Wadler v. Bio-Rad Laboratories, Inc. et al

Filing 93

ORDER by Judge Joseph C. Spero granting in part and denying in part 82 Motion to Strike. (jcslc1S, COURT STAFF) (Filed on 10/17/2016)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 SANFORD S. WADLER, Case No. 15-cv-02356-JCS Plaintiff, 8 v. 9 10 BIO-RAD LABORATORIES, INC., et al., Defendants. Re: Dkt. No. 82 11 United States District Court Northern District of California ORDER GRANTING IN PART AND DENYING IN PART MOTION TO STRIKE REBUTTAL REPORT OF BRADLEY WENDEL 12 13 14 I. INTRODUCTION Plaintiff Sanford Wadler brings a whistleblower action against his former employer, 15 Defendant Bio-Rad Laboratories, Inc. (“Bio-Rad”), contending he was wrongfully terminated in 16 retaliation for investigating and reporting to Bio-Rad‟s upper-level management possible 17 violations of the Foreign Corrupt Practices Act (“FCPA”) in China. Wadler asserts claims under 18 the Sarbanes-Oxley Act, the Dodd-Frank Act, and California state law. The case is scheduled to go 19 to trial in January 2017 and the parties exchanged their expert witness disclosures on July 1, 2016, 20 pursuant to the schedule set by the Court. On August 17, 2016, Plaintiff disclosed his rebuttel 21 expert opinions, which included an expert report by Mr. W. Bradley Wendel, a law professor. 22 Bio-Rad now brings a Motion to Strike Rebuttal Report of Bradley Wendel (“Motion”), asserting 23 that Mr. Wendel‟s opinions are not properly characterized as rebuttal and instead, are new 24 opinions that should have been disclosed on July 1, 2016. Bio-Rad asks the Court to preclude Mr. 25 Wendel from testifying at trial, pursuant to Rule 37(c)(1) of the Federal Rules of Civil Procedure, 26 or in the alternative, to allow Bio-Rad to submit a rebuttal to Mr. Wendel‟s “affirmative opinions.” 27 A hearing on the Motion was held on Friday, October 14, 2016 at 9:30 a.m. For the reasons 28 1 stated below, the Motion is GRANTED in part and DENIED in part.1 2 II. BACKGROUND 3 A. 4 The question before the Court is whether the opinions of Plaintiff‟s expert, Mr. Wendel, 5 are properly characterized as rebuttal or if, instead, they are new opinions that should have been 6 disclosed by July 1, 2016, in time for Bio-Rad to introduce its own rebuttal expert to respond to 7 Mr. Wendel‟s opinions. Because Plaintiff offered the opinions of Mr. Wendel to rebut the 8 opinions of Bio-Rad‟s expert, Dr. Emre Carr, the Court briefly summarizes the relevant opinions 9 of both experts below. 10 1. Expert Report of E. Emre Carr Dr. Carr‟s experience and training is in the area of financial reporting for public 11 United States District Court Northern District of California The Expert Reports of Dr. Emre Carr and Mr. Wendel 12 companies. Declaration of Linda M. Inscoe in Support of Defendants‟ Motion to Strike Rebuttal 13 Expert Report of Bradley Wendel (“Inscoe Decl.”), Ex. A (Expert Report of Emre Carr, Ph.D., 14 CFA) (“Carr Report”), at 3-5. He is currently a director in the Capital Markets Group at Berkeley 15 Research Group and has been engaged as a consultant on subjects that include “financial 16 reporting, public company disclosures, executive compensation, U.S. GAAP, SEC filing 17 requirements, SEC securities issuance regulations, corporate internal controls, registered and 18 unregistered securities issuances, securities and commodities trading, due diligence related to 19 securities offerings, and fiduciary responsibilities of executives and directors.” Carr Report ¶ 11. 20 Previously, Dr. Carr was a Senior Financial Economist at the Division of Risk, Strategy, and 21 Financial Innovation at the SEC. Id. ¶ 12. In his report, Dr. Carr offered opinions relating to two subjects that are relevant to the 22 23 dispute at hand. First, he opined that Mr. Wadler “overstepped his role as general counsel” when 24 he refused to sign off on a legal representation letter that was required in connection with Bio- 25 Rad‟s SEC Form 10-K filing based on his belief that the accrual amount stated in the letter needed 26 to be increased. Id. at 11-15. According to Dr. Carr, U.S. GAAP requires the “disclosure or 27 1 28 The parties have consented to the jurisdiction of a United States magistrate judge pursuant to 28 U.S.C. § 636(c). 