Silicon Knights, Inc. v. Epic Games, Inc.
ORDER granting in part 721 Motion to Exclude Evidence of and Argument on Damages and denying as moot 700 Motion for Leave to File Motion in Limine. Signed by Chief Judge James C. Dever III on 5/7/2012. (Sawyer, D.)
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
SILICON KNIGHTS, INC.,
EPIC GAMES, INC.,
On April 27, 2012, Epic Games, Inc. ("Epic" or "defendant") filed a motion to preclude
Silicon Knights, Inc. ("SK" or ''plaintiff') from offering evidence of, or arguments about, SK's
monetary damages at trial [D.E. 721]. Epic also filed a supporting memorandum with attached
exhibits [D.E. 722]. On May 1, 2012, SK responded in opposition and attached exhibits [D.E. 744].
On May 2,2012, the court held the pretrial conference, during which it heard arguments on Epic's
motion. As explained below, the court grants the motion in part and precludes SK from offering
evidence of, or arguments about, a computation of SK's monetary damages on SK's claims. If SK
prevails on any of its claims, it shall receive an award of nominal damages (Le., $1.00) as to any such
claim. This order, however, does not bar SK from offering evidence of, or making arguments about,
Epic's alleged damages on its counterclaims.
Federal Rule of Civil Procedure 26(a)(1)(A)(iii) requires a party to disclose to its opposing
party "a computation of each category of damages claimed by the disclosing party-who must also
make available ... the documents or other evidentiary material ... on which each computation is
based, including materials bearing on the nature and extent of injuries suffered ...." Fed. R. Civ.
P.26(a)(1)(A)(iii). A party cannot fulfill this requirement by providing "undifferentiated financial
statements; it requires a 'computation,' supported by documents." Design Strategy, Inc. v. Davis,
469 FJd284, 295 (2d Cir. 2006); see Bullard v. Roadway Express, 3 F.App'x418, 420-21 (6thCir.
2001) (per curiam) (unpublished); Frontline Med. Assocs., Inc. v. Coventry Health Care, 263 F.R.D.
567,569 (C.D. Cal. 2009) ("Simply producing financial statements ... is not sufficient."); Shock
v. Aerospace IntelUation Corp., No.3 :08cv304IRV!EMT, 2009 WL 595923, at *4-5 (N.D. Fla. Mar.
6, 2009). Instead, a party's Rule 26(a)(1 )(A)(iii) disclosure must state the types ofdamages that the
party seeks, must contain a specific computation of each category, and must include documents to
support the computations. See,~, Design Strategy. Inc., 469 FJd at 295.
Rule 26(e) requires a party to "supplement or correct its [Rule 26(a)] disclosure or response
... in a timely manner if the party learns that in some material respect the disclosure or response is
incomplete or incorrect ...." Fed. R. Civ. P. 26(e)(I)(A). Moreover, a party may supplement its
Rule 26(a)(l)(A)(iii) "computation" by producing an expert report (including documents) that
complies with Rule 26(a)(I)(A)(iii). Furthermore, when a party receives additional documents that
it intends to use to prove its damages, or when its previous damages computation becomes otherwise
inadequate, a party must supplement its Rule 26(a)(l)(A)(iii) computation. See Morrison Knudsen
Corp. v. Fireman's Fund Ins. Co., 175 F.3d 1221, 1229 n.2 (lOth Cir. 1999); Hertz v. Luzenac Am..
Inc., No. CIVA04CV196ILTBCBS, 2006 WL 994431, at *10 (D. Colo. Apr. 13, 2006)
When a party "fails to provide information or identify a witness as required by Rule 26(a)
or (e), the party is not allowed to use that information or witness to supply evidence ... at a trial,
unless the failure was substantially justified or is harmless." Fed. R. Civ. P. 37(c)(I). Rule 37(c)(l)
provides trial courts wide discretion to remedy violations ofRule 26(a) or Rule 26(e). In exercising
its "broad discretion," a trial court determines whether a party's failure to comply with Rule 26(a)
or Rule 26(e) was "substantially justified or is harmless" by considering
(I) the surprise to the party against whom the evidence would be offered; (2) the
ability ofthat party to cure the surprise; (3) the extent to which allowing the evidence
would disrupt the trial; (4) the importance ofthe evidence; and (5) the nondisclosing
party's explanation for its failure to disclose the evidence.
