Venture Industries Corp. v. Autoliv Asp, Inc.

• Decision Date: 07 August 2006
• Docket Number: No. 05-1537.,05-1537.
• Citation: 457 F.3d 1322
• Parties: VENTURE INDUSTRIES CORPORATION, Vemco, Inc., Patent Holding Company, and Larry J. Winget, Plaintiffs-Appellees, v. AUTOLIV ASP, INC. (successor to Morton International, Inc.), Defendant-Appellant, and Autoliv, Incorporated, Defendant.
• Court: U.S. Court of Appeals — Federal Circuit

457 F.3d 1322

VENTURE INDUSTRIES CORPORATION, Vemco, Inc., Patent Holding Company, and Larry J. Winget, Plaintiffs-Appellees, v. AUTOLIV ASP, INC. (successor to Morton International, Inc.), Defendant-Appellant, and Autoliv, Incorporated, Defendant.

No. 05-1537.

United States Court of Appeals, Federal Circuit.

August 7, 2006.

John E. Anding, Drew, Cooper & Anding, of Grand Rapids, Michigan, argued for plaintiffs-appellees. With him on the brief was Thomas V. Hubbard. Of counsel on the brief was Richard W. McLaren, Jr., Welsh & Katz, Ltd., of Chicago, Illinois.

Peter G. Greene, Skadden, Arps, Slate, Meagher & Flom LLP, of New York, New York, argued for defendant-appellant. With him on the brief was Cyrus Amir-Mokri. Of counsel on the brief was William H. Horton, Cox, Hodgman & Giarmarco, P.C., of Troy, Michigan.

Before LINN, DYK, and PROST, Circuit Judges.

DYK, Circuit Judge.

Autoliv ASP, Inc. ("Autoliv") appeals the decision of the United States District Court for the Eastern District of Michigan denying Autoliv's motion for relief from judgment in favor of Venture Industries Corp., Vemco, Inc., Patent Holding Co., and Larry J. Winget (collectively "Venture"), pursuant to Federal Rule of Civil Procedure 60, sections (b)(2) and (b)(3). Venture Indus. Corp. v. Autoliv ASP, Inc., No. 99-75354 (E.D.Mich. July 15, 2005) (Judge Avern Cohn).¹ We conclude that the district court did not err in denying Autoliv's request under Rule 60(b)(2), but that the district court erred in failing to address whether Venture's use at trial of financial statements containing false information constituted "fraud, misrepresentation, or other misconduct" warranting relief under Rule 60(b)(3). Accordingly, we affirm in part, vacate in part, and remand.

BACKGROUND

This appeal presents the issue of whether the use of falsified information in financial statements by Venture's damages expert at trial entitles Autoliv to relief from judgment under either Rule 60(b)(2) or 60(b)(3) of the Federal Rules of Civil Procedure.

As part of the 1995 settlement of a patent dispute between Venture and Autoliv, Venture and Autoliv executed a supply agreement.² Under the supply agreement Autoliv was obligated to purchase airbag covers from Venture so long as Venture was capable of filling the order and Venture's bids were "reasonably competitive" with the bids of other suppliers. In the period after 1995, Autoliv purchased some covers from Venture, but also acquired covers from other sources.

On November 3, 1999, Venture filed suit against Autoliv alleging that Autoliv breached the supply agreement with respect to 38 airbag cover projects either by not allowing Venture to bid on the projects or by rejecting Venture's reasonably competitive bids. Venture's complaint also stated several patent law claims, including claims for correction of inventorship, declaratory judgment of unenforceability of patents Autoliv claimed to own, and declaratory judgment of infringement of patents Venture claimed to own. These claims were stayed by the district court pending the outcome of arbitration of these claims as required by a cross-license agreement, also executed as part of the settlement of the 1995 litigation. Other claims relating to the supply agreement were either stayed by stipulation of the parties or voluntarily dismissed.³ Discovery and other pretrial proceedings took place for the next several years.

Discovery proved to be contentious. For this reason, on March 5, 2002, the district court appointed a Special Master to oversee discovery. On November 14, 2002, Autoliv submitted to Venture the following request for production of documents:

Please produce each and every one of Venture's monthly, quarterly, and annual internal and external financial statements for the years 1995 to the present, whether reviewed, compiled or audited, and all documents relied upon, referred to, consulted or generated in preparing such statements, including your general ledgers, subsidiary ledgers, accounts payable and receivable ledgers, trial balances, accountants' work papers, bank statements, check registers and bank records. The term financial statements shall include, but is not limited to your balance sheets, income statements, profit and loss statements, cash flow statements, statements of net worth, statements of retained earnings and all notes to such financial statements.

