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for the Southern District of New York

Court Granted, In Part, And Denied In Part, Third Party Defendants’ Motion To Preclude Defendant From Offering Certain Documents and Witnesses.

In a March 7, 2014 Opinion and Order, Magistrate Judge Henry Pitman granted, in part, and denied in part, third party defendant Bambams, LLC’s motion to preclude defendant Sherwood Group, Inc. from offering certain documents and witnesses. Plaintiff Max Impact, LLC commenced this lawsuit against defendant Sherwood Group, Inc. asserting patent and copyright infringement claims in connection with Sherwood's sale of a banner product called "Expand-A-Banner". Sherwood filed its answer and asserted counterclaims against third party defendant BamBams, LLC alleging that the counterclaim-defendants, including BamBams, made false statements in advertisements regarding Expand-A-Banner and had tortiously interfered with plaintiff's business relationships.

BamBams moved to preclude Sherwood from offering: (1) Bank of America deposit slips and cancelled checks for 2006; (2) the balance sheet and P&L statements Sherwood obtained from its accountant; (3) the QuickBooks summaries and reports as evidence of gross profits and/or costs of banners sold and (4) testimony from either Sherwood's accountant or bookkeeper. BamBams sought this relief pursuant Federal Rule of Civil Procedure 37(c) and argued that it was appropriate because Sherwood had (1) failed to provide adequate damages computations and documentary support for its damages claims as required by Fed.R.Civ.P. 26(a)(1)(A)(iii), (2) failed to comply with the fact discovery deadline set forth in my Order, dated July 25, 2013 and (3) failed to disclose its accountant and bookkeeper as potential witnesses in its initial disclosures.

The Court of Appeals for the Second Circuit has identified four factors to be considered in determining whether preclusion is an appropriate sanction: (1) the party's explanation for the failure to comply with the [disclosure obligation]; (2) the importance of the testimony of the precluded [evidence]; (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. A showing of bad faith is not necessary to justify preclusion.

The court ruled that Sherwood failed to provide BamBams with an adequate computation of its damages, because Sherwood's 26(a)(1) initial disclosures merely provided BamBams with total dollar figures for each category of damages and were unaccompanied by any analysis whatsoever.

Notwithstanding Sherwood's noncompliance with Rule 26(a)(1), the court found that precluding Sherwood from seeking its past lost profits was not appropriate. In deciding whether to preclude Sherwood's claim, the court considered Sherwood's explanation for its noncompliance, the importance of this claim to Sherwood, the prejudice suffered by BamBams, if any, and the possibility of a continuance. Although Sherwood did not offer a compelling explanation for its delay in providing BamBams with a damages computation, the court found that the remaining factors weighed against preclusion and that Sherwood's noncompliance was harmless.

The court also granted BamBams' request to preclude Sherwood from using the belatedly produced deposit slips and cancelled checks. It was undisputed that Sherwood failed to comply with the court’s Order, which directed Sherwood to produce deposit slips for 2006 "no later than August 8, 2013" and set October 21, 2013 as the end of fact discovery. Sherwood failed to demonstrate that its noncompliance was either substantially justified or harmless, or that preclusion is improper. Accordingly, Sherwood was precluded from relying on those documents.

In light of Sherwood's failure to provide documentary support for its damages claims in its 26(a)(1) initial disclosures, as well as its failure to provide a complete and timely response to BamBams' discovery requests, the court found that Sherwood failed to comply with its obligations under Rule 26(a)(1). "[T]he federal discovery rules place a duty on a party to turn over not only proper materials of which he is aware, but also those of which he reasonably ought to have been aware." Hence, Sherwood's contention that it did not foresee in 2010 the need to retain certain materials did not absolve it of its obligations under Rule 26(a)(1), particularly in light of the fact that it failed to raise any objections in its responses to BamBams' request for documents. However, because "preclusion of evidence is a 'harsh remedy'" and "should be imposed only in rare situations," the court reasoned that preclusion would not be appropriate if Sherwood could provide a substantial justification for its conduct. "Substantial justification may be demonstrated where there is justification to a degree that could satisfy a reasonable person that parties could differ as to whether the party was required to comply with the disclosure request, or if there exists a genuine dispute concerning compliance."

Applying the factors discussed above, the court found that Sherwood's conduct did not warrant preclusion of the QuickBooks reports and summaries.
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