SARA LIOI, District Judge.
This matter is before the Court on the amended motion of defendants Vista Food Exchange, Inc. ("Vista") and Joshua Newman ("Newman") (collectively, "Vista defendants") to exclude evidence of the lost profit claims of plaintiff Champion Foodservice, LLC ("plaintiff" or "Champion"). (Doc. No. 545
Defendants' motions seek a serious sanction as a consequence of plaintiff's persistent and pervasive refusal to fulfill its discovery obligations with respect to its lost profits damages computation. Champion is adamant that it fully complied with its damages discovery obligations as required by the Federal Rules. Throughout this litigation, however, Champion's purported "compliance" has been based on its own selfserving definition of evidence and information that supports its damages computation, and of what constitutes relevant discovery under the Federal Rules. By applying its own contrived interpretation of what the discovery rules require, Champion has refused to produce evidence and information that is clearly relevant and required under the federal rules, perhaps because such discovery would appear to be unfavorable to plaintiff's damages claim.
Our system of justice, aimed at resolving cases on the merits, hinges on the goodfaith and honest participation of all parties in the discovery process as required by the Federal Rules. In this memorandum opinion, the Court examines in detail several representative examples of Champion's deliberate and willful withholding of clearly relevant and discoverable documents and evidence, which spawned numerous discovery disputes that delayed resolution of this case on the merits and wasted judicial resources. If parties are permitted to abuse or manipulate the discovery process based upon their own self-serving interpretation of the Federal Rules, our system of justice will not work. Thus, for the reasons that follow, defendants' motions are granted.
The background of this case has been extensively detailed in orders and opinions previously issued by the Court, and familiarity therewith is assumed. For the purpose of providing context for this Memorandum Opinion, the undisputed factual background pertinent to defendants' motions is briefly summarized here. Additional facts are discussed in greater detail later in this opinion as relevant to the Court's analysis.
Plaintiff Champion is an Ohio company engaged in the business of supplying shelf-stable meals to various organizations and institutions, including the Ohio Association of Foodbanks ("OAFB"). Defendant Gibson was hired by Tyrone Weithman ("Weithman") in January 2011 to work for Champion's predecessor company— "GoFast"—and then for Champion upon its formation later in 2011.
In 2012, Champion submitted a proposal to the OAFB for its summer backpack program,
Vista was Champion's primary supplier for food products for the 2012 contract. Vista is also in the shelf-stable pre-packaged food business, but did not submit a proposal to the OAFB for the 2012 summer backpack program.
In February 2013, the OAFB requested bids for the 2013 summer backpack program, which were due on March 1, 2013. Gibson resigned from Champion on February 26, 2013. He submitted a bid on behalf of Vista on March 1, 2013. After Gibson resigned, Champion requested and received an extension of time from the OAFB, and submitted a bid for the OAFB 2013 summer backpack program within the extension provided.
The OAFB awarded the 2013 summer backpack contract to Vista in late March 2013. Champion was selected by the OAFB for a different 2013 summer food program— the innovative meal delivery program ("IMD").
Champion sued Gibson in Crawford County on March 7, 2013 in connection with his departure from Champion. On May 2, 2013, Champion amended its state court complaint and added the other defendants to the lawsuit. The defendants then removed the case from Crawford County to the Northern District of Ohio.
After the case was removed, plaintiff filed a second amended complaint. Champion asserted various allegations in the second amended complaint against Gibson and the other defendants, and set forth claims for breach of fiduciary duty, misappropriation of trade secrets, tortious interference, conspiracy, and fraud. (See Doc. No. 404 (Second Amended Complaint ["SAC"]).) Plaintiff claims that, as a result of defendants' alleged wrongful conduct, Champion was not awarded the contract for the OAFB's 2013 summer backpack program, or for the OAFB's 2014 summer backpack and IMD programs. (In fact, the 2014 OAFB summer backpack and IMD programs were not bid out; instead, the State handled these programs in-house.) Plaintiff seeks lost profits with respect to these three OAFB programs.
Defendants' motions seek to exclude plaintiff's lost profit claims as a sanction on the grounds that plaintiff failed to comply with the requirements of Rule 26 regarding damages discovery, and failed to comply with the Court's order regarding the same. (Vista Mot. at 29131-33.
This case has been fraught with disputes regarding discovery and other matters since it was removed to the Northern District of Ohio in 2013. Relevant to defendants' motions are the disputes regarding damages discovery, and discovery of plaintiff's electronically stored information ("ESI"). The Court utilized both an appointed special master and the assigned magistrate judge to assist in addressing the myriad disputes.
The Vista defendants first sought to exclude plaintiff's lost profit claims in June, 2014 based on a "pattern" of discovery violations. The alleged violations included Champion's failure to provide documentation that supports plaintiff's damages claim as required by the Federal Rules, and failure to provide a Rule 30(b)(6) witness—Edwin Nicewicz ("Nicewicz")—who was prepared to testify regarding lost profits. (Doc. No. 201.
The Court referred the motion to the special master. (Doc. No. 279.) In his proposed order, the special master noted that "[b]eyond accusing each other of deceit, concealment and fabrication, they are so factually incongruent as to make it nearly impossible to discern the truth[]" without an evidentiary hearing. (Doc. No. 336 ["10/24/2014 Special Master Order"] at 14389.) The special master did not conduct an evidentiary hearing, but ordered that Nicewicz be presented again, fully prepared, to testify on behalf of Champion on the issue of damages. (Id. at 14391-92.) Specifically, the special master ordered that:
(Order at 18801-02.)