J.A. at 648. Autoliv also requested financial information regarding the relationship between Venture and its subsidiaries. Venture responded that these requests "lack[ed] foundation in that Defendants have never contended Plaintiffs' financial condition was the basis for withholding the award of any program." J.A. at 668. Unsatisfied, Autoliv filed a motion to compel further responses on January 27, 2003. On March 10, 2003, the Special Master denied Autoliv's motion, concluding that "[r]equests for financial information in this lawsuit are appropriate, but these requests are overbroad." Rule 60(b) Opinion, slip op. at 6 (quoting Special Master report and recommendation).

On April 9, 2003, Autoliv, seeking additional financial information, filed a motion to compel the depositions of representatives of Venture and two of its subsidiaries pursuant to Rule 30(b)(6) of the Federal Rules of Civil Procedure. On September 23, 2003, the district court orally denied Autoliv's motion, concluding that "[a]ll of [Venture's] financial statements, its annual statements and its quarterly statements and its monthly statements should be produced," but that Autoliv's proposed deposition topic ("the basis for [the deponent's] contention that Venture's bid on each [project] would have been reasonably competitive with those quotes submitted by others") was "actually asking for Venture's position in the litigation." Id. at 6-7. The district court explained: "I prefer to wait until the final pretrial statement is prepared and we see which witnesses Venture is going to offer and the nature of their testimony . . . and then if there's some basis for asking that because you don't already have that, that's okay . . . ." Id. at 7.

Autoliv did not challenge or seek reconsideration of either the Special Master's or the district court's discovery rulings. Autoliv also did not submit further requests for the documents or alert the district court to any further problems with the discovery of Venture's financial information.

On November 4, 2003, trial began in Venture's action against Autoliv for breach of the Supply Agreement. Venture's expert witness on damages at trial was Aron Levko. To calculate Venture's damages, Levko relied on financial information from a manufacturing facility in Grand Blanc, Michigan, operated by a Venture subsidiary, Vemco, Inc., which would have produced the airbag covers for the projects awarded to Venture under the supply agreement with Autoliv. Levko utilized Venture's actual bids, some third party bids, and two independent production cost studies commissioned by Venture in 1997 and 1998. The cost estimates in the bids on which Levko relied did not separate variable costs (e.g., the costs of material and labor) from fixed costs (e.g., general overhead). Levko needed to separate fixed from variable costs for two reasons: (1) In addition to claiming lost profits, Venture claimed the right to recover the fixed costs attributable to the contracts; and (2) Levko needed to assign the correct amount of variable costs to the hypothetical bids he constructed for programs where no bid was submitted. To do this, Levko used the ratio of fixed to variable costs reflected in Grand Blanc's plant-wide financial statements.

In order to compute the material cost component of the variable costs, Levko needed to calculate the amount of the purchased raw material that would become unusable scrap. To verify the accuracy of the material (scrap) costs reflected in the bids, Levko compared the scrap rate reflected in the bids (15 percent), against the scrap rate discernable from actual production data (approximately 11 percent), and the scrap rate reflected in Grand Blanc's plant-wide financial statements (12.4 percent). To be conservative, Levko used the bid scrap rate of 15 percent in his calculations. Based on the bid data, Levko calculated a contribution margin of 25 percent.

On December 4, 2003, the jury found that Autoliv had breached the supply agreement and awarded Venture $27,576,001 in damages. The district court entered final judgment against Autoliv in the amount of the jury's verdict on January 20, 2004, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure.

During the discovery period, Venture filed for reorganization under the Bankruptcy Code. The bankruptcy court appointed Doeren Mayhew & Company, P.C. ("Doeren Mayhew"), a forensic accounting firm, to investigate certain aspects of Venture's financial condition, including "inter-company, shareholder and related party transactions." Rule 60(b) Opinion, slip op. at 3.⁴

After the entry of final judgment in this case, on March 10, 2004, Doeren Mayhew issued a report stating that "Venture had suffered multi-million dollar damages as a result of fraudulent related party transactions." Rule 60(b) Opinion, slip op. at 3-4. This conclusion called into question the representations in Venture's firm-wide financial statements.

On March 25, 2004, Doeren Mayhew issued a second report concerning the results of its "preliminary investigation of potential accounting irregularities." J.A. at 583. The report focused on Vemco and the Grand Blanc facility.⁵ As noted, the books and records of that facility had been used by Venture's damages expert at trial. Doeren Mayhew discovered "questionable accounting procedures and practices," a "[l]ack of proper accounting controls," and "potential accounting irregularities" and "errors," and concluded (1) that Grand Blanc's "material cost may have been understated by approximately $700,000 on a monthly basis"...