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REPLY (re 187 MOTION to Exclude Testimony of Finance Scholars Group,… — Brooks v. Thomson Reuters Corporation (Dkt. 193)

No. 3:21-cv-01418-EMC · Doc. 193 · Docket on CourtListener

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Case 3:21-cv-01418-EMC Document 193 Filed 03/31/23 Page 1 of 10

1 Susan D. Fahringer, Bar No. 21567 Gabriella Gallego, Bar No. 324226
SFahringer@perkinscoie.com GGallego@perkinscoie.com
2 Nicola C. Menaldo, pro hac vice PERKINS COIE LLP
3 NMenaldo@perkinscoie.com 3150 Porter Drive
Erin K. Earl, pro hac vice Palo Alto, CA 94304-1212
4 EEarl@perkinscoie.com Telephone: 650.838.4300
Anna M. Thompson, pro hac vice Facsimile: 650.838.4350
5 AnnaThompson@perkinscoie.com
PERKINS COIE LLP Hayden M. Schottlaender, pro hac vice
6
1201 Third Avenue, Suite 4900 HSchottlaender@perkinscoie.com
7 Seattle, WA 98101-3099 PERKINS COIE LLP
Telephone: 206.359.8000 500 N. Akard Street, Suite 3300
8 Facsimile: 206.359.9000 Dallas, TX 75201-3347
Telephone: 214.965.7700
9 Attorneys for Defendant Facsimile: 214.965.7799
Thomson Reuters Corporation
10

11
UNITED STATES DISTRICT COURT
12
NORTHERN DISTRICT OF CALIFORNIA
13 SAN FRANCISCO DIVISION

14 CAT BROOKS and RASHEED Case No. 3:21-cv-01418-EMC
SHABAZZ, individually and on behalf of
15 all others similarly situated, DEFENDANT THOMSON REUTERS’
REPLY IN SUPPORT OF ITS MOTION
16 Plaintiffs, TO EXCLUDE TESTIMONY OF
FINANCE SCHOLARS GROUP, INC.
17 v. (DR. TERRY LLOYD)
18
THOMSON REUTERS CORPORATION, REDACTED - PUBLICLY FILED
19 VERSION OF DOC. 177-2
Defendant. PURSUANT TO COURT ORDER,
20 DATED MARCH 30, 2023 (DOC. 190)
21
Date: April 20, 2023
22 Time: 1:30 p.m.
Place: Courtroom 5, 17th Floor
23 Judge: Hon. Edward M. Chen
24

28
Case No. 3:21-cv-01418-EMC THOMSON REUTERS’ REPLY ISO
ITS MOTION TO EXCLUDE LLOYD OPINION
Case 3:21-cv-01418-EMC Document 193 Filed 03/31/23 Page 2 of 10

1 I. INTRODUCTION
2 As Thomson Reuters (“TR”) explained in its motion, in purporting to offer an opinion on
3 methodology to calculate disgorgement in this case, Dr. Lloyd did not even attempt to undertake
4 the pertinent inquiry. He disregarded clear and uniform legal authority holding that net profit (and
5 not gross profit) is the proper measure of disgorgement, and he made no effort to subtract profit
6 that is attributable to the unchallenged aspects of CLEAR. He then invented an ad hoc and
7 unreliable method of calculating gross profit that nobody else in his field seems to have used.
8 Making matters worse, he allocated TR’s revenue to California based on variables that have
9 nothing to do with TR’s sales.
10 Plaintiffs’ response is that the Court need not address these issues now, and that if it does,
11 it should simply defer to Dr. Lloyd because he is an experienced accountant. But the Court must
12 address the admissibility of Dr. Lloyd’s opinion at class certification and must assess for itself
13 whether that testimony is relevant and reliable. Because it is not, Dr. Lloyd’s opinion should be
14 excluded.
15 II. DR. LLOYD’S OPINION IS INADMISSIBLE BECAUSE HE DID NOT ATTEMPT
TO UNDERTAKE THE PERTINENT INQUIRY.
16

17 The proper measure of disgorgement in California and under the Restatement is the
18 defendant’s “net profit attributable to the underlying wrong.” Am. Master Lease LLC v. Idanta
19 Partners, Ltd., 225 Cal. App. 4th 1451, 1491 (2014) (quoting Restatement (Third) of Restitution
20 and Unjust Enrichment § 51(4) (Am. L. Inst. 2011)), as modified (May 27, 2014). Despite this
21 clear guidance, Dr. Lloyd calculated gross profit, not net profit, and made no effort to isolate only
22 the profit attributable to the alleged wrong. Because Dr. Lloyd did not conduct “the pertinent
23 inquiry,” his testimony is inadmissible. Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579,
24 591-92 (1993).
25 A. Dr. Lloyd’s failure to conform his model to California law cannot be ignored
at class certification.
26