2 accrual of loss contingencies – circumstances involving uncertainty that will ultimately be 2 resolved when a future event occurs,” such as potential litigation or assessments against the 3 company. Id. at 9-10. He opines, however, that “the estimation of the accruals under U.S. GAAP 4 is a task for the accountants, not the General Counsel.” Id. at 10. General counsel‟s role is only 5 to provide “input . . . as to . . . the probability and amount of loss for legal contingencies,” Dr. 6 Carr opines. Id. Therefore, he concludes, “Mr. Wadler‟s responsibility was solely to provide the 7 facts and circumstances related to litigation, claims, and assessments against Bio-Rad,” and “[h]is 8 insistence that the accrual be increased demonstrated . . . a failure to observe the proper role of a 9 General Counsel in providing inputs for the accrual as opposed to dictating the accrual amount 10 itself.” Id. at 11, 14-15. Dr. Carr also challenged on the merits Mr. Wadler‟s assertion that the 11 United States District Court Northern District of California 1 accrual amount in the representation letter needed to be increased, opining that Mr. Wadler‟s 12 position reflected a lack of understanding of U.S. GAAP. Id. at 14. Dr. Carr also expressed opinions relating to Mr. Wadler‟s “severe allegations” to Bio- 13 14 Rad‟s Audit Committee on February 8, 2013. Id. at 15-18. According to Dr. Carr, Mr. Wadler‟s 15 report that “he had become aware of serious and prolonged violations of the FCPA in Bio-Rad‟s 16 business in China” that needed to be disclosed to government agencies and auditors was based on 17 evidence that was “far from sufficient to draw Mr. Wadler‟s conclusions,” even if his concerns 18 were “worth looking into further.” Id. at 15. In particular, he opined that “the set of sales 19 documents that Mr. Wadler presented did not contain discrepancies that supported Mr. Wadler‟s 20 conclusions.” Id. at 16. Among other things, Dr. Carr concluded that it was “not apparent from 21 the documents” that free products were being used as bribes in China, as Mr. Wadler suspected. 22 Id. 23 24 2. Expert Report of W. Bradley Wendel Mr. Wendel is a law professor whose area of expertise is legal ethics. Inscoe Decl., Ex. D 25 (Expert Declaration of W. Bradley Wendel) (“Wendel Report”) at 1-2. Mr. Wendel addresses in 26 his report obligations of counsel under the Model Rules of Professional Conduct, relevant state 27 law rules of professional ethics, and the regulations promulgated under the Sarbanes-Oxley Act 28 governing the duties of lawyers who represent public-traded companies. Id. at 5-6. Mr. Wendel 3 1 opines that based on these standards and the evidence that Mr. Wadler had about potential FCPA 2 violations in China, Mr. Wadler had an obligation to report his concerns to the Audit Committee 3 because an attorney has an ethical obligation not to “ignore the obvious.” Id. at 7-12. He further 4 challenges the opinion of Dr. Carr that a company‟s general counsel is “merely a source of inputs 5 into the accounting and financial reporting process.” Id. at 12. Mr. Wendel states that while “one 6 role of the General Counsel, with respect to the auditing and financial reporting process[ ] is to 7 provide inputs to accountants” “that role does not – and cannot – diminish the most important role 8 of a lawyer retained or employed by an organization, which is to ensure the organization‟s 9 compliance with all applicable legal standards and requirements.” Id. at 12-13. Therefore, Mr. Wendel concludes, Dr. Carr improperly faulted Mr. Wadler in his report for refusing to sign a 11 United States District Court Northern District of California 10 legal representation letter that reflected an accrual amount that he believed was incorrect. Id. at 12 13-14. Rather, Mr. Wendel states, it would have been unethical for Mr. Wadler to sign such a 13 representation letter. Id. at 14. 