S. States Rack & Fixture, Inc. v. Sherwin-Williams Co., 318 F.3d 592,597 (4th Cir. 2003).
In its motion to exclude, Epic argues that
In its Rule 26(a) disclosures, SK identified several categories of alleged
injury for which it seeks to recover in this action but failed to provide any
computation of its alleged damages as required by Rule 26(a)(1)(A)(iii).
Instead, SK deferred to "expert analysis and computation."
In supplementing its initial disclosures, SK never provided a computation of
its alleged damages.
SK proffered the report ofTerry Lloyd for its expert analysis and computation
of damages. SK did not proffer any other expert witness on the issue of
On December 22,2011, this Court excluded Lloyd's report and precluded
him from testifying about damages in this action.
Pursuant to Rule 37(c)( 1), the failure to disclose information required under
Rule 26(a) results in that information being precluded from use at trial unless
the failure to disclose was substantially justified or harmless. SK's failure to
disclose its computation of damages was neither substantially justified nor
Def.'s Mot. Exclude [D.E. 721] 1-2. In its memorandum, Epic notes that SK served its initial
disclosures on October 3, 2007. Def.'s Mem. Supp. Mot. Exclude [D.E. 722] 1. In a section of its
initial disclosures entitled "COMPUTATION OF DAMAGES," SK identified several categories of
alleged injury and stated,
As set forth in its Complaint, SK has been severely damaged by Defendant and SK
has several bases upon which it may recover compensatory and punitive damages, as
well as other relief, from Epic. Those specific damages calculations will be the
subject ofexpert analysis and computation. In good faith, however, SK believes that
its damages will total several million dollars due to fraud and other tortuous [sic]
conduct, breach of contract and substantial damages from ill-gotten gains from
collecting the license fees under false pretenses should be disgorged.
Docwnents in support ofSK's damages will be produced upon a mutually agreeable
date, to the extent such docwnents have not already been produced. In addition,
some of the docwnents in support ofSK's monetary damages are in the possession,
custody, and control of third parties, including Defendant. SK anticipates that its
continuing investigation of this matter and/or discovery in this action may lead to
additional information, witnesses, and/or docwnentation relevant to SK's damages
in this action, and SK expressly reserves its right to supplement this damage
computation with such additional information, witnesses, expert analysis, and/or
docwnentation as required by the Federal Rules of Civil Procedure.
Def.' s Mem. Supp. Mot. Exclude, Ex. 1 ("SK's Initial Disclosures") 18-19.
On July 15,2008, SK served its first supplemental initial disclosures. Def.'s Mem. SUpp.
Mot. Exclude, Ex. 2 ("SK's First Supplemental Initial Disclosures"). SK provided the identical
disclosure as to "COMPUTATION OF DAMAGES." rd. 25.
On March 23, 2009 and December 4,2009, SK again supplemented its initial disclosures.
See Def.' s Mem. SUpp. Mot. Exclude, Ex. 3 ("SK's Third Supplemental Initial Disclosures"); Def.' s
Mem. Supp. Mot. Exclude, Ex. 4 ("SK's Third [sic] Supplemental Initial Disclosures"). These
supplements do not include a section entitled "COMPUTATION OF DAMAGES." See SK's Third
Supplemental Initial Disclosures; SK's Third [sic] Supplemental Initial Disclosures.
On December 4, 2009, non-expert discovery closed and on June 4,2010, expert discovery
closed. See Mar. 5,2010 Order Amending Scheduling Order [D.E. 492] 1; Oct. 2, 2009 Order
Amending Scheduling Order [D.E. 400] 2; Scheduling Order [D.E. 33].
