Court Reverses Jury Award Based on Speculative Valuation

Sportswear Company is Too Much of a Stretch

By Michael Stover, CPA/ABV

A recent U.S. District Court decision vacates a jury award based on a speculative valuation.

Washington started a sports apparel company in 2002 that marketed compression wear to football players and branded the product with the logo and name of his fledgling sports agency, Sunday Players. Sunday Players did not have any manufacturing facilities, so Washington turned to Kellwood Company, one of the world’s largest “private label” clothing manufacturers. In 2003, Washington and Kellwood signed a license agreement giving Kellwood an exclusive license to use the Sunday Players mark in connection with the production, manufacturing, advertising, merchandising, promotion, distribution and sale of apparel. But, in March 2005, Kellwood unilaterally terminated the license agreement having sold no Sunday Players merchandise and had done no direct consumer marketing.

Washington sued claiming that the early termination killed the brand and effectively put Sunday Players out of business. Washington’s expert based his valuation of Sunday Players on a market leader, Under Armour’s, historical sales performance because he believed that the companies had similar products, business strategies, and brand philosophy. He testified that between 2005 and 2007, he expected Sunday Players would have one half of the sales that Under Armour achieved between 2002 and 2004. The jury returned a verdict in favor of Washington and concluded that Kellwood breached the contract by failing to use reasonable marketing efforts. It awarded lost profits of $4,350,000 and, alternatively, $500,000 in lost market value as of March 14, 2005.

Recently, however, the District Court judge concluded that while Sunday Players proved that Kellwood breached its obligation, the lost profits verdict was too speculative and should be set aside since it did not prove that its new and untested business would have achieved vast market success but for Kellwood’s breaches. The company had no brand recognition and less than $200,000 in total sales. Sunday Players did, however, prove that it lost business value, but because the jury’s lost value verdict relied on the same speculative evidence projections as its lost profits verdict, that award was also set aside.

According to the decision, Sunday Players lacked a track record and attempted to prove its damages by reference to a comparable company, but the choice to use Under Armour as that comparator had three fatal flaws.

  1. Sunday Players could not show causation – it didn’t prove that it would have made a profit simply by mimicking Under Armour’s marketing strategy.
  2. Sunday Players could not use Under Armour’s historical sales to prove lost profits to a reasonable certainty because the businesses were too different.
  3. Sunday Players did not prove that the amount of claimed lost profits were within the contemplation of the parties at the time of the contract.

Providing evidence of the damages is just as important as proving the action that caused the loss. Please contact me at (937) 913-2507 or if you would like to discuss a valuation/damages issue.

Comments are closed.