United States 2nd Circuit Court of Appeals Reports
DESIGN STRATEGY, INC. v. DAVIS, 05-4909-cv (2nd Cir. 10-19-2006) DESIGN STRATEGY, INC., Plaintiff-Counter-Defendant-Appellant, v. MARC E. DAVIS, Defendant-Counterclaimant-Appellee, INFO TECHNOLOGIES, INC., INFO TECHNOLOGIES WEB SOLUTIONS, INC., AND JOHN GOULLET, Defendants-Appellees. No. 05-4909-cv. United States Court of Appeals, Second Circuit. Argued: June 19, 2006. Decided: October 19, 2006.
Appeal by plaintiff from a judgment entered in the United
States District Court for the Southern District of New York
(Marrero, J.), in an action arising from the alleged
diversion of a corporate opportunity, the District Court
having (1) precluded evidence in support of a lost profits
claim for failure to provide an adequate computation in
discovery; (2) rejected a demand for trial by jury on the
ground that all remaining claims were “equitable” and
therefore that no jury trial right existed; and (3)
concluded, after a bench trial, that employee-defendant (a)
had not diverted a corporate opportunity; (b) had not
engaged in unfair competition; (c) had breached a fiduciary
duty of loyalty, requiring the forfeiture of four weeks of
salary; (d) was not liable for overpaid commissions; and
(e) had not been unjustly enriched; and that (f)
corporate-defendants had not aided and abetted employee’s
breach of fiduciary duty; and (g) a claim for punitive
damages was unsupported.
Affirmed.
JACK S. DWECK, Dweck Law Firm, LLP, New York, NY, for
Plaintiff-Counter-Defendant-Appellant.
LEONARD BENOWICH, Roosevelt & Benowich, LLP, White Plains,
NY, for Defendant-Counterclaimant-Appellee.
R. SCOTT GARLEY (Mark W. Stoutenburg, on the brief),
Gibbons, Del Deo, Dolan, Griffinger & Vecchione, P.C., New
York, NY, for Defendants-Appellees.
Before: MINER and CALABRESI, Circuit Judges, and HOLWELL,
District Judge.[fn1]
[fn1] The Honorable Richard J. Holwell of the United States
District Court for the Southern District of New York,
sitting by designation.
MINER, Circuit Judge:
Plaintiff-counter-defendant-appellant Design Strategies,
Inc. (“Design”) appeals from a judgment entered in the
United States District Court for the Southern District of
New York (Marrero, J.). The action arises out of the
alleged diversion of a corporate opportunity by
defendant-counterclaimant-appellee Marc E. Davis (“Davis”)
during the course of his employment with Design. According
to Design, the corporate opportunity was diverted to
defendant-appellee Info Technologies Web Solutions (“IT
Web”), with the collusion of defendants-appellees Info
Technologies, Inc. (“Infotech”) and John Goullet
(“Goullet”), Chief Executive Officer of both Infotech and
IT Web (collectively, the “IT Defendants”). Davis was
employed by IT Web following the alleged diversion.
The District Court, in an order dated April 27, 2005,
precluded Design from presenting evidence in support of its
claim for lost profits, pursuant to Fed.R.Civ.P. 37(b), on
the ground that it had not disclosed the computation of
those lost profits, as required by Fed.R.Civ.P.
26(a)(1)(c). In that same Order, the District Court also
rejected a demand by Design for a jury trial, the District
Court having found that all of Design’s remaining claims
were “equitable” and therefore that no jury trial right
existed. Following a bench trial, the District Court
concluded, in an Order dated August 11, 2005, that Davis
(a) had not diverted a corporate opportunity; (b) had not
engaged in unfair competition; (c) had breached a fiduciary
duty of loyalty, requiring the forfeiture of four weeks of
salary; (d) was not liable for overpaid commissions; and
(e) had not been unjustly enriched; and that (f) the IT
defendants had not aided and abetted Davis’s breach of
fiduciary duty; and (g) a claim for punitive damages was
unsupported.
BACKGROUND
I. The Factual Framework
Design is in the business of providing trained personnel
to companies needing technical support on specific
projects requiring computer technology services. Design
hires individuals on a contract basis as needed per project
and then assigns those individuals to work at a Design
client’s site under the client’s supervision and on the
specific temporary projects and duties determined by the
client. This aspect of the computer technology industry is
known as “staffing.” Design also claims to be involved in
the “solutions” aspect of the industry — the
provision of “the services of trained personnel employed by
[Design] on its premises and using the computers and other
technical equipment supplied at [Design’s] laboratory on
specific projects to design and develop websites for
clients in accordance with given specifications.”
Marsh Newmark is the President of Design and has been its
sole director and shareholder since the company’s founding
in 1980. Newmark hired Davis in 1987 to work for Design as
a Sales Representative and later as Sales Manager. Davis
was an at-will employee without a written agreement and was
not subject to any restrictive covenant of confidentiality,
non-competition, or non-solicitation. From 1998 though
February 2000, Davis earned an annual salary of $85,000.
Davis’s commissions in the last four calendar years of his
employment at Design (1997-2000) were $512,333; $434,212;
$285,947; and $73,119, respectively.
Sometime during the summer of 1999, Davis was advised by
Frank Murphy, a senior employee and one of his business
contacts at Microsoft, Inc., that Microsoft was cooperating
with an entity known as Brill Media (“Brill”) in a venture
that would entail the solicitation of companies for
participation in a $10-million computer technology project.
The project, which came to be known as Contentville.com
(“Contentville”), called for the creation of a high-profile
website, powered by Microsoft software, to engage in
electronic commerce in books and related products in
competition with similar businesses operated by Amazon.com
and BarnesandNoble.com. The company ultimately chosen to
work on Contentville would be required to provide
“solutions” work.
Design contends that Davis, while still employed at
Design, diverted this corporate opportunity from Design to
IT Web and subsequently benefitted from that diversion by
accepting an offer of employment with IT Web. Design also
contends that IT Web and its sister company, Infotech,
along with Goullet, colluded with Davis to divert the
Contentville corporate opportunity away from Design and
ultimately hired Davis. Moreover, Design argues that Davis
was paid a “bounty” in the form of a 50% commission on the
Contentville contract once he was hired by IT Web. Davis
responded that he notified Design of the Contentville
corporate opportunity first and referred IT Web to
Microsoft only after Newmark indicated that he was not
interested in the project and after Microsoft and Brill
made it clear that a “staffing” company like Design would
not be qualified to work on the Contentville project.
