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noting that the “burden rests upon the non-producing party to demonstrate that its actions were substantially justified or harmless”
Summary of this case from Fields v. Atlanta Indep. Sch. Sys.Opinion
Case No. 03-20164-CIV-UNGARO-BENAGES.
June 2, 2005
ORDER GRANTING DEFENDANTS' MOTION TO STRIKE EXPERT REPORT OF CLIVE MEDLAND/SHE AND EXCLUDE WITNESSES
THIS CAUSE is before the Court upon Defendants' Motion to Strike Expert Report of Clive Medland/SHE and Exclude Witnesses, filed December 21, 2004. Plaintiff filed its Response on January 12, 2005, to which Defendants replied on January 18, 2005. In conjunction with its Response, Plaintiff filed a Cross-Motion for Protective Order to which Defendants filed a Response January 18, 2005. Plaintiffs also filed a Supplemental Memorandum on February 3, 2005 but later withdrew this filing after Defendants filed a Motion to Strike Plaintiffs Supplemental Memorandum on February 7, 2005. The matters are ripe for disposition.
THE COURT has considered the motions, the pertinent portions of the record and is otherwise fully advised in the premises.
BACKGROUND
In this action, Plaintiff seeks to recover taxes owed by a company known as International Air Leases, Inc. ("IAL"). Plaintiff claims that Defendant is responsible for paying IAL's taxes because IAL transferred to Defendants so many of its assets that it rendered IAL insolvent and unable to pay its federal income tax liabilities. Plaintiff has employed a number of experts to prove its case, with each focusing on a different aspect of the transactions between Defendants and [AL. The experts' findings, conclusions and opinions are extremely interrelated. Each expert builds on the analysis and conclusions reached by the others and many of them could not have reached their conclusions without the work of the prior expert. Clive Medland, Senior Vice President and Managing Director at Simat Helliesen and Eichner, Inc. ("SHE"), is the first in Plaintiff's chain of experts. Plaintiff hired him to provide testimony regarding aviation asset appraisal. Medland's valuation of IAL's assets in turn led him to reach conclusions regarding IAL's income generating capacity.
On December 31, 2003, Plaintiff provided Defendants with Medland's expert report. On January 20, 2004, Defendants served SHE with a subpoena requesting, among other things, "all documents, spreadsheets, schedules or work papers whether furnished to you or created by you that form the basis for any assumption, assertion or conclusion by you in your report." (Pl.'s Resp. Ex. 1, at 3.) On February 20, 2004, Defendants' counsel sent an email to Plaintiffs counsel requesting information regarding the form of protective order desired by Plaintiffs experts and the list of documents that would be covered. (Defs.' Reply at 12.) That same day, Plaintiff responded to Defendants' counsel and stated it would address the protective order issue in its response to Defendants' subpoena. (Defs.' Reply at 13.) On February 27, 2004, Plaintiff shipped its response and SHE's production of documents to Defendants. (Pl.'s Resp. Ex. 2.) In its response, Plaintiff informed Defendants that Medland had not provided the documents or information that contained SHE's trade secrets such as "any spreadsheet or computer model that ha[d] algorithms, residual curves or other in-house models imbedded." (Pl.'s Resp. Ex. 2, at 2.) Plaintiff directed Defendants to reconsider their request regarding the proprietary information to avoid the necessity of Plaintiff obtaining a protective order. (Pl.'s Resp. Ex. 2, at 2.) On October 8, 2004, Defendants served another subpoena to SHE requesting that Medland produce at his upcoming deposition "all documents, spreadsheets, schedules or work papers whether furnished to you or created by you that form the basis for any assumption, assert ion or conclusion by you in your report." (Defs.' Mot., Subpoena dated October 8, 2004.)
Medland's report has been revised twice since December 30, 2003, on August 4, 2004 and on November 2, 2004. The parties are in agreement, however, that the reports are not materially different for the purposes of this motion.
On October 27, 2004, Defendants deposed Medland. Medland explained, as reflected in his report, that he prepared valuations of certain International Air Lease ("IAL") aircraft and engines, including (1) the Current (or Fair) Market Values, (2) the Lease-encumbered Values. and (3) the Net Realizable Values. (Medland Dep. at 26-28.) Medland stated that lie used proprietary computer models containing depreciation schedules to determine the aforementioned values for particular assets. (Medland Dep. at 43.) Specifically, Medland used what is termed a Residual Value Model ("RVM") to reach his calculations for the Current Market Value. Lease Encumbered Value and Net Realizable Value of IAL's assets. (Medland Dep. at 43-45, 53. 64-65.) Medland claimed that his RVM is proprietary information and a trade secret of SHE. (Medland Dep. at 4.) As such, Medland confirmed that lie redacted all spread sheets or computer models containing information on the RVM from his export report. He also refused to disclose the RVM during his deposition and further stated that he would not provide the RVM even if the parties entered into a protective order. (Medland Dep. at 43, 110.)
