Karum Holdings LLC et al v. Lowe's Companies, Inc. et al

Filing 228

MEMORANDUM Opinion and Order Signed by the Honorable John Z. Lee on 11/21/17.Mailed notice(ca, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
KARUM HOLDINGS LLC,
KARUM GROUP LLC, and
KARUM CARD SERVICES
S.A. DE C.V., SOFOM, E.N.R.,

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Plaintiffs,
v.
LOWE’S COMPANIES, INC., and
LOWE’S COMPANIES MEXICO,
S. DE R.L. DE C.V.,
Defendants.

15 C 380
Judge John Z. Lee

MEMORANDUM OPINION AND ORDER
Lowe’s Companies, Inc. (“Lowe’s Inc.”) is a corporation that operates home
improvement stores in North America. Around 2007, Lowe’s Inc. decided to create a
program to provide private label credit cards to customers of Lowe’s Mexico. To
that end, Lowe’s Companies Mexico, S. de R.L. de C.V. (“Lowe’s Mexico”) entered
into two agreements with Karum Holdings LLC (“Karum Holdings”), Karum Group
LLC (“Karum Group”), and Karum Card Services S.A. de C.V., SOFOM, E.N.R.
(“KCS”) to implement the private label credit card program.

In 2015, Karum

Holdings, Karum Group, and KCS (“Karum”) commenced this lawsuit against
Lowe’s Inc. and Lowe’s Mexico (“Lowe’s”) for purportedly breaching the parties’
agreements. The parties are scheduled to proceed to trial on December 11, 2017.

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In April 2015, Karum submitted to Lowe’s a summary damages model and
estimate of damages. In anticipation of trial, Lowe’s has filed a motion in limine to
preclude Karum from offering testimony of its damages model and to exclude the
underlying model altogether.

For the reasons stated herein, Lowe’s motion is

granted insofar as it seeks to exclude Karum’s witnesses from testifying to the
damages model at trial.
Background
In March 2015, Karum provided initial disclosures of individuals likely to
have discoverable information to support its claims or defenses, as required by
Federal Rule of Civil Procedure 26(a). See generally Pls.’ Rule 26(a) Disclosures,
ECF No. 201. As part of its initial disclosures, Karum notified Lowe’s that Karum
Chairman and Chief Executive Officer, Peter Johnson, (“Johnson”) and Chief
Financial Officer, Russell Ouchida (“Ouchida”), among others, were persons with
knowledge of discoverable information relevant to the dispute. Id. at 2–4. Karum
did not designate any potential witnesses in the disclosure as experts. See id. at 2–
5.
In April 2015, Karum provided Lowe’s with a summary damages model and
estimate of damages, as required by Rule 26(a)(1)(A)(iii). See generally Defs.’ Mot.
in Limine No. 1 to Exclude Evidence of Pls.’ Damages Model (“Defs.’ Mot.”), Ex. D,
Lowe’s Computation of Damages April 22, 2015 (“Damages Model”), ECF No. 175-4.
At that time or sometime shortly thereafter, Karum advised Lowe’s that it “did not
intend to use a retained expert to present damages, but rather would rely on

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opinion testimony” from Johnson. See Karum’s Mem. Opp’n Defs.’ Mot. Strike Pls.’
Supplemental April 22, 2017 Damages Model (“Pls.’ Resp. Defs.’ Mot. Strike Revised
Damages”) at 1, ECF No. 126. Karum’s statement in this regard is worth quoting.
Johnson can opine as a lay witness under Federal Rule of Evidence 701
on the subject of Karum’s estimated damages by virtue of his
perception of Karum’s business gained through his management of
that business. But he might also qualify as an expert under Federal
Rule of Evidence 702, through the knowledge and experience he has
gathered from decades in the credit business. In fact, Johnson has
served on the audit committees of multiple public companies, and as
such, is recognized by the SEC to have financial expertise. Either way,
Lowe’s knows Johnson and will not be surprised by his testimony.
Id. n.1.
In September 2017, Lowe’s filed a motion in limine to preclude Johnson and
Ouchida from testifying as to Karum’s damages model. Defs.’ Mot. at 5–8, ECF No.
159. Lowe’s argues that any testimony by Johnson and Ouchida regarding the
model would not be rationally based on their own perceptions and would require
specialized knowledge in contravention of Federal Rule of Evidence 701. Id. In
response, Karum argues that it does not intend (and has never intended) to offer
lay-opinion testimony under Rule 701, but rather that Johnson will provide expert
testimony regarding the damages model under Rule 702. 1 Karum’s Opp’n Lowe’s
Mot. in Limine (“Pls.’ Resp.”) at 1, ECF No. 184.