Before the close of expert discovery, SK produced the report of its damages expert, Terry
Lloyd ("Lloyd") ("Lloyd Report") [D.E. 564-1-3], and Lloyd's report in rebuttal to Epic's claimed
damages ("Lloyd Rebuttal Report") [D.E. 621-2]. The Lloyd Report contains a "computation of
each category of damages" claimed by SK and a discussion of the docwnents or other evidentiary
material on which the computation was based. See Lloyd Report [D.E. 564-1] 41; d Fed. R. Civ.
P.26(a)(l)(A)(iii). The Lloyd Report constitutes a supplement under Rule 26(e) and satisfied SK's
obligation under Rule 26(a)(I)(A)(iii). See Fed. R. Civ. P. 26(e). On May 26,2010, Epic deposed
Lloyd. See [D.E. 564-4].
On July 8, 2011, Epic moved to exclude Lloyd's reports and testimony [D.E. 620]. The
motion and SK's opposition were fully briefed. On November 30,2011, the court held a hearing on
Epic's motion to exclude. On December 22,20 II, the court granted Epic's motion to exclude expert
evidence from Lloyd regarding SK's damages and in rebuttal to Epic's damages. See Lloyd Order
[D.E.697]. The court determined that Lloyd's reports and proposed testimony were based on an
unreliable methodology and therefore were not admissible. Id. 10-32.
In opposing Epic's motion to exclude, SK initially focuses on whether Epic complied with
Rule 26(a)(I)(A)(iii) and Rule 26(e). Specifically, SK argues that Epic's initial disclosures and
supplements concerning its computation of damages under Rule 26(a)( 1)(A)(iii) were inadequate.
Pl.'s Mem. Opp'n Mot. Exclude [D.E. 744] 3,9-10, 16-17; see Pl.'s Mem. Opp'n Mot. Exclude,
Ex. 6 ("Epic's Initial Disclosures") 7-8. Thus, according to SK, if this court precludes SK from
offering at trial evidence of, or arguments about, SK's monetary damages, then the court likewise
must bar Epic from offering at trial evidence of, or arguments about, Epic's monetary damages. PI.' s
Mem. Opp'n Mot. Exclude 3, 16-17.
The court rejects SK's argument. The record shows that Epic timely produced Phillip
Beutel's ("Beutel") expert report ("Beutel Report") during discovery in this case [D.E. 636-7]. Just
as the Lloyd Report was SK's Rule 26(e) supplement to its Rule 26(a)(1)(A)(iii) computation, the
Beutel Report constitutes Epic's Rule 26(e) supplement to its Rule 26(a)(1)(A)(iii) computation.
See Fed. R. Civ. P. 26(e). The Beutel Report remains in the case; therefore, this court need not
explore whether Epic's initial disclosures, independent of the Beutel Report, satisfied Rule
26(a)(1)(A)(iii). In contrast to the Beutel Report, the Lloyd Report is no longer in this case as a
result ofthe court's December 22,2011 ruling. Accordingly, this court must determine whether,
independent ofthe Lloyd Report, SK complied with Rule 26(a)(1 )(A)(iii) and Rule 26(e). IfSK did,
it may present such evidence and argument to the jury. If SK did not, the court must determine the
remedy under Rule 37(c)(I) for SK's non-compliance.
Not surprisingly, SK argues that, independent of the Lloyd Report, it complied with Rules
26(a)(I)(A)(iii) and 26(e). First, SK notes that it stated in its initial and first supplemental initial
disclosures that it expected its damages for the various claims in its complaint to be "several million
dollars ...." Pl.'s Mem. Opp'n Mot. Exclude 4. SK then argues that these statements were
adequate damages computations. See id. However, a Rule 26(a)(I)(A)(iii) disclosure must include
"more than a lump sum statement of the damages allegedly sustained." City & Cnty. of S.F. v.
Tutor-Saliba Corp., 218 F.R.D. 219, 221 (N.D. Cal. 2003). Instead, the rule "contemplates some
analysis," including an analysis of the damages sought as to each claim. Id. at 221-22 (collecting
cases). SK's statements that it expected its damages to be "several million dollars" lack precision
and analysis. Accordingly, SK did not satisfy its Rule 26(a)(I)(A)(iii) obligation with these
statements. Moreover, SK stated in the same documents that its "specific damages calculations will
be the subject of expert analysis and computation." SK's Initial Disclosures 18; SK's First
Supplemental Initial Disclosures 25. This statement bolsters the conclusion that SK did not intend
for its "several million dollars" statement to serve as its Rule 26(a)(1 )(A)(iii) disclosure. Rather,
SK clearly intended to supplement under Rule 26(e).
