Legal Update
May 2023
In the recent case of Munro v. University of Southern California, the issue raised there is when and whether can a Plaintiff proceed to trial on a new damages theory after the discovery deadline has passed. This article discusses FRPC 37, the federal rule of civil procedures that sets forth the standard for admitting or denying the admission of a new theory under the circumstances described above.
For those of us caught up in the chaos of litigation, it may sometimes seem that scheduling orders and court deadlines are arbitrary and subject to change at the judge’s whim. As the plaintiffs in Munro v. University of Southern California, 2023 U.S. Dist. LEXIS 9707 (C.D.Ca. January 19, 2023) discovered, sometimes those deadlines are immutable.
Background
Munro was the named plaintiff in a class action (hereinafter referred to as “Plaintiff” or “Plaintiffs”) brought against the University of Southern California and the Oversight Committee (hereinafter referred to as “Defendant” or “Defendants). Plaintiff was a participant in two retirement programs offered by the University of Southern California. He brought this action on behalf of himself and, again, other participants and/or their beneficiaries in those programs. Plaintiff asserted two claims alleging that the defendant plans breached their fiduciary duties to plaintiff and the other members of the purported class by failing to negotiate lower record keeping fees for the plans (Claim One) and failing to remove “imprudent” investment options from the plans (Claim Two).
The court issued a scheduling order that ended expert discovery on July 31, 2022. Before that date, Plaintiff identified five prospective experts, including three related to the issues of damages. Expert 1 was to testify regarding Claim One losses attributable to Defendants’ failure to negotiate lower record keeping fees. Experts 2 and 3 would address the injury related to Claim Two. Expert 2 was to testify about comparable investment options that would have been more “prudent,” and Expert 3 was to testify about the amount of damages that members of the purported class sustained because of Defendants’ failure to use those more prudent investment options.
Defendants moved to preclude that expert testimony. In November, the court granted Defendant’ motions regarding Experts 2 and 3. The court concluded that Expert 2’s assessment of risk related to the various investment options, including both those offered by Defendants and those that Expert 2 identified as more “prudent,” were the product of hindsight. Since Expert 3’s analysis was based on the investments that Expert 2 had identified, his conclusions were equally flawed, and the court also excluded his testimony.
About six weeks later, Plaintiff filed a document titled “Claims and Contentions of Fact and Law,” in which he stated that losses would be proven without the use of expert testimony using “the Plans’ Form 5500 filings with the U.S. Department of Labor, through investment company filings with the U.S. Securities and Exchange Commission [the “SEC”], and through evidence admitted at trial.” In effect, Plaintiff sought to introduce evidence of damages using admissions (the Forms 5500), judicial notice (various investment company filings with the SEC), and fact witness testimony.
Defendants objected to this new damage theory, presented essentially on the eve of trial, as prejudicial.
Court Findings
Federal Rule of Civil Procedure 37 governs the consequences of failing to comply with disclosure requirements of Rule 26. FRCP 37 prohibits a party that has failed to comply with Rule 26 disclosure mandates from using that information at trial, “unless the failure was substantially justified or is harmless.” To assess substantial justification or harmlessness, courts look to four factors:
- Prejudice or surprise to the party against whom the evidence is offered;
- The ability of that party to cure the prejudice;
- Whether allowing the evidence will disrupt the trial; and
- The bad faith or willfulness in the party’s failure to timely disclose the evidence.[1]
The court focused primarily on the first prong of that test—prejudice or surprise. Throughout the litigation, Plaintiff had contended that expert testimony was necessary to prove damages. In the initial Rule 26 disclosures, Plaintiff claimed he would “require expert analysis to determine Plan losses.” In response to Defendants’ interrogatories seeking information regarding details of the alleged losses, Plaintiff objected to the interrogatory as premature because the loss “requires expert analysis and substantial discovery to be completed.” The court concluded that, based on the repeated contention that damages would require expert analysis and testimony, when Plaintiff proffered the expert reports, that would be the only evidence of damages to be presented at trial. For Plaintiff to introduce a whole new methodology of calculating damages over four months after the discovery deadline and just a month before trial would begin was, the court found, unquestionably prejudicial.
Looking to the second and third prongs, the court concluded that, given the timing, Defendants would be unable to cure that prejudice without a significant disruption to the trial. While the court acknowledged that Plaintiff was not acting in bad faith since the strategy was a response to the court’s recent ruling precluding Plaintiff’s experts, the lack of willfulness and bad faith does not cure the other Rule 37 issues.
Even aside from the timeliness issue, the court concluded that Plaintiff’s strategy to prove damages without expert testimony was unavailing. The new damages theory was based on yield information from a group of “index funds,” which track specified market metrics rather than the specific investment options identified by Expert 2. Plaintiff intended to compare the public SEC data of these index funds to the investment options that Defendants’ offered. The court acknowledged that the historic financial performance of those index funds might be appropriate for judicial notice, but the court could not conclude, as a matter of indisputable fact, that any of those funds were prudent or comparable alternatives to Defendants’ investment options. “Moreover, the computation of Plan losses would likely involve the application of ‘mathematical, accounting, and interest principles to calculate [Plaintiffs’] damages’ and thus require ‘testimony [that] falls squarely within Rule 702.’”[2]
Conclusion
Courts are often flexible with scheduling during litigation, allowing extensions of discovery and motion filing deadlines as a matter of course when those extensions are made in good faith and the parties are not delaying the litigation for the sake of delay. Once a deadline is past or the case is approaching a trial date, a party seeking to introduce something new or make changes to previously established arguments/positions faces an uphill battle to show that the change will not prejudice the opposing party or unduly complicate or delay trial. Also, damages claims that are not obvious on their face will likely require expert testimony because of the application of mathematical and accounting principles.
[1] 2023 U.S. Dist. LEXIS 9707 at *27, citing Liberty Ins. Corp. v. Brodeur, 41 F.4th 1185, 1192 (9th Cir. 2022).
[2] Ibid. at *29, citing EEOC v. Lennar Homes of Ariz., Inc., 2006 U.S. Dist. LEXIS 42865 (D. Ariz. June 23, 2006).
Michael J. Molder, JD, CPA, CFE, CVA, MAFF, applies 30 years of experience as a Certified Public Accountant and litigator to help investigate and analyze cases with complex financial and economic implications. He has acted as both counsel and accounting expert in pending and threatened litigation as well as participating in internal investigations of financial misconduct. As a litigator, Mr. Molder helped co-counsel understand complex financial and accounting issues in dozens of cases. In 2006, Mr. Molder returned to public accounting applying his unique skills to forensic engagements. He has also performed valuations of business interests in a wide variety of industries.
Mr. Molder has served as valuation expert for both plaintiffs and defendants in commercial litigation matters and owner and non-owner spouses in matrimonial dissolutions. He has participated in the valuations of businesses in a wide variety of industries, including: food service, wholesale and retail distribution, literary development and production, healthcare, manufacturing, and real estate development.
Mr. Molder has also investigated and valued damages in a wide variety of litigation contexts ranging from breach of contract claims to personal injury cases, and from employment disputes to civil fraud. He has consulted on many matters which have not involved the issuance of a report for litigation or resulted in deposition or trial testimony. Accordingly, the identity of these matters is protected by attorney client privilege.
Mr. Molder has also lectured widely on a variety of accounting and litigation related topics including business valuation, financial investigations in divorce proceedings, accountant ethics, financial statement manipulation and “earnings management.”
Mr. Molder can be contacted at (610) 208-3169 or by e-mail to Molder@lawandaccounting.com.
