Sunlight Saunas, Inc. v. Sundance Sauna, Inc.

Citations: 427 F. Supp. 2d 1022; 69 Fed. R. Serv. 988; 2006 U.S. Dist. LEXIS 20318; 2006 WL 880246Docket: CIV.A.04-2597

Court: District Court, D. Kansas; April 5, 2006; Federal District Court

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Sunlight Saunas, Inc. filed a lawsuit against Sundance Sauna, Inc. and Brighton Sauna, Inc., alleging various claims including tortious interference with contract and business relationships, trademark infringement, false advertising, injury to business reputation, and antitrust violations, under the Lanham Act, Sherman Act, and state laws of California and Kansas. The case addresses competitive practices in the sauna industry, highlighting accusations that competitors, particularly Sauna by Airwall, disseminated false information about Sunlight’s products. Specific allegations involved misleading statements about the materials and safety of Sunlight's saunas, including claims regarding ceramic heaters, veneer construction, and safety certifications. The court reviewed motions from both parties, sustaining the defendants' motion to exclude the plaintiff's expert testimony while overruling the plaintiff's motion to strike the defendants' statement of facts. The factual background outlines the establishment of Sunlight Saunas in 2000, its leadership changes in 2002, and the competitive environment faced by the company.

Sunlight Saunas claims to offer a lifetime warranty and presents itself as the manufacturer of its saunas; however, it has changed manufacturers three times in four years and does not actually produce its own products. Other companies provide similar products without the misleading assertions made by Sunlight Saunas. A website created by Hall, in collaboration with Sundance's CEO Matt Thomas, included competitor links but was taken down following Sundance's directive. Hall's website was live for just over a month, during which time a few customers mentioned it to the plaintiff, though there’s no evidence of any purchases resulting from it. The plaintiff failed to meet its sales targets from October 2004 to June 2005, with March being particularly affected by the cancellation of a credit card used for online services and the installation of a new database and phone system. Sales manager Lisa Zinnecker indicated that market shifts and an influx of cheaper saunas contributed to the decline in sales. On July 12, 2005, Sunlight Saunas sued Jeffers for his alleged failure to manage customer and vendor inquiries, which supposedly resulted in lost business opportunities. The plaintiff also initiated lawsuits against Sauna by Airwall, Sundance, and John Does 1-2, later adding Brighton and Cobalt Multimedia as defendants. The court dismissed claims against Sauna by Airwall in November 2005 and against Cobalt Multimedia and Hall in March 2006.

Plaintiff's claims against Sundance and Brighton include: tortious interference with contract (Count I), tortious interference with prospective business relationship (Count II), trademark infringement and unfair competition (Count III), defamation (Count IV), injurious falsehood (Count VI), civil conspiracy (Counts VII and VIII), prima facie tort (Count IX), unfair business practices under California Business and Professions Code § 17200 (Count XII), false advertising under California Business and Professions Code § 17500 (Count XIII), false advertising under the Lanham Act (Counts XIV and XV), cybersquatting (Count XVI), and antitrust violations under the Sherman Act (Count XVII). 

Plaintiff seeks economic damages, damages for lost goodwill, injury to reputation, statutory damages under the Anticybersquatting Act, attorneys' fees, treble damages, costs, and punitive damages. Testimony from Zack during his deposition indicated he did not calculate damages, lacked knowledge of market share, and was unaware of industry sales reporting. Competition from low-cost Chinese sauna manufacturers began in early 2005, with a witness noting an influx of new competitors. 

Sales data from 2001-2005 shows forecasted and actual sales, with significant growth rates, although Zack indicated that the defendant's website adversely affected plaintiff's business performance. Plaintiff's growth projections involved reviewing financial documents and market factors, expecting increased competition in 2005. Zack reported gross sales from 2004 as $5 to $7 million, compared to $2.5 to $4 million in 2003. An expert witness, Charles E. Finch, submitted a damage report in August 2005.

Finch, lacking certification as a public accountant but holding an M.B.A. in Finance and a Master's in Economics, has been engaged in expert testimony and economic consulting since 1992, also teaching at Avila University. He has provided expert testimony in over 22 cases. His report estimates the plaintiff's lost profits attributed to the defendants' misleading claims regarding the quality and safety of Sunlight saunas. Finch's analysis rests on several assumptions, including the truth of the plaintiff's allegations and the validity of sales projections from October 2004 to June 2005. He calculated lost sales by comparing actual sales to these projections, excluding November 2004 when sales exceeded forecasts. Finch determined that the plaintiff suffered lost profits totaling $1,287,214, with $226,986 for 2004 and $1,060,228 for 2005 through June 30.

