JAMES L. ROBART, District Judge.
Before the court is Defendant American Zurich Insurance Company's ("American Zurich") Federal Rule of Civil Procedure 37(c)(1) motion for sanctions against Plaintiff MKB Constructors ("MKB") seeking to exclude at trial MKB's supplemental damages computation which MKB disclosed after the discovery cutoff.
This case is about an insurance dispute. MKB is a Washington joint venture comprised of Derian, Inc. and R. Scott Constructors, Inc. (Am. Compl. (Dkt. # 35) ¶ 1.) MKB contracted with the Lower Yukon School District ("LYSD") for a project, which included "the procurement, delivery and placement of gravel fill" for a new building pad and driveway upon which a school building would be built. (Id. ¶ 6.) American Zurich issued MKB a "Builders Risk" policy for the period of June 15, 2012, to October 31, 2012, which provided MKB with insurance coverage related to the LYSD project. (See id. ¶ 8.) A dispute arose between MKB and LYSD about the volume of fill required to be placed on the building pad. Eventually, LYSD terminated its contract with MKB (7/22/14 Videa Decl. (Dkt. # 94) Ex. 32), and withheld payment of the remaining contract balance of $1,436,419.40 (see id. Ex. 33 at MKB000012). MKB and LYSD entered into arbitration before finally settling their dispute (see generally id. Ex. 35). As part of their settlement, LYSD paid MKB $1,436,419.40. (Id. at 2.)
MKB notified American Zurich that it was placing a claim under its Builders Risk policy for the damages or losses it had incurred with respect to earth movement beneath the LYSD building pad. (Id. Ex 39.) On December 28, 2012, MKB sent a letter to American Zurich submitting the "specific monetary damages" that MKB was claiming under the Policy "as a direct result of earth movement." (Id. Ex. 40 at 2.) The specific items MKB listed in its letter included:
(7/22/14 Videa Decl. Ex. 40; 7/22/14 Mullenix Decl. Ex. 32.) With respect to the $669,508.99 claimed for additional foundational materials, MKB originally calculated "that 4,773 tons of extra [gravel] fill, beyond plan quantities, had cost them that amount of money." (See 8/27/14 Videa Decl. (Dkt. # 115) Ex. 10 (MKB Supp. Resp. to 1st Int.) at 8.)
Throughout this litigation, MKB has repeatedly affirmed that it is claiming the foregoing specific cost items originally listed in its December 28, 2012, letter to American Zurich. In its May 31, 2013, Initial Disclosures, MKB identified the same costs as those listed in its December 28, 2012, letter.
On June 5, 2014, MKB served a timely answer to a discovery request from American Zurich asking MKB to identify "with specificity the physical loss or damage to the building pad or foundation at the Project as alleged in MKB's response to American Zurich's Interrogatories, Set One, Interrogatory No. 1."
Pursuant to the court's November 7, 2013, scheduling order, the discovery period closed on June 23, 2014. (Sched. Ord. (Dkt. # 38) at 1.) On July 17, 2014, more than three weeks following the close of discovery, and just five days before the deadline for dispositive motions, MKB sent via email a Second Supplemental Response to American Zurich's First Set of Interrogatories to American Zurich.
It is unclear based on MKB's supplemental discovery response whether the new damages calculation of $1,384,324.63 is intended to replace its original claim for $669,508.99 in additional foundational materials, its original claim for the contract balance of $1,436,419.40, both, or neither. Indeed, the court is uncertain if MKB intends to replace its entire previous damages computation, totaling 2,679,095.11, with the new computation, or only a portion of it, and if so, which portion.