SK also argues that it responded to Epic's request for "documents relating to ... damages"
with "several million pages of documents." Pl.'s Mem. Opp'n Mot. Exclude 4 (quotation and
emphasis omitted). I However, SK does not contend that the disclosed documents include a specific
Specifically, SK states that it disclosed its
(1) profit and loss statements; (2) books; (3) ledgers; (4) audited and unaudited
annual reports; (5) tax returns and associated schedules; (6) every videogame
development contract; (7) every amendment to those videogame development
contracts; and (8) the various schedules of man-hours, expenses, and anticipated
profits connected with those videogame development contracts.
Pl.'s Mem. Opp'n Mot. Exclude 2. SK also notes that it disclosed specific exhibits that may have
some bearing on its damages. Id.9.
damages computation. See id. Disclosing damages-related documents alone, without disclosing a
computation based on such documents, does not satisfy a party's Rule 26(a)(l)(A)(iii) obligation.
See,~, Design Strate~, Inc., 469 F.3d at 295; Bullard, 3 F. App'x at 420-21; Gould Paper Corp.
v. Madisen Corp., 614 F. Supp. 2d 485,490 (S.D.N.Y. 2009) (holding that defendants' disclosure
of "six hundred and twenty-nine pages . . . which document [ed] and detail [ed] the basis for
[defendants'] damage claim" did not satisfy Rule 26(a)(l )(A)(iii) (quotation omitted)).
Similarly, SK argues that Epic served interrogatories and requests for admission that raised
damages-related issues to which SK responded. PL's Mem. Opp'n Mot. Exclude 4-5; see PL's
Mem. Opp'n Mot. Exclude, Ex. 4 ("Epic's Second Set of Interrogatories") 9-11.2 However, SK does
not argue (or produce evidence showing) that it included in its interrogatory responses or in its
responses to requests for admission specific damages computations supported by documentary
evidence. See Gillum v. ICF Emergency Mgmt. Servs., L.L.C., Civil Action No. 08-314-C-M2,
2009 WL 1458200, at *3 (M.D. La. May 21, 2009) (holding that "vague assertions of damages"
contained in interrogatory answers do not fulfill a party's Rule 26(a)(l ) (A) (iii) obligation); cf. Fed.
R. Civ. P. 26(a)(1)(A)(iii).
Next, SK argues that it produced "multiple witnesses on fmancial and damages related topics
...." Pl.'s Mem. Opp'n Mot. Exclude 5 (emphasis omitted). For example, SK notes that before
deposing SK's president, Dennis Dyack ("Dyack"), and SK's chief financial officer, Mike Mays
("Mays"), under Rule 30(b)(6), Epic stated its intention to ask Dyack and Mays damages-related
questions. Id. 8. SK then argues that "Epic voluntarily elected not to pursue damages inquiries"
when deposing Dyack and Mays. Id. SK also contends that Epic received information about SK's
2SK attached a copy ofEpic's interrogatories to its opposition memorandum. SK, however,
did not attach its answers to those interrogatories. See Epic's Second Set ofInterrogatories. Thus,
the court does not know SK's responses. Moreover, Epic's interrogatories do not lend themselves
to responses that would include specific damages computations supported by documentary evidence.
Cf. Fed. R. Civ. P. 26(a)(l)(A)(iii).
damages during the deposition ofRobert DePetris ("DePetris"), a fonner SK vice president. See id.
In response to SK's argument, Epic noted at oral argument on the motion to exclude that it
did ask Mays about damages during SK's Rule 30(b)(6) deposition and that Mays stated that he
"[had] not calculated an amount" ofSK's damages. See Mays Dep. [D.E. 621-4] 6 (Dep. 20). As
for DePetris, DePetris did testify generally as to the revenue SK expected to generate from Too
Human. See DePetris Dep. [D.E. 533-18] 53-57 (Dep. 210-25). However, DePetris did not
compute SK's alleged damages, much less offer documents to support such a computation. See id.