Dr. Christopher C. Pflaum, an economist hired by the defendants, critiqued Finch's methodology, arguing that the plaintiff's forecasts were unreliable due to unaccounted market changes, operational issues, and disparagement from a competitor. Subsequently, the defendants filed a Daubert motion to exclude Finch's expert testimony. The plaintiff responded by seeking to strike 26 statements from the defendants' supporting brief, claiming they lacked proper citation. The defendants countered that the motion to strike was unwarranted. Rule 12(f) of the Federal Rules of Civil Procedure allows a court to strike insufficient or irrelevant material from pleadings upon motion by a party or by the court's initiative.

A motion to strike is typically denied unless the allegations are irrelevant to the case and could prejudice a party. A Rule 12(f) motion is not suitable for disputing the factual basis of allegations. Under Rule 12(f), the court may strike material from pleadings, but a Daubert motion brief is not classified as a pleading. The court has overruled the plaintiff's motion to strike, supporting its decision with reasons from the defendant's opposition. Unsupported facts will not be considered. 

In the Daubert motion, defendants argue that expert Finch lacks qualifications and relies on unvalidated projections, seeking to exclude his testimony under Federal Rules of Evidence 403 and 702. The court must act as a gatekeeper, verifying that the expert testimony is based on scientific knowledge that aids in understanding the facts. This requires assessing the scientific validity of the reasoning or methodology used. The court's discretion governs the admission of expert testimony, and it should evaluate several factors for scientific validity, including testing, peer review, error rates, and general acceptance in the scientific community. 

While the Daubert framework applies generally, it is not required for expert testimony based solely on experience or training. Courts must also ensure that expert opinions are based on accurate facts rather than speculation, focusing on their helpfulness to the fact-finder. The defendants argue Finch is unqualified, specifically citing his lack of market data analysis, while the plaintiff contends that the defendants do not challenge Finch's credentials but rather the reliability of his opinion. The court concurs, treating the arguments as pertaining to reliability rather than qualifications.

Defendants challenge Finch's methodology on several grounds: 

1. Finch's conclusions rely on the flawed assumption that the plaintiff's sales projections for October 2004 to June 2005 were accurate, despite historical inaccuracies.
2. Finch could not explain how the plaintiff derived its sales projections.
3. Finch neglected to consider significant external factors, aside from the defendants' actions, that could have contributed to the decline in the plaintiff's sales.
4. Finch accepted Zack’s assertion that industry and economic factors did not affect the plaintiff's sales decline during the relevant period, ignoring increased competition and internal issues faced by the plaintiff.
5. Finch failed to account for the wrongful actions of a competitor, Sauna by Airwall.

These criticisms indicate that Finch's entire damage calculation hinges on unverified sales projections, which are deemed unexpert and vague. There is no supporting data for the plaintiff's claims of sales growth absent defendant misconduct, and the projections lack credibility according to established economic methodologies. The record reveals that increased competition from Chinese manufacturers beginning in January 2005 likely impacted sales, yet Finch did not separate damages attributable to this competition from those linked to the defendants' alleged misconduct.

Furthermore, Finch did not address the potential impact of Jeffers' absence or the loss of Internet leads in March, which could have historically affected sales. His failure to consider these factors, along with an improper attribution of all losses to the defendants, undermines the validity of his testimony. Ultimately, Finch's analysis lacks the rigor expected from an economist, making his testimony unlikely to assist the jury in determining damages.

Finch's exclusion of data from November 2004 in calculating lost profits lacks justification, as it was the only month where actual sales surpassed the plaintiffs' projections and closely followed the posting of Hall's defamatory website. Finch claims this exclusion is due to a significant initial order from a new international distributor, but there is no standard economic methodology supporting the exclusion of such orders in lost profit calculations. His methodology, while mathematically correct, is deemed unsound and unreliable, failing to meet the standards of admissibility under Rule 702. The court finds that the potential for misleading the jury and causing unfair prejudice from Finch's unsupported assumptions outweighs any probative value of his opinion on damages. The defendants' motion to exclude Finch's expert testimony is granted, while the plaintiff's motion to strike the defendants' statement of facts is overruled. The case involves disputes regarding marketing accounts and pertains to far infrared saunas. Finch's calculations do not address claims under the Lanham and Sherman Acts, and he admits he is not an antitrust expert. 

Additional context includes that a significant tariff clarification request related to infrared saunas was made in late 2004, leading to increased importation classifications by U.S. Customs.