The Vista defendants objected to the special master's order (Doc. No. 342), but the Court overruled the objection and, in order to give Champion another opportunity to fulfill its discover obligations, denied the motion to exclude plaintiff's lost profits claim without prejudice. Specifically, the Court noted that excluding Champion's lost profits "eventually may be an appropriate sanction[]" but, excluding damages "is an extreme sanction, and the Court is reluctant to impose such a sanction without providing Champion with an additional opportunity to properly and completely respond to Vista's discovery requests regarding lost profits." (Id. at 18803 (emphasis added).) The Court further warned, however, that "[f]ailure of Champion to comply with this Order may result in sanctions, up to and including dismissal of this case." (Id. at 18805.)
The order addressed both production of documents and Champion's Rule 30(b)(6) witnesses. (Id. at 18804-05.) With respect to the Rule 30(b)(6) damages depositions,
After the depositions, the Vista defendants renewed the motion to exclude Champion's lost profit claims, arguing that plaintiff failed to comply with the order to provide documents supporting plaintiff's lost profit claims, and failed to produce Rule 30(b)(6) witnesses prepared to testify on the noticed topics. (Doc. No. 500.)
Intertwined with the parties' discovery dispute on the issue of damages is defendants' discovery of plaintiff's electronically stored information ("ESI"). Champion long resisted ESI discovery and the issue was extensively briefed by the parties on multiple occasions. Ultimately, after repeated accusations by the defendants that the plaintiff was not fulfilling its discovery obligations (and over the protestations of the plaintiff), the Court ordered that plaintiff permit defendants to conduct on-site discovery of plaintiff's ESI by a forensic expert to be jointly selected by the parties. (Doc. No. 396.) The inspection was performed by Matthew Curtin ("Curtin") from InterHack in May, 2015.
Multiple disputes, spanning a period of months arose among the parties regarding the court-ordered ESI discovery. Plaintiff sought to maintain the entire ESI discovery under an "attorney eyes only" designation; the Court, however, refused, to permit such a blanket designation. (Doc. No. 524.) Defendants now claim that the court-mandated ESI discovery revealed documents relevant to Champion's claimed lost profit claims that were (wrongfully) not produced by Champion in discovery, and that plaintiff had outright denied the existence of some of those documents. (See Doc. No. 649 at 48803-48988 (Transcript of June 3, 2016 evidentiary hearing ["Tr."]) at 48853-55).) But for the courtordered access to Champion's ESI, these discovery abuses would not have been discovered. (See Tr. at 48881-82.)
The Court conducted an evidentiary hearing regarding defendants' motions on June 3, 2016. The hearing was concluded that day, with the exception of the testimony of defendants' expert, Robert Greenwald ("Greenwald"), and Nicewicz. The parties agreed to submit Nicewicz's Rule 30(b)(6) testimony in lieu of live testimony at the hearing,
Greenwald's deposition
In ruling on the defendants' motions, the Court has considered the parties' motions and post-hearing briefing and exhibits thereto, the testimony at the evidentiary hearing and admitted exhibits, the Rule 30(b)(6) deposition of Nicewicz, and the deposition of Greenwald.
Rule 26 governs disclosures required "without awaiting a discovery request" with respect to damages:
Fed. R. Civ. P. 26(a)(1)(A)(iii).
This rule obliges a party claiming damages "to disclose `the best information then available to it concerning that claim, however limited and potentially changing it may be.'" Hesco Parts, LLC v. Ford Motor Co., No. 3:02-CV-736-S, 2007 WL 2407255, at *1 (W.D. Ky. Aug. 20, 2007) (quoting 6 James W. Moore, Moore's Federal Practice § 26.22[4][c][ii] (3d ed. 2007)). Rule 26's requirements have been described "as the `functional equivalent of a standing Request for Production under Rule 34.'" Bridgestone Am., Inc. v. Int'l Bus. Mach. Corp., No. 3:13-CV-1196, 2016 WL 3211226, at *3 (M.D. Tenn. Jan. 12, 2016) (quoting Fed. R. Civ. P. 26 advisory committee's note to 1993 amendment). Moreover, Fed. R. Civ. P. 26(e)(1) requires a party to supplement or correct its disclosures or responses.
The documentation and evidence required by Rule 26 must be sufficient to allow the opposing party to "independently analyze" the claim. Bessemer & Lake Erie R.R. Co. v. Seaway Marine Transp., 596 F.3d 357, 370 (6th Cir. 2010) (summary nature of damages documentation provides insufficient data to analyze claim for lost profits and fails to satisfy Rule 26); Scheel v. Harris, Civil Action No. 3:11-17-DCR, 2012 WL 3879279, at *4 (E.D. Ky. Sept. 6, 2012) (quoting Bessemer, 596 F.3d at 370); see also Silicon Knights, Inc. v. Epic Games, Inc., No. 5:07-CV-275-D, 2012 WL 1596722, at *7 (E.D.N.C. May 7, 2012) (Rule 26(a)(1)(A)(iii) and Rule 26(e) are designed to provide a damages computation and analysis so that the opposing party "may then prepare to meet that evidence via cross examination and via evidence in its rebuttal case (such as its own expert witness).") A "critical factor" in determining lost profits are avoided costs—costs saved by not incurring the expenses necessary to earn the revenue
In addition to failing to comply with Rule 26, defendants contend that Champion also failed to comply with the order regarding document discovery of plaintiff's lost profit claims. In that order issued on March 18, 2015, the Court—echoing the language of Rule 26—provided plaintiff "with an additional opportunity to properly and completely respond to Vista's discovery requests relating to lost profits[,]" and further directed plaintiff to:
(Order at 18803-04.)