27 Plaintiffs suggest that Dr. Lloyd’s failure to create a model that is consistent with
28 California law is a merits issue that is not relevant at class certification, and that Dr. Lloyd can
Case No. 3:21-cv-01418-EMC -1- THOMSON REUTERS’ REPLY ISO
ITS MOTION TO EXCLUDE LLOYD OPINION
Case 3:21-cv-01418-EMC Document 193 Filed 03/31/23 Page 3 of 10

1 cure these deficiencies by offering a new methodology at the merits stage. See Doc. 167-3
2 (“Opp.”) at 10. Plaintiffs are incorrect. At class certification, a plaintiff must provide a model for
3 awarding monetary relief that is consistent with the plaintiff’s theory of liability. Comcast Corp.
4 v. Behrend, 569 U.S. 27, 35 (2013); see Opp. at 4 (conceding same). Thus, the court must assess
5 at class certification whether the plaintiff’s proposed model is “consistent with its liability case . .
6 . even when that requires inquiry into the merits of the claim.” Comcast, 569 U.S. at 35 (emphasis
7 added). Plaintiffs’ argument that the Court need not address the mismatch between California law
8 and Dr. Lloyd’s analysis because TR did not “argue that estimating net profits for purposes of
9 classwide disgorgement is an impossible task” also misses the mark. See Opp. at 1. The question
10 is not whether it is theoretically possible to produce a disgorgement model consistent with
11 California law; it is whether Plaintiffs have done so. See Comcast, 569 U.S. at 36. They have not.
12 B. Dr. Lloyd’s opinion is inadmissible because his model is designed to estimate
TR’s gross profit instead of its net profit.
13

14 “Gross profit and net profit are different things.” Doc. 157-07 (“Lloyd Dep.”) at 56:12-13.
15 Both experts agree on this distinction, and decades of California precedent–including the cases
16 Dr. Lloyd cites–is in accord. See Mot. at 6-8. California law and the Restatement provide that net
17 profit is the proper measure of disgorgement, meaning all costs of producing the revenue–not just
18 the costs of goods sold–must be deducted. See id. Despite this overwhelming consensus, Dr.
19 Lloyd admits that his model estimates gross profit instead of net profit. Lloyd Dep. at 57:21-58:2
20 (“Q: And in this case, did you calculate gross profits for CLEAR or net profits for CLEAR? A:
21 We calculated the gross profits as I describe.”); see also Mot. at 7; Opp. at 6 (“Lloyd measured
22 the relevant gross profit”).
23 Plaintiffs have been unable to muster a single case holding that gross profit is the proper
24 measure of disgorgement, and though they contend that the authority TR cited “does not account
25 for the more nuanced guidance from the Restatement,” Opp. at 10, that assertion is plainly
26 incorrect because the authority on which TR relies quotes from and interprets the Restatement.
27 See, e.g., Am. Master Lease, 225 Cal.App.4th at 1487-88, 1491-92.
28

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ITS MOTION TO EXCLUDE LLOYD OPINION
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1 In the absence of legal authority, Plaintiffs resort to suggesting that Dr. Lloyd is entitled to
2 decide for himself the meaning of California law–or at least that the meaning of California law is
3 a factual matter for the experts to debate at trial. See Opp. at 10. But the proper measure of profit
4 for an unjust enrichment claim is a legal issue for the Court to decide, and a matter on which the
5 Court will need to instruct the jury. See, e.g., California Civil Jury Instruction 4410 Unjust
6 Enrichment for Misappropriation of Trade Secrets (“subtract . . . [name of defendant]’s
7 reasonable expenses, including the value of the [specific categories of expenses in evidence, such
8 as labor, materials, rents, interest on invested capital]”); Ninth Circuit Model Civil Jury
9 Instruction 17.34 Copyright–Damages–Defendant’s Profits (“The defendant’s profit is determined
10 by [deducting] [subtracting] all expenses from the defendant’s gross revenue.”). As TR
11 demonstrated earlier, the Court must determine at class certification whether Plaintiffs’ damages
12 model is consistent with their theory of liability. See Section II(A). To do so, the Court must first
13 identify the governing law.
14 C. Dr. Lloyd’s opinion is inadmissible because his model does not even attempt
to isolate only the profit attributable to the alleged wrong.
15