II. Proceedings in the District Court
Design filed its Complaint on July 11, 2002, pleading
claims against Davis for breach of employment agreement,
breach of fiduciary duties, unfair competition, and unjust
enrichment. Design pleaded claims against the IT Defendants
for aiding and abetting a breach of fiduciary duty,
wrongful inducement of a breach of fiduciary duty, and
interference with employment. Design also pleaded a claim
of conspiracy to breach fiduciary duties against both Davis
and the IT Defendants. Design sought several forms of
relief. First, Design sought injunctive relief against
Davis and others to preclude Davis from: (a) using Design
documents containing confidential information; (b)
soliciting any business from a client of Design that Davis
had contact with at Design; and (c) competing with Design.
Design also sought the imposition of a constructive trust
on all revenues that all defendants derived from the
alleged breach of fiduciary duty, as well as restitution
and exemplary damages from Davis. Finally, Design sought
“damages” “in an amount to be determined at trial.”
Following the completion of discovery, the parties
cross-moved for summary judgment. The District Court, in a
Decision and Order, dated June 22, 2004, found “that the
record in this case raises issues of material fact with
regard to whether Contentville was a corporate opportunity
for Design, whether Davis breached his fiduciary duty to
Design, and whether the IT Defendants knew or should have
known about Davis’s alleged breach.” Specifically, the
District Court found, in regard to Design’s claims of
breach of fiduciary duty, unfair competition, unjust
enrichment, aiding and abetting a breach of fiduciary duty,
and wrongful inducement of a breach of fiduciary duties,
that there were genuine issues of material fact as to
whether Contentville, absent Davis’s alleged breach, could
have been awarded to Design (i.e., whether Contentville was
a “corporate opportunity”) and whether, and to what extent,
Davis informed Design and Newmark about Contentville (i.e.,
whether Davis breached his fiduciary duty). The District
Court determined, however, that no claim arising from the
alleged breach of employment agreement could be made out
because “there was no written agreement covering Davis’s
employment” nor was there any support for finding an oral
agreement between Design and Davis. Finally, the District
Court found that no claim for conspiracy to breach a
fiduciary duty could be proven because some of the parties
to the alleged breach — specifically, the IT
Defendants — did not independently owe a duty to
Design.
In a subsequent Order, dated February 16, 2005, responding
to the motion by Davis and the IT Defendants to strike
Design’s jury demand, the District Court found:
[T]o the extent that Design seeks monetary damages for
the alleged misappropriation of a corporate opportunity
and diversion of corporate assets in the form of the legal
remedy of lost profits, in other words, corporate revenues
Design would have earned out of its business operations
but for Defendants’ alleged wrongful conduct, it is
entitled to a trial by jury. The Court finds that Design
is not, however, entitled to a trial by jury on any claims
with respect to which it seeks only the equitable
remedies of disgorgement of profits, restitution, the
imposition of a trust, an accounting, exemplary damages,
or permanent injunction.
In an Order dated April 27, 2005, responding to the motion
by Davis and the IT Defendants to preclude Design from
introducing evidence of its alleged lost profits at trial,
the District Court found that “Design [had] 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.” In accordance with its
Order of February 16, the District Court therefore held
that Design was not entitled to a jury trial, because lost
profits were the only “compensatory damages” that it had
sought, and the remainder of its remedies were equitable.
The court then determined that “the central issue for trial
is whether or not Davis provided Design with sufficient
notice of and opportunity to compete for a contract with
Microsoft.”
The case proceeded to a bench trial, after which the
District Court made findings of fact and conclusions of law
in a Decision and Order dated August 11, 2005. The District
Court found, based on the testimony of Murphy and Davis,
that Davis initially sought to procure the Contentville
contract for Design from the time he learned about it until
sometime in November 1999. The District Court also found
that Davis had informed Newmark about the Contentville
opportunity but that “Newmark apparently was at best
ambiguous about making the necessary initial capital
investment[] and that it was not until much later, when
Davis believed that Design was not prepared to pursue the
Contentville business under the terms established by
Microsoft, that Davis turned to IT Web.”
The District Court found that “in or before early November
1999, Davis ceased attempting to solicit the Contentville
contract for Design and, instead, commenced trying to
promote IT Web for the contract.” The District Court
further found that Davis took the additional steps of
contacting and/or attempting to contact Microsoft employee
John Gomez (“Gomez”) directly on numerous occasions in late
November and early December 1999 to encourage him to
consider IT Web for the Contentville contract. And, most
importantly, the District Court found that Design “would
not have obtained the Contentville contract even if Davis
had not promoted IT Web.” The District Court reasoned that
this was so because Design “did not satisfy the vendor
requirements Microsoft and Brill had established” or “the
readiness timetable Microsoft sought with regard to the
Contentville contract.” According to Gomez, “prior web
solutions business experience and an operational computer
lab were firm requirements,” and Design lacked the
experience and the operational capacity to fulfill those
requirements.
Microsoft awarded the Contentville contract to IT Web in
mid-December of 1999. IT Web extended an offer of employment
to Davis by letter dated December 14, 1999, which Davis
accepted in January 2000. Davis began working for IT Web in
early February 2000. The District Court determined that,
although Davis had first interviewed for a position with
the IT Defendants on September 22, 1999, there was “no
evidence that the IT Defendants encouraged Davis to provide
them with information concerning the Contentville contract,
or that they in any way affirmatively sought his assistance
in obtaining it.” Additionally, the District Court found
that no “Infotech or IT Web officer[] ever offered Davis a
job or payment in exchange for referral of the Contentville
business or other information about opportunities with
Microsoft.” Finally, the District Court found that,
although Infotech was a competitor of Design in the
“staffing” aspect of the web business, IT Web and Design
were not competitors in the “solutions” aspect of the
business because “Design had no substantial competence or
volume of business in providing web solutions.” Indeed, the
District Court found that, between 1997 and 2000, 99.5% of
Design’s revenue came from “staffing” services.
Based on the foregoing findings, the District Court found
that Contentville was not a “corporate opportunity” for
Design because “Design would [not] have been able to meet
Microsoft’s demands for the project,” Newmark had “refused
to take tangible steps necessary to” expand Design’s
business to include providing “solutions” services, and
because Davis had “initially promoted Design” for the
Contentville contract. The District Court also found that
claims sounding in “unfair competition” were not sustained
because “Design [had] not presented sufficient evidence to
demonstrate that the Contentville contract represented a
benefit or property right that `belonged’ to it in any real
or legal sense” and because “the record does not support a
finding that during the period of his employment Davis set
himself up to engage in competition with Design on his own,
or that he did so in a `conspiracy’ with others.”
Similarly, the District Court found that recovery for
unjust enrichment was not warranted because Davis was not
“enriched” by a “misappropriation and use of a tangible
benefit or property that belonged to Design,” because
“Contentville did not constitute a corporate opportunity
for Design,” and because Design would not have been awarded
the Contentville contract notwithstanding Davis’s
disloyalty. “As a result, there is no basis on which to
find that Davis’s misconduct was at Design’s expense.”
