Peterman v. Herbalife Int'l Inc

• Decision Date: 29 June 2010
• Docket Number: No. DA 09-0643.,DA 09-0643.
• Citation: 2010 MT 142,234 P.3d 898,356 Mont. 542
• Parties: David PETERMAN, Plaintiff and Appellant,v.HERBALIFE INTERNATIONAL, INC., and Herbalife of America, Inc., Respondents and Appellees.
• Court: Montana Supreme Court

356 Mont. 542

234 P.3d 898

2010 MT 142

David PETERMAN, Plaintiff and Appellant,v.HERBALIFE INTERNATIONAL, INC., and Herbalife of America, Inc., Respondents and Appellees.

No. DA 09-0643.

Supreme Court of Montana.

Submitted on Briefs April 28, 2010.

Decided June 29, 2010.

For Appellant: James Greenfield, Attorney at Law, Radnor, Pennsylvania.

For Appellees: Sean P. Goicoechea, Christensen Moore Cockrell Cummings & Axelberg, P.C., Kalispell, Montana, Charles E. Patterson, Morrison & Foerster, LLP, Los Angeles, California.

Justice W. WILLIAM LEAPHART delivered the Opinion of the Court.

¶ 1 Plaintiff David Peterman sued Defendants Herbalife International Inc. and Herbalife of America Inc. (collectively, “Herbalife”) for inter alia, breach of contract. The District Court for the Eleventh Judicial District, Flathead County, dismissed Peterman's case on account of discovery abuses. Peterman appeals this and two other pretrial rulings. We conclude that the District Court did not abuse its discretion in dismissing the case and, therefore, affirm.

¶ 2 The dispositive issue on appeal is whether the District Court erred in dismissing Peterman's case as a sanction for discovery abuse.

FACTUAL AND PROCEDURAL BACKGROUND

¶ 3 Herbalife produces weight-loss and dietary supplements, as well as “personal care” products. Herbalife is a multilevel marketing business (or, “MLM”) that sells its wares worldwide through a network of independent distributors. Under this pyramidal sales structure, an interested person becomes a distributor through an existing distributor, called a “sponsor.” The aspiring distributor submits an application for distributorship and purchases a “distributor kit” from Herbalife. When Herbalife accepts the application of distributorship, the person becomes a distributor, entitled to purchase Herbalife products at a discounted price. The sponsor and the line of distributors between him and the peak of the distribution pyramid become the “upline” of the new distributor. The new distributor may then recruit additional distributors, who become his “downline.”

¶ 4 An Herbalife distributor may earn compensation in a number of ways. First, the distributor, after purchasing Herbalife products at discount, may resell them at retail for profit. Second, if the distributor purchases (for resale) a certain quantity of Herbalife products in a specified period, he becomes a “supervisor,” entitled to earn royalties from the sales of distributors in his downline. Third, Herbalife offers distributors who purchase a still greater volume of products the option to enter into an agreement in which the distributor forswears participation in any other MLM and in return becomes entitled to additional bonus payments based on downline sales.

¶ 5 Peterman, along with his wife Sharon, applied and became a distributor with Herbalife in 1985. Peterman enjoyed a measure of success as a distributor, eventually qualifying for and entering into Herbalife's bonus program. In 1998 Peterman and Sharon dissolved their marriage, and their dissolution decree awarded Peterman's interest in the Herbalife distributorship to Sharon.

¶ 6 The present case began a decade ago in 2000, when Peterman and a handful of other distributors sued Herbalife, alleging breach of contract, as well as various tort claims that were subsequently dismissed. Regarding the contract claim, Peterman asserted that Herbalife “denied [him] royalty and bonus checks to which he was entitled and stripped away portions of his downline organization.” For relief, Peterman sought damages “for all losses sustained ... as a result of [Herbalife's] breach of contract.”

¶ 7 In 2001 Herbalife sought discovery of Peterman's federal and state income tax returns for 1993 through 2000. Peterman objected that the request was “unduly burdensome, oppressive and harassing, and [was] not reasonably calculated to lead to discovery of admissible evidence.” An initial trial date in 2004 was vacated. In 2006, on the eve of the second trial date (which was also later vacated), Herbalife served its third request for production of documents on Peterman, seeking all documents relating to Peterman's income from 1994 to the present, including tax returns. Peterman objected generally that the period for discovery had ended, that Herbalife was only attempting to disrupt Peterman's trial preparations, and that the requests were duplicative. Peterman then repeated his specific objection that the request was overbroad, burdensome, and beyond the scope of discovery. Nevertheless, Peterman admitted, “In the unlikely event that any responsive documents are used in preparation of plaintiff's expert report on damages, plaintiff will deliver such documents to defendant in conjunction with the expert report.”

