August 10, 2016 Articles

Rule 26 Damages Disclosures: Pitfalls, Sanctions, and Suggested Practices

By Peter G. Pappas

This article addresses common issues faced by attorneys disclosing damages pursuant to Federal Rules of Civil Procedure 26(a) and (e), as well as the possibility of severe sanctions for violating the rules. In addition, it suggests practices attorneys may use to comply with the rules. 

Requirements of Rule 26(a)(1)(A)(iii)
The damages disclosure provision of Rule 26 provides in pertinent part:

[A] party must, without awaiting a discovery request, provide to the other parties . . . a computation of each category of damages claimed . . . [and] make available for inspection and copying . . . 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).  

Simply providing information to the opposing party and expecting it to compute the damages does not satisfy Rule 26(a)’s requirements. Rather, “by its very terms Rule 26(a) requires more than providing—without any explanation—undifferentiated financial statements; it requires a ‘computation,’ supported by documents.” Design Strategy, Inc. v. Davis, 469 F.3d 284, 295 (2d Cir. 2006). A party’s obligation to deliver all the documents used to calculate damages is “the functional equivalent of a standing Request for Production under Rule 34[,]” which grants the opposing party general access to these relevant documents. Id. at 296 (quoting Fed. R. Civ. P. 26 advisory committee notes to 1993 amendments).  

Rule 26(e) prescribes an ongoing duty to provide up-to-date damages computations: 

A party who has made a[n initial] 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) (emphasis added). See also AVX Corp. v. Cabot Corp., 252 F.R.D. 70, 79 (D. Mass. 2008) (finding a supplemental calculation untimely when made “after the close of discovery,” leaving the opposing party “without the means to explore and challenge” its basis). 

Possible Pitfalls 

Overgeneralization of damages. Parties sometimes attempt to comply with Rule 26 by initially disclosing a broad damages estimate. This strategy, coupled with timely supplementation, may satisfy Rule 26 but could also lead to preclusion if handled improperly. For example, the plaintiff in Design Strategy was unsuccessful when it attempted to rely on a generalized initial disclosure using broad categories, such as “[a]ll monies paid to [Defendant] . . . based upon breach of fiduciary relationship[.]” Design Strategy, 469 F.3d at 292. The trial court excluded damages evidence because this categorical disclosure alone was insufficiently specific to satisfy Rule 26 and was not adequately supplemented before trial. Id. at 293.  

Another insufficient response to Rule 26(a)’s initial disclosure requirement is to attempt a lump-sum damages disclosure rather than providing a precise computation. See City & Cty. of S.F. v. Tutor-Saliba Corp., 218 F.R.D. 219, 221 (N.D. Cal. 2003) (stating that a damages disclosure must be “more than a lump sum statement”). For instance, the plaintiff in Silicon Knights, Inc. v. Epic Games, Inc., 2012 WL 1596722 (E.D.N.C. May 7, 2012), initially disclosed that “its damages [would] total several million dollars[.]” Silicon Knights, 2012 WL 1596722, at *2. The plaintiff attempted to supplement this lump-sum disclosure with a more detailed expert report, but the court ultimately deemed the report inadmissible. Id. at *3. Given that the plaintiff had not made any other supplemental disclosure, when ruling on the defendant’s motion to exclude damages evidence, the court had only the plaintiff’s “several million dollars” estimate on which to base its decision. Id. at *4. The court held that this disclosure was not the specific computation required by Rule 26 because it “lack[ed] precision and analysis” and granted the motion to preclude. Id. 

Reference to documents produced in discovery. The opposing party is entitled to both a specific damages computation and the documents or other evidentiary material on which the computation is based. This evidence must be designated and made clearly available for inspection and copying, regardless of how straightforward the method of damages calculation may seem. See Design Strategy, 469 F.3d at 295 (finding inadequate the disclosing party’s assertion that calculating damages was “simple arithmetic”). 

Courts have repeatedly held that parties cannot circumvent Rule 26(a)’s damages disclosure requirement by referring to the documents disclosed in discovery as the basis for their calculation. See, e.g., Silicon Knights, 2012 WL 1596722, at *4 (“Disclosing damages-related documents alone, without disclosing a computation based on such documents, does not satisfy . . . Rule 26(a)(1)(A)(iii). . . .”). For example, in Gould Paper Corp. v. Madisen Corp., the party seeking damages alleged that it had complied with Rule 26 by providing “documents consist[ing] of approximately [629 pages] which document and detail the basis for the damage claim.” 614 F. Supp. 2d 485, 490 (S.D.N.Y. 2009) (internal quotation marks omitted). The court held that this reference to a multitude of documents was not a “computation of each category of damages claimed” and did not satisfy Rule 26. Id. 