The Court's directive did not limit Champion's production to documents previously produced. (Tr. at 48884-85.) On April 13, 2015, Champion certified that it complied with the order.
The damages packet compiled by Champion may be found in several places in the record ("damages packet").
The packet is divided into four sections—(1) projected profits for the 2013 OAFB summer backpack program; (2) projected profits for the 2014 OAFB summer backpack program; (3) profit calculations for the 2013 OAFB IMD program that was actually performed by Champion in 2013; and (4) projected profits for the 2014 OAFB IMD program. The projected profits for the three OAFB contracts at issue, and the "profit calculation" for the 2013 IMD program performed by Champion, are all presented following the same pattern.
The first document of each section is a spreadsheet containing a sale amount, followed by a list of expenses (food and utensils, boxes, packaging film, box label, assembly and packaging labor, delivery, plastic "T shirt" bag,
Each section contains documentation that Champion claims supports the calculations on the spreadsheets. Defendants argue that this documentation is insufficient and inadequate to enable defendants to analyze and verify plaintiff's lost profit claims, and thus does not comply with Rule 26 or the Court's order.
For example, with respect to delivery of the meals, Champion claims that it would have made all deliveries in its own box truck.
Part of Champion's damages packet is the "profit calculations" for the OAFB's 2013 IMD program, which Champion actually performed and which Champion included in the packet as a "baseline"
With respect to the cost of meal delivery for this performed contract, Champion applies the same non-documented sum—1.5 cent per meal—to calculate profits for the 2013 IMD contract that Champion applies to project lost profits. (See damages packet at 239, 316.) Even though Champion actually performed this contract in the summer of 2013, Champion claims to not know the extent to which the meals were delivered in its box truck or contracted out. (Tr. at 48919-20.) No documentation of cost for deliveries made by Champion's box truck (e.g. cost for the truck, driver cost, fuel cost, maintenance cost, mileage, etc.), or freight bills for contracted meal deliveries, were provided by Champion in its "profit calculation" for the 2013 IMD program. Champion asserts that this information was not provided because "we didn't rely on that. Again, it would have been a semi-truck here and there going to a location. If you were to work it back, it would be at that 1.5—a penny and a half delivery, if you work the numbers back." (Id. at 48920.)
But there is no way to "work the numbers back." Without actual supporting documentation, which Champion admittedly did not provide, Champion's meal delivery costs cannot be independently analyzed for the completed 2013 IMD program or for the three OAFB contracts for which plaintiff claims lost profits. (See Greenwald Dep. at 49709, 49722-25; Doc. No. 546-1 (Supplemental Report of Robert Greenwald ["Greenwald Supp. R."]) at 29188, 29191.)
Production capacity is another example of expenses (avoided costs) for which plaintiff provides no documentation from which defendants may perform an independent analysis. In the damages packet, Champion asserts a production capacity of 38,000 packaged meal kits per 8 hour shift for all three of the OAFB contracts for which plaintiff claims lost profits, and for the 2013 IMD program that was actually performed by Champion.
According to Weithman, Champion's two packing machines operate at a speed of 40-55 units per minute. Calculated at 50 units per minute, 21,000 meals would be produced in a shift per machine. With a total of two machines, Champion assumes that it could package 42,000 meals per day on average. (Id. at 48895-96, 48902.) Nicewicz testified that the best speed to run the packaging machines is at dial setting 5—50 meals a minute. (Nicewicz Dep. at 42112-14.)
But the actual rate of production depends on the type of meal produced (Tr. at 48894-95) and the number of items in the meal being packed. (Nicewicz Dep. at 42113). Besides production variability due to the nature and content of meals produced, there are days when the machines jam, stop working, or run less efficiently. (Id. at 42116-17.) Nicewicz claims that these variables were taken into account in arriving at an assumed daily production rate of 38,000 units per shift, which Champion uses in both its lost profits projections, and profit calculation for the 2013 IMD program. (Id. at 42117-18.) Champion provides no documentation, however, upon which to analyze or verify this assumption.
Champion claims it maintains inventory/lot reports but not production reports. (Tr. at 48871; Nicewicz at 42115-16.) Champion did not produce any inventory reports, nor did it produce an actual production report prepared in December 2014. Champion claimed to be unaware these reports existed, even though they were maintained on Champion's network. (See Tr. at 48887-88, 48890-92.) The documents were discovered by defendants during the course of the deposition of Champion's former administrative assistant, Linda Atkinson ("Atkinson"), and as a result of court-ordered discovery of Champion's ESI. (See id. at 48881, 48886.)
Even though these documents were not originally produced during the normal course of discovery, but were belatedly discovered by chance during the Atkinson deposition and court-ordered ESI discovery, Champion contends that it is of no consequence because the documents are not relevant. (See id. at 48894.) According to Champion, the December 2014 production report, which reflects production rates in the range of 23,000-27,000 units per day (an amount significantly lower than that used by Champion in its calculations), is not relevant to its lost profits calculations because: "[T]his is December, a down time, and this wouldn't correlate with us having 600,000 of, you know, five different meals to run. This would be sporadic. It would be piecemeal. Everyone's on Christmas break. The schools are [out]. So this would not be reflective and would not be a good sampling of what our factory is capable of." (Id. at 48896, see also 48903-04.) Champion likewise claims that the inventory reports are not relevant because they track lot numbers, not production. (Id. at 48929-30.) Champion's assertion that these documents were not produced based on plaintiff's conclusion that the documents are not relevant under Rule 26 reflects a recurring theme—the failure of Champion to produce relevant documents that might contradict Champion's unsubstantiated lost profit projections.