Medland claims that no proprietary computer models were used to reach his calculation for Net Realizable Value. However, Medland's Net Realizable Value calculation is based on his calculation of the Current Market Value which used the RVM. Therefore, the Net Realizable Value calculation is also based on Medland's RVM.
In addition to the RVM, Medland also used other SHE proprietary information in reaching his calculations including, implied return models, residual value curves, lessor economic return curves, and other SHE algorithms. (Medland Dep. at 74.) These also have not been disclosed to Defendants. Medland admits that without this information and the RVM it is impossible for another expert to determine how Medland and SHE reached their opinion on the value of IAL's assets. (Medland Dep. at 74.)
ANALYSIS
1. Clive Medland and SHE
Federal of Rule of Civil Procedure 26(a)(2)(B) requires the party seeking to introduce expert testimony at trial to disclose an expert report containing
a complete statement of all opinions to be expressed and the basis and reasons therefor; the data or other information considered by the witness in forming tile opinions; [and] any exhibits to be used as a summary of or support for the opinions.
These disclosures must be made at the "times and in the sequence directed by the court." F.R.C.P. 26(a)(2)(C). The consequences for a party's failure to comply with Rule 26(a)(2)(B) are governed by Rule 37(c)(I). It states, in pertinent part,
[A] party that without substantial justification fails to disclose information required by Rule 26(a) or 26(e)(1) . . ., is not, unless such failure is harmless, permitted to use as evidence at a trial, at a hearing, or on a motion any witness or information not so disclosed.
Rule 37(c)(1) "requires absolute compliance with Rule 26(a)," in that it "`mandates that a trial court punish a party for discovery violations in connection with Rule 26 unless the violation was harmless or substantially justified.'" Roberts ex rel. Johnson v. Galen of Virginia, Inc., 325 F.3d 776, 782 (6th Cir. 2003) (quoting Vance v. United States, 1999 WL 455435 *3 (6th Or. June 25. 1999)) (footnote omitted); see also Salgado v. General Motors Corp., 150 F.3d 735, 742 (7th Cir. 1998) (reasoning that "the sanction of exclusion is automatic and mandatory unless the sanctioned party can show that its violation of Rule 26(a) was either justified or harmless"). The burden rests upon the non-producing party to demonstrate that its actions were substantially justified or harmless. Stallworth v. E-Z Serve Convenience Stores, 199 F.R.D. 366, 368 (M.D.Ala. 2001); Roberts ex rel. Johnson, 325 F.3d at 782; Wilson v. Bradlees of New England, Inc., 250 F.3d 10, 21 (1st Cir. 2001); Yeti by Molly, Ltd. v. Deckers Outdoor Corp., 259 F.3d 1101, 1107 (9th Cir. 2001); Heidman v. County of El Paso, 171 F.3d 1038, 1040 (5th Cir. 1999).
Plaintiff's Rule 26(a)(2)(B) disclosures were originally due on January 2, 2004. The Court extended this deadline to June 25, 2004 and then again to July 6, 2004. Plaintiff does not dispute that it failed to provide Defendants with Medland and SHE's RVM, implied return models, residual value curves and lessor economic return curves. Plaintiff also does not dispute that Defendants are unable to test the reliability of the valuation methods used or verify the accuracy of Medland's opinion without the aforementioned models and curves which formed the basis for Medland's calculations. Therefore, it seems clear that Plaintiffs failure to disclose the SHE models was not harmless within the meaning of Rule 37(c)(1). The remaining issue is whether Plaintiff has demonstrated to the Court that its actions were substantially justified.
Plaintiff makes two arguments to support its claim that Medland's report should not he excluded. The Court notes that neither of Plaintiffs arguments seek to justify the failure to disclose but are instead procedural arguments. First, Plaintiff claims that Defendants have tailed to comply with Local Rule 26.1.H.1 because Defendants failed to file their motion within thirty days of the occurrence of grounds for the motion. Second, Plaintiff claims that Defendants failed to make a good faith effort to resolve this dispute before filing their motion as required by Local Rule 7.1.A.3.
That Court notes that Plaintiffs Motion for Protective Order falls victim to Plaintiff's own reasoning under Local Rule 26.1.H.1.
