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Sanchelima International, Inc. v. Walker Stainless Equipment Company, LLC

United States District Court, W.D. Wisconsin

March 19, 2018

SANCHELIMA INTERNATIONAL, INC., and SANCHELIMA INTERNATIONAL S. DE R.L. DE C.V., Plaintiffs,
v.
WALKER STAINLESS EQUIPMENT COMPANY, LLC, BULK SOLUTIONS, LLC, and BULK TANK INTERNATIONAL, S. DE R.L. DE C.V., Defendants.

          OPINION & ORDER

          JAMES D. PETERSON District Judge

         This is a contract case. Plaintiffs are affiliated companies that the court will refer to collectively as “Sanchelima, ” except when it's necessary to refer to one of them separately. The court will take the same approach with defendants and refer to them as “Walker.”

         Walker manufactures dairy silos; Sanchelima sells and distributes dairy silos in Latin America. In a written distribution agreement, Walker designated Sanchelima to be its exclusive distributor of dairy silos in 13 Latin American countries. Sanchelima contends that Walker breached the contract by selling diary silos directly to customers in Sanchelima's territory, so Sanchelima sued for the resulting lost profits. In response to the suit, Walker terminated the distribution contract and filed counterclaims alleging that Sanchelima was first to breach the contract by failing to use its best efforts, to maintain accurate records, to provide quarterly reports, and, most important, to meet the annual revenue target for 2013, the first year of the agreement.

         The case was tried in a two-day bench trial. This opinion sets out the court's findings of fact and conclusions of law as required under Federal Rule of Civil Procedure 52. The court finds for Sanchelima on its breach of contract claim and against Walker on its counterclaims and affirmative defenses. Sanchelima is entitled to $778, 306.70 in lost profits.

         PLAINTIFFS' DAUBERT MOTION

         The court begins with an evidentiary issue. Prior to trial, the court denied Sanchelima's motion to exclude the testimony of Walker's expert, Leonardo Giacchino, insofar as it related to Giacchino's qualifications; the court deferred ruling on whether Giacchino's methods were so unreliable as to be inadmissible. Giacchino, an economist, opined that Sanchelima would have achieved 10 percent of the Mexican dairy silo market-which he valued at more than $50 million annually-within five years had it used its best efforts to market Walker's products. Giacchino also criticized the calculations of Sanchelima's expert, Sheri Schultz, used to determine Sanchelima's average gross profit margin. Giacchino's criticisms of Schultz are not at issue in Sanchelima's motion.

         After hearing Giacchino's testimony, the court will grant the remainder of Sanchelima's Daubert motion and exclude Giacchino's testimony about the size of the Mexican dairy silo market and his testimony that Sanchelima should have been able to capture 10 percent of the market. Giacchino's testimony is inadmissible for several reasons. Expert testimony is admissible only if the expert's opinions are based on reliable methods and reasoning, among other things. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 141 (1999); Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 597 (1993). Walker, as the proponent of the expert evidence, bears the burden of establishing that the expert's testimony is reliable. Lewis v. CITGO Petroleum Corp., 561 F.3d 698, 705 (7th Cir. 2009).

         Some of the problems with Giacchino's testimony stem from his use of a report that he specially commissioned from Market Data Forecast (MDF), a market research firm, to determine the size of the Mexican dairy silo market. Giacchino's report, Dkt. 94-1, disclosed his reliance on the MDF report and included a copy of the report as an exhibit. Giacchino also cited and relied on several email communications from MDF to Giacchino's consulting firm. At trial, Giacchino testified that he could have done the type of analysis in the MDF report himself, but that it was less expensive to commission the analysis from MDF. He testified that he had spot-checked aspects of the MDF report, and that he had used MDF before and found MDF to be generally reliable.

         Walker argues that Giacchino may rely on the report under Federal Rule of Evidence 703 because it is the type of data that economists regularly rely upon. This argument misses the point. “Rule 703 does not necessarily allow a witness to rely on the methodology of another expert, if that expert's methodology would be deemed unreliable under Daubert.” Gopalratnam v. Hewlett-Packard Co., 877 F.3d 771, 789 (7th Cir. 2017) (quoting Tajonera v. Black Elk Energy Offshore Operations, LLC, No. 13-0366, 2016 WL 3180776, at *11 (E.D. La. June 7, 2016)). The MDF report is actually an independent expert opinion that must pass muster under Daubert.

         The MDF report has two fundamental problems. First, the MDF report was not disclosed in compliance with Rule 26, which would have required additional disclosure of the people who prepared the report, their qualifications, and their litigation history. This deficiency was not harmless, because it deprived Sanchelima of full opportunity to impeach the report.

         Second, and more important, the MDF report does not at all explain either the underlying data or methods used to reach its critical finding-that the Mexican dairy silo market was worth at least $50 million annually. See Dkt. 94-2 (Section 6 and especially Table 1). In the disclaimer at the end of the report, MDF says:

Quantitative market information is based primarily on interviews and therefore, is subject to fluctuation. Market Data Forecast takes no responsibility for any incorrect information supplied to us by manufacturers or users.

Id. at 14. The bottom line is that neither Giacchino nor the MDF report discloses how they reached the critical conclusion about the size of the dairy silo market, other than to say that it was based on some unspecified interviews. This fundamental unreliability infects the rest of Giacchino's opinion about Walker's damages.