Closely related to plant productivity is labor cost. (Greenwald Dep. at 49699.) Champion identified labor costs on the spreadsheets as an expense (avoided cost) to be deducted from revenue in calculating its lost profits.
In support of Champion's labor costs, Champion provides a "sample" of payroll information for two line workers and for an administrative worker for a two-week period in August, 2013. (Tr. at 48907.) From this sample, Champion determined that an hourly rate of $9.06 per hour for line workers, and an hourly rate of $13.44 for it administrative employee costs, would be applied to its lost profit calculations. (See damages packet at 181, 182.) Champion used these blanket sample rates for all three contracts for which it claims lost profits, and for its profit calculation for 2013 IMD program. (See id. at 178, 226, 316, 382.)
Champion's damages packet contains no documentation of actual labor costs or payroll records (such as payroll journals and payroll tax returns). (Greenwald Dep. at 49702-03.) Champion has an electronic payroll system, but Champion did not produce payroll records, which Nicewicz admitted were available for 2013, that could be examined to verify labor rates. (Nicewicz Dep. at 42059; Tr. at 48863-64.)
While Champion testified that it was possible to determine accurate labor costs for a given project from payroll (Tr. at 48864-65), no such calculations were made, either for contracts for which lost profits were calculated, or for the 2012 summer backpack and 2013 IMD contracts that Champion actually completed. Greenwald detailed the insufficiency of Champion's sample two-week payroll documentation to verify pay rates for workers over a two year period, and to verify Champion's avoided cost calculations for labor. (Greenwald Dep. at 49745-47; Greenwald Supp. R. at 29179, 29185.)
For yet another example, the food pricing used by Champion to calculate its profits for the 2013 IMD program performed by Champion is purportedly based on the use of food contained in Champion's inventory. (Nicewicz Dep. at 42207-11.) Nicewicz was not entirely certain, however, about the nature and amount of the food inventory used to perform the contract. (Id. at 42209-10.) Champion has a software program for tracking food inventory (Id. at 42166; Tr. at 48939), but Champion provided no inventory documentation from which to verify its calculations regarding food costs from inventory. (Greenwald Supp. R. at 29184; Greenwald Dep. at 49742-43.)
In addition to the deficiencies of the documentation provided by Champion in the damages packet, defendants also argue that plaintiff's lost profits disclosure is inadequate because some avoided costs were omitted from the calculation and other information relevant to the issue of lost profits was not produced.
For example, Champion claims lost profits for the OAFB's 2013 and 2014 summer backpack programs. The 2012 summer backpack program was actually performed by Champion. Weithman testified that Champion's performance of the 2012 summer backpack program would be a good case study—a good indicator—of Champion's expected performance of the 2013 summer backpack program. The 2012, 2013, and 2014 summer backpack programs involved 600,000 meals delivered to foodbanks across Ohio. (Weithman Dep. at 41035-36.) Greenwald agrees with Weithman that Champion's performance of the 2012 summer backpack program would be probative and useful in performing his analysis of Champion's lost profits claim for the 2013 and 2014 summer backpack programs. (Greenwald Dep. at 49708; Doc. No. 541-5 (Dec. 7, 2015 Declaration of Robert Greenwald ["Greenwald Dec."]) ¶¶ 7, 11.)
But discovery regarding the 2012 summer backpack contract was not provided, and no analysis of the profitability of the 2012 summer backpack program was performed by Champion in connection with its lost profit calculations.
Regardless of whether Champion relied on the 2012 contract in calculating lost profits for the similar 2013 and 2014 OAFB summer backpack programs, the Court specifically ordered Champion to comply with defendants discovery requests regarding lost profits and defendants made such request for information regarding Champion's performance of the 2012 contract, which both Weithman and Greenwald agreed would be probative of Champion's lost profit claims. Specifically, Vista's second request for production of documents sought this information, by requesting the following:
(Pl. Resp. to Second Demand for Prod. of Docs. at 29580.
Given Champion's acknowledgement of the similarities between the 2012 contract and the 2013 and 2014 summer backpack programs for which plaintiff claims lost profits, and the liberal construction of discovery under Rule 26, Champion's performance of the 2012 contract is clearly relevant.
In a similar fashion and notwithstanding multiple discovery requests, plaintiff refused to produce actual documentation supporting its damages computations.
Another example of available documents that were not produced by Champion in connection with its lost profit calculations on the grounds of relevance
While Champion identified some avoided costs on its lost profit spreadsheets, other avoided costs were omitted altogether from Champion's lost profit calculations. See Bessemer, 596 F.3d at 367 (avoided costs are a "critical factor" in determining lost profits).