16 In addition to failing to calculate net profit, Dr. Lloyd’s opinion should be excluded
17 because his model does not make any attempt to isolate only the profit attributable to the alleged
18 wrong. Plaintiffs contend that Dr. Lloyd was not required to do so because it is TR’s burden to
19 demonstrate costs and because CLEAR would be “worthless without the underlying [California]
20 data.” See Opp. at 10. Neither argument is persuasive.
21 California adopted the legal standard from the Restatement, which assigns “the claimant
22 . . . the burden of producing evidence from which the court may make at least a reasonable
23 approximation of the defendant’s unjust enrichment.” Am. Master Lease, 225 Cal.App.4th at
24 1487-88 (emphasis added). Once the plaintiff meets this threshold burden, the defendant is “free
25 . . . to introduce evidence tending to show that the true extent of unjust enrichment is something
26 less.” Id. at 1488. California adopted this framework instead of the framework in the copyright
27 context where “the claimant has the burden of proving revenues and the defendant has the burden
28 of proving deductions.” Id. at 1487. Thus, Plaintiffs bore the initial burden of identifying at least a

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ITS MOTION TO EXCLUDE LLOYD OPINION
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1 reasonable approximation of only the profit attributable to the alleged wrong. Because Dr. Lloyd
2 admits that he did not even attempt to do so, Plaintiffs did not carry that burden. See Mot. at 9;
3 Comcast, 569 U.S. at 35 (reversing class certification because the plaintiffs’ damages expert
4 “[did] not even attempt” to “measure only those damages attributable to [their] theory” of
5 liability).
6 Plaintiffs’ second argument–that they were not required to provide a reasonable
7 approximation of only the profit attributable to the alleged wrong because CLEAR would be
8 “worthless” without information about Californians–is equally unavailing. Plaintiffs do not cite
9 any authority for the proposition that the fact that a particular component of a product is
10 important–or even essential–means that all of the profit earned from that product is attributable to
11 that component.
12 Plaintiffs’ theory is not only unsupported by precedent, but also contrary to the
13 Restatement and common sense. Imagine a lawsuit exactly like this one, except instead of
14 complaining about collecting and sharing information, a plaintiff complained about an automobile
15 manufacturer including gas tanks in its vehicles. While a car might be “worthless” without a gas
16 tank, it does not follow that 100% of the manufacturer’s profits were attributable to the gas tank.
17 Many components of a vehicle are essential (e.g., the brakes, the drivetrain, the steering wheel),
18 and if any one of them were removed the product would be “worthless,” but each one of them
19 cannot be responsible for 100% of the profits. And many non-essential components, like air
20 conditioning or a navigation system, plainly contribute to the manufacturer’s profits too. The
21 same is true here; CLEAR is like the car, and the many essential components of CLEAR (e.g., the
22 organization of the data, the search function, etc.) are like the brakes and the steering wheel. Even
23 if CLEAR would be “worthless” without information about Californians, it would be equally
24 “worthless” without other essential components of the product. CLEAR would not have generated
25 revenue, for instance, if TR did not organize the information and maintain an effective search
26 function and user interface. See Doc. 151-17 (“Kidder Rep.”) at 19-20.
27 Recognizing this commonsense principle, the Restatement provides that one must assess
28 what portion of the net profit “is properly attributable to the underlying wrong” and what portion

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ITS MOTION TO EXCLUDE LLOYD OPINION
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1 is “the product of legitimate contributions by the defendant that should not, in justice, be awarded
2 to the claimant.” Restatement § 51 cmt. f. Nothing in the Restatement says that a plaintiff is
3 entitled to all of the profits if he complains about an important or essential component of a
4 product. See also Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390, 397-98, 408-09
5 (1940) (affirming conclusion that no more than 20% of the film’s profits were attributable to the
6 copied story).
7 Since Dr. Lloyd admits that his model does not even attempt to estimate net profit
8 attributable to the underlying wrong, which is the only acceptable measure of disgorgement in
9 California, his opinion is irrelevant, and it should be excluded. See Oracle Am., Inc. v. Google,
10 Inc., No. C 10-03561 WHA, 2016 WL 2342365, at *7 (N.D. Cal. May 3, 2016) (excluding
11 Oracle’s expert’s testimony because his model “simply ignore[d] the numerous critical non-
12 infringing elements of Android to which some of the profits should be apportioned”).
13 III. DR. LLOYD HAS NOT DEMONSTRATED THAT HIS METHODS WERE
RELIABLE.
14
A. Dr. Lloyd has not identified any external source that validates his ad hoc
15 method of calculating gross profit.

