages sought in litigation. While the use of comparable companies in lost profits calculations is well-recognized and established, one recent case demonstrates the risks of using comparables that are not reasonably similar to the firm that is the subject of the lost profits calculation.

The risk of selecting a company that is too “speculative” for use as a proxy in a lost profits calculation was clearly highlighted in the matter Daryl K. Washington et al., v. Kellwood Company.1 In this matter, the plaintiff expert’s use of the clothing company Under Armour as a proxy for the plaintiff’s damages calculation was deemed “too speculative,” and, according to the Court’s decision, the plaintiff “did not prove that its new and untested business would have achieved vast market success but for Kellwood’s (defendant) breaches.”2

Case Background
The plaintiff, Daryl Washington, owner of the “Sunday Players” brand name, sued Kellwood Company for an alleged breach of a licensing agreement to manufacture and market a line of sport compression clothing under the Sunday Players name. A large clothing manufacturer that focused on “private label” arrangements, Kellwood often manufactured specialized clothing lines for retailers and marketers such as Sunday Players under their individual brand names. Founded in 2002 by Washington, Sunday Players was a start-up clothing brand focused on the sport compression segment, a fast-growing apparel segment. Licensing negotiations between Sunday Players and Kellwood began in early 2003 and proceeded amid discussions between Kellwood and MTV about a potential promotion agreement pitching the Sunday Players clothing line. With an MTV deal still possible, Sunday Players and Kellwood agreed to a 3-year licensing and manufacturing arrangement in November 2003 whereby Kellwood obtained exclusive license to manufacture, market, sell, and distribute Sunday Players labeled apparel. In addition to the production capability, Sunday Players, which was still a nascent brand, would receive 5% in royalties from all sales.3 The promotion deal with MTV never took place however, and other problems with the partnership execution developed resulting in Kellwood terminating the license agreement in March 2005.4

In the lawsuit filed by Washington in November of 2005, Sunday Players contended that Kellwood breached the licensing agreement by failing to market the Sunday Players brand name appropriately per the agreement and for terminating it early. A summary judgement ruled that Kellwood did breach the license agreement by terminating too early and failed to provide adequate sampling as part of the marketing campaign. A trial followed in February of 2016 to determine whether Kellwood also breached the agreement by failing to make reasonable marketing efforts, and a jury found Kellwood liable. Washington was subsequently awarded $4,350,000 in lost profits damages resulting from the breach.5 In July 2016 however, Judge Sarah Netburn, US Magistrate Judge from the Southern District of New York, agreed with Kellwood’s arguments that Sunday Player’s alleged damages were not sufficiently supported. Judge Netburn vacated the entire $4,350,000 award in her July 15, 2016 Opinion & Order and concluded that the jury’s lost profits award relied on overly speculative evidence and projections. While the court afforded the plaintiff a motion for reconsideration in order to prove damages from lost profits, in September 2016 the plaintiff’s motion for reconsideration was denied. Judge Netburn retained the vacated damages decision because of the plaintiff’s failure to present a reasonable comparable company for revenue and lost profits measurement.

Lost Profits/Damages
Sunday Player’s damages expert used a yardstick approach to estimate revenue in a lost profits calculation and selected Under Armour, the billion-dollar clothing and accessories company, as an appropriate comparable to Sunday Players.6 Using Under Armour’s historical revenues as a baseline, the expert argued Under Armour’s moisture-wicking apparel products, distribution channels, branding, and business strategy were similar to Sunday Players. Importantly, he compared Kellwood’s MTV promotion opportunity to a 2003 advertising and marketing agreement between Under Armour and ESPN, arguing that Kellwood’s MTV agreement would have resulted in similar success for Sunday Players. To estimate Sunday Player’s 2005-2007 revenue, Barnes then discounted Under Armour’s 2002-2004 sales figures by 50% stating that the 2002-2004 time period was the appropriate comparable time frame and the 50% discount reflected Under Armour’s dominance of the market and the apparel competitive landscape.