¶ 8 In June 2006 Herbalife responded to the objections by moving to compel production of Peterman's tax returns from 1993 to 2006. In the alternative Herbalife sought, as a sanction, to exclude any evidence of Peterman's damages. Herbalife contended that discovery of the tax returns was proper and was necessary to determine if Peterman had “met [his] duty to mitigate [his] damages.” Peterman opposed Herbalife's motion. He argued that his “mitigation attempts began after July 1998, when he transferred his interest in his distributorship to his former wife, Sharon,” and that he had produced all evidence within his control of his income for the period of 2000 to 2005. He also argued that Herbalife was seeking his tax returns for 1998 and earlier years for reasons other than mitigation.

¶ 9 The District Court addressed the motion to compel at a pretrial hearing in July 2006. At the hearing, counsel for Peterman conceded that Peterman did not possess tax returns for 1998 onwards because he had failed to file his tax returns. Despite this oversight, Peterman's counsel assured the District Court, Peterman was planning to file: “He is actively working on the problem with an entity that helps people deal with issues regarding past returns, trying to put those returns together now. But they have not, as of this time, been filed.” Peterman also asserted that he did not possess his tax returns for 1998 and earlier, but that they were in the possession of his ex-wife Sharon. The District Court indicated that it was granting Herbalife's motion to compel. The court reasoned that the tax returns were discoverable and that Peterman, though he did not possess his tax returns, was required to retrieve them from either Sharon or the IRS. The District Court concluded that sanctions were not appropriate at that time:

The only sanction that would be available to the Court would be to prevent [Peterman] from providing any evidence as to income during those years, or any damages during those years, which would be a sanction that to this Court would be draconian to say the least, would be beyond what should be sanctioned in this case.

The District Court did not issue a written order compelling discovery. Nor did the court directly address the tax returns (for 1998 and forward) that Peterman had not, at that time, prepared.

¶ 10 In September 2006 Peterman provided Herbalife with his and Sharon's joint tax returns for 1996 and 1997. He further indicated that he was trying to determine if the IRS had destroyed his tax returns for 1993 to 1995. Regarding his taxes for the years after 1998, Peterman wrote, “Dave's returns for the years 1999-2005 are being prepared and will be produced as soon as they are completed.... We expect to deliver tax documents to you by November 15.” In January 2007 Peterman's counsel wrote to Herbalife's counsel that the IRS could not find copies of Peterman's tax returns for 1993 to 1996 and that Peterman had not completed his tax returns for 1998 onwards. Peterman subsequently authorized Herbalife to seek his tax returns for 1993 to 1996 from the IRS, but Herbalife was no more successful with the IRS than Peterman had been. Ultimately, Peterman did not file tax returns for the years beginning in 1998.

¶ 11 In July 2008, two years after the District Court granted Herbalife's motion to compel, Herbalife moved to dismiss the case on the grounds that, despite the court's order, Peterman had not produced his tax returns for 1993 to 1995 and “if he filed them,” Peterman had not produced his tax returns for 1998 and forward. Herbalife argued that by failing to produce his tax returns, Peterman had delayed the case for two years and impaired Herbalife's ability to present a defense. Peterman countered that he had not, in fact, failed to comply with the District Court's order compelling discovery. Peterman reasoned that he had requested his tax returns for 1993 to 1997 from both Sharon and the IRS and that he had forwarded to Herbalife all the returns that he received (those for 1996 and 1997). Further, Peterson continued, he never completed tax returns for 1998 and onwards, so the District Court could not compel him to produce those nonexistent documents. Peterman blamed Herbalife for the delay and argued that given the District Court's previous statement about sanctions being “draconian,” Peterman had no reason to believe that he even faced the threat of sanctions.

¶ 12 The District Court agreed with Herbalife's arguments and dismissed the case. The court reasoned that Peterson had completely failed to comply with Herbalife's discovery requests and the court's order compelling discovery. This evidenced disregard for the court's authority and disregard for the rights of Herbalife. The District Court also concluded that alternative sanctions would not be appropriate and that dismissing the case would serve to alleviate its “excessive back-log of cases.”

¶ 13 This appeal followed.

STANDARD OF REVIEW

¶ 14 We employ an abuse of discretion standard in reviewing a district court's imposition of sanctions for discovery abuse. In re Marriage of Lundstrom, 2009 MT 400, ¶¶ 15-16, 353 Mont. 436, 221 P.3d 1178.

DISCUSSION

¶ 15 Whether...