14 B. 15 In the Motion, Bio-Rad argues that Mr. Wendel‟s report does not rebut Dr. Carr‟s opinions The Contentions of the Parties 16 but instead, offers new opinions that should have been disclosed on July 1, 2016, the deadline for 17 expert disclosures. Motion at 4. According to Bio-Rad, Dr. Carr‟s opinions are “based on the 18 laws and standards of conduct applicable to public companies engaged in financial reporting” and 19 are aimed at showing that Mr. Wadler “did not have support for his allegations that Bio-Rad 20 violated the FCPA.” Id. at 5. Mr. Wendel, however, has no expertise in financial reporting or the 21 “standards of conduct applicable to executives responsible for internal controls over financial 22 reporting,” Bio-Rad asserts. Id. Nor does Mr. Wendel rely on GAAP or the securities laws that 23 are the basis for Dr. Carr‟s opinions. Id. And, Bio-Rad contends, Mr. Wendel does not “directly 24 respond to a single one of Dr. Carr‟s opinions.” Id. It is “telling,” Bio-Rad asserts, that Plaintiff 25 has submitted a rebuttal report by another expert, Dr. Donald Walker, with expertise in financial 26 reporting and accounting, to respond to Dr. Carr‟s substantive challenges to the concerns 27 expressed by Mr. Wadler to the Audit Committee and his reasons for initially refusing to sign the 28 representation letter. Id. 4 1 Plaintiff responds that Mr. Wendel‟s opinions are properly characterized as rebuttal 2 because he responds to two opinions of Dr. Carr. Opposition at 1. First, Plaintiff contends, Mr. 3 Wendel responds directly to Dr. Carr‟s opinion that Mr. Wadler overstepped his role as General 4 Counsel when he refused to sign the representation letter based on his disagreement with the 5 accrual amount. Id. at 2-3. In particular, Plaintiff asserts that “Professor Wendel rebutted Dr. 6 Carr‟s statement that Mr. Wadler had somehow acted outside of the scope of his role by refusing 7 to merely be a rubber stamp for finance when it came to signing off on a legal representation letter 8 for Bio-Rad‟s 10-K filing that stated that the accrual should remain unchanged.” Id. at 4. Second, 9 Plaintiff contends Mr. Wendel responds to Dr. Carr‟s opinion that Mr. Wadler “acted inappropriately by blowing the whistle in the first place.” Id. at 3. Specifically, he asserts, Mr. 11 United States District Court Northern District of California 10 Wendel rebuts Dr. Carr‟s opinion that the documents attached to Mr. Wadler‟s memo to the Audit 12 Committee provided sufficient support to trigger Mr. Wadler‟s ethical obligations as General 13 Counsel based on his legal duty not to ignore the obvious. Id. at 8. 14 Plaintiff rejects Bio-Rad‟s contention that Mr. Wendel is not a proper rebuttal expert 15 because he does not have the same qualifications or use the same methodology as Dr. Carr, 16 arguing that this is irrelevant to whether a report constitutes proper rebuttal. Id. at 6 (citing 17 Lindner v. Meadow Gold Dairies, Inc., 249 F.R.D. 625, 630, 637 (D. Haw. 2008); Fed. Trade 18 Comm’n v. Amazon.com, Inc., No. C14-1038-JCC, 2016 WL 4154284, at *2 (W.D. Wash. Feb. 9, 19 2016); Lott v. ITW Food Equip. Grp. LLC, No. 10 CV 1686, 2013 WL 3728581, at *23 (N.D. Ill. 20 July 15, 2013)). To the contrary, Plaintiff asserts, “the fact that Dr. Carr failed to consider [an] 21 attorneys‟ mandatory ethical duties when opining on the proper role of a general counsel only 22 serves to show how methodologically flawed his analysis is, which is „precisely the type of 23 rebuttal testimony‟ Rule 26 contemplates.” Id. at 6-7 (quoting Laflamme v. Safeway, Inc., No. 24 3:09-CV-00514, 2010 WL 3522378, at *3 (D. Nev. Sept. 2, 2010)). Plaintiff also notes that he 25 intends to bring a motion in limine to preclude Dr. Carr from offering testimony on the question of 26 whether Mr. Wadler‟s concerns about Bio-Rad‟s possible violation of the FCPA were justified, 27 asserting that this sort of opinion usurps the role of the jury. Id. at 9. 28 5 1 III. ANALYSIS 2 A. 3 “A party must make [expert] disclosures at the time[ ] and in the sequence that the court Legal Standards 4 orders.” Fed. R. Civ. P. 26(a)(2)(D)(i). Parties may introduce an expert opinion after the deadline 5 for expert disclosures only if it “is intended solely to contradict or rebut evidence on the same 6 subject matter identified by another party under Rule 26(a)(2)(B) or (C).” Fed. R. Civ. P. 7 26(a)(2)(D)(ii). “„Rule 37(c)(1) provides that a party failing to provide information required by 8 Rule 26(a) or (e) “is not allowed to use that information . . . to supply evidence on a motion, at a 9 hearing, or at a trial, unless the failure was substantially justified or is harmless.”