Pawelko v. Hasbro, Inc.

          ORDER

          John J. McConnell, Jr. Chief Judge United States District Court

         This business dispute is now in the pre trial motion phase-each party seeking the Court's guidance in their ramp up to trial. As a reminder of the facts underlying this dispute, the Court reprints the factual recitation from Magistrate Judge Lincoln D. Almond's Report & Recommendation:

Plaintiff claims to be the inventor of an "original, innovative [crafting] product and idea" known as "Liquid Mosaic," She describes the invention as "a one of a kind arts and crafts play system...that made it easy and fun for children to create art projects and decorate by using a unique craft gun, with interchangeable extrusion tips to draw different line patterns and create textures, and prefilled removable cartridges containing a compound that sticks to multiple surfaces...." On November 15, 2010, Plaintiff executed Hasbro's standard Non-disclosure Agreement and thereafter pitched the idea to Hasbro. Her presentation included participation in a conference call, a five-page slide deck sent by email, and three sample craft projects (a hat, a purse and a light switch cover) made with a prototype compound made of caulk. Hasbro passed on the idea in December 2010 *** Plaintiff contends that Hasbro misappropriated her "Liquid Mosaic Submission" and used it to develop Play Doh Plus and DohVinci, two new product lines that incorporate the elements and features of "Liquid Mosaic." Hasbro denies such misappropriation and disputes that the "Liquid Mosaic Submission" qualifies as a legally protectable trade secret."

ECF No. 219 at 1-2 (citations omitted).

         Before the Court are seventeen pretrial motions in Ms, Pawelko's trade secret misappropriation and breach of contract case; Hasbro filed fourteen motions;^[1] Ms. Pawelko filed three motions. Each of these motions raises many issues-some at the forefront of this litigation in need of pretrial determination and many side issues the specter of which hovers in the abyss of potential trial issues. The Court does its best to decide definitively those issues that are cued up and reserves its decision on issues that may become moot before trial or that are more suitably decided closer to or at trial. To the extent this Order does not address all the parties' "what if arguments, it will do so when and if they come to fruition.

         I. Hasbro's Motions Seeking to Strike or Exclude Damages Opinions

         Hasbro has filed three motions that relate to the opinions and testimony from Ms. Pawelko's two damages experts-Suzanne Mills-Winkler and Pauline Booth. ECF Nos. 123, 124, 125. Because these three motions contain overlapping arguments, the Court will address them globally.

         A. The Experts

         Ms. Mills-Winkler essentially gives two categories of opinions: the Liquid Mosaic compound Ms. Pawelko pitched to Hasbro is a trade secret and that the royalty damages Hasbro owes Ms. Pawelko should be based on a royalty rate of between YA and 5%. She does not offer opinions that a public submission is entitled to royalties; instead she testifies that an invention qualifies as a trade secret even if it contains a compound available in the public domain, if that compound in a new form gives the ultimate product a competitive advantage, Ms. Mills-Winkler also gives opinions on industry standards of confidentiality, Hasbro's breach, and how that breach informed the facts on misappropriation.

         Ms. Booth opines on the royalty base, which she says consists of the total net sales of all products in the DohVinci sub-brand and the total net sales of all products sold with the PlayDoh Plus compound. She defines net sales as the gross amounts that Hasbro earned for the sale of each product less returns and discounts. Ms, Booth's opines that Ms. Pawelko's damages are about $255 million. Her opinion includes all profits from at least twenty-five products sold with PlayDoh Plus and all products sold under the DohVinci sub-brand earned or to be earned from 2014 through 2023. Those products contained other Hasbro-invented components such as regular PlayDoh, cutlery, and extruders. Hasbro's expert's opinion is that her damages are $261, 000 at most. One explanation for this huge disparity is that Ms, Booth's opinion does not restrict-or apportion-the damages to the allegedly infringing component only and Hasbro's expert's opinion does.

         1. Royalty Damages

         Hasbro moves under Federal Rules of Evidence Rules 401, 403, and 702 and under Daubert v. Men-ell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) to exclude some of Ms. Mills-Winkler's opinions about what reasonable royalty damages to which Ms. Pawelko may be entitled if the jury determines that Hasbro misappropriated her trade secret. Hasbro's main argument is that Ms. Mills- Winkler's opinions are not based on an acceptable methodology and are speculative because she did not adhere to the fifteen factors set forth in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y. 1970), modified and aff'd sub nom. Georgia Pac. Corp. v. U.S. Plywood-Champion Papers, Inc., 446 F.2d 295 (2d Cir. 1971), cert, denied, 404 U.S. 870 (1971)^[2] to determine the reasonable royalty rate percentage, ECF Nos. 123, 124. Hasbro also argues that Ms. Mills-Winkler reduced her royalty rate opinion at her deposition from 5% to 3% without explanation. ECF No. 124. Ms. Pawelko counters that Ms. Mills-Winkler's opinions meet the threshold set forth in the rules and Daubert because she relies on her extensive work experience in the toy industry in opining on the generally accepted and standard royalty rates. Hasbro's arguments against Ms. Mills-Winkler, she argues, go to the credibility of her opinions that Hasbro can test on cross-examination, not to their admissibility.

