Employment Law Daily Employer can’t use any evidence of damages relating to breach of contract counterclaims due to insufficient disclosures
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Wednesday, October 24, 2018

Employer can’t use any evidence of damages relating to breach of contract counterclaims due to insufficient disclosures

By Marjorie Johnson, J.D.

An employer was barred from introducing any evidence of damages relating to its counterclaims for breach of employment contract against a former employee since it failed to comply with federal rules relating to the timely and adequate disclosure of damages evidence and calculations. However, the more severe sanction of dismissal of its counterclaims altogether was not warranted and the employer could still pursue injunctive relief. Finding partial error in the federal magistrate judge’s order on the issue, a federal district court in Oregon granted in part the employee’s motion for sanctions (Schedler v. Fieldturf USA, Inc., October 18, 2018, Simon, M.).

Applicable federal rules. At issue were the requirements under the federal rules for providing evidence relating to damages. Rule 26(a)(1)(A)(iii) requires disclosure of a “computation of each category of damages claimed” and that the disclosing party disclose the documents on which each computation is based, unless those documents are privileged or otherwise protected from disclosure. Additionally, Rule 26(e) sets forth requirements for supplementing and/or correcting any such disclosures. Rule 37(c)(1) prohibits a party from using evidence that was not properly disclosed unless the failure to disclose is “substantially justified or harmless.”

Insufficient disclosures. In its initial Rule 26(a) disclosures, the employer stated generally that its damages arose out of the employee’s breach of his fiduciary duties and contract obligations, as well as its loss of company information, including confidential information. It further stated that the “precise method of computation” would be disclosed pursuant to its “obligations to provide expert disclosures” and that it had “documentation of expenses paid for ownership costs associated with the company vehicle related to defendants’ trespass to chattels claim.”

Though the employee repeatedly sought a computation of damages, the employer didn’t provide any further disclosures. After expert discovery closed without either party identifying any experts, the employer responded to an interrogatory relating to damages by stating that the precise method of computation would be disclosed “pursuant to the parties’ obligations to provide expert disclosures” and that it had “produced documentation of expenses paid for ownership costs associated with the company vehicle” related to its counterclaims. The employee continued to complain that it had received no computation of damages and that 20 months had passed without a proper disclosure, but the employer provided no further response.

Motion for sanctions. The employee filed his motion for sanctions, which was assigned to the magistrate judge, seeking either outright dismissal of the counterclaims or exclusion of all evidence of damages. Finding that dismissal was not warranted, the magistrate ordered the exclusion of any “undisclosed” evidence provided under Rule 37(c)(1). Making no determination as to the sufficiency of the employer’s purported disclosures, the judge noted its position that it had produced documents relating to damages. This included salary and commission payments to the employee after he allegedly breached his employment agreement, a worksheet showing lost profit on a particular project, invoices showing amounts he received in violation of his noncompetition agreement, and documents showing the costs for insurance and transporting his vehicle after he refused to sign title back. The employer also claimed that it disclosed several persons who were competent to testify about damages.

Incomplete disclosures. Finding that the magistrate’s analysis was incomplete, the district court held the employer’s initial disclosures were insufficient to comply with Rule 26(a)(1)(A)(iii). There was no indication it made any effort based on information reasonably available to it about costs relating to the company vehicle and expenses relating to salary, commission, and other expenses paid to the employee. And even if it needed discovery to obtain other information, the federal rules expressly anticipated supplementation of initial disclosures. Simply providing no information and stating that experts will be relied on, when at least some damages didn’t require “complicated methodology and computation,” was insufficient.

The employer’s interrogatory response compounded this insufficiency and was worse because it occurred after the close of expert discovery. Even if it believed that expert discovery had impliedly been extended, it did not seek clarification from the court or move the court to extend expert discovery deadlines. And once it knew that expert discovery was closed and its disclosures relating to damages calculations were insufficient, it never supplemented its disclosures or interrogatory response, as required under Rule 26(e).

No “computation.” Though the employer produced some documents relating to damages and had some lay witnesses who might testify to damages, it still did not meet Rule 26(a)’s obligations since document production and identification of lay witnesses was not a “computation” that complied with the rule. The employer also failed to timely identify which documents related to damages, nor did it identify that lay witnesses (and which ones) would be testifying to damages. Instead, it limited its damages disclosure to the assertion that an expert would provide the necessary computation and testimony and a vague reference to documents of ownership relating to the vehicle, which was insufficient. Finally, its failure to comply with Rule 26(a) was not substantially justified or harmless.

Evidence of damages barred, but no dismissal. Ruling that dismissing the employer’s counterclaims as a sanction was too harsh, the court agreed with the employee that application of the “self-executing, automatic” evidentiary exclusion of Rule 37(c)(1) was appropriate since the employer failed timely to provide any analysis or computation of damages, identify the documents relating to damages, and supplement its initial disclosures and response to the damages interrogatory. However, while all evidence of damages relating to the employer’s counterclaims was excluded, it could still pursue its bid for injunctive relief before the court.

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