Reliance on a future expert. Although making a general initial damages disclosure and later supplementing that disclosure with a timely expert report meeting the detailed computation and document requirements of Rule 26(a)(1)(A)(iii) is a permissible strategy, relying exclusively on a future expert can be risky. As discussed earlier, in Silicon Knights, the plaintiff made a general initial damages disclosure, then supplemented it later with an expert report detailing the damages computation. See Silicon Knights, 2012 WL 1596722, at *3. However, after the court determined that the expert report was “based on an unreliable methodology” and excluded it, the plaintiff was forced to rely on the initial lump-sum disclosure of “several million dollars[.]” Id. at *3–4. The court found that this disclosure “lack[ed] precision and analysis” and precluded the plaintiff’s damages evidence at trial, rendering nominal damages the only possible recovery. Id. at *4, *9.

Sanctions for Rule 26 Violations
Rule 26 violations are sanctionable under Rule 37(c): 

If a party fails to provide information . . . as required by Rule 26(a) or (e), the party is not allowed to use that information . . . to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially justified or is harmless. In addition to or instead of this sanction, the court . . .

(A) may order payment of the reasonable expenses, including attorney’s fees, caused by the failure;
(B) may inform the jury of the party’s failure; and
(C) may impose other appropriate sanctions, including any of the orders listed in Rule 37(b)(2)(A)(i)–(vi).

Fed. R. Civ. P. 37(c)(1). 

Rule 37(c)(1) states that preclusion of damages information will be the sanction for failure to comply with Rules 26(a)(1)(A)(iii) and 26(e) unless the failure “was substantially justified or is harmless.” Courts have developed criteria for determining whether “a nondisclosure of evidence is substantially justified or harmless for purposes of a Rule 37(c)(1) exclusion analysis. . . .” See e.g., S. States Rack & Fixture, Inc. v. Sherwin-Williams Co., 318 F.3d 592, 597 (4th Cir. 2003); see also Design Strategy, 469 F.3d at 296 (quoting Patterson v. Balsamico, 440 F.3d 104, 117 (2d Cir. 2006)); Silicon Knights, 2012 WL 1596722, at *2. For instance, the Fourth Circuit approach requires district courts to consider:  

(1) the surprise to the party against whom the evidence would be offered; (2) the ability of that party to cure the surprise; (3) the extent to which allowing the evidence would disrupt the trial; (4) the importance of the evidence; and (5) the nondisclosing party’s explanation for its failure to disclose the evidence.

S. States Rack & Fixture, Inc., 318 F.3d at 597.  

While the advisory committee notes to Rule 37(c) refer to the preclusion sanction as “automatic” or “self-executing,” Rule 37(c) also allows for the imposition of “other appropriate sanctions.” See Fed. R. Civ. P. 37(c), advisory committee notes to 1993 amendment, subsection (c); Design Strategy, 469 F.3d at 298 (“[T]he plain text of the rule provides that if an appropriate motion is made and a hearing has been held, the court does have discretion to impose other, less drastic sanctions.”)

Generally, when factors such as the advanced stage of the litigation and surprise to the opposing party are present, courts are more likely to preclude damages evidence rather than impose an alternative sanction. See, e.g., CQ, Inc. v. TXU Mining Co., 565 F.3d 268, 280 (5th Cir. 2009) (precluding damages evidence because inter alia the introduction of undisclosed damages at an “advanced stage of [the] litigation” would cause scheduling changes and prejudice the opposing party); see also Bean v. Pearson Educ., Inc., 949 F. Supp. 2d 941, 953 (D. Ariz. 2013) (“Courts are more likely to exclude damages evidence when the belated disclosure would require a new briefing schedule and the reopening [of] discovery.”) (citation omitted). 

On the other hand, courts hesitate to preclude damages evidence when discovery remains open. See City & Cty. of S.F., 218 F.R.D. at 221; see also Marais v. Chase Home Fin., LLC, 24 F. Supp. 3d 712, 731 (S.D. Ohio 2014) (nondisclosure of damages computation was harmless, and no sanctions would be imposed because it was noted “early in discovery”). Courts may also disfavor preclusion when the moving party has not requested a damages computation during discovery. See Carotek, Inc. v. Textron Fastening Sys., Inc., 2008 WL 1777829, at *4 (W.D.N.C. Apr. 16, 2008) (denying a motion to exclude when trial was not yet scheduled and the moving party “never filed a motion to compel, nor . . . ‘conferred or . . . attempted in good faith to resolve areas of disagreement’”) (quoting Local Rule 7.1B (W.D.N.C.)).  

When preclusion is disfavored, courts have several alternatives. A court may extend discovery, allowing the party seeking damages to pursue its desired award and affording opposing counsel an opportunity “to conduct discovery and defend against the damages claims.” Frontline Med. Assocs., Inc. v. Coventry Health Care, 263 F.R.D. 567, 570 (C.D. Cal. 2009). Discovery is typically extended only when the failure to make an adequate disclosure occurs “sufficiently in advance of the discovery cut-off date[,]” such that an extension is harmless and does not interfere with a scheduled trial. Id. The court may also reopen discovery after it has closed. This option is uncommon after a trial date is scheduled because of the possible prejudice to the opposing party and inconvenience to the court. See Design Strategy, 469 F.3d at 294 (finding that reopening discovery would cost the opposing party both time and money).  

