HCG Platinum, LLC v. Preferred Prod. Placement Corp.

• Decision Date: 17 October 2017
• Docket Number: No. 15-4157.,15-4157.
• Citation: 873 F.3d 1191
• Parties: HCG PLATINUM, LLC, Plaintiff Counter Defendant-Appellee, v. PREFERRED PRODUCT PLACEMENT CORPORATION, Defendant Counterclaimant Third-Party Plaintiff-Appellant, v. Right Way Nutrition LLC ; Kevin Wright; Ty Mattingly ; Annette Wright; Primary Colors, LLC; Weekes Holdings, LLC ; Julie C. Mattingly, Third-Party Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

873 F.3d 1191

HCG PLATINUM, LLC, Plaintiff Counter Defendant-Appellee,

v.PREFERRED PRODUCT PLACEMENT CORPORATION, Defendant Counterclaimant Third-Party Plaintiff-Appellant,

v.Right Way Nutrition LLC ; Kevin Wright; Ty Mattingly ; Annette Wright; Primary Colors, LLC; Weekes Holdings, LLC ; Julie C. Mattingly, Third-Party Defendants-Appellees.

No. 15-4157.

United States Court of Appeals, Tenth Circuit.

FILED October 17, 2017

Scott E. Schutzman, of the Law Offices of Scott E. Schutzman, Santa Ana, California, for Defendant Counterclaimant Third-Party Plaintiff-Appellant.

Kimberly N. Baum (Evan A. Schmutz, on the briefs), of Durham Jones & Pinegar, P.C., Lehi, Utah, for Plaintiff Counter Defendant-Appellee and Third-Party Defendants-Appellees.

Before HOLMES, SEYMOUR, and MORITZ, Circuit Judges.

HOLMES, Circuit Judge.

HCG Platinum, LLC ("HCG") and Preferred Product Placement Corporation ("PPPC") entered into a Manufacturer's Representative Agreement ("Marketing Agreement"), under which PPPC agreed to place HCG products into specified retailers in exchange for a percentage of the proceeds. Shortly thereafter, HCG filed the underlying breach-of-contract action against PPPC, seeking compensatory damages for PPPC's alleged breaches and a declaratory judgment that HCG properly terminated the Marketing Agreement on account of these breaches. PPPC counterclaimed for breach of contract and asserted third-party contract claims against individuals and entities associated with HCG.

In advance of trial, HCG moved to preclude PPPC from presenting evidence of damages, asserting that PPPC's initial (and never supplemented) disclosures provided an insufficient description and computation of PPPC's damages theory. Finding PPPC's initial disclosures insufficient and its request to compel discovery untimely, the district court excluded the damages evidence from PPPC's disclosures. Exclusion of that evidence, in turn, necessarily barred PPPC from pursuing its counterclaims, and the district court subsequently entered judgment against PPPC on that basis. PPPC appeals, arguing that the district court abused its discretion by imposing a discovery sanction (exclusion) that carried the force of dismissal, despite the fact that its discovery shortcomings resulted in only minimal and curable prejudice to HCG.

Exercising jurisdiction under 28 U.S.C. § 1291, we reverse the district court's judgment in favor of HCG on PPPC's counterclaims, and remand with instructions that the district court reconsider the exclusion of PPPC's damages evidence under an analysis that considers, among other things, the availability of lesser sanctions.

I

A

On March 30, 2010, HCG, a Utah-based manufacturer of dietary supplements, contracted with PPPC to "actively promote and market" HCG products. Aplt.'s App., Vol. II, at 73 (Manufacturer's Representative Agreement, dated Mar. 30, 2010). In exchange for these services, HCG agreed to pay PPPC a fee and staggered commissions based on PPPC's placement of HCG products within specified tiers of retailers.

Separately, the parties entered into a "Confidentiality Non-Circumvent Agreement" ("Non-Circumvention Agreement"), id. at 79, which recognized that the parties' relationship required PPPC to disclose confidential business information concerning its "customer lists and information relating to customers, marketing plans and strategies, ... details of negotiations with current partners and business associates, details of business opportunities or projects," and other information, id. As a result, the Non-Circumvention Agreement precluded HCG from "directly or indirectly interfer[ing] with, circumvent[ing], avoid[ing], by-pass[ing], obviat[ing], influenc[ing], or otherwise control[ling]" PPPC's "interests, relationship[s], agreements or arrangements" with any third-parties, id. at 80.

B

In the following year, HCG filed a breach-of-contract action in Utah state court, alleging that PPPC breached the Marketing Agreement by "fail[ing] to execute a sales agreement with all of the [retailers in HCG's top two tiers], except GNC, Europa, Bartell Drugs, Miejer [sic], [and] Rite Aid." Aplt.'s App., Vol. I, at 26 (Compl., filed May 9, 2011). After removing the matter to federal district court, PPPC filed a counterclaim and third-party complaint, alleging that HCG (and associated entities and individuals) breached the Marketing and Non-Circumvention Agreements by failing to pay outstanding commissions and "interfering" with PPPC's third-party relationships. Id. , Vol. II, at 70 (First Am. Countercl. and Third Party Compl., filed Nov. 23, 2011). PPPC therefore sought compensatory damages "in an amount according to proof," consequential damages, attorneys' fees and costs, and injunctive relief against future violations of the Non-Circumvention Agreement. Id. at 70–71.