The District Court, however, did find that Davis had
breached his fiduciary duty to Design by being “disloyal”
to his employer. The District Court found that “Davis’s
advocacy on behalf of IT Web as a partner with Microsoft
for the Contentville project was inconsistent with his duty
of loyalty to Design.” The District Court determined that
“[i]n order for Davis’s efforts to advance IT Web’s
prospects as regards the Contentville opportunity to
constitute a breach of his duty of loyalty to Design, it
must further be established that Design and IT Web were
competitors.” Although the District Court had already found
that IT Web and Design were not competitors in the
“solutions” aspect of the business, the District Court,
relying on Elco Shoe Mnfrs., Inc. v. Sisk, 260 N.Y. 100,
103-04 (1932), noted that “even if strictly speaking Design
and IT Web were not themselves competitors in the web
solutions niche of the computer industry, they had
sufficiently conflicting business interests at the relevant
time to be deemed competitors in the present context.” The
District Court also emphasized that Davis had, at the time
he began promoting IT Web to Microsoft, already interviewed
for a job there, and thus, “he had strong personal reasons
and business incentives for IT Web to be selected by
Microsoft for the Contentville services.”
Having determined that Davis violated his duty of loyalty,
the District Court turned to the question of remedy.
Relying on this Court’s reasoning in Phansalkar v. Andersen
Weinroth & Co., L.P., 344 F.3d 184 (2d Cir. 2003), the
District Court determined that forfeiture of salary earned
“during the period of disloyalty” was the appropriate
remedy. Specifically, the District Court reasoned that New
York law requires “forfeiture of salary earned during a
period of disloyalty, but not during periods of loyal
employment that may follow the period of disloyalty.”
Moreover, relying on Phansalkar and Musico v. Champion
Credit Corp., 764 F.2d 102 (2d Cir. 1985), the District
Court found that Davis would not be required to forfeit any
commissions earned, even during the period of disloyalty.
The District Court fixed Davis’s period of disloyalty from
mid-November of 1999, when he first began to promote IT Web
to Microsoft, to early-December of 1999, when he ceased
making contact with Microsoft. The District Court fixed
exact dates of November 11 to December 9, 1999, calculated
that Davis had earned $6,538.00, exclusive of commissions,
during this period, and set that amount for forfeiture.
The District Court, however, refused to award punitive
damages in connection with Davis’s disloyalty because there
was
no evidence in the record to support a finding of the
level of extreme moral culpability necessary for an award
of punitive damages. In this regard, the [c]ourt considers
particularly compelling its finding that Davis initially
sought to procure the Contentville project solutions work
for Design, that he informed Newmark about the opportunity
and Newmark apparently was at best ambiguous about making
the necessary initial capital investment, and that it was
not until much later, when Davis believed that Design was
not prepared to pursue the Contentville business under the
terms established by Microsoft, that Davis turned to IT
Web.
The District Court found, in relation to Design’s claim
that Davis was “overpaid commissions” on a wholly separate
deal with Merill Lynch while at Design, that “Design did
not plead this claim in its complaint or include it in its
initial disclosures, nor has it offered any legal theory on
the basis of which the Court could sustain such a claim.
Accordingly, Design’s claim for overpaid commissions is
dismissed.”
Finally, the District Court refused to award attorneys’
fees because Design had “not cited, nor [was] the Court
aware of, any . . . basis,” such as an “agreement between
the parties, statute, or court rule,” “on which to award
attorneys’ fees in this case.”[fn2]
Judgment was entered on August 18, 2005. Design filed a
Notice of Appeal on September 8, 2005. This Court has
jurisdiction pursuant to 28 U.S.C. § 1291.
ANALYSIS
I. Exclusion of Lost Profits Evidence
A. On October 22, 2002, Design filed its Initial
Disclosure, as required by Rule 26(a)(1) of the Federal
Rules of Civil Procedure. Design listed as claimed
“damages”:
1. All monies paid to Marc Davis for salaries based upon
breach of fiduciary relationship with Plaintiff.
2. All monies earned by Marc Davis as a result of
unlawful diversion of business from Design Strategy to the
corporate Defendants.
3. All profits earned by the Defendants as a result of
the unlawful diversion of business from the Plaintiff to
the Defendants, which business was generated with
Microsoft Corporation.
4. Attorneys’ fees for the prosecution of this action.
5. Punitive damages.
6. Interest costs and disbursements.
The IT Defendants’ First Set of Interrogatories and Request
for the Production of Documents, dated November 5, 2002,
requested a statement
in detail [of] each financial expense or loss allegedly
incurred by plaintiffs as a result of any acts or
omissions of [the] 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.
Design responded to this request on March 26, 2003,
repeating the language of its Initial Disclosure, and
adding the descriptive category of “[l]oss of sale of
Design Strategy,” under which it affixed various “not less
than” amounts for each descriptive category of claimed
“damages.”
Well after the close of discovery, in a proposed pretrial
order submitted shortly before trial, Design disclosed two
witnesses — one of whom it disclosed as an expert
witness — to testify regarding Design’s “lost
profits.” The defendants filed a motion in limine to
preclude Design from offering these witnesses or any other
evidence of its lost profits on the ground that “lost
profits” had not been listed as a category of claimed
damages in Design’s Initial Disclosure or at any point
during discovery, and thus, the offering of evidence or
testimony as to “lost profits” was in violation of Rules
26(a)(1)(c) and (a)(2). The District Court held a telephone
conference on April 5, 2005, to resolve objections to these
two witnesses and to resolve “a question concerning the
evidence of lost profits and the extent to which damages
can be proven in” this case. The District Court noted that
although Design indicated that it might seek lost profits
by referring to lost revenues in the first cause of action
in the [C]omplaint for breach of employment agreement and
thereby arguably put the defendants on notice that lost
profits might be sought, Design has not provided any
specific computation of lost profits nor provided any
evidence on the basis of which such computation might be
made.
The District Court’s written Order of April 27, 2005
further explained that Design’s Initial Disclosure
Statement, though describing the damages it sought with
some specificity, did not mention lost profits. The
District Court ruled that Design’s failure to abide by
Fed.R.Civ.P. 26(a)(1)(c) meant that evidence of lost
profits would not be admissible.
Design objected that it had, in fact, turned over evidence
from which a computation of damages could be made —
its financial records. When pressed, Design argued that it
was not obligated to provide a calculation of damages
because the calculation of damages from these records would
be “simple arithmetic” — “If our revenue is $100 and
our expenses are $50, then we have a 50 percent profit
margin, and that is the basis on which I would have our
people testify.” The District Court corrected Design,
noting that Rule 26 required more of plaintiffs:
THE COURT: Mr. Dweck [Design’s counsel], it is not as
simple as simply providing the [financial statements] to
the defendant without your providing as well a specific
formula indicating how your theory of damages is
supported. That is not something that the defendant is in
a position to do for you.
