Design Strategies, Inc. v. Davis

367 F.Supp.2d 630

DESIGN STRATEGIES, INC., Plaintiff, v. Marc E. DAVIS, Info Technologies, Inc., Info Technologies Web Solutions, Inc., and John Goullet, Defendants.

No. 02CIV5329VM.

United States District Court, S.D. New York.

April 28, 2005.

COPYRIGHT MATERIAL OMITTED

Leonard Benowich, Roosevelt, Benowich & Lewis, L.L.P., White Plains, NY, for Marc E. Davis.

Jason M. Butler, Sharon L. Nelles, Sullivan & Cromwell, New York, NY, Helen Bergman Moure, Preston, Gates & Ellis, L.L.P., Seattle, WA, for Microsoft Corp.

Patrick V. DiDomenico, Richard Scott Garley, Gibbons, Del Deo et al., New York, NY, for Info Technologies Web Solutions, Inc.

Jack S. Dweck, The Dweck Law Firm, LLP, New York, NY, for Design Strategy, Inc.

DECISION AND ORDER

MARRERO, District Judge.

By Order dated February 16, 2005 (the "February 16th Order"), the Court denied a motion filed by defendants Marc E. Davis ("Davis"), Info Technologies, Inc., Info Technologies Web Solutions, and John Goullet (collectively the "IT Defendants," and together with Davis, "Defendants") to strike the demand by plaintiff Design Strategies, Inc. ("Design") for a jury trial in this case. On April 5, 2005, the Court held a telephone conference (the "April 5th Conference") concerning Defendants' motion for an order precluding Design from introducing at trial evidence of its alleged lost profits and the testimony of two proposed witnesses. At that conference, the Court ruled on the record that Defendants' motion was granted in part and denied in part. The Court sets forth below the specific findings, reasoning, and conclusions underlying both of these rulings.

I. BACKGROUND

The Court addressed many of the facts and issues involved in this case in its Decision and Order granting in part and denying in part Defendants' and Plaintiff's cross-motions for summary judgment ("Design I").¹ Accordingly, those matters will not be reiterated here, except to explain the factual basis for the instant motions. As explained in Design I, the crux of Design's causes of action lies with Defendants' alleged diversion of a contract with Microsoft, Inc. ("Microsoft") for a project known as Contentville.com ("Contentville"). Contentville entailed establishing a major high-profile website for an electronic bookseller that would use Microsoft's software and compete directly with well-known websites such as amazon.com and barnesandnoble.com.

Design alleges that sometime between October and December 1999, Davis actively solicited and procured the Contentville contract for the IT Defendants while still an employee of Design and without giving Design an opportunity to compete for the contract, thereby breaching his fiduciary duty to Design.

II. DISCUSSION

A. MOTION TO PRECLUDE EVIDENCE OF LOST PROFITS

Design has not provided sufficient discovery regarding the amount of or basis for calculating damages based on alleged lost profits to enable it to seek those damages at trial. Federal Rule of Civil Procedure 26(a)(1)(C) ("Rule 26(a)(1)(C)") requires that a party seeking damages provide the opposing party with a computation of the damages sought and "the documents or other evidentiary material ... on which such computation is based." This requirement is effective even if the opposing party does not specifically request this material. See Fed.R.Civ.P. 26(a)(1) ("Rule 26(a)(1)"). In this case, however, the IT Defendants specifically requested that Design "[s]tate in detail each financial expense or loss allegedly incurred by plaintiff as a result of any acts or omissions of IT Defendants in this action giving: (a) a description of its nature; (b) the amount; (c) the date incurred; (d) the amount of similar estimated future expenses or losses, if any." (IT Defendants' First Set of Interrogatories and Request for the Production of Documents ("IT Defs.' Interrogs.") ¶ 9.)

Despite Rule 26(a)(1)'s disclosure requirement and the IT Defendants' request, Design has not provided Defendants or the Court with the required computation of lost profits. A review of the record before the Court indicates that Design's only allegation as to the amount of profits that it would have earned but for Davis's alleged disloyalty is its statement in the Complaint that it suffered "particular monetary damage, in an amount ... believed to be in excess of Twenty-five Million ($25,000,000.00) Dollars in lost revenues." (Compl.¶ 33.) Design has not, however, provided any specific computation of its alleged lost profits, nor any documents or other evidence on the basis of which such a computation could be made.

