NERA was retained by counsel of a high-end home furnishing manufacturer to measure the damages resulting from alleged trademark infringement and breaches of contract by its major retailer. The contractual relationship between the two was guided by several agreements, one of which stipulated advertising requirements for the retailer, specifically forbidding the use of discount advertising since the manufacturer believed such advertising cheapened its premium brand image. The manufacturer contended that the retailer used its trade names and trademarks to advertise products at deep discounts and as clearance items, thereby violating the terms and conditions of the agreements. 

Damages analysis was challenging because of the myriad of factors affecting sales in this industry, including the nature of the supply chain, a combination of retail and direct customer sales, the role of advertising, and the seasonality of sales. Since lost profits damages are typically expressed as the difference in a firm’s profits between the actual and the so-called “but-for” world, the experts’ task was to isolate the effect of the harmful acts by considering what sales and profits would have been in the damages period but for the violations. The NERA team led by Dr. Christine Meyer identified two benchmark periods (before and after the discount advertising) during which the alleged wrongful conduct did not occur to serve as guides to predict what sales would have been in the “but-for” world.

NERA’s experts disaggregated sales made through various channels and observed that during the damages period, sales made through channels other than that to the violating retailer saw a decline as compared to other periods. Other retailers curtailed their orders as they recognized that the discount advertising by the violating retailer would tend to lead to fewer customers at their stores. Interestingly, the violating retailer did not increase its orders from the manufacturer, likely because it used the discount advertising to attract customers but then sold them other products. Furthermore, NERA’s experts found no evidence that the reduction in sales during the damages period reflected merely a shifting of sales from one time period to another. After the advertising ended, while the sales to other retailers rebounded somewhat, they were still below what would have been expected from the performance in the earlier benchmark period. Thus, consistent with the literature on premium branding, the discount advertising likely depressed sales beyond the period of the discount advertising.

Since sales in this industry tend to fluctuate significantly due to seasonality, NERA’s consultants analyzed the ratio of weekly sales in the year under consideration to sales in the previous year. To determine what sales would have been had the retailer not advertised as it did, NERA’s experts calculated the average ratio for the benchmark periods and used this average to estimate the level of sales the manufacturer would have realized but-for the discount advertising. The lost sales during the period of harmful conduct was multiplied by the gross margin the manufacturer realized on its sales to determine its lost profits.

The parties settled on favorable terms shortly before trial.