The only way that you can establish that you suffered
damages is to be able to set it forth in some theory and
then support the theory with facts. Simply providing
documents to the defendant and assuming that somehow the
defendant will divine what your alleged lost profits are
by having documents is not sufficient. This Court on that
basis is persuaded that this record does not support that
theory.
MR. DWECK: . . . I didn’t think we were obligated to do
their homework.
THE COURT: It is quite the opposite, Mr. Dweck. You, the
plaintiff, are the one[] who [is] asserting the damages.
If you assert the damages and you claim that you suffered
a certain amount of injury, it is for you, you have the
burden of proof on injury and the amounts thereof, and
they have to be calculated with reasonable certainty. So
your saying that you provided documents to the defendant
doesn’t go far enough in meeting your burden of proof on
this issue.
In its written Order of April 27, 2005, the District Court
again found that Design had not complied with Rule 26. The
District Court determined that “Design has not provided any
justification for its failure to disclose information
regarding the amount of, or basis for computing, its
alleged lost profits,” noting specifically Design’s failed
argument at the telephone conference. The District Court
further found that this failure was not harmless because
discovery had been closed since October 2003 and because
the trial date had already been postponed in part at
Design’s request. Accordingly,
reopen[ing] 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 [c]ourt 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.
The District Court also noted that
[i]n violating Rule 26(a)(1)(c), Design has also failed
to provide the [c]ourt 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, 403 (1993), as New York law requires. The
absence of any basis on which to make this determination
further supports the [c]ourt’s holding that Design may not
pursue a lost profits theory of damages at trial.”
In a lengthy footnote, the District Court determined that
it lacked discretion to decline to impose sanctions
pursuant to Rule 37(c)(1). Specifically, the District Court
held that
the plain language of Rule 37(c)(1), indicate[s] that,
while trial courts have discretion to determine whether or
not a substantial justification exists and whether or not
a failure to disclose is harmless, if the trial court
finds that there is no substantial justification and the
failure to disclose is not harmless, preclusion is
mandatory.
B. A district court has wide discretion to impose
sanctions, including severe sanctions, under Federal Rule
of Civil Procedure 37, and its ruling will be reversed only
if it constitutes an abuse of discretion. See Patterson v.
Balsamico, 440 F.3d 104, 117 (2d Cir. 2006) (“This Court
reviews the district court’s exclusion of testimony under
Rule 37(c)(1) for abuse of discretion.”); Daval Steel
Products, a Div. of Francosteel Corp. v. M/V Fakredine, 951
F.2d 1357, 1365 (2d Cir. 1991) (discussing discretion under
Rule 37(b)(2)). “A district court `abuses’ or `exceeds’ the
discretion accorded to it when (1) its decision rests on an
error of law (such as application of the wrong legal
principle) or a clearly erroneous factual finding, or (2)
its decision — though not necessarily the product of
a legal error or a clearly erroneous factual finding
— cannot be located within the range of permissible
decisions.” Zervos v. Verizon New York, Inc., 252 F.3d 163,
169 (2d Cir. 2001) (footnote omitted).
Design argues that it was not in violation of Rule
26(a)(1)(c) because “[i]n the instant action there was no
direct order to the Plaintiff to calculate damages. The
simplicity of taking Design’s revenue and deducting the
cost of operations from the financial statements would have
yielded the gross profits.” This is a misstatement both of
the facts of this case and of Rule 26(a)’s requirements.
Rule 26(a)(1)(c) of the Federal Rules of Civil Procedure
provides that
a party must, without awaiting a discovery request,
provide to other parties: . . . a computation of any
category of damages claimed by the disclosing party,
making available for inspection and copying as under Rule
34 the documents or other evidentiary material, not
privileged or protected from disclosure, on which such
computation is based, including materials bearing on the
nature and extent of injuries suffered. . . . (emphasis
added).
The District Court’s finding that Design had failed to
comply with this rule was well within the proper range of
its discretion.
First, as correctly noted by the District Court, nowhere
did Design ever disclose “lost profits” as even a
“category” of “damages” sought on its Initial Disclosure
Statement. Although Design’s Complaint does include a
generic reference to “damages” in its Initial Disclosure,
Design omitted any reference to its own lost profits as a
measure of recompense, focusing instead on “monies earned”
by the defendants. Moreover, the Record does not reflect
any supplemental disclosures as required by Rule 26(e) of
the Federal Rules of Civil Procedure. The defendants were,
therefore, without notice that such claims would be an
issue until they were provided, shortly before the
commencement of trial, with the names of two witnesses who
would testify as to lost profits.
Second, by its very terms Rule 26(a) requires more than
providing — without any explanation —
undifferentiated financial statements; it requires a
“computation,” supported by documents. The need for
computation and supporting documents is especially
necessary in a case like this, where the damages claim is
for lost profits from a project of a type with which the
plaintiff had little-to-no prior experience. Design’s
“simple arithmetic” calculation is wholly inadequate as a
measure of damages, given that it is undisputed that, in
order to perform on the project, Design would have had to
establish an entirely new computer lab and hire all new
personnel in the space of two weeks. At the late point in
the proceedings when Design disclosed that it would be
presenting lost-profits witnesses, much greater detail than
previously provided would have been necessary to satisfy
Rule 26(a). See City & County of San Francisco v.
Tutor-Saliba Corp., 218 F.R.D. 219 (N.D. Cal. 2003)
(recognizing that Rule 26(a)(1)(c) anticipates supplemental
disclosures with ever-greater level of detail as discovery
progresses).
Third, Rule 26(a) requires a party to provide a computation
of any category of damages voluntarily, i.e., “without
awaiting a discovery request”; Design’s failure to comply
with this requirement was especially troubling because, as
noted by the District Court, the IT Defendants specifically
requested a calculation of damages.
Fourth, Rule 26(a) requires a party — in addition to
providing a calculation of damages — to make
“available for inspection and copying as under Rule 34 the
documents or other evidentiary material . . . on which such
computation is based.” The Advisory Committee Notes to Rule
26(a)(1)(c) accompanying its promulgation make clear that
the rule “imposes a burden of disclosure that includes the
functional equivalent of a standing Request for Production
under Rule 34. A party claiming damages or other monetary
relief must, in addition to disclosing the calculation of
such damages, make available the supporting documents for
inspection and copying as if a request for such material had
been made under Rule 34.” Fed.R.Civ.P. 26 Advisory
Committee Notes to 1993 Amendments. Design failed to
disclose both a calculation of damages and the documents
supporting that calculation.
