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FIFTH DIVISION
JUNE 18, 2004

Defendants-counter claimants A.O. Smith Corporation, American Water Heater Company,Bradford White Corporation, Lochinvar Corporation, and Rheem Manufacturing Company(collectively "Tank Manufacturers"), appeal from entry of summary judgment in favor of plaintiff,Perfection Corporation (Perfection), on their claim alleging lost profits as a result of damage totheir business reputations in connection with the purchase of an allegedly defective water heatercomponent. On appeal, the Tank Manufacturers contend that: (1) the trial court misapprehendedthe controlling law in ruling that expert testimony was inadmissible; and (2) genuine issues of factremain in dispute regarding alleged damage to business reputation claims. For the followingreasons, we affirm the judgment of the trial court.

BACKGROUND

Defendants, Tank Manufacturers, manufacture water heaters. Plaintiff Perfectionmanufactures and sells a component part for water heaters called a "dip tube." The dip tubes assist the water heater in the process of heating the water by delivering the inflow of water to agreater depth within the water heater than would otherwise be achieved without the dip tube. Toaccomplish this function, the dip tube must be constructed of material that can function and notdeteriorate in the environment of a water heater. Prior to 1993, Perfection, and one or more of theTank Manufacturers, entered into agreements to purchase dip tubes for use with the water heatersthey manufactured.

Perfection had been manufacturing and selling plastic dip tubes for approximately 40years. From approximately 1975 through 1992, and from October 1996, to the time of thisaction, Perfection manufactured dip tubes out of a proprietary form of polypropylene calledHimont, a form of plastic, that Perfection purchased in pre-compound pellets. During some ofthis time period, Perfection was the sole supplier of dip tubes to at least some of the TankManufacturers. Polypropylene dip tubes made of out of Himont were time-proven tubes andvirtually all lasted for the life of the water heater. Perfection received only 10-12 returns ofHimont dip tubes a year out of approximately five million manufactured annually.

In 1992, Perfection entered into negotiations with Manner Plastics Materials, Inc. for thepurchase of a proprietary form of polypropylene called Prolene 6654 (Prolene). Between August1993 and October 1996, Perfection manufactured its dip tubes out of Prolene. The TankManufacturers installed the Prolene dip tubes in their water heaters. During the period thatProlene dip tubes were used, the Tank Manufacturers received reports from field personnel that acertain percentage Prolene tubes were deteriorating inside water heaters during the first year andone-half of use, resulting in loss of function of the water heaters, clogging of plumbing lines, lossof water pressure, and damage to appliances.

On July 16, 1999, more than 20 consumer class action litigations were initiated againstthe Tank Manufacturers and Perfection asserting that Prolene tubes deteriorated prematurelyinside water heaters. The Tank Manufacturers ultimately entered into a nationwide settlementwith a consumer class certified by a federal court. Perfection was not party to the settlement, nordid the settlement agreement purport to release Perfection from any potential liability to theconsumer class. Rather, the settlement agreement purported to assign to the Tank Manufacturersany claims that the settlement class members might have against Perfection. The TankManufacturers' counterclaims are premised both on their own alleged direct causes of actionagainst Perfection as well as in their capacities as assignees of consumer claims against Perfection. On March 23, 2001, the Tank Manufacturers filed counterclaims alleging strictliability/negligence, breach of contract, breach of express and implied warranties,misrepresentation, negligence, and unjust enrichment. On May 31, 2002, the Tank Manufacturersfiled consolidated counterclaims alleging all of the above, and adding allegations in counts III(Misrepresentation) & IV (Negligence) for damages to their business reputations in the aggregateof $182 million. The Tank Manufacturers alleged that as a result of the property damage claimsfiled by consumer claimants, the Tank Manufacturers and their water heaters were:

"disparaged, criticized, questioned, and maligned in television,print, and other media directed at the public, including but notlimited to, reports on the national Good Morning Americatelevision show, in Chicago on WMAQ TV-News Channel 5, onthe Appliance Doctor syndicated radio show, and in the Wall StreetJournal."

The Tank Manufacturers alleged that the negative publicity surrounding the property damageclaims "has damaged and will continue to damage the Tank Manufacturers' goodwill and presentand future profitability."

In support, the Tank Manufacturers submitted expert opinion evidence given by Dr. SilasH. Lee III, and Dr. Darrell L. Williams. Dr. Lee, an expert specializing in public opinion andmarketing research, conducted a generic consumer survey or poll, examining how consumers feelabout purchasing a product that was defective, and what impact purchasing a defective productwould have on the reputation of a company." Based on his survey results, Dr. Lee opined that"consumers are less likely to buy a product if it is manufactured by a company that producedsomething defective in the past," and concluded that purchasing a defective product has a negativeimpact on reputation. Dr. Lee did not do a study specifically relating to water heaters.

