Zenith Electronics Corp. v. Wh-Tv Broadcasting

• Decision Date: 20 January 2005
• Docket Number: No. 04-1635.,No. 04-1790.,04-1635.,04-1790.
• Citation: 395 F.3d 416
• Parties: ZENITH ELECTRONICS CORP., Plaintiff-Appellee, Cross-Appellant, v. WH-TV BROADCASTING CORP., Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

395 F.3d 416

ZENITH ELECTRONICS CORP., Plaintiff-Appellee, Cross-Appellant, v. WH-TV BROADCASTING CORP., Defendant-Appellant, Cross-Appellee.

No. 04-1635.

No. 04-1790.

United States Court of Appeals, Seventh Circuit.

Argued December 6, 2004.

Decided January 20, 2005.

Lawrence Benjamin (argued), Neal, Gerber & Eisenberg, Chicago, IL, for Plaintiff-Appellee.

Thomas F. Sax, Pedersen & Houpt, Chicago, IL, Gary L. Starkman (argued), McGuirewoods, Chicago, IL, Edgar Cartagena-Santiago (argued), Ramon Dapena, Goldman, Antonetti & Cardova, for Defendant-Appellant.

Michael Dockerman (argued), Wildman, Harrold, Allen & Dixon, Chicago, IL, for General Instrument Corp.

Before EASTERBROOK, KANNE, and EVANS, Circuit Judges.

EASTERBROOK, Circuit Judge.

WH-TV broadcasts a digital television signal in San Juan, Puerto Rico, competing with cable and direct-broadcast satellite services. Seeking to expand its business, it purchased set-top boxes from Zenith Electronics. These boxes, which broadcasters furnish to subscribers, convert the digital input into an analog output that TV sets can display. Boxes may have other functions, such as presenting a programming grid from which subscribers can choose their favorites, and descrambling pay-per-view shows. WH-TV wanted boxes that use the digital video broadcasting (DVB) standard, so that it could mix equipment from different vendors and upgrade its broadcasting gear to take advantage of the latest features. Zenith assured WH-TV that its boxes conform to the DVB standard. By this Zenith meant the 1995 version of that standard — though WH-TV thought that Zenith meant the 1998 version, which had been adopted a year before the sales, and planned its operations on that assumption. A trier of fact could find that Zenith misled WH-TV or at least withheld material information and that the consequences were unhappy for WH-TV and its customers: the broadcaster lost business when customers encountered problems in using the boxes, and it was unable to substitute other vendors' boxes, because they did not speak the same dialect of the DVB standard. We must assume, given the posture of the case, that serious problems existed and were Zenith's fault.

Zenith filed suit to collect unpaid bills for boxes it delivered; WH-TV filed a counterclaim seeking to recover for profits it says it lost because of defects in Zenith's merchandise. After extended proceedings that we need not recount, the district court granted summary judgment in Zenith's favor, holding that it had a right to payment under the contract while WH-TV would be unable to establish damages at trial. 2003 U.S. Dist. LEXIS 11037 (N.D. Ill. June 25, 2003), 2003 U.S. Dist. LEXIS 13819 (N.D.Ill. Aug. 6, 2003), 2003 U.S. Dist. LEXIS 17661 (N.D.Ill. Oct. 1, 2003). WH-TV proposed to rely on the testimony of Peter Shapiro that its business would have grown rapidly, and its profits ballooned, had Zenith's boxes been as promised. The district judge excluded this projection under Fed.R.Evid. 702 as unreliable, knocking out this theory independent of any limitations on the recovery of lost profits specified by Zenith's sales documents and the doctrine of Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854). Although WH-TV might have been able to show loss based on defects in the boxes Zenith actually provided, that route was closed, the judge concluded, by WH-TV's failure to provide a responsive answer to Zenith's contentions interrogatory. WH-TV was left with no evidence about damages.

Shapiro proposed to testify that, with set-top boxes meeting the 1998 DVB standard and otherwise up to snuff, WH-TV would have experienced rapid growth paralleling that of DirecTV, the leading satellite broadcaster. Shapiro's estimate had two components: first the number of customers in San Juan who would have subscribed to DirecTV during the period 2002 through 2008, and second the percentage of those customers who would have used WH-TV instead, had WH-TV been able to offer customers service better than Zenith's equipment allowed. Shapiro might have based at least the former on DirecTV's actual sales in other markets, but he did not do so. Instead he proposed to testify that San Juan is "unique" and that all experience in other markets is irrelevant. He took the same approach to the second task, estimating WH-TV's potential share of the digitalbroadcasting business. WH-TV uses a technology known as multipoint multichannel digital system or MMDS. Other markets have MMDS service using equipment that meets the 1998 DVB standard, and Shapiro might have used data from these to gauge the potential for such a service in San Juan, relative to the number of potential subscribers (principally hotels plus households that lack access to cable TV service). Again, however, Shapiro made no effort to calculate the potential subscriber base or use data from other markets (other than one in Mexico, which he eyeballed but did not analyze) to inform his projection about San Juan. Each market is unique, Shapiro insisted, making experience elsewhere irrelevant.

Expert evidence is admissible under Rule 702 when "(1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case." See also Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993), and Kumho Tire Co. v. Carmichael, 526 U.S. 137, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999), which interpret an earlier version of Rule 702. The district judge thought that Shapiro's failure to look outside San Juan, even for a reality check, meant that he lacked "sufficient" facts. Shapiro himself all but conceded that he had not applied "reliable principles and methods". Asked repeatedly during his deposition what methods he had used to generate projections, Shapiro repeatedly answered "my expertise" or some variant ("my industry expertise", "[my] awareness," and "my curriculum vitae") — which is to say that he either had no method or could not describe one. He was relying on intuition, which won't do. See, e.g., McMahon v. Bunn-O-Matic Corp., 150 F.3d 651, 658 (7th Cir.1998); Rosen v. Ciba-Geigy Corp., 78 F.3d 316, 319 (7th Cir.1996).

Appellate review of a decision under Rule 702 is deferential, see General Electric Corp. v. Joiner, 522 U.S. 136, 118 S.Ct. 512, 139 L.Ed.2d 508 (1997), and the judge did not abuse his discretion. The supposed "uniqueness" of a market does not justify substituting a guess for careful analysis. Cities differ in size, average income, levels of education, availability of over-the-air TV signals, and other factors that might affect the demand for MMDS service. But social science has tools to isolate the effects of multiple variables and determine how they influence one dependent variable — here, sales of MMDS service. Perhaps the leading tool is the multivariate regression, which is used extensively by all social sciences. Regression analysis is common enough in litigation to earn extended treatment in the Federal Judicial Center's Reference Manual on Scientific Evidence (2d ed.2000). Regression has its own chapter (Reference Guide on Multiple Regression, prepared by Daniel L. Rubinfeld, at Reference Manual 179-228) and plays a leading role in two more: David H. Kaye & David A. Freedman, Reference Guide on Statistics, at Reference Manual 83-178, and Robert E. Hall & Victoria A. Lazear, Reference Guide on Estimation of Economic Losses in Damages Awards, at Reference Manual 277-332. Shapiro neither employed any of the methods covered in the Reference Manual nor explained why he hadn't.

Judges asked to determine whether an approach is "reliable" by the standards of science encounter the problem that we are lawyers rather than scientists. See Daubert v. Merrell Dow Pharmaceuticals, Inc., 43 F.3d 1311 (9th Cir.1995). It will not do to stop with lawyers' arguments pro and con, for these may fail to appreciate the difficulties that...