Design next argues that, even if it did violate Rule 26,
the District Court applied the wrong standard to preclude
its evidence under Rule 37.[fn3] Specifically, Design
asserts that, before a court may preclude evidence as a
discovery sanction, it must find “bad faith and callous
disregard of the Federal Rules.” See DiPirro v. United
States, 43 F. Supp. 2d 327, 340 (W.D.N.Y. 1999)
(“Precluding expert testimony under [Rule 37(c)(1)] is a
drastic remedy and should only be applied in cases where
the party’s conduct represents flagrant bad faith and
callous disregard for the requirements of Rule
26(a)(2)(B).”). As noted above, the District Court decided
there was no such requirement and observed that this Court
had not yet passed on this issue. See Hein v. Cuprum, S.A.,
de C.V., 53 F. App’x 134, 137 (2d Cir. 2002) (“We express
no opinion as to whether a showing of bad faith is required
before evidence may be excluded under Rule 37(c)(1).”).
Since Rule 37(c)(1) by its terms does not require a showing
of bad faith, we now hold that such a requirement should
not be read into the Rule.
In determining whether the District Court abused its
discretion in imposing the sanction under Rule 37, we are
governed by the standard set forth in Patterson v.
Balsamico, 440 F.3d 104 (2d Cir. 2006). In Patterson, two
defendants violated Rule 26(a)(3) by not timely disclosing
the names of witnesses they planned to call at trial. Id.
at 117. The District Court granted the plaintiff’s motion
to preclude, except as to one witness who was named in the
original complaint and whose testimony reasonably could
have been anticipated. Id. On appeal to this Court, we held
that “[i]n determining whether the district court acted
within its discretion, this Court [must] consider[] `(1)
the party’s explanation for the failure to comply with the
[disclosure requirement]; (2) the importance of the
testimony of the precluded witness[es]; (3) the prejudice
suffered by the opposing party as a result of having to
prepare to meet the new testimony; and (4) the possibility
of a continuance.'” Id. (citing Softel, Inc. v. Dragon Med.
& Scientific Commc’ns, Inc., 118 F.3d 955, 961 (2d Cir.
1997)) (brackets in Patterson). Thus, although a
“bad-faith” violation of the Rule 26 is not required in
order to exclude evidence pursuant to Rule 37, it can be
taken into account as part of the party’s explanation for
its failure to comply.
Applying Patterson to this case, we cannot say that the
District Court abused its discretion when it determined that
the sanction imposed was warranted under Rule 37. Although
the second Patterson factor favors Design because Design’s
evidence of lost profits was essential to proving these
damages, all of the other factors weigh heavily in favor of
exclusion. Design has not yet explained why it omitted
“lost profits” as a category of damages in its Initial
Disclosure.[fn4] The prejudice to the defendants in having
to prepare for this evidence would have been severe, as
discovery would have had to be reopened to determine
whether Design’s calculations were proper. The “expert”
witness that Design wanted to call also would have had to
(a) prepare a report; and (b) be qualified as an expert
with regard to the calculation of damages. Finally,
weighing heavily on both the prejudice and possibility of
continuance factors was the fact that discovery had been
closed for “approximately one and a half years,” and at the
time of the offer of expert testimony there was only a
“short time left before trial.” On the facts before us, the
District Court did not abuse its discretion in determining
that sanctions, including severe sanctions, were warranted
for Design’s failure to abide by Rule 26(a)(1)(c).
The District Court did, however, err in its determination
that “preclusion is mandatory” under Rule 37(c)(1) once
“the trial court finds that there is no substantial
justification and the failure to disclose is not harmless.”
The language in two cases from our sister circuits is in
conformity with this viewpoint: Finley v. Marathon Oil Co.,
75 F.3d 1225 (7th Cir. 1996), and Wilson v. Bradlees of New
England, Inc., 250 F.3d 10 (1st Cir. 2001). In Finley, the
plaintiffs failed to disclose “expert testimony intended
for use as rebuttal evidence” to the defendants “within 30
days of the [defendant’s] disclosure of his expert
testimony” in violation of Fed.R.Civ.P. 26(a)(2)(c)
— indeed, the plaintiffs “missed the deadline [for
disclosure] by months.” Id. at 1230. The Seventh Circuit
held that the district court in that case had not “abused
his discretion in refusing to permit the introduction” of
this evidence. Id. The Seventh Circuit reasoned that
Rule 37(c)(1) provides that “a party that without
substantial justification fails to disclose information
required by Rule 26(a) . . . shall not, unless such
failure is harmless, be permitted to use as evidence at a
trial . . . any . . . information not so disclosed”
(emphasis added). The sanction of exclusion is thus
automatic and mandatory unless the party to be sanctioned
can show that its violation of Rule 26(a) was either
justified or harmless.
Id. (alterations in original).
In Wilson, the plaintiffs disclosed two videotapes,
prepared by expert witnesses, reenacting the injury-causing
accident at issue in that case. Wilson, 250 F.3d at 18-19.
These disclosures occurred months after the close of
discovery. Id. In affirming the district court’s exclusion
of those two videotapes from evidence the First Circuit
called Rule 37(c)(1)’s preclusion sanction “near
automatic.” Wilson, 250 F.3d at 20 (emphasis added). The
First Circuit explained that
it is the obligation of the party facing sanctions for
belated disclosure to show that its failure to comply with
the Rule was either justified or harmless and therefore
deserving of some lesser sanction. This is a burden that
plaintiff made no attempt to shoulder, and the district
court did not abuse its discretion in imposing Rule
37(c)(1)’s `self-executing’ sanction.
Id. at 21 (internal citations omitted).
Both Finley and Wilson find some support in the 1993
Advisory Committee Notes accompanying Rule 37, which refers
to Rule 37(c)(1) as an “automatic” sanction:
Paragraph (1) prevents a party from using as evidence any
witnesses or information that, without substantial
justification, has not been disclosed as required by Rules
26(a) and 26(e)(1). This automatic sanction provides a
strong inducement for disclosure of material that the
disclosing party would expect to use as evidence. . . .
Fed.R.Civ.P. 37 Advisory Committee Notes to 1993 Amendments
(emphasis added). To the extent that the Advisory Committee
Note calls Rule 37(c)’s exclusion of evidence “automatic,”
however, that characterization cannot be squared with the
plain language of Rule 37(c)(1) itself. Rule 37(c)(1)
itself recognizes that “[i]n addition to or in lieu of this
[preclusion] sanction, the court, on motion and after
affording an opportunity to be heard, may impose other
appropriate sanctions.” Thus, the 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.
In another part of its Order, the District Court did
recognize this discretion when it precluded another Design
expert, John Doughty, from testifying about the nature of
the solutions and staffing business:
Given that Defendants have moved to preclude Doughty’s
testimony and that the [c]ourt held a telephone conference
on this matter, it is not necessary to invoke Rule
37(c)(1)’s automatic sanction in order to preclude
Doughty’s testimony. Rather, Rule 37(c)(1) provides that
“[i]n addition to or in lieu of [the automatic sanction],
the court, on motion and after affording an opportunity to
be heard, may impose other appropriate sanctions.” The
Court precludes Doughty’s testimony in an exercise of this
discretion.
