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After Sanctions Resulted in Dismissal, the Tenth Circuit Gives Party a Second Chance

Litigate enough cases, and you’re sure to see initial disclosures that are far from adequate. In federal court, a court can sanction a party for failing to make disclosures (or failing to supplement them later if the initial disclosures are not complete), and the default sanction is that the party who failed to disclose is not allowed to present that evidence. But what if such a sanction effectively results in the case being dismissed? A recent, published case from the Tenth Circuit is full of useful guidance on the standard for applying discovery sanctions in this context.

This dive into the Tenth Circuit’s opinion in HCG Platinum LLC v. Preferred Product Placement Corp. explores the Court’s guidance on appropriate sanctions where a party fails to supplement its initial disclosures.

“Sharp” Discovery Practices and the Initial Disclosure Conflict

The case involved a product placer who had a contract with a dietary supplement manufacturer. The product placer would place the manufacturer’s products in retail stores and then take a percentage of the profits. Apparently unsatisfied with how things were going, the manufacturer filed a breach of contract action against the product placer and sought a declaratory judgment that it had properly terminated the contract because of the breach. The product placer filed a counterclaim, and the litigation eventually proceeded to discovery.

The product placer submitted initial disclosures that claimed over $7 million in damages as a result of the breach of contract. However, the calculations set forth in those disclosures did not have any evidence to support or explain them. The product placer claimed that the reason for the minimal information was that much of the information was in the hands of the manufacturer and that the manufacturer had failed to provide meaningful discovery responses. But the product placer never filed a motion to compel during discovery.

On the eve of trial, the manufacturer brought up the fact that the product placer had never supplemented its initial disclosures on the issue of damages and had not retained a damages expert in order to prove damages. The product placer countered by arguing that the reason it had not was because the manufacturer failed to respond to its discovery requests in a sufficient manner and that it didn’t have the information it needed to accurately calculate damages. The product placer also noted that it had not willfully failed to respond nor was there bad faith.

Federal Rule of Civil Procedure 37(c)(1) states that if a party fails to provide information in its Rule 26 initial disclosures (or doesn’t supplement an earlier response), then the party is not allowed to use that information to supply evidence at trial, unless the failure was substantially justified or harmless. But despite its absolute language, the rule is qualified by a provision that allows a district court to choose a different sanction in lieu of exclusion, so there is some discretion.

In this case, the district court chided the parties for what it viewed as “sharp” discovery practices but agreed that there was nothing on the record to show that the product placer had acted in bad faith in failing to supplement its disclosures. Nevertheless, the district court ruled that sanctions were warranted and that the product placer should be excluded from presenting undisclosed evidence on the issue of damages. This sanction was severe, because it meant the product placer could not prove damages, an essential element of its case. The court then granted judgment in favor of the manufacturer on the product placer’s counterclaims.

Severe Sanctions Require Careful Consideration

On appeal, the Tenth Circuit reversed the district court’s order and remanded the case back for the district court to reconsider the issue in light of the Court’s guidance. In cases where “the exclusion of evidence under Rule 37(c)(1) has the necessary effect of a dismissal,” courts should conduct a more detailed analysis. In any case, courts should conduct the traditional Woodworker’s inquiry (explained in more detail below). But they should not stop there. They should also “carefully explore and consider the efficacy of less drastic alternatives, ordinarily reserving the extreme sanction of dismissal for cases involving bad faith or willfulness or instances where less severe sanctions would obviously prove futile.”

The Court’s opinion started out by reiterating the traditional standard. When a party fails to provide information in its initial disclosures and fails to supplement those disclosures, as occurred here, Federal Rule of Civil Procedure 37(c)(1) permits the district court to impose sanctions. When deciding what sanctions are appropriate, courts in this circuit are to be guided by the “Woodworker’s” factors. These factors include:

(1) the prejudice or surprise to the party against whom the testimony is offered;

(2) the ability of the party to cure the prejudice;

(3) the extent to which introducing such testimony would disrupt the trial; and

(4) the moving party’s bad faith or willfulness.

In this case, the appellate court concluded that the district court gave only lip service to the factors, naming them and recognizing their applicability but not actually applying them to the case. In fact, the district court’s findings on three of the factors seemed to support the opposite result. The fact that the product placer’s attorney had pointed this out in a “short record” after the Court ruled supported the appellate court’s conclusion that there had been an error requiring reversal.

This was all the more important because the sanction of exclusion was imposed in a way that effectively resulted in dismissal of the case. The appellate court recognized that its decisions had not provided much guidance on how to apply the Woodworker’s factors where an exclusionary sanction carries the force of dismissal. To this end, the panel noted that when faced with such a situation, lower courts should look to the Tenth Circuit’s analogous line of cases on sanctions under Rule 37(b)(2)—sanctions for disobeying a discovery order—and also consider whether a lesser sanction would accomplish the same goal.

The appellate court declined to perform this analysis on appeal, even though it could have. Instead, the Court sent the case back to the district court to reevaluate the situation under the proper standard. But the Court was clear that the district court was not foreclosed from coming to the same conclusion. Exclusion of the evidence resulting in dismissal might well be the “right” answer; it just had to be reached in a legally justifiable way. In other words, failing to supplement initial disclosures, even when not done in bad faith, might be a discovery violation severe enough to warrant exclusionary sanctions that effectively dismiss the action, but the district court must consider the Woodworker’s factors and whether lesser sanctions are available before going there.

The moral is that failing to supplement discovery—or failing to compel the other side to hand over discovery—can be a very expensive mistake.

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1 HCG Platinum, LLC v. Preferred Product Placement Corp., No. 15-4157 (10th Cir. Oct. 17, 2017) (slip op. at 26).
2 Id.
3 So named for the case Woodworker’s Supply, Inc. v. Principal Mutual Life Insurance Co., 170 F.3d 985, 993 (10th Cir. 1999).
4 HCG Platinum, LLC v. Preferred Product Placement Corp., No. 15-4157 (10th Cir. Oct. 17, 2017) (slip op. at 15) (quoting Woodworker’s Supply, Inc., 170 F.3d at 993) (internal quotation marks omitted).
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