For example, the cost of inbound freight is not included as an expense in Champion's damages packet, impacting defendants' ability to independently analyze plaintiff's lost profit calculations. (Greenwald Supp. R. at 29179; Greenwald Dep. at 49734-35.) Inbound freight costs are shipping costs that Champion incurs with respect to items that it orders from vendors. Champion's tax returns reflect inbound freight costs. (See, e.g., Doc. No. 662-3 (2013 U.S. Tax Return) at 49929 ($25,762); Doc. No. 662-2 (2012 U.S. Tax Return) at 49892 ($36,289).) Nicewicz testified that whether Champion pays inbound freight charges for products it orders "[d]epends on the supplier." (Nicewicz Dep. at 42387, 42394.) Weithman also testified that Champion incurs inbound or FOB freight charges for supplies purchased by Champion. (Tr. at 48917-18.) Champon did not include this expense (avoided cost) in its damages calculation or contemporaneous invoices for all of its food and supplies, thus Champion's assertion that shipping costs are included in the cost of these items cannot be tested.
Also not included as an avoided cost in plaintiff's damages packet are utility costs, and Champion did not produce utility bills. While acknowledging that such costs might increase at times of higher production, Champion did not list utility costs as an expense because "[i]t would be so incidental that it's not—we didn't put it in, didn't rely on it. It would be a negligible cost." (Id. at 48922.) Greenwald agrees that utility costs are going to vary with production. (See Greenwald Dep. at 49712; Greenwald Supp. R. at 29188.) Without utility bills, however, Champion's conclusion that such costs are negligible cannot be independently analyzed.
Virtually all of plaintiff's expenses (avoided costs) listed on its lost profit spreadsheets
From the information provided by Champion in support of it damages computation, defendants are unable to verify or test plaintiff's projected lost profits. (See Greenwald Supp. R. at 29179-29191; Greenwald Dep. at 49793-94.) Damages disclosures lacking supporting documentation that would allow the opposing party to "independently analyze" a lost profits claim violate Rule 26. Acuity Brands Lighting, Inc. v. Bickley, No. 5:13-CV-366-DLB-REW, 2015 WL 10551946, at *2 (E.D. Ky. Nov. 30, 2015) (disclosure lacking supporting documentation that would allow the opposing party to independently analyze the claim violates Rule 26) (citing Bessemer, 596 F.3d at 370), report and recommendation adopted sub nom. Acuity Brands, Inc. v. Bickley, No. CV 13-366-DLB-REW, 2016 WL 1171541 (E.D. Ky. Mar. 24, 2016) (citing Scheel, 2012 WL 3879279, at *4)).
As argued by defendants' in their original motion for sanctions, and discussed by the Court in the order providing Champion with an additional opportunity to fulfill is discover obligations under Rule 26, Bessemer sets the standard in the Sixth Circuit regarding Rule 26's requirements relating to a party's damages discovery obligations.
Accordingly, the Court concludes that Champion's damages disclosures, and failure to properly and completely respond to defendants' discovery requests relating to lost profits, violate Rule 26 and the Court's order.
Information that was not provided by Champion in its damages packet and document discovery regarding lost profits was also not provided by its Rule 30(b)(6) witnesses. Defendants contend that Champion also violated the order relative to Champion's Rule 30(b)(6) witnesses. In that regard, the order required Champion:
(Order at 18805.)
Rule 30(b)(6) requires that individuals designated to speak for the company must testify about "information known or reasonably available to the organization." The designated witness must be prepared by the organization to adequately testify on the noticed topics. Nacco Materials Handling Grp., Inc. v. Lilly Co., 278 F.R.D. 395, 400-01 (W.D. Tenn. 2011) (citing FDIC v. Butcher, 116 F.R.D. 196, 199 (E.D. Tenn. 1986) (a corporation must make a good-faith effort to designate persons having knowledge of the information sought and to prepare those persons) and Marker v. Union Fid. Life Ins. Co., 125 F.R.D. 121, 126 (M.D. N.C. 1989) (Rule 30(b)(6) requires a corporation not only to produce persons to testify with respect to the designated matters, but also to prepare the witness to give complete and knowledgeable answers)); Prosonic Corp. v. Stafford, No. 2:07-CV-0803, 2008 WL 2323528, at *1 (S.D. Ohio June 2, 2008) ("[f]or a Rule 30(b)(6) deposition to operate effectively, the deposing party must designate the areas of inquiry with reasonable particularity, and the corporation must designate and adequately prepare witnesses to address these matters") (quoting Starlight Intern. Inc. v. Herlihy, 186 F.R.D. 626, 638 (D. Kan. 1999) (quotation marks and further citation omitted)).
Preparation of a Rule 30(b)(6) witness is an active process. "Rule 30(b)(6) requires all such designees to review all matters known or reasonably available to the corporation in preparation for the deposition, even if the documents are voluminous and burdensome to review." Beattie v. CenturyTel, Inc., No. 02-10277, 2009 WL 5066676, at *6 (E.D. Mich. Dec. 16, 2009) (citing Sprint Commc'ns Co. v. Theglobe.com, Inc., 236 F.R.D. 524, 528 (D. Kan. 2006)); Nacco Materials Handling Grp., 278 F.R.D. at 401 (Lilly's Rule 30(b)(6) designee was not adequately prepared to testify on the noticed topics because he did not meet with employees he knew had accessed plaintiff's website, examine their computers to determine what portion of plaintiff's secure site had been accessed, or "review any documents or records to determine who accessed the site, although he admitted that Lilly probably had such records available").