Plaintiff mistakes the issue before the Court. This is not a discovery dispute where a plaintiff objects to an interrogatory or request for production after which the defendant files a belated motion to compel in violation of Local Rule 26.1.H.1. Rule 26(a)(2)(B) places an absolute duty on the party seeking to introduce the expert testimony. Plaintiff has failed to identify any authority for the proposition that its expert is relieved of Rule 26(a)(2)(B)'s disclosure requirements because Defendants never filed a motion to compel. Plaintiff is the party seeking to introduce Medland's testimony and has both the duty to disclose the basis of his opinions under Rule 26(a)(2)(B) and the burden of demonstrating their reliability under Federal Rule of Evidence 702. There is no dispute that Plaintiff failed to make the required disclosures and, even if the Court accepted Plaintiff's argument that Defendants waived their right to pursue this issue pursuant to Local Rule 26.1.H.1, Medland's opinion would still be excluded because the Court, like Defendants, is unable to test the reliability of his opinion without the redacted models and curves. Daubert v. Merrel Dorn Pharmaceuticals. Inc., 509 U.S. 579 (1993).
Plaintiff's second argument that Defendants failed to comply with Local Rule 7.1.A.3 is equally unpersuasive. Defendants served two subpoenas on Plaintiff requesting the information upon which Medland relied. In response to the first subpoena, Plaintiff refused to disclose the information and suggested that Defendants reconsider their request. Plaintiff then chose not to respond to the second subpoena. At his deposition, Medland unequivocally refused to disclose the proprietary information even if the parties entered into a protective order. Furthermore, in their motion Defendants' counsel states that "she discussed this motion with [Plaintiff but Plaintiff] did not agree that Mr. Medland's disclosures and testimony were inadequate and thus did not agree to the relief requested." (Defs.' Mot. at 18.) Contrary to Plaintiff's argument, it appears that Defendants made good faith attempts to resolve this dispute without Court intervention. Therefore, the Court rejects Plaintiff's claim that Defendant's Motion should be denied for failure to comply with Local Rule 7.1.A.3.
The Court finds that Plaintiff has failed to justify its refusal to disclose Medland's models and curves. The language of Rule 37(c)(1) is clear that the consequence for Plaintiff's failure to justify its nondisclosure is the exclusion of Medland's testimony at trial. Such a result is not overly harsh, especially when viewed in light of Plaintiff's repeated failure to meet the deadlines set by this Court. Furthermore, without the disclosure or even if Plaintiff tiled a late disclosure, Defendants would he prejudiced in their ability to adequately cross-examine Medland and prepare their defense. Such results are exactly those that Rule 26(a)(2)(B) and 37(c)(1) are intended to prevent. Therefore, the Court concludes that Medland's report should be excluded and that Medland should be precluded from testifying at trial. See Cooper v. Southern Co., 390 F.3d 695 (11th Cir. 2004).
2. Plaintiffs Remaining Experts
Defendants claim that a number of Plaintiff's experts rely on the conclusions and opinions reached by Medland to form their opinions without independently testing Medland's methodology. Therefore, Defendants claim, if Medland's report is excluded it logically follows that those experts who relied on his report to form their opinions must also he excluded. Plaintiff makes no attempt to dispute this contention. The Court will first detail the extent to which Plaintiff's experts rely on Medland's conclusions and then will analyze whether their reports and testimony should be excluded at trial.
Richard May: Plaintiff's Insolvency Expert and Kenneth Gartrell: Plaintiff's Tax Liability and Excess Consideration Expert
May is the subject of other pending motions not addressed in this Order.
Gartell is the subject of other pending motions not addressed in this Order.
Plaintiff hired Richard May to render an opinion on the solvency of IAL as of April 1, 1999. May employed five individual solvency tests in his analysis, including the (1) Cash Flow Test, (2) Balance Sheet Test (Fair Market Value Basis), (3) Balance Sheet Test (Net Realizable Value Basis), (4) Capital Adequacy Test and (5) Default Probabilities Test. May utilized the conclusions and opinions reached by Medland and SHE as the foundation for his tests. Specifically. May "extracted[ed] the revenues and various direct expenses . . . associated with the assets held by [IAL], [including the] lease rental income, maintenance related revenues. maintenance related expenses, re-lease expenses and asset sale revenues" from Medland's report. (May Report at 21.) "[I]n the aggregate, [Medland] and SHE's projections provided the raw data with which [May] was able to perform [his] calculations on the solvency of [IAL]." (May Report at 22.)
At his deposition, May confirmed his reliance on Medland's conclusions and opinions. May admitted the following:
Q. If you didn't determine the value of IAL's assets through your own, you used other sources; is that what you meant?
A. Yes. We relied upon other experts to provide essential information that allowed us to derive and utilize the solvency analysis.
(Depo. of Richard May, at 16.)