In its supplemental discovery response, MKB suggests that it is no longer claiming the some of the specific figures it identified in its Rule 26 damages computation, but rather utilizing those figures simply to support its new calculation. For example, MKB states that it "is not claiming that [American] Zurich is required to pay MKB [the `Contract Balance' of $1,436,419.40] simply because LYSD decided to withhold earned contract proceeds," but rather that the Contract Balance of $1,436,419.40 "demonstrates that MKB had a financial and insurable interest in the covered property . . . [and] also provides evidence of the price of the fill that was lost due to settlement, as that is the amount that LYSD withheld from MKB on the contract in order to pay for another contractor to finish the Phase One work." (Id. at 7-8.) MKB also states that "[t]he number for additional foundational materials ($669,508.99) is . . . useful for calculating a unit price of the fill that was lost below original ground." (Id. at 8.) MKB then uses this figure to calculate a unit price of $140.27 per ton. (Id.) Multiplying this figure by 9,869 tons, MKB arrives at its new damages calculation of $1,384,324.63. (See id. at 9.) Yet, during the course of its July 17, 2014, supplemental interrogatory response, MKB never expressly clarifies if its new damages computation of $1,384.324.63 is intended to replace all or only a portion of its previous damages computation, or if its new damages calculation is intended to be in addition to its previous computation. The later option seems unlikely to the court, but MKB never explicitly clarifies its intent with respect to the new $1,384,324.63 figure.
On July 22, 2014 (the deadline for filing dispositive motions), the parties filed dueling motions for summary judgment. (See MKB SJ Mot. (Dkt. # 91); AZ SJ Mot. (Dkt. # 93).) American Zurich moved for summary judgment with respect to all of the cost items listed in MKB's December 28, 2012, claim letter and MKB's Rule 26(a) initial disclosures. (See AZ SJ Mot. at 12-18.) In its order on the parties' motions for summary judgment, the court granted American Zurich's motion for summary judgment on the $1,436,419.40 contract balance on grounds that it was undisputed that LYSD had already paid MKB this amount in settlement of the arbitration proceedings between them. (See 9/25/14 Order (Dkt. # 128) at 16-24.) In its response to American Zurich's summary judgment motion, MKB never discusses its new damages computation of $1,384,324.63 (which it had sent to American Zurich five days before the dispositive motions deadline), how the new calculation relates to its previous damages computation in any way, or how the court should consider the new computation in relation to American Zurich's motion for summary judgment. (See generally MKB SJ Resp. (Dkt. # 107).)
Further, in its response to American Zurich's present motion, MKB again fails to clarify how its new damages computation of $1,384,324.63 relates to the specific items listed in its original damages computation. In response to American Zurich's present motion, MKB states that "the real dispute at the heart of [American Zurich's] motion is that of how to characterize the $1,436,419.40 in withheld contract proceeds that has been part of MKB's claim since December 2012."
This matter is presently scheduled for a jury trial on October 20, 2014, which is just three weeks away. Because MKB did not disclose its new damages computation until after the close of discovery and just five days prior to the dispositive motions deadline, American Zurich moves under Federal Rule of Civil Procedure 37(c)(1) for sanctions to prohibit MKB from using its newly revealed damages computation at trial. (See generally Mot.)
In its response, MKB "does not dispute that its claim, and the documents supporting that claim, were required to have been produced to [American] Zurich in discovery." (Resp. at 2.) Although MKB acknowledges that it did not provide the actual damages computation of $1,384,324.63 until after the discovery cutoff, MKB argues that American Zurich is not prejudiced because MKB provided American Zurich with all of the information it needed to come up with the new computation on its own during the discovery period. (See Resp. at 7-9.) In particular, MKB states:
(Resp. at 9.) MKB also argues that if the court "concludes MKB should have made some greater disclosure than it did," the court should impose a lesser sanction than the exclusion of MKB's new damages computation. (Id. at 10.) Specifically, MKB asks the court to limit any sanction to allowing American Zurich to re-depose Mark Jensen (who MKB previously designated as Federal Rule of Civil Procedure 36 deponent) and permitting American Zurich's cost expert to issue a supplemental report on the issue of the cost to repair a 9,869 ton settlement loss. (Resp. at 10.)
The court now considers the merits of American Zurich's motion and MKB's response.