This is a correct statement of the Rule and of the court’s
discretion in applying it.
In prior cases in which a district court erroneously
imposed a sanction against a party, this Court has
indicated a preference for remanding the case to the
district court to reconsider whether to sanction, and, if
so, the appropriate sanction. See, e.g., Simon DeBartolo
Group, L.P. v. Richard E. Jacobs Group, Inc., 186 F.3d 157,
177 (2d Cir. 1999) (stating, in case involving sanctions
pursuant to Fed.R.Civ.P. 11, that “were this an ordinary
case, we would likely remand it to the district court for a
determination as to whether it will persist in its decision
to impose sanctions at all, and only if so for a
determination of what those reconsidered sanctions should
be”); Hernandez v. Conriv Realty Assocs., 116 F.3d 35, 41
(2d Cir. 1997) (concluding, in case involving sanctions
pursuant to Fed.R.Civ.P. 16(f), that district court “should
reconsider whether to impose sanctions” and that “[i]f the
court decides to impose sanctions, the court should also
reconsider what sanctions are appropriate”). Here, however,
remand is inappropriate because Design has not, to this
day, presented any evidence of lost profits. As when a
district court abuses its discretion by erroneously
excluding evidence under the Federal Rules of Evidence, we
look to whether this exclusion was likely to have affected
the outcome of the case. See Fed.R.Evid. 103(a); Phoenix
Associates III v. Stone, 60 F.3d 95, 104-05 (2d Cir. 1995).
As late as oral argument before this Court, Design has
persisted in characterizing its bare financial statements
and the “simple arithmetic” of figuring its overall profit
margin as adequate evidence of its lost profits. For the
reasons discussed above, that evidence is insufficient to
prove lost profits in this case and therefore the exclusion
of that evidence cannot have prejudiced Design nor have
affected the outcome of the case.
II. Denial of a Jury Trial
By Order dated February 16, 2005, the District Court found
that “Design [was] not . . . entitled to a trial by jury on
any claims with respect to which it seeks only the
equitable remedies of disgorgement of profits, restitution,
the imposition of a trust, an accounting, exemplary
damages, or a permanent injunction.” Design argues that
even if this Court affirms the judgment of the District
Court incorporating its decision to preclude evidence, and
therefore a claim, of lost profits, that its “other causes
of action not related to the lost profits claim” entitled
it to a jury trial.
“We review de novo a district court’s decision to deny a
jury trial.” Pereira v. Farace, 413 F.3d 330, 337 (2d Cir.
2005).[fn5] As this Court recently reaffirmed, only those
claims that can be classified as “suits at common law”
trigger the right to a jury trial. See Id. (citing U.S.
Const. amend. VII.).
In deciding whether a particular action is a suit at law
that triggers this important protection, we are instructed
to apply the two-step test set forth in Granfinanciera[,
S.A. v. Nordberg, 492 U.S. 33, 42 (1989)]. First, we ask
whether the action would have been deemed legal or
equitable in 18th century England. Second, we examine the
remedy sought and determine whether it is legal or
equitable in nature.
Id. (internal citations and quotation marks omitted).
Although the District Court initially found that Design’s
remaining claims were arguably “legal” because they “may be
construed as contractually grounded” in an implied contract
for employment, it ultimately determined that the remedies
sought by Design, save the lost profits that the District
Court had precluded evidence of, were all equitable.
Specifically, the District Court determined that “[t]here
does not appear to be any significant argument that
Design’s claims for an injunction, punitive damages, or
attorneys’ fees and costs” were anything but “equitable.”
The District Court further determined the claims for
“constructive trust” and restitution were also equitable,
reasoning that “these remedies do not aim to compensate
Design for damages it suffered in the form of monetary
gains it would have earned . . . [but] [r]ather, the relief
demanded seeks to remove from Defendants the funds that
they allegedly obtained unjustly and that in good
conscience should be turned over to Design.”
Design’s arguments as to why the District Court erred in
so finding are all variations on the same theme —
its claims were designed to obtain “compensat[ion].” Design
does not put forward, nor analyze, the holding of
Granfinanciera, as did the District Court. Moreover, Design
does not address at all the District Court’s central
proposition that the remedies sought here could not be
deemed “compensatory” in the strict sense.
An examination of Design’s Initial Disclosure demonstrates
that the District Court correctly found that all of
Design’s claimed remedies were equitable. The Initial
Disclosure stated:
1. All monies paid to Marc Davis for salaries based upon
breach of fiduciary relationship with Plaintiff.
2. All monies earned by Marc Davis as a result of
unlawful diversion of business from Design Strategy to the
corporate Defendants.
3. All profits earned by the Defendants as a result of
the unlawful diversion of business from the Plaintiff to
the Defendants, which business was generated with
Microsoft Corporation.
4. Attorneys’ fees for the prosecution of this action.
5. Punitive damages.
6. Interest costs and disbursements.
As found by the District Court, none of these categories is
“damages” in the strict sense of remedying “loss” to
Design. Rather, all these categories seek monies unjustly
earned by Davis and the IT Defendants or monies expended
during litigation — none of these categories has any
connection to Design’s actual loss. See Dan B. Dobbs, Law
of Remedies, § 2.6(3) (2d ed. 1993) (“Some money
claims are not `damages’ representing the plaintiff’s loss
but `restitution’ representing the defendant’s unjust gains
in a transaction.”).
At oral argument the issue of whether a claim for punitive
damages independently entitles a plaintiff to a jury trial
under the Seventh Amendment was raised for the first time
in this case. This issue, however, was not argued, nor even
mentioned, in the brief. “Issues not sufficiently argued in
the briefs are considered waived and normally will not be
addressed on appeal.” Norton v. Sam’s Club, 145 F.3d 114,
117 (2d Cir. 1998). We therefore do not address this issue
in this case.
III. Decisions Following Trial
Having determined that the District Court did not commit
reversible error in striking any claim by Design for lost
profits and that the District Court did not err in finding
that Design was not entitled to a jury trial on its
remaining claims, we next examine Design’s challenges to
the District Court’s findings of fact and conclusions of
law following the bench trial. “Following a bench trial, we
set aside findings of fact only when they are clearly
erroneous, and we give due regard to the trial court’s
credibility determinations. However, we review de novo the
district court’s conclusions of law and its resolution of
mixed questions of law and fact.” Phansalkar v. Andersen
Weinroth & Co., L.P., 344 F.3d 184, 199 (2d Cir. 2003).
A. Finding of and Remedy for Employee Disloyalty
The District Court determined that Davis had violated his
fiduciary duty of loyalty to Design in promoting IT Web for
the Contentville project and that the proper remedy for
this breach was the forfeiture of salary, but not
commissions, earned during the period of disloyalty. This
Court has observed that:
New York law with respect to disloyal or faithless
performance of employment duties is grounded in the law of
agency, and has developed for well over a century. . . .