Plaintiff also hired Kenneth Gartrell to render an opinion on the value of any excess consideration paid to Defendants in connection with the sale of their shareholdings in IAL and the reasonably foreseeable tax liability to IAL resulting from the sale. Gartrell reached the conclusion that Defendants received excess consideration totaling $95,725,670 and that IAL was left with a reasonably foreseeable tax liability totaling $135,773,383. Similar to May, Gartrell relied heavily on the Medland report to reach these conclusions. Gartrell stated during his deposition
Q. Now part of the report that you issued on August 24th or a large part of your report, if not all of it, relied on a report by Mr. Medland of SHE; did it not. sir?
A. Yes.
. . .
Q. And if you were precluded from relying — if you didn't have the August 6, 2004 report of Mr. Medland to rely upon, you could not have come to the conclusions that your reached in your report; could you, sir?
A. That's right.
. . .
Q. Did you do anything to test the veracity and accuracy of the Medland report. that you relied upon?
A. No. I mean I did identify the credentials of Mr. Medland, but nothing beyond that.
(Depo. of Kenneth Gartrell, at 31-33.)
It is axiomatic that if an expert's report is excluded under Rule 37(c)(1) because of a failure to disclose information required by Rule 26(a)(2)(B), other experts that rely on that Information in forming their opinions will also be excluded under the same reasoning. Additionally. an expert may not blindly rely on the conclusions of another and still meet the reliability requirements of Rule 702 and Daubert American Key Corp. v. Cole Natl' Corp., 762 F.2d 1569, 1580 (11th Cir. 1985) (holding that expert opinions based upon opinions of others are normally inadmissible); See In re TMI Litigation, 193 F.3d 613, 715 (3rd Cir. 1999) (holding that expert's "failure to assess the validity of the opinions of the experts he relied upon together with his unblinking reliance on those experts' opinions, demonstrates that the methodology he used to formulate his opinion was flawed under Daubers as it was not calculated to produce reliable results").
In J.B. Hunt Transport Inc. v. General Motors Corp., 243 F.3d 441 (8th Cir. 2001), the court addressed the identical issue. The court in J.B. Hunt was confronted with the question of the admissibility of an expert whose testimony was derivative of an expert already excluded by the court. Id. at 444. The court reasoned that the second expert had no evidentiary basis absent the first expert's testimony and therefore excluded the second expert because his testimony was inextricably linked to the first. Id.
The May and Gartrell reports fall victim to the same reasoning. Without Medland's asset valuations, May and Gartrell have no evidentiary basis for the conclusions they reach. In turn. May and Gartrell's opinions are unreliable under Rule 702 because they admittedly relied on Medland's valuations without performing any independent calculations themselves. Accordingly, the Court concludes that the May and Gartrell reports must he excluded because they are inextricable linked to Medland's asset valuations and in turn May and Gartrell are precluded from testifying at trial.
Lawrence Smeltzer: Plaintiff's Summary Fact Witness
Smeltzer is the subject of other pending motions not addressed in this Order.
Plaintiff has also retained Larry Smeltzer to testify, pursuant to Federal Rule of Evidence 1006, as a summary fact witness. It appears that Smeltzer is not being offered to testify as an expert on any of the issues presented, but instead will summarize the voluminous documentary evidence, including the expert reports of Medland and Gartrell, expected to be introduced at trial. Accordingly, because the Court has found that the Medland and Gartrell reports are excluded. Smeltzer shall not be permitted to testify to the extent his testimony summarizes conclusions and opinions reached Medland and Gartrell.
Raul Valez and Micheline Maritz:
Although not addressed by Plaintiff, Defendants claim that Plaintiff will seek to introduce the testimony of Raul Velez, an IRS agent, whose testimony will be based in large part on the conclusions reached by Medland and Gartrell. Defendants also claim that Plaintiff will seek to introduce the testimony of Micheline Maritz, a Department of Justice computations specialist. whose computations are based on the conclusions reached by Velez. Velez relied strictly on the conclusions reached by Medland and Gartrell and Maritz relied strictly on the calulations made by Velez. (Depo. of Raul Velez, at 24-25; Depo. of Micheline Maritz, at 18-20, 54-55). Therefore, Velez is precluded from testifying to the extent his testimony is based on Medland and Gartrell. As a corollary, Maritz is precluded from testifying to the extent her testimony is based on the testimony of Velez in so far as Velez's testimony is based on the Medland and Gartrell reports. Accordingly, it is hereby
ORDERED AND ADJUDGED that Defendants' Motion is GRANTED. Medland is precluded from testifying at trial and his expert report is excluded. May and Gartrell are also precluded from testifying at trial and their reports are excluded. Smeltzer is precluded from testifying to the extent his testimony is based on Medland and Gartrell or any other expert excluded by this Court. Valez and Maritz are precluded from testifying to the extent their testimony is based on any of the experts excluded by this Court. It is further
ORDERED AND ADJUDGED that Plaintiffs Motion for Protective Order is DENIED.
DONE AND ORDERED.