Dr. Williams, a professor and economist, employed a technique called the "event studymethodology" to analyze whether Tank Manufacturer A.O. Smith, a publicly traded company,suffered damage to its reputation as a result of public comments relating to the dip tube litigationand, if so, to quantify the magnitude of any such damages. Dr. Williams described the event studymethodology as a "commonly and widely accepted method used by economists to estimate thechange in the market value of a company as reflected in the change in the market value of thecompany's equity." Dr. Williams explained that the event study methodology is "based on thewidely accepted principle that publicly available information relevant to the valuation of acompany is rapidly incorporated into stock prices such that the market value of a company'sequity responds quickly to information that is relevant to the company's market value."

An "event" is an informational disclosure, such as an appearance in a newspaper, televisionor radio. Dr. Williams established an "event window," i.e., the period of time over which thatdisclosure is deemed to have an "effect." Dr. Williams described the methodology as using"statistical techniques in order to isolate stock price effects resulting from relevant informationdisclosures, in this case those related to defective dip tubes, as opposed to general market-widestock price movements or random variance in stock prices." In other words, Dr. Williamscalculated the "loss" based on the "event." Dr. Williams explained that a premise of the eventstudy methodology is that the market value of a firm, the sum of the value of all of its assets,broadly defined, is equal to the market value of its equity plus the market value of its debt.

Dr. Williams analyzed the measure of changes in the price of A.O. Smith's publicly tradedstock during three separate three-day periods and determined that a decline in the stock price wassolely the result of two newspaper reports in the Kansas city Star and a local Detroit radiobroadcast about the dip tube claims and class action litigation against the Tank Manufacturers (the"events"). For each event, Dr. Williams calculated the total change in the closing stock price ofA.O. Smith for the three-day period from what he deemed public dissemination of these localmedia reports. He then translated the net change in stock price of A.O. Smith into a change in theaggregate "market value" of the company's stock by multiplying the per share price change by thenumber of shares outstanding.

In rendering his opinion, Dr. Williams produced his calculations of the change in A.O.Smith's stock value for the three separate three-day periods selected between March 1999 andApril 2000. Dr. Williams totaled these amounts and concluded that, on these nine days, A.O.Smith's stock value had decreased by over $115 million. Deducting all non-reputational damageclaims that A..O. Smith asserted in the counterclaim, i.e., its alleged direct costs, Dr. Williamsreduced his aggregate stock value decrease to $80 million and identified this result as A.O.Smith's "reputational" or "brand" damage. None of the other Tank Manufacturers are publiclytraded and there is no published source of their stock prices. Dr. Williams therefore extrapolatedthe A.O. Smith stock price study to the other four corporate counter-claimant TankManufacturers, and assumed a "reputational" impact proportionately equal to that calculated forA.O. Smith stock. Totaling the figures for each corporation under five alternate methods ofcomparison, Dr. Williams estimated that the "average" aggregate business reputation damageallegedly incurred by the Tank Manufacturers was $195 million.⁽¹⁾

Perfection filed a motion for summary judgment and a motion to strike the TankManufacturers' counterclaims for damages to their business reputation. Perfection argued that theTank Manufacturers deliberately waited until the closing days of discovery to file this claim, inorder to gain an advantage in discovery. On November 15, 2002, a full hearing on Perfection'smotions was held before Judge Lester D. Foreman. The trial court noted that "when the value ofa share of stock in a corporation goes down on the market, that doesn't necessarily mean that thevalue of the corporation has gone down," that changes in the value of stock changes what anindividual will pay for a share of stock on a given day, but "doesn't change the intrinsic value ofthe company." The court questioned how the expert knew "that the stock dropped down becauseof the events" in the present case:

"He's going to say that there was an article in the paper and ittalked about the fact that people are very unhappy because thesetanks are not operating efficiently and the reason for it and thatcustomers are highly dissatisfied, and then he's going to say on thatexact date the stock drops."

The trial court concluded that Dr. Williams' analysis was speculative and did not indicate damageto the company, but rather, damage to the stockholder: "I don't think that you can just pinpointbecause this man sees an adverse event and the stock does down, he says that is unquestionablyan adverse effect upon the company's reputation, I just can't see it." The trial court grantedPerfection's motion for summary judgment. On November 22, 2002, the trial court vacated itsorder entered on November 15, 2002, and entered an order granting Perfection's motion forsummary judgment and deeming Perfection's motion to strike moot. The trial court noted thatpursuant to Supreme Court Rule 304(a), there is no just reason for delay of enforcement orappeal of the summary judgment ruling. This timely appeal followed.