Suggested Practices for Rule 26 Compliance 

Categorize damages. At the outset of discovery, a party may organize its damages computations by category. See Fed. R. Civ. P. 26(a)(1)(A)(iii). These categories may be types of damages corresponding to the claims (e.g., lost wages due to breach of contract), with each category having its own precise computation with attached supporting documents or other damages evidence. It is wise to maintain the same categories throughout litigation, so that merely relabeling a category does not appear to be an attempt to make a new damages allegation immediately before trial. See Design Strategy, 469 F.3d at 295 (excluding damages of “lost profits” at trial because the plaintiff had disclosed only that moneys earned by the diversion of business from the plaintiff would be sought and failed to disclose “‘lost profits’ as even a ‘category’ of ‘damages’ sought” until shortly before trial).  

Retain an expert. Counsel may provide a damages computation, disclosing information reasonably available to it during the initial disclosure, and then supplement the disclosure with a more detailed calculation prepared by an expert. Frontline, 263 F.R.D. at 569–70 (citing City & Cty. of S.F., 218 F.R.D. at 222) (the “precise method of calculation need not be disclosed to the extent the method is properly the subject of expert testimony,” but also noting that “[f]uture expert analysis does not relieve Plaintiff of its obligation to provide information reasonably available to it as to gross revenues, expenses and any other component of its lost profits computation.”) (bold in original). It is also wise to have a “back-up plan” when relying on an expert in case the expert’s testimony is excluded, as occurred in Silicon Knights, 2012 WL 1596722, at *8 n.5. This could consist of a second expert analysis supporting the methodology or a more detailed nonexpert computation of damages that can be disclosed initially or if the expert’s testimony is unexpectedly excluded. 

Break down lump sums. Lump-sum damage amounts should be broken down into their component parts. See City & Cty. of S.F., 218 F.R.D. at 221 (“[M]ore than a lump sum statement of the damages allegedly sustained” should be provided.). In addition, the computation required by the rule “contemplates some analysis.” Id. (citation omitted) (pointing out, by example, that a lost wages claim should include “some information relating to hours worked and pay rate”). The party seeking damages should specify the specific amount attributable to each claim and defendant, providing all opposing parties with information regarding their potential liability. Id. at 221–22. Courts view this practice favorably because it allows defendants to assess their individual liability earlier in the litigation and make informed decisions about whether to proceed to trial. Id. at 222.  

Calendar time requirements. Once the date for the Rule 26(f) conference is set, attorneys should note on their calendars that disclosure is due within two weeks of the conference, unless another date is agreed on. See Fed. R. Civ. P. 26(a)(1)(C). In addition, thorough pre-suit investigation of damages, to the extent possible, is significant in being prepared to make proper disclosures when due. 

Argue that lesser sanctions are insufficient if moving for preclusion. Where supported by appropriate facts, a party moving for preclusion under Rule 37(c)(1) should argue that lesser sanctions are insufficient. Compare R & R Sails, Inc. v. Ins. Co. of the Pa., 673 F.3d 1240, 1247 (9th Cir. 2012) (where sanctions “amounted to dismissal,” the district court erred by excluding offending damages evidence without considering “the availability of lesser sanctions”), with Carmody v. Kansas City Bd. of Police Comm’rs, 713 F.3d 401, 405 (8th Cir. 2013) (upholding the decision to exclude when the court considered lesser sanctions but found them insufficient). 

Know the jurisdiction’s approach to Rule 37(c)(1). Some jurisdictions strictly apply Rule 37(c)(1)’s statement that a party violating Rule 26(a) cannot “use that information” as evidence unless the violation was “substantially justified or is harmless.” However, other circuits focus on Rule 37(c)(1)(C)’s language that a court “may impose other appropriate sanctions. . . .” Compare Bessemer & Lake Erie R.R. Co. v. Seaway Marine Transp., 596 F.3d 357, 370 (6th Cir. 2010) (“[T]he sanction is mandatory unless there is a reasonable explanation of why Rule 26 was not complied with or the mistake was harmless.”) (citation omitted), with Design Strategy, Inc., 469 F.3d at 297–98 (2d Cir. 2006) (the trial court “err[ed] in its determination that ‘preclusion is mandatory’ . . . [if] ‘there is no substantial justification and the failure to disclose is not harmless’” despite contrary holdings from other circuits). Practitioners should determine where on this spectrum their jurisdiction falls.

 Complying with Rule 26 is challenging, but by recognizing the significance of damages disclosures and making supplemental disclosures in a timely manner, attorneys can address each challenge and avoid sanctions.  

Keywords: litigation, products liability, damages, Rule 26, disclosure, sanctions 

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