In addition, Design did not list lost profits or compensatory damages as remedies sought in its initial disclosures or in its response to the IT Defendants' interrogatories.² Thus, to the extent that Design gave Defendants notice of its intention to seek lost profits in its Complaint, it arguably took that notice away by omitting such damages from its subsequent representations regarding the remedies it planned to seek, and by failing to produce any discovery with respect to them.

Federal Rule of Civil Procedure 37(c)(1) provides that "[a] party that without substantial justification fails to disclose information required by Rule 26(a) ... is not, unless such failure is harmless, permitted to use as evidence at a trial ... any witness or information not so disclosed." "Rule 37(c)(1)'s preclusionary sanction is `automatic' absent a determination of either `substantial justification' or `harmlessness.' "American Stock Exchange, LLC v. Mopex, Inc., 215 F.R.D. 87, 93 (S.D.N.Y.2002) (citing Salgado v. General Motors Corp., 150 F.3d 735, 742 (7th Cir.1998); In re Motel 6 Sec. Litig., 161 F.Supp.2d 227, 243 (S.D.N.Y.2001); Bastys v. Rothschild, No. 97 Civ. 5154, 2000 WL 1810107, at *26 (S.D.N.Y. Nov.21, 2000)).³

Design has not provided any justification for its failure to disclose information regarding the amount of, or basis for computing its alleged lost profits. Instead, Design's counsel argued at the April 5th Conference that Design's disclosure of its financial statements constitutes sufficient discovery to enable it to proceed with its lost profits claim. (Tr. at 7.) Design's financial statements, however, do not provide any means by which to compute the profits that Design would have earned had it been awarded the Microsoft contract. While the financial statements may indicate Design's standard profit margin, they do not provide any basis on which to calculate the specific sum of money that the Contentville Project would have generated had it been awarded to Design, nor the percent of that sum that Design would have retained.

Even in the absence of a substantial justification for the failure to disclose, Rule 37(c)(1)'s automatic sanction does not apply unless the failure results in harm to the opposing party. "The burden to prove ... harmlessness rests with the dilatory party." American Stock Exchange, 215 F.R.D. at 93 (citation omitted). Design, however, has not provided any argument or reason to believe that permitting it to proceed with its lost profit claims, and conducting the additional discovery that would be necessary in order to allow it to do so, would be harmless.

This action was commenced in July 2002. Discovery was scheduled to close in October 2003, after the granting of several extensions. In addition, the trial date has already been postponed once, in part at Design's request. To reopen discovery for purposes of investigating the subject of lost profits would inevitably result in further substantial delays in the resolution of this case and impose additional costs on Defendants. Defendants would thus be harmed if the Court were to permit Design to pursue a lost profits theory of damages, in that Defendants would be required either to postpone a trial for which they are otherwise prepared and which has already been significantly delayed, or proceed without having had the opportunity to conduct adequate discovery on this issue. Therefore, the Court finds that permitting Design to advance a lost profits theory of damages in this case would not be harmless. See American Stock Exchange, 215 F.R.D. at 95 (finding that, "[b]ecause the [plaintiff] did not know during discovery that its alleged infringement of patent claim 34 was now at issue, [the defendant's] failure to amend seasonably was not harmless. The [plaintiff] was prejudiced by [the defendant's] late disclosure of its claim regarding patent claim 34 because the plaintiff was ... deprived of the opportunity to pursue needed fact discovery unless it was willing to accept a substantial delay in the case."). Given that Design has not presented, and the Court has not found, a substantial justification for its failure to disclose the required discovery, preclusion of any evidence of lost profits is mandatory under Rule 37(c)(1).

In violating Rule 26(a)(1)(C), Design has also failed to provide the Court with any basis on which to determine whether or not its alleged lost profits are "capable of measurement based upon known reliable factors without undue speculation," Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395, 604 N.Y.S.2d 912, 624 N.E.2d 1007, 1010 (1993), as New York law requires. The absence of any basis on which to make this determination further supports the Court's holding that Design may not pursue a lost profits theory of damages at trial.

Although, as Design points out, "the burden of uncertainty as to the amount of damage is upon the wrongdoer" in cases where "the existence of damage is certain, and the only uncertainty is as to its amount," Schonfeld v. Hilliard, 218 F.3d 164, 174-175 (2d Cir.2000) (quoting Contemporary Mission, Inc. v. Famous Music Corp., 557 F.2d 918, 926 (2d Cir.1977) (quotation marks omitted)), this principle has no application here where there has not yet been a determination regarding liability. Moreover, the fact that the burden of uncertainty shifts to the wrongdoer upon a showing of liability...