The yardstick approach, often employed by damages practitioners to estimate revenue as part of a lost profits analysis, is a well-recognized and established method for lost profits calculation in business litigation.7 In the yardstick approach, a practitioner selects a firm or group of firms similar to the plaintiff and assumes that but for the defendant’s actions, the plaintiff would perform the same relative to the comparable(s).8 For the approach to be valid, the comparable firm or group of firms must be similar enough to the plaintiff to be relied upon as an indication of performance. There are important considerations, however, in the selection of the yard stick approach, especially in the selection of the comparable firm(s) used in the calculation.

In addition, according to the decision in this matter, under New York law “lost profits need not be ‘be determined with mathematical precision,’ but they must ‘be capable of measurement based upon known reliable factors without undue speculation.’”9 A lost profits calculation should have a “stable foundation for a reasonable estimate” or it “fails for uncertainty.”10

Under Armour, a company founded in 1996, raised $157 million in its November 2005 initial public offering. Its 2004 revenue was $205 million and its average annual revenue growth rate between 2002-2004 exceeded 100%. Sunday Player’s, a company founded in 2002, had little to no capital and no manufacturing capability at the time of the licensing agreement with Kellwood. Its annual revenues were less than $200,000.11

Despite Sunday Players nascent status, plaintiff’s expert concluded Kellwood would have sold more than $82 million of Sunday Players merchandise during the term of the licensing agreement. In one New York case, however, the Court found that “evidence of lost profits from a new business venture receives greater scrutiny because there is no track record upon which to base an estimate.”12 In the same case, the Court found that comparable firms’ revenues are pertinent when “plaintiff’s business bears a close comparison to the proposed business, the products or services involved are standardized, and the profits do not depend heavily on local or personal management skills.”13 Under Armour was the industry leader for moisture-wicking apparel while Sunday Players lacked any significant market share. In fact, Judge Netburn cited the comparison to Under Armour as “little more than the entrepreneur’s cheerful prognostications.”14

1.Daryl K. Washington et al., v. Kellwood Company, United States District Court Southern District of New York, Civil Action No. 05-CV-10034 (SN)
2.Daryl K. Washington et al., v. Kellwood Company, United States District Court Southern District of New York, Opinion & Order, July 15, 2016 (“Opinion and Order”), at 1.
3.Id. at 4.
4.Id. at 6.
5.Id. at 8.
6.Id. at 7.
7.Litigation Services Handbook Fifth Edition, The Role of the Financial Expert, 28-29, (Roman L. Weil, Daniel G. Lentz & and David P. Hoffman), 5th ed., 2012
8.Id. at 28
9.Daryl K. Washington et al., v. Kellwood Company Opinion & Order July 15, 2016 at 13 (Ashland Mgmt., Inc. v. Janien, 82 N.Y.2d 395,403 (1993).
10.Daryl K. Washington et al., v. Kellwood Company Opinion & Order July 15, 2016 at 13 (Freund v. Washington Sq. Press, Inc., 34 N.Y. 2nd 379, 383 (1974)).
11.Daryl K. Washington et al., v. Kellwood Company Opinion & Order July 15, 2016 at 14.
12.Id. at 13 (Schonfeld v. Hilliard, 218 F.3d 164, 172 (2d Cir.2000) (McLaughlin, J.)
13.Id. at 13 (Schonfeld v. Hilliard, 218 F.3d at 174)
14.Id. at 25.

Case in Point: The Danger of Dissimilar Comparables 2017-02-03T00:00:00.0000000 /insights/publications/litigation-and-disputes/the-danger-of-dissimilar-comparables publication {C8894F56-FF6C-4DEA-AB91-58D66A7F0624} {A3EB1451-9854-4D28-88C7-692EE2C0A78E} {C91DEFE0-8446-4573-8D7B-6D30B0BA9D81} {51947818-C499-4911-9447-3AA383066F9E}

Related Services

Duff & Phelps Disputes

Disputes and Investigations and Legal Management Consulting

Commercial Disputes and Litigation

Industry and technical insights to win disputes related to contractual, fiduciary or related obligations.

Commercial Disputes and Litigation
Duff & Phelps Corporate Finance

Corporate Finance

Fairness Opinions

#1 ranked provider of fairness opinions for boards of directors and special committees.

Fairness Opinions
Duff & Phelps Valuation Advisory Services

Valuation Advisory

Business Valuation

Valuation of a business or a business interest.

Business Valuation

Case Studies