Defendants' Rule 30(b)(6) notice, in relevant part, identified the following topics:
Weithman was designated by Champion to testify regarding projects similar to the OAFB contracts at issue. As previously discussed, Champion conceded that the 2012 contract performed by Champion would be an indicator of Champion's expected performance with respect to the OAFB's 2013 summer backpack program,
Weithman testified that Champion did not separately maintain profit/loss statements on a per project basis, but acknowledged that all of the documents necessary to compute profits and margins for the 2012 OAFB summer backpack program were available, and "if asked," he could perform that analysis. (Tr. at 48826 (emphasis added); see also Weithman Dep. at 41054-55.) Defendants did ask.
The deposition notice directed Champion to provide profitability analysis for projects "similar" to the OAFB contracts at issue in the lost profits claims. Champion identified two such projects—the 2012 summer backpack and 2013 IMD programs. (Weithman Dep. at 41035-36; Nicewicz Dep. at 42120-24).
Nicewicz prepared Champion's damages packet and was questioned at his deposition regarding those calculations. Nicewicz provided no more information in his Rule 30(b)(6) deposition than was available in the unsubstantiated information in the damages packet such as would enable defendants to independently verify and analyze plaintiff's lost profit claims.
For example with respect to food prices, Champion's damages packet contains invoices from time frames that are not contemporaneous with the time frame in which the project was to have been performed.
Nicewicz also testified regarding labor costs. First, Nicewicz testified how he initially arrived at the labor costs contained in the damages packet, noting mistakes along the way with respect to both labor rate and the number of employees required to perform the work. (Id. at 42162-66.) Nicewicz's testimony about the corrected labor costs is no more illuminating, and is filled with estimates and uncertainty with respect to the details of Champion's labor costs used in its lost profit calculations. In the end, Nicewicz testified that Champion does not keep records of time to complete a project and required labor, even with respect to completed projects similar to the contracts for which Champion claims lost profits. (Id. at 42162-75.)
As previously discussed regarding meal delivery costs, the damages packet contains no documentation to support Champion's use of 1.5 cents per mile for meal delivery costs. Nicewicz was questioned about this expense at his Rule 30(b)(6) deposition, but his testimony is a confusing labyrinth of assumptions, estimates, and guesswork and he admits that Champion produced no calculations to support this sum. (Id. at 42424-47.) Rather, Champion's meal delivery costs are based simply on Champion's "long experience." (Champion Resp. at 50153.)
Both Weithman and Nicewicz were unprepared to testify about matters for which they were noticed regarding Champion's lost profit claims. Both Rule 30(b)(6) and the Court's order required Champion to produce witnesses that were knowledgeable and prepared, and to perform whatever inquiry and review was required to be so prepared. Nacco Materials Handling Grp., 278 F.R.D. at 400-01. This preparation is an active process, and Weithman and Nicewicz had a duty to inquire and review documents so that they were knowledgeable about, and could testify, regarding the noticed topics. Beattie, 2009 WL 5066676, at *6; Nacco Materials Handling Grp., 278 F.R.D. at 401. Champion's failure to produce Rule 30(b)(6) witnesses knowledgeable and prepared to testify violates the requirements of the Federal Rules and the order. See Bessemer, 596 F.3d at 367-68.
The Court now considers what sanctions, if any, are appropriate based on these findings.
Defendants seek to exclude evidence of plaintiff's lost profits pursuant to Fed. R. Civ. P. 37(c)(1).
"[T]he party seeking to invoke the preclusion sanction [of Rule 37(c)(1)] must first prove that the opposing party violated Rule 26(a) or (e). . . ." Nathan v. Ohio State Univ., No. 2:10-CV-872, 2012 WL 5342666, at *4 (S.D. Ohio Oct. 29, 2012) (quoting 7 James Wm. Moore et al., Moore's Federal Practice § 37.60 [2][a] (3d ed. 2012)).
The Court has previously detailed the severe deficiencies regarding plaintiff's damages disclosures in connection with its damages computation, and concluded that Champion's disclosures are insufficient to enable defendants to independently analyze plaintiff's damages claim. Nicewicz, who prepared plaintiff's damages packet, is admittedly not an accountant, has no experience in accounting, forensic accounting, auditing, appraisals, or business valuation. (Nicewicz Dep. at 42329-31.) Defendants' expert has detailed the insufficiencies of plaintiff's damages packet. The damages packet, does not permit the plaintiff's damages computation to be verified or tested. While an expert is not required under Ohio law to prove damages, without an expert Champion is unable to rebut the compelling opinion and testimony of defendants' expert that such documentation is needed in order to independently analyze plaintiff's damages claim. Bessemer, 596 F.3d at 369 ("[A]ccording to the unrebutted opinion of Seaway's expert, the records requested were `standard accounting records' and Bessemer could not excuse its failure to disclose on the grounds that there were no documents to produce.")
Plaintiff argues that it has complied with Rule 26 and the order, and that defendants' motion is really a dispute about the amount of damages, not the sufficiency of the damages documentation under Rule 26. Under Ohio law, plaintiff need not prove the amount lost with "absolute precision," and the "evidence need only be reasonable, not specific."
It is true that plaintiff compiled a packet of more than 400 pages to "support" its damages claim. Quantity alone does satisfy the requirements of the Federal Rules, and Champion included many pages that are of no value in allowing defendants to analyze plaintiff's damages claim. More troubling, though, is that Champion deliberately failed to provide information pertinent to defendants' analysis. Both with respect to the insufficient documentation provided, and with respect to the information not provided based on Champion's own contrived determination as to what information was relevant or was not relied upon, Champion is essentially asking defendants to "take their word for it" regarding plaintiff's overviews, summaries, samples, estimates, experience, and averages used to compute lost profits.