Federal Rule of Civil Procedure 26(a)(1)(A) provides in relevant part that "a party must, without awaiting a discovery request, provide to the other parties . . . a computation of each category of damages claimed by the disclosing party—who must also make available for inspection or copying as under Rule 34 the documents or other evidentiary material, unless privileged or protected from disclosure, on which each computation is based, including materials bearing on the nature and extent of injuries suffered . . . ." Fed. R. Civ. P. 26(a)(1)(A)(iii). Rule 26(a)(1)(A) requires a party to disclose both "a computation of each category of damages," as well as the documents and other evidentiary material underpinning the computation. Id. In addition, Rule 26(e)(1)(A) requires that "[a] party who has made a disclosure under Rule 26(a). . . must supplement or correct its disclosure or response . . . in a timely manner if the party learns that in some material respect the disclosure or response is incomplete or incorrect, and if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing." Fed. R. Civ. P. 26(e)(1)(A).
Federal Rule of Civil Procedure 37(c)(1) "forbid[s] the use at trial of any information required to be disclosed by Rule 26(a) that is not properly disclosed." R & R Sails, Inc. v. Ins. Co. of Pa., 673 F.3d 1240, 1246 (9th Cir. 2012) (quoting Yeti by Molly, Ltd. v. Deckers Outdoor Corp., 259 F.3d 1101, 1106 (9th Cir. 2001) and Hoffman v. Constr. Protective Servs., Inc., 541 F.3d 1175, 1179 (9th Cir. 2008)). Specifically, Rule 37(c)(1) provides:
Fed. R. Civ. P. 37(c)(1). The party facing sanctions bears the burden of proving that its failure to disclose the required information was substantially justified or is harmless. R & R Sails, 673 F.3d at 1246 (citing Torres v. City of L.A., 548 F.3d 1197, 1213 (9th Cir. 2008).
As explained above, under Rule 26(a), MKB was required to serve a computation of damages on American Zurich, and under Rule 26(e), MKB was required to supplement its damages computation in a timely manner. MKB failed to comply with these requirements when it revised its damages computation on July 17, 2014, after the close of discovery on June 23, 2014. Under any reasonable interpretation and application of Rule 26(a) and (e), MKB's supplemental disclosure of its revised damages computation on July 17, 2014, as well as the specific methodology it used to compute those damages, was untimely.
MKB, however, tries to minimize the impact of the untimeliness of its disclosure by asserting that it had provide American Zurich prior to the discovery cutoff with everything American Zurich needed to devise the revised damages computation on its own. (See Resp. at 9.) MKB, however, is required to produce not only the materials on which the computation can be formulated, but the computation itself. See Fed. R. Civ. P. 26(a)(1)(A)(iii) ("A party must . . . provide . . . a computation of each category of damages claimed by the disclosing party."). "The plaintiff cannot shift to the defendant the burden of attempting to determine the amount of the plaintiff's alleged damages." Jackson v. United Artists Theatre Circuit, Inc., 278 F.R.D. 586, 593 (D. Ariz. 2011) (citing Design Strategy, Inc. v. Davis, 469 F.3d 284, 294-95 (2nd Cir. 2006)). Simply providing documents or other information and assuming that the defendant will somehow divine the plaintiff's damages computation from those documents or other information is insufficient and not in accord with the requirements of Rule 26(a) and (e). As the language of Rule 26(a)(1)(A)(iii) indicates, for disclosure purposes, damages are determined not by actual cost, but by what the party claims. See Patton v. Wal-Mart Stores, Inc., NO. 2:12-cv-02142-GMN-VCF, 2013 WL 6158461, at *4 (D. Nev. Nov. 20, 2013). The court concludes that MKB failed to comply with Rule 26(e) when it failed to timely supplement its damages computation within the discovery period. Thus, the burden now rests with MKB to show that its failure was substantially justified or harmless. See R & R Sails, 673 F.3d at 1246.