Karum further asserts that

Johnson was disclosed as an expert “from day one” of this litigation and that, in the

Karum refers to Lowe’s suggestion that Johnson would provide lay opinion
testimony as an “epic misstatement” and “unadulterated misdirection.” Pls.’ Resp. at 1. Of
course, as we have seen, it was Karum who first raised this prospect in the first place.
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footnote quoted above, Karum “reminded” Lowe’s that it intended to call Johnson as
an expert witness under Rule 702. Id. at 1 n.1.
Legal Standard
Under Rule 26(a)(2), a party “shall disclose to other parties the identity of
any person who may be used at trial to present evidence” under Federal Rule of
Evidence 702.

Where, as here, the Court does not order a different disclosure

deadline, the disclosures must be made “at least 90 days before the date set for trial
or for the case to be ready for trial . . . .” Fed. R. Civ. P. 26(a)(2)(D)(i). Expert
witnesses who are not retained as experts or whose duties do not regularly involve
giving expert testimony need not provide a written expert report, but a party
offering any expert witness must always: (1) state the subject matter on which the
expert witness is expected to present evidence under Federal Rule of Evidence 702
and (2) provide a summary of the facts and opinions to which the witness is
expected to testify. Fed. R. Civ. P. 26(a)(2)(B), (C). “[A]ll disclosures under Rule
26(a) must be in writing, signed, and served.” Fed. R. Civ. P. 26(a)(4).
Proper disclosure of an expert witness requires formally designating the
witness as an “expert.” See Musser v. Gentiva Health Servs., 356 F.3d 751, 757–58
(7th Cir. 2004). Moreover, the “duty to disclose a witness as an expert is not excused
when a witness who will testify as a fact witness and as an expert witness is
disclosed as a fact witness.” Tribble v. Evangelides, 670 F.3d 753, 759–60 (7th Cir.
2012) (citing Musser, 356 F.3d at 757) (emphasis in original). “This is a strict but
well-founded requirement: ‘Knowing the identity of the opponent’s expert witnesses

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allows a party to properly prepare for trial.’” Id. at 759 (citing Musser, 356 F.3d at
757).
The exclusion of non-disclosed evidence, including an expert witness, “is
automatic and mandatory under Rule 37(c)(1) unless non-disclosure was justified or
harmless.” Musser, 356 F.3d at 758; see David v. Caterpillar, Inc., 324 F.3d 851,
857 (7th Cir. 2003); NutraSweet Co. v. X-L Eng'g Co., 227 F.3d 776, 785–86 (7th Cir.
2000). “The determination of whether a Rule 26(a) violation is justified or harmless
is entrusted to the broad discretion of the district court.” Caterpillar, 324 F.3d at
857 (quoting Mid-Am. Tablewares, Inc. v. Mogi Trading Co., Ltd., 100 F.3d 1353,
1363 (7th Cir. 1996)).
Failure to disclose a witness as an expert is usually not harmless because, for
example, “[w]ithout proper disclosures, a party may miss its opportunity to
disqualify the expert, retain rebuttal experts, or hold depositions for an expert not
required to provide a report.” Tribble, 670 F.3d. at 759–60 (citing Musser, 356 F.3d
at 758). Moreover, “a misunderstanding of the law does not equate to a substantial
justification for failing to comply with the disclosure” requirements. Musser, 356
F.3d at 758.
Finally, “[a] district court need not make explicit findings concerning the
existence of a substantial justification or the harmlessness of a failure to disclose.”
Caterpillar, 324 F.3d at 857 (quoting Woodworker's Supply, Inc. v. Principal Mut.
Life Ins. Co., 170 F.3d 985, 993 (10th Cir. 1999)).

However, in making this

determination, the district court should consider and weigh the following factors: (1)

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the prejudice or surprise to the party against whom the evidence is offered; (2) the
ability of that party to cure the prejudice; (3) the likelihood of disruption to the trial;
and (4) the bad faith or willfulness involved in not disclosing the evidence at an
earlier date. Caterpillar, 324 F.3d at 857; see also Bronk v. Ineichen, 54 F.3d 425,
428 (7th Cir.1995) (citing Spray–Rite Serv. Corp. v. Monsanto Co., 684 F.2d 1226,
1245 (7th Cir. 1982)).
Analysis
Lowe’s has moved to exclude testimony as to Karum’s damages model
because, it argues, such testimony requires an expert and Karum has failed to
disclose any witness as an expert as required by F.R.C.P. 26(a).