OPINION

Initially, the Tank Manufacturers contend that the trial court erred in granting summaryjudgment in favor of Perfection and in ruling that Dr. Williams' expert opinion was inadmissibleunder Frye v. United States, 54 App. D.C. 46 , 293 F. 1013 , 34 A.L.R. 145 (.D.C. 1923). TheTank Manufacturers argue that under Frye, expert opinion is admissible if it is based upon agenerally accepted methodology or technique (Donaldson v. Central Ill Pub. Serv. Co., 199 Ill. 2d63, 76-77, 767 N.E.2d 314 (2002)), and that Williams' "event study" is an accepted method ofdetermining loss of profits as a result of damages to reputation.

The Tank Manufacturers argue that Donaldson supports their position that the event studymethodology is generally accepted. In Donaldson, the plaintiffs, four sets of parents of children,brought an action against the defendant, the owner of a former manufactured gas plant, allegingthat ceratin acts or omissions by the defendant and its contractors during the cleanup of the sitecertain chemicals and dusts emitted from the ground, causing their children to developneuroblastoma, a rare form of cancer. The trial court allowed expert opinion testimony about anew medical epidemiological inquiry to establish a cause and effect relationship between coal tarand neuroblastoma; all of the experts utilized the method of "extrapolation" a generally acceptedmethod used in the fields of medical and scientific research. Donaldson, 199 Ill. 2d at 87. Thedefendant argued that the conclusion of the experts, that coal tar caused the cancer, was notgenerally accepted in the scientific community. This court disagreed with the defendant, and thesupreme court affirmed, holding that "the Frye standard does not demand unanimity, consensus,or even a majority to satisfy the general acceptance test." Donaldson, 199 Ill. 2d at 88.

Perfection responds that the Tank Manufacturers misconstrue the ruling of the trial court. Perfection argues that the trial court did not find Williams' expert testimony inadmissible, but,rather, granted summary judgment to Perfection because the Williams' evidence of damages to theTank Manufacturers' reputation was speculative. In other words, summary judgment is properbecause there is no disputed fact that the Tank Manufacturers cannot show the existence of lostprofits as a result of damage to their reputation, notwithstanding the methodology used. Thepresent case is distinguishable from Donaldson in this important aspect: In Donaldson, there wasno dispute over the evidence that the children suffered from cancer, only whether the cause couldbe linked to the coal tar leakage

The party who seeks damages has the burden not only to establish that he sustaineddamages, but also to establish a reasonable basis for computation of those damages. Damagesmay not be awarded on the basis of speculation and conjecture. Finance America CommercialCorp. v. Econo Coach, Inc., 118 Ill. App. 3d 385, 390, 454 N.E.2d 1127, 1131 (1983). Thepresent case is distinguishable from Donaldson in one important aspect: In Donaldson, there wasno dispute over the evidence that the children suffered from cancer, only whether the cause couldbe linked to the coal tar leakage. The Tank Manufacturers' "evidence" of consumer complaintsand news media coverage about the failure of dip tubes does not constitute actual financialdamages to their respective companies as a result of "aspersions cast" upon them by thesesources.

Moreover, Dr. Williams' conclusions need not be accepted on summary judgmentbecause they do not constitute competent evidence capable of raising a genuine issue of materialfact for trial pursuant to Supreme Court Rule 191(a):

"Affidavits in support of and in opposition to a motion for summaryjudgment under section 2-1005 of the Code of Civil Procedure* * * shall * * * not consist of conclusions but of facts admissible inevidence." 154 Il. 2d R. 191(a).

Summary judgment shall be granted "if the pleadings, depositions, and admissions on file,together with the affidavits, if any, show that there is no genuine issue of material fact and themoving party is entitled to judgment as a matter of law. 735 ILCS 5/2-1005(c). The purpose ofsummary judgment is not to try a question of fact, but to determine if one exists. Gilbert v.Sycamore Municipal Hospital, 156 Ill. 2d 511, 517, 622 N.E.2d 788 (1993). Although a plaintiffis not required to prove his case at the summary judgment stage, in order to survive a motion forsummary judgment, the nonmoving party must present a factual basis that would arguably entitlethe party to a judgment. Allegro Services, Ltd. v. Metropolitan Pier & Exposition Authority, 172Ill. 2d 256, 665 N. N.E.2d 1246 (1996). Unsupported assertions, opinions, and self-serving orconclusory statements made in deposition testimony are not admissible evidence upon review of asummary judgment motion. Davis v. Times Mirror Magazines, Inc., 297 Ill. App. 3d 488, 495,697 N.E.2d 380, 386 appeal denied, 179 Ill. 2d 580, 708 N.E.2d 436 (1998).