On August 4, 2011, PPPC served initial disclosures providing the following "Computation of Damages":

1. Static Analysis: $1,840,243.50*

Based on May 11, 2011 Invoice for April sales to GNC, Europa Sports and Bartell Drug. $47,185.73 x 39 months (36 months until first termination date + 3 month notice period) = $1,840,243.50 (* This figure does not include sales to Meijer)

a. Note: Meijer Supermarkets has attempted to pay HCG $16,703.00 for products shipped in February and March 2011, but as HCG has not set up EDI (Electronic Data Exchange) and no payments were made. PPPC is owed $1,670.30 for these sales.

2. Dynamic Analysis: Based on projections in attached chart: 7,538,840.00^[1]

a. Existing Accounts: GNC, Europa Sports, Bartell Drug, Meijer with sales increasing gradually over the life of the Agreement: $3,838,700.00

b. Pending Accounts: Vitamin Shoppe, Vitamin World, Rite Aid, CVS, Walgreens, Savon, Wal-Mart, etc., that order HCG products over the life of the Agreement with sales to these retailers increasing gradually: $3,610,140.00c. All Accounts: Existing Accounts, other specialty market accounts (Vitamin Shoppe, Vitamin World) and other mass-market chains (Rite Aid, CVS, Walgreens, etc ...) that order HCG products over the life of the Agreement with sales to these retailers increasing gradually: $7,538,840.00

3. Additional Damages: To be determined

HCG has failed to pay PPPC 1% for every bottle sold. HCG has only paid PPPC for bottles sold to PPPC customers. These additional damages will be determined upon inspection of HCG books and records.

Aplt.'s App., Vol. VI, at 204–05 (numbering altered) (Initial Disclosures, dated Aug. 4, 2011). Thus, the damages aspect of PPPC's initial disclosures set forth several different calculations, each without evidential support or significant written explanation.

Over the course of the next two years, PPPC appears to have requested additional information concerning sales under the Marketing Agreement,² but claims that HCG provided only a "one page conclusory—conclusory statement" that "said $10 million, and [then] broke out what was sold through GNC." Dist. Ct. Docket No. 139, at 51 (Tr. Final Pretrial Conference, dated Sept. 2, 2015).³ Given that disclosure, PPPC subpoenaed GNC's records and allegedly discovered that HCG's discovery response "was off by a million dollars." Id. Nevertheless, PPPC never moved to compel more informative or meaningful discovery responses, nor supplemented its own damages disclosures to account for the alleged deficiency, and factual discovery ended on June 12, 2012.

Following dispositive motion practice, on March 5, 2015, the district court granted PPPC leave to serve follow-up interrogatories concerning HCG's ongoing product sales, and leave to file "additional motions" within two weeks.⁴ Aplt.'s App., Vol. I, at 12–13. PPPC served follow-up discovery requests on April 1, 2015, and HCG served responses on April 30, 2015. Upon receipt, PPPC deemed HCG's discovery responses inadequate (and supposedly raised the inadequacy during an informal meet and confer in June of 2015), but again made no effort to address the deficiency with the district court through filing a motion to compel or otherwise.

Rather, the parties prepared for the final pretrial conference and trial. In connection with that process, on August 11, 2015, HCG moved to preclude PPPC from presenting any evidence of damages under the Marketing Agreement. In doing so, HCG argued that PPPC's initial disclosures—i.e., the only document PPPC ever produced on the issue of damages—described projections that would be inadmissible without the benefit of expert testimony.

HCG reasoned that, because PPPC never designated a damages expert, it would be unable to put on any evidence of damages. PPPC responded to HCG's motion on August 24, 2015, by moving to compel more adequate responses to its supplemental interrogatories (served in April of 2015), and requesting that discovery be reopened on the issue of damages.

C

The district court resolved the parties' motions during the final pretrial conference on September 2, 2015. Beginning with HCG's motion, the district court stated that PPPC's failure to supplement the damages aspect of its initial disclosures, as required by Federal Rule of Civil Procedure 26(e), meant that PPPC could not introduce evidence of damages unless its discovery deficiency proved harmless or substantially justified within the meaning of Federal Rule of Civil Procedure 37(c)(1). See Dist. Ct. Docket No. 139, at 51, 28-29. The district court then described, at least initially, our established "four factor test" that (as relevant here) inquires regarding: (1) the prejudice or surprise to the party against whom the damages evidence would be offered, HCG; (2) HCG's ability to cure that prejudice; (3) the extent to which the introduction of new damages evidence would disrupt the trial; and (4) whether bad faith or willfulness motivated PPPC's discovery failures. Dist. Ct. Docket No. 139, at 29; accord id. at 39 ("this is going to boil down to those four factors"); see also Woodworker's Supply, Inc. v. Principal Mutual Life Insurance Co. , 170 F.3d 985, 993 (...