16 Even if gross profit were the proper measure of disgorgement, Dr. Lloyd’s novel method

17 of calculating it is unreliable. See Mot. at 9-11. For the revenue side of his analysis, Dr. Lloyd

18 included all revenue TR earned from CLEAR over the relevant period, while for the cost side he

19 deducted only costs that vary per search. See id. Dr. Lloyd did not cite any authority recognizing

20 this mixing and matching as a reliable method of calculating gross profit, and, despite what

21 Plaintiffs claim, his say-so is not enough. See Daubert v. Merrell Dow Pharms., 43 F.3d 1311,

22 1319 (9th Cir. 1995) (“Daubert II”) (excluding expert testimony because plaintiffs were unable to

23 “point to any external source to validate [the] methodology” and instead presented the court with

24 “only the experts’ qualifications, their conclusions, and their assurances of reliability”).

25 It is unsurprising that Plaintiffs were unable to find any independent support for Dr.

26 Lloyd’s bespoke method of calculating gross profit because it is nonsensical. Dr. Lloyd reasons

27 that if the only cost of an additional search is a transactional royalty fee, then transactional royalty

28 fees are the only costs TR incurred in producing the revenue over the entire four-year period. But

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1 that is plainly incorrect. For example, TR has paid a flat-rate royalty to the
2 .1 See Kidder Rep. at 30-31. If Plaintiffs had
3 their way and TR were unable to provide access to any information about Californians (including
4 this information that is required to be made available upon request by statute), then TR would
5 save the flat-rate royalty costs it incurs to license that information. That those costs do not vary by
6 search does not mean that one can pretend they do not exist. As another example, the fact that
7 TR’s sales representatives’ salaries do not vary per search does not mean that TR did not incur
8 any sales costs attributable to California over the four-year period Dr. Lloyd examined. Plaintiffs
9 have not identified any authority to support Dr. Lloyd’s methodology.
10 Plaintiffs attempt to paper over the lack of support for Dr. Lloyd’s method by citing two
11 cases, neither of which were relied upon by Dr. Lloyd, and neither of which endorse his novel
12 approach. In Brown v. Google, No. 20-CV-3664-YGR, 2022 WL 17961497, at *1 (N.D. Cal.
13 2022), the plaintiffs contended that Google’s tracking of the web-browsing of individuals using
14 Google Chrome’s “Incognito Mode” was unlawful. Google earned revenue from this practice by
15 serving targeted advertisements to these individuals. Id.2 When estimating Google’s net profit
16 from those advertisements the plaintiffs’ expert did not deduct any costs because a separate
17 plaintiffs’ expert and two Google witnesses testified that Google did not incur costs in serving
18 targeted advertisements to those using Incognito mode. Id. at *6. The court held that the expert’s
19 decision not to deduct costs was reasonable under the circumstances, and that a factual dispute
20 raised by a third Google witness about whether Google actually incurred costs would need to be
21 resolved at trial. Id. at *7. The key difference between Brown and this case is that everyone in
22 Brown agreed that if Google did incur costs in tracking individuals using Incognito mode and
23 serving them advertisements, they would need to be deducted. In other words, everyone in Brown
24