         Rule 702 states that if "scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue" an expert "may testify in the form of an opinion or otherwise," Fed.R.Evid. R. 702. This Court must determine whether l) the testimony embodies specialized knowledge and 2) that specialized knowledge is relevant so that it will help the jury make its factual determinations. Daubert, 509 U.S. at 592-3. As to the first inquiry, the United States Supreme Court in Daubert noted that "[m]any factors will bear on the inquiry" such as whether the scientific theory can be tested, whether it has been subject to peer review, and whether it is generally accepted within the applicable community. Id. at 593-594.

         Ms. Mills-Winkler stated that the general industry standard royalty rate in the toy industry is 5%, discounted to 3% for co-branded products. She opined at first in her report that PlayDoh Plus earned a 5% royalty rate, but after learning that PlayDoh Plus was a co-branded product, changed her opinion at her deposition to 3%. There is no dispute that the percentages Ms. Mills-Winkler used in her opinion were the industry standards generally accepted within the toy industry. Hasbro's witnesses confirmed that the industry standard for royalties was 5%. For this reason, the Court finds that Ms. Mills-Winkler's opinions pass muster under Rule 702.

         And the fact that she did not expound on every Georgia-Pacific factor in her report does not doom her opinion's admissibility, The court in Georgia-Pacific set forth fifteen factors relevant to determining a reasonable royalty because it was "necessary to resort to a broad spectrum of other evidentiary facts probative of a 'reasonable' royalty" when there was no "established" royalty. 318 F. Supp, at 1121. Because there is an established toy industry standard royalty rate, the Court finds that the fact that Ms. Mills-Winkler did not focus specifically on the Georgia-Pacific factors to render her opinions does not make those opinions inadmissible. If Hasbro believes her opinions are on shaky ground, "[v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence." Daubert, 509 U.S. at 59G. Hasbro's motions on this point are DENIED. ECF Nos. 123, 124.

         2. Industry Standards of Confidentiality

         Consistent with its previous Order, the Court finds that Ms. Mills-Winkler's opinions based on industry standards of confidentiality are not relevant to this case in which the parties' Non-disclosure Agreement controls. See ECF No. 242. In its reply, Hasbro moves to strike certain numbered paragraphs from Ms. Mills-Winkler's report that relate to the Court's ruling and the Court therefore GRANTS Hasbro's motion to strike as they relate to the industry standards of confidentiality. ECF No. 123.

         3. Apportionment

         Hasbro objects to both experts' failure to reduce their damages opinions to account for Hasbro's contributions to the financial success of the DohVinci and PlayDoh Plus product lines. Without this apportionment, it argues that Ms. Mills-Winkler's and Ms. Booth's^[3] opinions are unreliable and should be excluded. ECF Nos. 124, 125.

         Ms. Pawelko's theory of the case is that DohVinci and PlayDoh Plus derived from her Liquid Mosaic Submission, PlayDoh Plus was the driving reason that consumers bought the PlayDoh Plus sets, and Hasbro decided to add on components like regular PlayDoh, cutlery, and extruders to charge more money because the PlayDoh Plus compound was so unique. Therefore, she argues, the "entire market value rule" exception to apportionment applies because her invention is what motivated consumers to buy the products Hasbro created using the misappropriated Liquid Mosaic Submission. "The 'entire market rule' typically allows the recovery of damages based on the entire value of an apparatus with several features, even though only one feature is patented." Trustees of Columbia Univ. v, Roche Diagnostics GmbH, 272 F.Supp.2d 90, 119 (D. Mass. 2002) (citing Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11, 22 (Fed. Cir. 1984)). "For the entire market value rule to apply, the patentee must prove that 'the patent-related feature is the basis for the customer demand.'" Lucent Techs., 580 F.3d at 1336 (citation omitted).

         Reviewing the cases the parties cite and others, it is clear to the Court that apportionment in trade misappropriation cases is a potentially important tool that the parties can give the jury if the jury ...