We agree with Perfection that whether the event study methodology is an accepted theoryunder Frye is not a dispositive issue in the present case. The event study methodology has beenuniversally rejected by Federal Courts in lawsuits for restitution other than securities fraud classaction litigation. In LaSalle Talman Bank F.S.B. v. United States, 45 Fed Cl. 64 (1999) aff'd inpart and vacated in part on other grounds, 317 F. 3d 1363 (2003), the Federal Appeals Courtruled that the government was not permitted to use event study methodology to disprove injury toTalman Bank as a result of the government's breach of contract with Talman under the FinancialInstitutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). The governmentcontended that an analysis of the impact of FIRREA on the value of Talman's outstandingcommon stock demonstrated that no damages were due. In support, an expert witnesses testifiedthat an event study of Talman's stock price in the two-week period surrounding the date ofenactment of FIRREA demonstrated that plaintiff's market value increased as a direct result of thestatute's enactment. The court rejected defendant's event study argument, finding it "flawedconceptually." The court declined to accept "this novel method of determining damages forbreach of contract, either as a method of determining quantum per se, or as means of refutingplaintiff's calculations of damages under standard contract damages theories." Whileacknowledging that event studies are "a widely used tool in the academic field of economics toassess the impact of an event upon the value of a company's stock," (see, e.g., Galigher v. Jones,129 U.S. 193, 9 S. Ct. 335, 32 L. Ed. 658 (1889); Holland Furnace Co. v. Allen, 118 F.2d 969(6th Cir. 1941)), courts have frequently adjudicated breach of contract claims involvingcompanies that are publicly traded, and have done so without resorting to the use of event studies.The court noted that the government failed to cite any cases in which a court has adopted anevent study to determine the quantum of damages for breach of contract. Courts which haveadopted event studies have done so only in stockholder class action or derivative suits allegingfraud-on-the-market. See, e.g., Goldkrantz v. Griffin, Fed. Sec. L. Rep. P 90, 462, No. 97 Civ.9075, 1999 WL 191540 (S.D.N.Y. Apr. 6, 1999); In re Executive Telecard, Ltd. Sec. Litig., 979F. Supp. 1021, 1025-26 (S.D.N.Y. 1997)⁽²⁾; In re California Micro Devices Sec. Litig., 965 F.Supp. 1327, 1333 (N.D. Cal. 1997); In re Seagate Technology II Securities Litigation, 843 F.Supp. 1341, 1348, 1368 (N.D. Cal. 1994); In re Oracle Securities Litigation, 829 F. Supp. 1176,1181 (N.D. Cal. 1993). In these cases, plaintiffs alleged fraud-on-the-market: fraudulentmisrepresentation or concealment of information regarding the defendant that improperly affectedits stock price, to the injury of investors who were not aware of the fraud. The plaintiffs allegedthey were harmed by purchasing stock at an inflated price, which they could not later recoup afterthe fraud was discovered. The courts considered event study analysis to support or refuteplaintiffs' claims that stock price movements were caused by the fraudulent acts and to measurethe quantum of damages. The LaSalle court concluded: "This methodology has never beenemployed to limit damages in the context of a breach of contract claim brought by a corporateplaintiff, as far as the court is aware. We see no reason to extend this concept to the case at hand,and decline to do so." Lasalle Talman Bank, 45 Fed. Cl. at 87.

Here, the Tank Manufacturers have presented no evidence that they have sufferedeconomic damage to their business reputations in any amount, let alone $182 million. The recordshows that representatives of four Tank Manufacturers testified that they could identify no lostcustomers, profits, declines in revenues, or loss of sales as a result of the dip tube failure andassociated media coverage. A representative of Rheem testified in a deposition that its profits hadincreased during that period. The Tank Manufacturers' claims, therefore, are entirely dependenton Williams testimony which is insufficient to show a link between a specific event and loss ofprofits. The "event window" alleges injury only to shareholders, not to the corporation. We seeno reason to detour from the route of the federal courts and follow their lead in declining toextend the event study methodology to this case to calculate alleged damages to the concept ofthe "good will" of the Tank Manufacturers. The Tank Manufacturers have failed to point to anyevidence of tangible loss of profits. We therefore find that entry of summary judgment in favor ofPerfection was proper.

For the reasons stated above, we affirm the judgment of the trial court.

Affirmed.

O'BRIEN and REID, JJ., concur.

1. Perfection notes in its brief that the Tank Manufacturers had previously identified $182million in damages as the aggregate from their business reputation damages claims. Dr. Williamscalculated aggregate figures ranging from $150 million to $230 million and then averaged thesefigures, yielding a sum of $195 million.

2. The event study was praised by the court as "by far the most thorough, sophisticated andwell substantiated plan in a securities class action." In re California Micro Devices, 965 F. Suppat 1332. (Emphasis added).