Lowe’s also

contends that Karum’s failure to disclose is not justified and is not harmless
because it is prejudicial. In response, Karum concedes that no witness may provide
lay-opinion testimony as to its damages model and instead asserts that it has
adequately disclosed Johnson as an expert witness. For the reasons stated below,
the Court agrees with Lowe’s and grants Lowe’s motion to exclude Karum from
offering any testimony regarding its damages model.
I.

Karum’s Rule 26(a) Violation
Karum argues that it timely disclosed Johnson as an expert witness in its

March 2015 Rule 26(a) disclosures and then “reminded” Lowe’s of this in a footnote
to a response brief in June 2017. See Pls.’ Resp. at 1; Pls.’ 26(a) Disclosures at 2–4;
Pls.’ Mot. Strike Revised Damages at 1.

As Karum sees it, its March 2015

disclosure of Johnson as a possible witness, and its accompanying disclosure of the

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damages model upon which Johnson will rely, were sufficient to disclose Johnson as
an expert witness. Pls.’ Resp. at 1. Lowe’s counters that, until now, Karum has
consistently represented that Johnson would provide lay-opinion testimony and
that Karum now claims otherwise because it realizes that it erred in believing that
Johnson would be allowed to do so. Defs.’ Reply Supp. Mot. in Limine No. 1 to
Exclude Evidence of Pls.’ Damages Model (“Defs.’ Reply”) at 1–4, 7, ECF No. 200.
The Court finds that Karum’s purported disclosure of Johnson as an expert
witness was plainly inadequate. Karum’s March 2015 Rule 26(a) disclosures listing
Johnson as a potential witness did not designate him—or anyone else for that
matter—as an expert witness. See Pls.’ Rule 26(a) Disclosures at 2–4; Musser, 356
F.3d at 757–58; Tribble, 670 F.3d at 759–60. Moreover, Karum affirmatively stated
in a June 2017 brief that “Karum advised Lowe’s that it did not intend to use a
retained expert to present damages, but rather would rely on opinion testimony
through Karum’s Chief Executive Officer, Peter Johnson.” 2 Pls.’ Resp. Defs.’ Mot.
Strike Revised Damages at 1. Karum’s statement suggests that it might not have
understood that it needed to disclose Johnson as a non-retained expert under Rule
26(a)(2)(C), but its possible misunderstanding of the law is not an excuse.

See

Musser, 356 F.3d at 758.

Karum’s footnote to this statement, suggesting that Johnson “might also qualify as
an expert,” Pls.’ Resp. Defs.’ Mot. Strike Revised Damages at 1, does not suffice as a
disclosure of Johnson as an expert witness—particularly here, where Karum affirmatively
stated that it intended to call him to provide only lay-opinion testimony as to the damages
model.
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Finally, Karum’s would-be disclosure of Johnson as an expert in its October
2017 response to Lowe’s motion in limine comes too late. Even if it were otherwise
adequate, with trial scheduled for December 11, 2017, Karum was required to
disclose an expert witness by September 12, 2017. Fed. R. Civ. P. 26(a)(2)(D)(i).
Moreover, Lowe’s apparently still has not received a summary of the facts and
opinions to which any purported expert witness is expected to testify, as required by
Rule 26(a)(2)(C), see Defs.’ Reply at 4, and the Court does not find Karum’s response
brief to Lowe’s motion in limine sufficient for this purpose. To the extent Karum
might assert that its damages model satisfies Rule 26(a)(2)’s disclosure
requirement, this extensive document never refers to Johnson or summarizes what
Johnson will say about the hundreds of figures, assumptions, and conclusions
contained in it.
For the foregoing reasons, the Court finds that Karum violated Rule 26(a) by
failing to disclose an expert witness to testify at trial to its damages model, and its
prior disclosures related to Johnson do not meet this obligation.
II.

Karum’s Failure to Disclose Experts Was Not Harmless or Justified
Having found that Karum has failed to timely disclose an expert witness to

testify regarding the damages model, the Court next considers whether the
violation was harmless or substantially justified.

See Musser, 356 F.3d at 758;

Caterpillar, 324 F.3d at 857.
As to harmlessness, the Court finds that the Caterpillar factors weigh in
favor of excluding Johnson as an expert witness. Lowe’s argues that it would be

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prejudiced if Johnson were allowed to testify as an expert at trial, because it had no
reason to take discovery regarding Johnson’s alleged qualifications or expertise.
Defs.’ Reply at 6.