25 1
Section 102230(c)(5) of California’s Health & Safety Code provides that this information “shall
be made available to financial institutions . . . [their] representatives or contractors, consumer credit
26 reporting agencies . . . [their] representatives or contractors, [and] those entities providing
27 information services for purposes of law enforcement or preventing fraud.”
2
28 The court incorporated by reference this background from a previous order. See Brown v. Google,
No. 20-CV-03664-LHK, 2021 WL 6064009, at *3 (N.D. Cal. 2021).
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1 agreed with TR (and the Restatement) that all costs a defendant incurs in producing the revenue
2 must be deducted. See Restatement § 51 cmt. h (providing that one must deduct “all marginal
3 costs incurred in producing the revenues that are subject to disgorgement”). That is why both
4 experts and the court in Brown examined all costs “associated with Google generating revenue,”
5 including those that did not vary with each advertisement served, like the cost of “maintaining the
6 advertising infrastructure.” Brown, 2022 WL 17961497 at *6-7.
7 Plaintiffs’ citation to In re Actiq Sales & Marketing Practices Litigation, No. 07–4992,
8 2014 WL 3572932 (E.D. Pa. 2014), fares no better. In that case, the plaintiffs claimed that the
9 defendant’s sale of a drug was unlawful and the parties’ experts attempted to estimate the net
10 profit attributable to those sales. See id. at *1-2, *7-9. The plaintiffs’ expert–the one Plaintiffs
11 contend endorses Dr. Lloyd’s new method–agreed with TR’s position that the expert’s task in
12 estimating net profit is to subtract all “costs that would specifically go away if the product went
13 away.” Id. at *8 n.12. Sunk costs or costs that the business would bear even if the product went
14 away, like a CEO’s salary, would not be deducted, but other costs that would go away must be
15 deducted, even if they did not vary with each unit sold. Id. Thus, the plaintiffs’ expert deducted
16 numerous costs that did not vary with each sale of Actiq, including “marketing expenditures, field
17 sales costs,” and “clinical trials and regulatory costs.” Id. at *5. Dr. Lloyd did not deduct any
18 costs like these. Indeed, he did not deduct a cent for sales or marketing expenses because he
19 claims that simply ignoring any costs that did not vary per search is an appropriate method of
20 calculating gross profit. Doc. 127-12 (“Lloyd Rep.”) at 14-17. Actiq does not support that
21 proposition–nor does any other authority.
22 Plaintiffs’ failure to identify any authority endorsing Dr. Lloyd’s novel method of mixing
23 and matching total revenue over the four-year period while deducting only costs that varied per
24 search, means that they failed to meet their burden of demonstrating that Dr. Lloyd’s method of
25 calculating gross profit is “practiced by (at least) a recognized minority of [experts] in [his] field,”
26 and thus Dr. Lloyd’s testimony is inadmissible.3 Daubert II, 43 F.3d at 1319.
27 3
Plaintiffs attempt to distract from the lack of support for Dr. Lloyd’s approach by contending that
28 TR has not demonstrated that it is unreliable. See, e.g., Opp. at 6 n.5. That is incorrect, but it is also
irrelevant, as it is Plaintiffs’ burden to demonstrate that Dr. Lloyd’s method is reliable, not TR’s
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ITS MOTION TO EXCLUDE LLOYD OPINION
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1 B. Dr. Lloyd has not demonstrated that his method of allocating revenue to
California is reliable.
2

3 Dr. Lloyd’s method of apportioning revenue to California is also unreliable because he did

4 so based on an average of California’s share of U.S. GDP in 2021 and California’s share of U.S.

5 arrests from 2018 without ever explaining or demonstrating why those variables have anything to

6 do with TR’s revenue from CLEAR. See Mot. at 10-11. Plaintiffs double down on Dr. Lloyd’s

7 assertion that he was trying to assess “what data was actually of interest to CLEAR subscribers,”

8 Opp. at 2 n.1, but he never analyzed or explained why an average of California’s shares of GDP

9 and national arrests answers that question. See Mot. at 10-11. While experts may make reasonable

10 assumptions, they must explain why their assumptions are reasonable. Simply making an

11 assumption without any explanation or supporting analysis does not suffice. Gen. Elec. Co. v.

12 Joiner, 522 U.S. 136, 144 (1997) (“[N]othing in either Daubert or the Federal Rules of Evidence

13 requires a district court to admit opinion evidence that is connected to existing data only by the

14 ipse dixit of the expert.”); see also Oracle Am., 2016 WL 2342365, at *7 (excluding expert

15 testimony based on assumption that Google’s revenue would grow at the same rate from 2011

16 through 2015 as it had in 2009 and 2010 without any analysis justifying the assumption).

17 IV. CONCLUSION
18 In the end, Dr. Lloyd did not even attempt to undertake the pertinent inquiry. He

19 disregarded clear and uniform legal authority holding that net profit (and not gross profit) is the

20 proper measure of disgorgement, and he made no effort to subtract profit that is attributable to the

21 unchallenged aspects of CLEAR. He then devised an ad hoc and unreliable method of calculating

22 gross profit that is not used by others in his field. This irrelevant and unreliable testimony is

23 precisely what Daubert is designed to avoid, and it should not be admitted.

28
burden to demonstrate it is not. Daubert, 509 U.S. at 592 n.10.
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1 Dated: March 20, 2023 PERKINS COIE LLP
2

3 By: /s/ Anna Mouw Thompson
Anna Mouw Thompson
4 AnnaThompson@perkinscoie.com
5
Attorneys for Defendant
6 Thomson Reuters Corporation
7

Case No. 3:21-cv-01418-EMC -9- THOMSON REUTERS’ REPLY ISO
ITS MOTION TO EXCLUDE LLOYD OPINION

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