The court first considers whether MKB's conduct was substantially justified. Unfortunately, MKB offers no explanation for why it did not provide its revised damages computation during the discovery period. As noted above, MKB argues that American Zurich had everything it needed to calculate MKB's revised damages on June 5, 2014, when MKB told American Zurich in a discovery response that the amount of settling it intended to prove at trial was equivalent to 9,869 tons of fill. (See MKB Resp. at 9.) If this is true, however, then MKB also had everything it needed to supplement and produce its own revised damages computation within the discovery period. As discussed above, there can be no doubt that MKB was under an obligation to do so. See Fed. R. Civ. P. 26(e)(1)(A). The court does not presume to know MKB's (or its counsel's) precise state of mind when MKB failed to timely supplement its damages computation. Whether intentional or not, MKB's failure to timely comply with its obligations to supplement its initial disclosures under Rule 26(e) gives the appearance of gamesmanship and of attempting to impair American Zurich's ability to marshal a timely defense for trial. Thus, the court concludes that MKB has failed to meet its burden of demonstrating that its conduct was substantially justified.
The court next considers whether MKB's untimely disclosure of its revised damages computation was harmless. As discussed above, the fact that the MKB provided other documents or information within the discovery period from which American Zurich might have divined MKB's revised $1,384,324.63 damages calculation is insufficient to avoid prejudice or harm to American Zurich. MKB had repeatedly told American Zurich that it intended to rely on the damages calculation provided to American Zurich in its December 28, 2012, letter. American Zurich was entitled to rely on MKB's disclosures. American Zurich was not required to guess that MKB might attempt to prove some other damages calculation at trial that MKB had not yet disclosed during discovery. American Zurich has been deprived of the opportunity to conduct discovery aimed at investigating, evaluating, and testing MKB's new damages computation. Indeed, American Zurich retained experts based on MKB's original damages computations, and American Zurich moved for summary judgment and has prepared for trial on that basis too. MKB has not met its burden of demonstrating that its failure to timely supplement its damages computation was harmless.
Under the foregoing circumstances, the court would be justified in barring MKB from utilizing its revised damages computation at trial. Nevertheless, in the Ninth Circuit, the court is required to consider whether an exclusionary ruling would amount to dismissal of a claim. See R & R Sails, 673 F.3d at 1247. If so, then the court is further required to consider whether the noncompliance at issue involved willfulness, fault, or bad faith and also to consider the availability of lesser sanctions.
Even if the court were to consider willfulness, fault, bad faith, and the availability of lesser sanctions, however, the court would still conclude that exclusion is the appropriate sanction here. In the absence of any explanation from MKB as to why it failed to adhere to its Rule 26(e) obligations to provide timely supplementation of its damages computation, the court is forced to conclude that MKB's failure was willful. Indeed, as discussed above when the court considered whether MKB's conduct was substantially justified, MKB's conduct in failing to timely supplement its damages computation when it had all the information it needed to do so within the discovery period, and its failure to provide the court with a coherent explanation for its dilatory conduct, gives the appearance of bad faith.
The court also concludes that imposing lesser sanctions is not a viable solution and cannot remedy the harm and prejudice that MKB's late disclosure has already caused. MKB suggests that, instead of excluding its revised damages computation, the court should permit American Zurich to (1) re-depose Mark Jensen (who MKB previously designated as its Federal Rule of Civil Procedure 30(b)(6) deponent) and (2) issue a supplemental report by one of its costs experts. (Resp. at 10.) Permitting American Zurich to reopen Mr. Jensen's deposition would be of only minimal assistance to American Zurich, however, because MKB has asserted that it is relying on the testimony of a variety of witnesses for its revised damages computation, including Maria Kampsen, Bill Nesheim, Andy Romine, Tony Wilson, and perhaps others. (Resp. at 7; see also 8/27/14 Videa Decl. Ex. 10 (MKB Supp. Resp. to 1st Int.) at 9 ("These issues were explored more fully at MKB's 30(b)(6) depositions, at the depositions of Richard Norman, at the deposition of Steve Nourse, and at the depositions of Andy Romine and Bill Nesheim.").) Because American Zurich did not know about MKB's revised damages computation at the time it deposed these witnesses, American Zurich would need (at a minimum) the opportunity to re-depose all of these witnesses to limit any prejudice. Further, although American Zurich's costs expert can address pricing issues, he cannot opine on geotechnical issues. Despite MKB's protestations to the contrary, the court concludes that American Zurich would be entitled to supplement the reports of other experts as well—not just its costs expert—in response to MKB's revised damages computation. After all, the revised damages computation is expressly based on a different volume of earth settlement (9,869 tons of fill) than MKB had previously relied upon in formulating its original damages computation (4,773 tons of fill).