According to Lowe’s, it is thus prejudiced in its ability to

challenge Johnson’s qualifications or the admissibility of his expert testimony under
Rule 702. Id. Moreover, although Lowe’s has a rebuttal expert ready to critique
Karum’s damages model, as Lowe’s sees it, it could have prepared more effectively,
or it may have chosen a different path, if it had better understood Johnson’s
purported qualifications and possessed a summary of the facts and opinions to
which he would be giving expert testimony, as required by Rule 26(a)(2)(C). Id.
Lowe’s also argues that, if Johnson were disclosed as an expert, it would have been
entitled to discover the communications between Johnson and Karum’s counsel that
he relied on in forming his expert opinion. Id. at 6 (citing Luminara Worldwide,
LLC v. RAZ Imports, Inc., 2016 WL 6774231, at *2–4 (D. Minn. Nov. 15, 2016)).
The Court finds that allowing Johnson to testify as a damages expert witness
at the upcoming trial would inflict undue prejudice upon Lowe’s. Although—as
Karum points out—Lowe’s has been familiar with Johnson since the beginning of
litigation in 2015 and had reason to believe he would testify in some capacity,
Karum has (until now) consistently stated that Johnson will be offered to provide
only lay-opinion testimony.

In doing so, Karum has given Lowe’s no reason to

request discovery as to his qualifications or his understanding of and role in
preparing the damages analysis. See Musser, 356 F.3d at 759 (finding prejudice
where defendants “had to rely on depositions conducted without the knowledge that

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. . . the witnesses would be used as experts”); Tribble, 670 F.3d at 760 (finding
prejudice where, even though defendants knew the witnesses were going to testify,
plaintiff’s disclosures indicated it would be only lay-opinion testimony).

And,

although Lowe’s has a rebuttal expert, the scope of his testimony appears to be
substantially limited to rebutting Karum’s underlying damages model, rather than
challenging Johnson’s own qualifications or understanding of the model.

See

generally Expert Report of James L. McGovern, ECF No. 171; Karum’s Mem. Law
Supp. Mot. Strike Portions of James McGovern’s Report, ECF No. 168-2; Defs.
Mem. Opp’n Pls.’ Mot. Strike Expert Report, ECF No. 214.
Further, the prejudice to Lowe’s is not curable without substantially
disrupting an expeditious trial in this case. As in Musser, there is not “ample time
remain[ing] for further discovery” to cure the prejudice before the December trial.
See 356 F.3d at 759.

And even if there were enough time before trial, “[l]ate

disclosure is not harmless within the meaning of Rule 37 simply because there is
time to reopen discovery.” Finwall v. City of Chi., 239 F.R.D. 494, 501 (N.D. Ill.
2006); see Aon Risk Serv., Inc. of Ill. v. Shetzer, 2002 WL 1989466, at *6 (N.D. Ill.
Aug. 27, 2002) (rejecting argument that late disclosure was harmless because there
was time to conduct deposition before trial); see also, e.g., Rick v. Toyota Indus.
Equip. Co., 1994 WL 484633, at *1 (N.D. Ill. Sept. 2, 1994) (rejecting that reopening
of discovery is curative of prejudice).
Additionally, the Court finds an element of willfulness in Karum’s failure to
disclose an expert witness to prove its damages in this case. As in Tribble, Karum

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knew early on that it would call Johnson to offer testimony regarding its damages
model, but it decided not to designate him as an expert under Rule 26(a)(2).
Perhaps Karum did not wish to expose its Chairman and CEO to the type of
extensive, probing discovery that would be required, had Johnson been designated
as an expert witness. Or perhaps Karum did not want to give Lowe’s cause to seek
discovery into Johnson’s qualifications or his understanding of the complicated
model. Whatever the reason, Karum made its election, and it is left to live with the
consequences. See Tribble, 670 F.3d at 759 (“They knew that they wanted to elicit
exactly the testimony that they did . . . but, nevertheless, they did not disclose [the
witness] as an expert.”).
Lastly, the Court also finds that Karum’s failure to disclose an expert witness
was not substantially justified. In Karum’s response to Lowe’s motion in limine,
Karum does not attempt to provide justification for its failure to disclose an expert
witness, but rather it insists that it had properly done so all along. See Pls.’ Resp.
at 1, 3–4. As noted, this assessment was incorrect. 3 Therefore, for the reasons
discussed, the Court finds that Karum failed to disclose Johnson or any other
individual as an expert witness as to damages under Rule 26(a)(2) and grants
Lowe’s motion on that basis.