Under New York law, an agent is obligated to be loyal to
his employer and is prohibited from acting in any manner
inconsistent with his agency or trust and is at all times
bound to exercise the utmost good faith and loyalty in the
performance of his duties. One who owes a duty of fidelity
to a principal and who is faithless in the performance of
his services is generally disentitled to recover his
compensation, whether commissions or salary. Moreover, a
principal is entitled to recover from his unfaithful agent
any commission paid by the principal. It does not make
any difference that the services were beneficial to the
principal, or that the principal suffered no provable
damage as a result of the breach of fidelity by the agent.
Phansalkar, 344 F.3d at 200 (internal quotation marks and
citations omitted). Davis does not argue that he was not
disloyal nor that some forfeiture of income was
appropriate. Thus, the only question presented here is
Design’s contention that the District Court erred in
determining the remedy.
This Court recognized in Phansalkar that “New York’s lower
courts have endorsed limiting forfeiture to compensation
paid during the time period of disloyalty.” Id. at 205.
Despite this clear statement of law, Design insists it is
entitled to forfeiture of all salaries and commissions
earned by Davis over his thirteen-year career at Design.
Design cites no authority for this proposition,[fn6] and
this Court rejects it.
Design also argues that Davis should be forced to forfeit
the commissions he earned during the period of disloyalty.
In Phansalkar, this Court held that a disloyal employee was
to forfeit all salary earned during the period of his
disloyalty. Id. at 207-08. In doing so, this Court
expressly distinguished a prior case, Musico v. Champion
Credit Corp., 764 F.2d 102 (2d Cir. 1985), which had
instead permitted a “transaction-by-transaction
forfeiture.” Phansalkar, 344 F.3d at 207. This Court
explained that such a limitation of forfeitures was
permitted only where:
(1) the parties had agreed that the agent will be paid on
a task-by-task basis (e.g., a commission on each sale
arranged by the agent), (2) the agent engaged in no
misconduct at all with respect to certain tasks, and (3)
the agent’s disloyalty with respect to other tasks
“neither tainted nor interfered with the completion of”
the tasks as to which the agent was loyal.
Phansalkar, 344 F.3d at 205 (citing Musico, 764 F.2d at
114). Thus, this Court distinguished forfeiture in cases
involving an employee who drew a regular salary from cases
in which an employee drew a commission.
As the District Court found,
[t]he instant case presents a hybrid of Musico and
Phansalkar in that Davis received both general
compensation (his salary) and commissions, or specific
amounts paid for individual tasks completed (in this case,
sales of staffing services to Design clients). Applying
the forfeiture methods used in both of those cases, the
Court finds that Davis must forfeit the salary that he
received during the period of disloyalty, but that he is
not required to forfeit any commissions because, unlike
the defendant in Phansalkar, Davis’s disloyalty did not
arise in connection with any Design transaction from which
he was entitled under the terms of his employment
agreement to receive a commission, nor did it “taint[] or
interfere[] with the completion” of any sales in relation
to which he received a commission. [Phansalkar, 344 F.3d]
at 205 (quoting Musico, 764 F.2d at 114).
We adopt the District Court’s application of our precedents
to this case. The District Court did not err in determining
that Davis should forfeit salary for the disloyal period
but not any commissions earned.
Finally, Design challenges the facts found by the District
Court in relation to the duration of Davis’s disloyalty for
the purposes of forfeiture and the “outrageous[ness]” of
Davis’s conduct for the purposes of punitive damages.
Examining these challenges in reverse order, the District
Court did not err in finding that “[a]lthough Davis’s
disloyal actions were knowing and reflected a
prioritization of self-interested ends over his duty of
loyalty to his employer,” there was “no evidence in the
record to support a finding of the level of extreme moral
culpability necessary for an award of punitive damages.”
The District Court reasonably based this conclusion on its
finding
that Davis initially sought to procure the Contentville
project solutions work for Design, that he informed
Newmark about the opportunity and Newmark apparently was
at best ambiguous about making the necessary initial
capital investment, and that it was not until much later,
when Davis believed that Design was not prepared to pursue
the Contentville business under the terms established by
Microsoft, that Davis turned to IT Web.
The District Court’s factual findings are not clearly
erroneous, nor can it be said, based on those findings,
that the District Court abused its discretion in finding
that those facts did not rise to “gross, wanton, or willful
fraud or other morally culpable conduct.” See Action S.A.
v. Marc Rich & Co., Inc., 951 F.2d 504, 509 (2d Cir. 1991)
(setting forth standard for punitive damages in New York);
Whitney v. Citibank, N.A., 782 F.2d 1106, 1118-19 (2d Cir.
1986) (holding that this Court reviews award of punitive
damages for abuse of discretion).
With respect to the duration of Davis’s disloyalty, the
District Court required Davis to pay damages in the amount
of his salary between November 11, 1999, and December 9,
1999. Although Design asserts that the period of Davis’s
disloyalty spanned from at least September 22, 1999, when
he first interviewed for a position with the IT Defendants,
through March 2000, after he had accepted that position but
remained on Design’s “payroll,” the Record supports the
District Court’s determination that
Davis was promoting Design in discussions with Murphy
until sometime in November 1999, that IT Web had
effectively been awarded the Contentville contract by
mid-December 1999, and that most of the allegations
concerning Davis’s disloyalty entailing his advocacy on
behalf of IT Web point to events that occurred in mid- to
late November and not later than early December 1999.
Moreover, Design’s contention that Davis was on its payroll
in March 2000 does not make clear whether Davis merely
continued to receive commission checks after he left Design
in February 2000 or whether he was still drawing a salary.
Design does not further develop this point or refer to any
supporting evidence in the Record.[fn7] Accordingly, we
find no error in the damages award.
B. Finding of Non-complicity by Competitor-IT Defendants
Under New York law,
[a] plaintiff seeking to establish a cause of action for
aiding and abetting a breach of fiduciary duty must show:
“(1) the existence of a . . . violation by the primary (as
opposed to the aiding and abetting) party; (2) `knowledge’
of this violation on the part of the aider and abettor;
and (3) `substantial assistance’ by the aider and abettor
in the achievement of the primary violation.”
Samuel M. Feinberg Testamentary Trust v. Carter, 652 F.
Supp. 1066, 1082 (S.D.N.Y. 1987) (quoting IIT v. Cornfeld,
619 F.2d 909, 922 (2d Cir. 1980)). Design challenges the
District Court’s finding that “there is insufficient
evidence in the record . . . to establish the second or
third elements.” As noted above, this Court reviews that
determination for clear error as to the facts and reviews
de novo the District Court’s conclusions of law.