Rule 26 does not require defendants to take plaintiff's word for it. "Bessemer requires robust damage-related production." Acuity Brands Lighting, 2015 WL 10551946, at *1 n.2. Damages disclosures lacking supporting documentation that allows the opposing party to "independently analyze" the lost profit claims violates Rule 26. Id. at *2 (citation omitted); Shoffner v. Qwest Commc'ns Corp., No. 4:01-CV-54, 2014 WL 3495045, at *9 (E.D. Tenn. June 23, 2014) (damages claim not sufficiently documented when plaintiff's estimated value of land then calculated various percentages of diminished values), report and recommendation adopted, No. 4:01-CV-54, 2014 WL 3495175 (E.D. Tenn. July 11, 2014).
Champion repeatedly failed to comply with the requirements of the Federal Rules by applying its own definition of relevance and what constitutes "support" for its damages claim. Rule 26's requirement that a claimant provide evidence supporting its damages computation is not a license to pick and choose what constitutes support, and exclude evidence that may be unfavorable to the claim, because plaintiff chooses not to "rely" on it. The Federal Rules and the courts determine what constitutes relevant evidence, not the claimant. "Our system of discovery was designed to increase the likelihood that justice will be served in each case, not to promote principles of gamesmanship and deception in which the person who hides the ball most effectively wins the case." Abrahamsen v. Trans-State Exp., Inc., 92 F.3d 425, 428-29 (6th Cir. 1996).
During the entire course of damages discovery, plaintiff continually objected to clearly relevant damages discovery requests based on the self-serving contention that the information was not relevant, or not utilized by plaintiff to support its damages claim. Additionally, plaintiff steadfastly refused to provide actual supporting documentation for its damages computation, which was admittedly available, and instead provided defendants with prepared-for-litigation summaries and overviews from which defendants could not independently analyze plaintiff's calculations. Plaintiff's sustained and deliberate refusal to comply with its discovery obligations violates both Rule 26 and the Court's order.
If the moving party establishes that the party seeking damages did not comply with its discovery obligations under Rule 26, the burden shifts to the potentially sanctioned party to show that the violation of Rule 26 was justified or harmless. R.C. Olmstead, Inc. v. CU Interface, LLC, 657 F.Supp.2d 905, 908-09 (N.D. Ohio 2008), aff'd, 606 F.3d 262 (6th Cir. 2010) (citations omitted).
"The advisory committee note to Rule 37(c) `strongly suggests that `harmless' involves an honest mistake on the part of the party coupled with sufficient knowledge on the part of the other party.'" Sommer v. Davis, 317 F.3d 686, 692 (6th Cir. 2003) (quoting Vance v. United States, No. 98-5488, 1999 WL 455435, at *5 (6th Cir. June 25, 1999) (unpublished table decision)); R.C. Olmstead, 657 F. Supp. 2d at 908-09.
In its post-hearing brief, plaintiff continues to advance its recurring themes that the evidence sought by defendants to independently analyze plaintiff's damages computation is not relevant, and/or that plaintiff did not rely on the evidence to support its computation. (See Champion Resp.) As discussed above and at the evidentiary hearing, a party does not satisfy its discovery obligations by picking and choosing supporting documentation based on its own definition of relevance, and ignoring information clearly relevant under the Federal Rules that may be unfavorable to its damages computation. (See Tr. at 48879-83.)
Moreover, plaintiff's refusal to comply with its discovery obligations under Rule 26 continued unabashed in the face of the Court's order regarding damages discovery (relating to both documents and Rule 30(b)(6) witness testimony), and in the face of the Court's warning that the sanction of exclusion or dismissal may be imposed if plaintiff did not avail itself of the additional opportunity provided by the Court to comply with its discovery obligations under both Rules 26 and 30(b)(6). Bessemer, 596 F.3d at 370 ("Even with the entry of a protective order in May 2007, Bessemer continued to evade Seaway's requests for information[.]") Undeterred, plaintiff continued to steadfastly rely on its own definition of relevance and support with respect to its lost profit calculations.
Plaintiff's argument that the court-ordered ESI discovery of Champion's network absolves plaintiff of its failure to comply with its discovery obligations is unavailing. Even if the ESI discovery revealed all of the documents that defendants sought regarding plaintiff's damages computation, and the Court does not find that it did,
Rule 37(c)'s sanction of exclusion is mandatory unless there is a reasonable explanation of why Rule 26 was not complied with or the mistake was harmless. Bessemer, 596 F.3d at 370 (citation omitted); Numatics, Inc. v. Balluff, Inc., 66 F.Supp.3d 934, 943 (E.D. Mich. 2014) (When the disclosure requirements of Rule 26 are violated, Rule 37 mandates preclusion of the evidence "unless there is a reasonable explnation of why Rule 26 was not complied with or the mistake was harmless.") (quoting Bessemer, 596 F.3d at 370 (6th Cir. 2010) (quotation marks and further citation omitted)); Callen Mfg. Corp., 2016 WL 865733, at *5 ("A noncompliant party may avoid sanction if there is a reasonable explanation of why Rule 26 was not complied with or the mistake was harmless.") (quoting Howe v. City of Akron, 801 F.3d 718, 747 (6th Cir. 2015) (quotation marks and further citation omitted)).