‟” Fed. Trade Comm’n v. Amazon.com, Inc., No. C14-1038-JCC, 2016 WL 4154284, at *2 (W.D. Wash. Feb. 9, 11 United States District Court Northern District of California 10 2016) (quoting Hoffman v. Constr. Protective Servs., Inc., 541 F.3d 1175, 1179 (9th Cir. 2008) 12 (quoting Fed. R. Civ. Proc. 37(c)(1))). “Rule 37(c)(1) is a self-executing, automatic sanction 13 designed to provide a strong inducement for disclosure.” Goodman v. Staples the Office 14 Superstore, LLC, 644 F.3d 817, 827 (9th Cir. 2011) (internal quotations omitted). 15 B. 16 “Rebuttal testimony cannot be used to advance new arguments or new evidence.” 17 Columbia Grain, Inc. v. Hinrichs Trading, LLC, No. 3:14-CV-115-BLW, 2015 WL 6675538, at 18 *2 (D. Idaho Oct. 30, 2015) (citing Century Indem. Co. v. Marine Group, LLC, 2015 WL 5521986 19 at *3 (D.Or. Sept. 26, 2015). The test of whether an expert‟s opinion constitutes rebuttal or a 20 “new” opinion, however, is not “whether a rebuttal expert employs new testing or methodologies” 21 but instead, whether “a rebuttal attempts to put forward new theories outside the scope of the 22 report it claims to rebut.” Fed. Trade Comm’n v. Amazon.com, Inc., No. C14-1038-JCC, 2016 23 WL 4154284, at *2 (W.D. Wash. Feb. 9, 2016). The Court concludes that Mr. Wendel‟s opinions 24 relating to Mr. Wadler‟s ethical duties as Bio-Rad‟s general counsel in connection with the 25 representation letter directly address opinions expressed by Dr. Carr and therefore relate to the 26 same subject matter for the purposes of Rule 26(a)(2)(D)(ii). On the other hand, Mr. Wendel‟s 27 opinions relating to Mr. Wadler‟s ethical duties in connection with his interactions with the Audit 28 Committee go beyond the scope of Dr. Carr‟s opinions and therefore are not proper rebuttal. Discussion 6 First, Dr. Carr expresses opinions relating to Mr. Wadler‟s role in connection with the 1 2 representation letter that he initially refused to sign. Dr. Carr opines that once Mr. Wadler 3 provided the “inputs” for determining the accrual amount his job was done and it was improper for 4 him to refuse to sign the representation letter based on his belief that the accrual amount stated in 5 it was too low. Mr. Wendel directly addresses this opinion, opining that Dr. Carr‟s opinion is 6 inconsistent with the ethical obligations that apply to an attorney who signs a representation letter 7 on behalf of a public company. It is of no moment that Mr. Wendel is a law professor who is 8 looking to the rules of legal ethics whereas Dr. Carr is relying on his expertise in the field of 9 reporting requirements for public companies and corporate internal controls. The subject matter is the same, namely, whether it was proper for Mr. Wadler, as Bio-Rad‟s general counsel, to refuse 11 United States District Court Northern District of California 10 to sign a representation letter with an accrual amount that he believed was incorrect. Therefore, 12 the Court declines to strike the opinions of Mr. Wendel on that subject. Second, Dr. Carr expresses the opinion that the evidence Mr. Wadler attached to his letter 13 14 to Bio-Rad‟s Audit Committee “was not sufficient to draw Mr. Wadler‟s conclusions.” He did 15 not, however, opine in his report that Mr. Wadler should not have brought his concerns to the 16 attention of the Audit Committee because he did not have enough evidence to support his 17 concerns. Nor will Dr. Carr be permitted to offer any such opinions at trial as he did not include 18 them in his report.2 Therefore, Mr. Wendel‟s opinions relating to the ethical duty of general 19 counsel not to “ignore the obvious” and Mr. Wadler‟s ethical obligations to report to the Audit 20 Committee fall outside the scope of Dr. Carr‟s original opinions and are stricken. Finally, Bio-Rad‟s request that it be permitted to submit a “sur-rebuttal” in response to Mr. 21 22 Wendel‟s report is denied. 23 24 25 26 2 27 28 Of course, were Dr. Carr to opine at trial that Mr. Wadler did not have sufficient evidence to warrant bringing his concerns to the attention of the Audit Committee (or were Bio-Rad‟s counsel to rely on Dr. Carr‟s testimony to make such an argument), the Court would permit Plaintiff to introduce the opinions of Mr. Wendel on this subject so long as they were included in his report. 7 1 IV. CONCLUSION 2 The Motion is GRANTED in part and DENIED in part. 3 IT IS SO ORDERED. 4 Dated: October 17, 2016 5 6 7 ______________________________________ JOSEPH C. SPERO Chief Magistrate Judge 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 8

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