Design argues that the IT Defendants were complicit
because they knew that Davis was employed by Design at the
time he interviewed with them and later promoted IT Web for
the Contentville contract and that Contentville went to IT
Web largely because of Davis. However, the District Court
found that the IT Defendants did not know, or have any
reason to know, that Davis was breaching his duty of
loyalty when he acted. As the District Court explained,
In this case, although the IT Defendants clearly had
knowledge that Davis had alerted them to the possibility
of a software solutions business opportunity with
Microsoft, there is no basis on which to conclude that
they had actual knowledge that Davis’s behavior in so
alerting them was disloyal to Design. In order to have
such knowledge, the IT Defendants would have to have
known, among other things, that Davis had not informed
Newmark about his promoting IT Web for the Contentville
business, and that Newmark had not consented to Davis’s
informing them of such an opportunity. In general terms,
Goullet, [the President of IT Web, and the Executive
Vice-President of Infotech] all testified that at their
first interview with Davis on September 22, 1999, he told
them that one of his reasons for seeking to leave Design
was that Newmark was not interested in expanding Design
into the web solutions business that Davis wanted to
pursue.
More specifically, Goullet testified that he knew that
Davis had originally tried to solicit a business
opportunity with Microsoft on behalf of Design. Design’s
counsel asked Goullet if he “ever [said] anything to Mr.
Davis, you may have a conflict of interest with what you
are giving me, or information you are transmitting to me,
about this opportunity at Microsoft; you better check with
your boss and see if it’s okay.” Goullet replied that he
and Davis had “discussed this” and that he thought he
“asked [Davis] if he had brought it to Marsh [Newmark]
and to Design Strategy” and that Davis had told him he
had. When asked if he “ever ask[ed] [Davis] if he had
talked to Mr. Newmark about giving [Goullet] the
information with regard to the Contentville contract,”
however, Goullet replied that he had not spoken to Davis
about this. Under these circumstances Goullet had no
reason to question Davis’s statements. He reasonably could
have concluded that Design was not interested in or
qualified to pursue the Contentville business. He was not
under any independent affirmative duty to call Design to
verify what Davis had represented.
(internal citations omitted). In light of the District
Court’s other findings regarding Davis having initially
notified Design and Newmark about Contentville, and
Newmark’s reaction to the Contentville opportunity, this
Court cannot say that these findings of fact are clearly
erroneous. Design also argues that Davis’s compensation at
IT Web was in an amount that compels the conclusion that he
was paid to bring the Contentville project to IT Web.
Again, the District Court squarely addressed and rejected
this contention. Design’s objection that Goullet’s testimony
was “incredible as a matter of law” notwithstanding, the
District Court did not commit clear error in finding that
the IT Defendants did not aid and abet Davis’s breach of
fiduciary duty.
C. Rejection of Overpaid Commissions Claim
Apparently, at some point after Davis left Design, Design
was obligated to provide a discount on services already
rendered to Merrill Lynch. Davis had serviced, and earned
commissions from, that Merrill Lynch account. Design
thereafter sent a letter to Davis, demanding the return of
approximately $41,000 in commissions that he allegedly owed
due to the discount.
It is undisputed that Design did not list this claim in
its Complaint nor in its Initial Disclosure. Design first
indicated that it intended to seek to recover commissions
in its February 15, 2005, draft pre-trial order. Davis
moved for an order precluding Design from offering any
evidence on its overpaid commissions claim as part of the
same motion in limine in which defendants moved to preclude
evidence of Design’s lost profits and on the same grounds
— Design had not asserted the overpaid commissions
claim in its Complaint or in its Initial Disclosures, and
no discovery had been conducted as to that claim. The
District Court denied Davis’s motion in part by Order dated
April 27, 2005, concluding that it would allow Design’s
proposed witness, Joel Redesky, to offer “factual
testimony” concerning the alleged overpayment of
commissions to Davis “to the extent there has been
discovery concerning those commissions.”
At the bench trial, Design presented evidence and
testimony, but not from Redesky, concerning these
commissions. Near the conclusion of its findings of fact
and law, the District Court stated
Design argued at trial that Davis was “overpaid
commissions on Merrill Lynch work undertaken by Design.”
Design did not plead this claim in its complaint or
include it in its initial disclosures, nor has it offered
any legal theory on the basis of which the Court could
sustain such a claim. Accordingly, Design’s claim for
overpaid commissions is dismissed.
(internal citation omitted). It thus appears that the
District Court rejected this claim on two grounds, one
procedural, one on the merits.
The District Court erred in rejecting this claim on
procedural grounds, inasmuch as its prior order of April
27, 2005, permitted this claim to go to trial. However,
Design’s claim fails on the merits. Under New York law,
“[i]n the absence of a special agreement, an employer may
not recover back wages or equivalent drawings paid during a
period of completed employment.” Kleinfeld v. Roburn
Agencies, Inc., 60 N.Y.S.2d 485, 487 (N.Y.App.Div. 1946).
This rule applies even to “unearned commissions.”
Centerbank Mortgage Co. v. Shapiro, 655 N.Y.S.2d 596, 597
(N.Y.App.Div. 1997).
Design does not point to any “special agreement” to permit
the recovery of these allegedly excess commissions.
Although Design asserts that “[t]he practice of adjustment
of overpaid commissions at Design was known to Davis and
was contained within Design’s commission plan,” Design
points to no such agreement in the Record, nor does it
address Davis’s invocation of the relevant New York law.
Accordingly, we find that the District Court’s dismissal of
this claim was proper.
CONCLUSION
For the foregoing reasons, the judgment of the District
Court is affirmed.
[fn2] The District Court also rejected a counterclaim by
Davis against Design that has no relevance to the instant
appeal.
[fn3] Rule 37(c)(1) of the Federal Rules of Evidence
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, at a hearing, or on a motion any
witness or information not so disclosed. In addition to or
in lieu of this sanction, the court, on motion and after
affording an opportunity to be heard, may impose other
appropriate sanctions.
[fn4] Nor does the Record reflect that Design ever updated
its disclosures as required by Rule 26(e). That this
category of damages was never claimed further explains why
there were never “direct order[s]” to calculate those
damages.
[fn5] The opinion in Pereira was issued after the District
Court’s decision in this case.
[fn6] Design does cite Phansalkar, 344 F.3d at 202, in
support, but that citation is to Phansalkar’s recitation of
the historical rule of salary forfeiture, a rule that
Phansalkar specifically noted had been abandoned, id. at
205.
[fn7] Design makes a further argument that is wholly
without merit. Design asserts that Davis was disloyal by
interviewing with IT Web while still at Design because
these interviews were “not done on a casual basis,” were
“during business hours and on Design’s time,” and because
Davis used a cell phone and vehicle provided by Design in
relation to these interviews. These are not the kind of
actions the “disloyal servant” doctrine was meant to deter.