Applying the factors used in the Sixth Circuit to determine if the non-disclosures are substantially justified or harmless,
Rule 37(c)(1) allows for the imposition of both greater and lesser sanctions for failure to disclose or supplement discovery required by Rule 26(a) or (e).
For example, the Court considered shifting the cost of court-ordered ESI discovery from defendants to plaintiff because the court-ordered discovery revealed that plaintiff did not produce documents available on their computers that were relevant to plaintiff's lost profit claims. The Court also considered utilizing a jury instruction with respect to the issue of damages, such as, for example, Champion's unprofitability as a company.
The Court concludes, however, that these sanctions would be insufficient under the circumstances of this case. First, the Court provided plaintiff with an additional opportunity to comply with its discovery obligations, both with respect to Rule 26 and Rule 30(b)(6), and warned plaintiff that failing to do so may result in the exclusion of lost profits evidence, and even dismissal of the case. (Order at 18803-05.) Despite being given this additional opportunity to properly and completely comply with the discovery rules and avoid sanction, Champion persisted to flout its discovery obligations under the Federal Rules. Second, the lesser sanctions considered would not be sufficient to address the ultimate consequence of plaintiff's discovery violations, which thwarted defendants' ability to independently analyze—and ultimately defend against—plaintiff's unsupported lost profit claims.
Thus, the Court concludes that exclusion of evidence of plaintiff's lost profit claims for repeated failure to fulfill its discovery obligations, even after being given numerous opportunities to do so, is an appropriate and necessary sanction under Rule 37(c)(1) given the enormity plaintiff's deficiencies in fulfilling its discovery obligations. See Bessemer, 596 F.3d at 369-70.
Rule 37(b)(2) provides for the imposition of sanctions for the failure to obey a court order to provide or permit discovery. For such violations, a court may issue "further just orders[,]" which may include "prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters into evidence." See Laukus v. Rio Brands, Inc., 292 F.R.D. 485, 500 (N.D. Ohio 2013) (quoting Fed.R.Civ.P. 37(b)(2)(A)(i)-(vii)).
Appropriate sanctions under Rule 37(b)(2) include prohibiting a party from pursuing damages that would have been supported by the discovery that the party failed to provide pursuant to a court's order. See Karlik v. Colvin, No. 12-CV-14879, 2014 WL 2095352, at *2 (E.D. Mich. May 20, 2014) (granting defendant's motion to exclude medical-based damages evidence at trial pursuant to Fed. R. Civ. P. 37(b)(2)(A)(ii) where plaintiff failed to comply with court order to provide medical release, even though plaintiff provided some medical documents, because defendant would be prejudiced by not having an opportunity to review plaintiff's medical records prior to trial); see also Fontaine v. State Farm Fire & Cas. Co., No. 2:15-CV-12881, 2016 WL 520988, at *2 (E.D. Mich. Feb. 4, 2016) ("Should Plaintiff fail to supplement his answer to Interrogatory No. 1 within the time specified, he will be precluded from pursuing the damages that would be supported by these documents and responses; in other words, he will be prohibited `from supporting or. . . from introducing designated matters in evidence[,]' as the sanction specified in Fed. R. Civ. P. 37(b)(2)(A)(ii).").
In this case, plaintiff failed to comply with the Court's order regarding discovery under both Rules 26 and 30(b)(6). Although plaintiff provided some information in its damages packet, plaintiff failed to: (1) fully and completely respond to defendants' requests for discovery relating to lost profits; (2) failed to produce available evidence sufficient under Rule 26 to support its damages computation; and (3) failed to produce knowledgeable and prepared Rule 30(b)(6) witnesses regarding its lost profit claims. See, e.g., Karlik, 2014 WL 2095352, at *2; TLC Realty 1 LLC, 2016 WL 1730712, at *2; Acuity Brands Lighting, Inc., 20015 WL 10551946at *2 (citing Scheel, 2012 WL 3879279, at *4); Nacco Materials Handling Grp., 278 F.R.D. at 400-01.
Based on plaintiff's deliberate failure to comply with the Court's order to fulfill its discovery obligations, the Court finds that excluding evidence of plaintiff's lost profits is also the most appropriate sanction under Rule 37(b)(2).
For all of the foregoing reasons, defendants' motions to exclude evidence of Champion's lost profits claim with respect to the OAFB 2013 and 2014 summer backpack programs, and OAFB 2014 summer IMD program, as a sanction for plaintiff's failure to fulfill its obligations under the Federal Rules and for its violations of the Court's order regarding lost profits discovery, are granted. Accordingly, Champion is precluded from making any reference to, or presenting at trial any testimony, evidence, or argument, concerning alleged lost profits and/or damages with respect to any of the OAFB contracts at issue in this case.
Additionally, the Court's analysis herein focuses entirely on whether evidence of Champio's lost profits should be excluded because Champion failed to comply with its discovery obligations. This analysis does not address the issue of whether such contracts would have been awarded to Champion if it were not for defendants' alleged wrongful conduct, or if Champion would be entitled to such damages if its loss profits claim was not excluded as a sanction.
Howe, 801 F.3d at 748 (quoting Russell v. Absolute Collection Servs., Inc., 763 F.3d 385, 396-97 (4th Cir. 2014) (further citation omitted)); Callen Mfg. Corp. v. Nexteer Auto. Corp., No. 15-CV-11363, 2016 WL 865733, at *5-6 (E.D. Mich. Mar. 7, 2016).