Thus, the additional discovery required to mitigate the prejudice to American Zurich if the court were to allow the introduction of MKB's revised damages computation at trial would be far more extensive than suggested by MKB. Under such circumstances, it would be impossible for the parties to hold onto their current trial date, which is only about three weeks away. If, instead of excluding the use of MKB's supplemental damages computation at trial, the court were to reopen discovery to mitigate the prejudice to American Zurich, the court will be forced to reschedule the trial date as well. The late disclosure of information required by Rule 26 is not harmless when it requires the court to reopen discovery and reschedule the trial date. See Wong v. Regents of Univ. of Cal., 410 F.3d 1052, 1062 (9th Cir. 2005) (as amended) ("Disruption to the schedule of the court and other parties . . . is not harmless.").
In addition, the court spent considerable time and resources analyzing and deciding the parties' recent motions for summary judgment. A large portion of American Zurich's motion was based on MKB's original damages computation. (See AZ SJ Mot. (Dkt. # 93) at 12-18.) If the court were to permit MKB to proceed to trial on the basis of its untimely revised damages computation, MKB could effectively escape the consequences of the court's rulings on summary judgment with respect to its original damages computation or render those rulings irrelevant. In addition, American Zurich would be deprived of any opportunity to test MKB's revised computation in a pre-trial dispositive motion. The court sets case schedules and asks the parties to adhere to those schedules specifically to avoid situations like this where both the parties' and the court's time and resources are at stake. If the court permits MKB to rely on its untimely supplemental damages computation at trial, then much of the time and resources devoted by both the parties and the court in the recent round of dispositive motions will have been for naught. Sanctions other than the exclusion of the MKB's untimely supplemental damages calculation at trial simply cannot mitigate this prejudice.
Courts are more likely to exclude damages evidence when a party first discloses its computation of damages shortly before trial or substantially after discovery has closed. See, e.g., CQ Inc. v. TXU Mining Co., 565 F.3d 268 (5th Cir. 2009); 24/7 Records v. Sony Music Entm't, 566 F.Supp.2d 305, 318 (S.D.N.Y. 2008). In Hoffman v. Construction Protective Services, 541 F.3d 1175 (9th Cir. 2008), the Ninth Circuit affirmed the district court's order excluding plaintiffs' damages evidence because they failed to provide any computation of damages prior to the pretrial conference. The court stated that the late disclosure was not harmless because it would have most likely required the trial court to create a new briefing schedule and perhaps re-open discovery, rather than simply set a trial date. Id. at 1179. The same is true here.
Trial is set for October 20, 2014—just over three weeks away. Even if the court were to reopen discovery to permit American Zurich to investigate MKB's new damages computation, three weeks would be insufficient time. Thus, the parties' trial date would be lost and the court would be required to reschedule it. Further, much of the time and expense incurred by the parties and the court in briefing and deciding the parties' motions for summary judgment would be wasted if the court were to permit MKB to proceed to trial based on its untimely revised damages computation. Thus, the court GRANTS American Zurich's motion for Rule 37 sanctions against MKB, and ORDERS that MKB may not use its untimely supplemental damages computation at trial.
Based on the foregoing and for good cause shown, the court GRANTS American Zuirch's motion for Rule 37 sanctions against MKB (Dkt. # 115) and ORDERS MKB not use to its untimely supplemental damages computation at trial.
Fed. R. Civ. P. 37(b)(2)(A)(i)-(vi).