One possible justification for Karum’s failure to disclose is that, until Lowe’s filed its
motion in limine, Karum incorrectly believed that Johnson’s testimony would be admissible
as lay-opinion testimony. However, as noted, such a belief “is not justification; at best, it’s
just a misunderstanding of law.” See Musser, 356 F.3d at 757. The alternative explanation
is that Karum knew all along that its damages model required expert testimony, and it
decided to “press[ ] their luck” without disclosing an expert witness. See Tribble, 670 F.3d
at 760. But this too cannot relieve Karum of its obligations under Rule 26(a)(2).
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III.

Why Rule 26(a)(2) Disclosures Matter
This case aptly illustrates the wisdom of Rule 26(a)(2).

In addition to

challenging Johnson’s anticipated expert testimony on inadequate disclosure
grounds, Lowe’s contends that his testimony does not satisfy the requirements of
Rule 702 and Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993). Of course,
when assessing the admissibility of expert testimony under Rule 702 and Daubert,
district courts employ a three-part analysis: (1) the expert must be qualified as an
expert by knowledge, skill, experience, training, or education; (2) the expert’s
reasoning or methodology underlying his testimony must be scientifically reliable;
and (3) the expert’s testimony must assist the trier of fact in understanding the
evidence or to determine a factual issue. Myers v. Ill. Cent. R.R. Co., 629 F.3d 639,
644 (7th Cir. 2010). The proponent of the expert bears the burden of demonstrating
to the Court—which must act as an evidentiary gatekeeper—that the expert’s
testimony would satisfy the Daubert standard by a preponderance of the evidence.
Lewis v. CITGO Petroleum Corp., 561 F.3d 698, 705 (7th Cir. 2009).
Karum argues that Johnson is qualified to give expert testimony on the
damages model by virtue of his relevant business experience and education, that
the information would be helpful to the trier of fact, and that Johnson’s proposed
testimony and the damages model are reliable. Pls.’ Resp. at 2–10. But Karum’s
failure to adequately disclose Johnson as an expert witness materially impedes the
Court’s ability evaluate whether Karum has met its burden on these issues. For
example, Karum asks the Court to rely on a few of Johnson’s statements in a

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deposition, and a two-page sworn affidavit, to assess his qualifications. Pls.’ Resp.
at 2–3. However, as discussed above, Karum has not provided Lowe’s or the Court
with a summary of what Johnson will actually say at trial about the damages
model, and the Court is left largely to guess as to what Johnson’s expert testimony
would be.
Of course, it may well be that Karum intends to have Johnson adopt the
entire damages model as his own, including all of the facts, assumptions, and
conclusions contained therein. But, if so, Johnson stated in his deposition that the
damages model was built not by him, but by “experts [with] very significant
expertise that worked for us in the portfolio management team,” supervised by
Ouchida. Johnson Dep. 378:8–25, ECF No. 175-3. Nor did Johnson oversee its
development. See id.; Ouchida Dep. 30:24–31:4, ECF No. 175-2. And, according to
Ouchida, the spreadsheet underlying the model was a joint effort of two employeeanalysts who “understood the . . . model much better than I do.” Ouchida Dep.
30:24–31:4. Taken together, Johnson and Ouchida’s statements raise significant
concerns that Johnson would be “just parroting the opinion” of other experts (whose
own purported expertise the Court has had no opportunity to review). See Dura
Auto. Sys. of Indiana, Inc. v. CTS Corp., 285 F.3d 609, 613 (7th Cir. 2002).
Rule 26(a)(2) was designed to prevent such dilemmas. For if Karum had
adequately disclosed Johnson as an expert, Lowe’s would have had the opportunity
to obtain discovery into Johnson’s qualifications, as well as his role in creating the
damages model that Karum would like to present at trial. Having failed to do so,

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Karum falls short of satisfying its burden to demonstrate, based upon the record,
that Johnson is qualified to testify as to the methodologies and conclusions set forth
in Karum’s damages model. See Myers, 629 F.3d at 644; Lewis, 561 F.3d at 705.
Conclusion
For the reasons stated herein, Lowe’s motion in limine [159] to exclude Peter
Johnson from offering testimony regarding Karum’s damages model is granted.
IT IS SO ORDERED.

ENTERED

11/21/17

__________________________________
John Z. Lee
United States District Judge

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