         And there is yet another problem with Giacchino's analysis. Giacchino theorizes that because there are 10 providers of dairy silo equipment in the Mexico market, had Sanchelima used its best efforts, it would have been able to capture a proportionate share of the market- 10 percent. Giacchino called this a conservative estimate, given that Walker is one of the two market leaders in dairy silos in Mexico. But Giacchino's theory doesn't account for several other significant factors that would affect Walker's market share. The evidence at trial showed that Walker offers a premium product at a high price and that the Mexican market is price-sensitive. Giacchino's analysis did not account for the possibility that the premium brand might not achieve a proportionate market share. The evidence also demonstrates that used dairy silos capture a significant share of the Mexican market. The MDF report says nothing about used silos, but Giacchino's report says that an MDF email confirmed that the MDF market estimate includes used silos. Dkt. 94-1, at 46 and n.81. But Giacchino does not explain what share of the market would be served by used equipment, and the evidence at trial suggested that used silos were Sanchelima's main competition. Finally, Giacchino did not consider the fact that before the distribution agreement, Sanchelima had been selling Walker equipment in Mexico for decades on a non-exclusive basis without achieving anything close to $5 million per year. Giacchino's so-called conservative forecast that Sanchelima could achieve $5 million in annual sales within five years, or even a consistent $1 million in annual sales beginning in the first year of the agreement, is rank speculation.

         Giacchino is a well-credentialed economist, but his opinions about Walker's damages are unreliable. The court will grant Sanchelima's Daubert motion.

         FINDINGS OF FACT

         The court finds the following facts from the evidence adduced at trial.

         Defendant Walker Stainless Equipment Company, LLC, manufactures and sells custom-made stainless steel vessels for storing and processing various liquid and semi-liquid products, such as dairy products. Its members are citizens of Indiana and Delaware, but its manufacturing plants are located in Wisconsin. It is capable of manufacturing many of its vessels according to the 3-A Sanitary Standards, a set of voluntary standards for dairy processing equipment embraced by the dairy industry in the United States that require, among other things, that (1) the interior surface of the tank be at a certain level of smoothness and (2) the interior welds be ground and polished. These features facilitate thorough cleaning and thus inhibit contamination. One of Walker's main products, the one at the heart of this lawsuit, is a vertical, insulated storage vessel known as a “dairy silo.” “Walker” is a well-respected premium brand in this industry.

         For approximately 30 years, plaintiff Sanchelima International, Inc., (a citizen of Florida) bought goods from Walker, shipped them to Mexico, and resold them at a markup to its customers. Those customers were businesses in the dairy industry relying on Sanchelima, and particularly its owner, Juan Andres Sanchelima, to create a complete dairy processing system. Because of increasing transportation costs, Sanchelima's sales of Walker products had declined in recent years.

         In 2012, Walker acquired defendant Bulk Tank International, S. de R.L. de C.V., a Mexican company (whose members are citizens of Indiana and Delaware) that manufactured tank trailers at a plant in San Jose Iturbide, Mexico. Walker then approached Sanchelima, explaining that it planned to begin to manufacture dairy silos in the Bulk Tank plant, thus cutting distribution costs and making Walker products more competitive in the Mexican market. It wanted Sanchelima's help to develop the Mexican market. Although Walker made no commitments regarding the Bulk Tank plant in the parties' distribution agreement, the potential for manufacturing silos at the Bulk Tank plant motivated the parties to enter the agreement.

         The parties began negotiating a distribution agreement. Walker proposed making Sanchelima an exclusive distributor with a few exceptions for specific companies that Walker could sell to directly; Sanchelima wanted no exceptions. During the negotiations, Sanchelima established a Mexican corporation, Sanchelima International, S. de. R.L. de C.V., (whose members are citizens of Mexico and Florida) to operate in Mexico under the distribution agreement.

         On April 22, 2013, the parties entered into the distribution agreement. The agreement named both Sanchelima companies as the “distributors” and named Walker, Bulk Tank, and another affiliated company, Bulk Solutions, LLC, (whose members are citizens of Indiana and Delaware) as the “manufacturers.” The agreement made Sanchelima in some sense Walker's “exclusive” distributor; the scope of that exclusivity is at the heart of the parties' dispute.

         Two paragraphs within section II of the agreement address exclusivity. The first paragraph makes Sanchelima the exclusive distributor of “Products” to the “Dairy Industry” in the “Territory”:

A. Appointment and Acceptance.

Subject to the terms and conditions of this Agreement, Manufacturers hereby appoint the Distributors to act as their exclusive distributor to promote, sell and distribute Products to Persons in the Dairy Industry whose principal place of business is in the Territory and who agree to use the Product solely in the Territory, and each Distributor accepts such appointment. Without limiting the foregoing, Distributors shall not sell or distribute any Products to: (x) any Person whose principal place of business is within the United States, even if the Product would be delivered or exported by Distributor or the Customer to the Territory, or (y) any Person who Distributor knows or has reason to believe will transfer or install the Products outside of the Territory.

Dkt. 39-1, at 3. In the second paragraph, defendants agree that they will not sell “Products” to third parties in the “Territory”:

B. Manufacturers' Agreement.

During the Term of this Agreement, each Manufacturer agrees not to enter into an agreement with any Third Party for the promotion, sale and/or distribution of Products within the Territory; provided, however, Manufacturers shall have no responsibility or liability should one or more Third Parties promote, distribute and/or sell any Products in the Territory without Manufacturers' written authorization .....

Id.

         The agreement defines “Products” as the following items manufactured by Walker, Bulk Solutions, or Bulk Tank:

1. Walker Dairy Silos
2. Walker Dairy Process Vessels, including, without limitation, Multi-mixer, PX Y PZ-ST, PZ-CB, PZ-CR, PZ-K, ...

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