Moreover, Epic correctly notes that making witnesses available is not a substitute for the
computation and analysis that Rule 26(a)(1)(A)(iii) requires.
Design Strategy. Inc., 469
F.3d at 295-96.
In Clayman v. Starwood Hotels & Resorts Worldwide, 343 F. Supp. 2d 1037 (D. Kan. 2004),
plaintiff made an argument similar to SK's when trying to defend its failure to otherwise disclose
a damages computation. Id. at 1047 ("Plaintiff claims that defendant has not been prejudiced
because defendant had the opportunity to discover infonnation about plaintiff s damages through the
deposition of Dr. Younger, and therefore such non-compliance [with Rule 26(a)(I)(A)(iii)] is
harmless."). The court rejected plaintiffs argument, holding that "defendant [was] entitled to a
specific computation of plaintiffs damages, and [was] entitled to ... the documents and other
evidentiary material on which such computation is based." Id; see Sauer v. Exelon Generation Co.,
LLC, No. 10 C 3258, 2011 WL 3584780, at *9-10 (N.D. Ill. Aug. 15,2011). As in Clayman, Epic's
ability to depose witnesses who had some knowledge of SK's damages did not satisfy Rule
In sum, independent of the Lloyd Report, SK did not comply with Rule
Rule 26(e) required SK to supplement its Rule 26(a)(1)(A)(iii) disclosure "in a timely
manner" after SK learned that its disclosure was materially "incomplete or incorrect ...." See Fed.
R. Civ. P. 26(e). SK did not provide a damages computation other than the ones contained in the
Lloyd Report. Therefore, in light ofthe expiration of the period for SK to disclose its experts, see
Mar. 5,2010 Order Amending Scheduling Order 1, this court's order excluding Lloyd and his reports
made SK's statement that its damages would "be the subject of expert analysis and computation,"
see SK's Initial Disclosures 18; SK's First Supplemental Initial Disclosures 25, materially incorrect
on December 22, 2011. See Fed. R. Civ. P. 26(e)(I)(A). Moreover, the court's exclusion of the
Lloyd Report resulted in SK's having failed to disclose to Epic a damages computation that complied
with Rule 26(a)(l)(A)(iii).
Since December 22, 2011, SK has yet to supplement its Rule
26(a)(I)(A)(iii) computation pursuant to Rule 26(e). The court therefore must determine the
appropriate remedy under Rule 37.
Rule 37(c)(l) gives a court discretion to preclude a party from introducing evidence to
establish damages when the party fails to make a Rule 26(a)(1 )(A )(iii) disclosure or fails to properly
supplement its Rule 26(a)(I)(A)(iii) disclosure pursuant to Rule 26(e). See S. States, 318 F.3d at
597-98; Nelson-Salabes. Inc. v.
Dev.. LLC, 284 F.3d 505, 512 n.1O (4th Cir. 2002);
see also Gould Paper, 614 F. Supp. 2d at 490-91 (holding that defendants' statement in their Rule
26(a) disclosure that they intended to prove counterclaim damages through expert testimony, and
defendants' subsequent failure to disclose such expert-based evidence,justified application ofRule
37(c)(l) to limit defendants to seeking nominal damages); AVX Corp. v. Cabot Corp., 252 F.R.D.
70, 76-81 (D. Mass. 2008) (holding that plaintiffs failure to timely supplement its damages
computation subjected plaintiff to Rule 37(c)(1), and that plaintiff could not use the supplemental
response in opposing defendant's motion for summary judgment). Under Rule 37(c)( 1), the court's
inquiry focuses on whether SK's failure to comply with Rule 26(a)(I)(A)(iii) and Rule 26(e) was
"substantially justified or is harmless." Fed. R. Civ. P. 37 (c)(1). SK has the burden ofproving either
substantial justification or harmlessness. See,~, S. States, 318 F.3d at 596-98; AVX Corp., 252
F.R.D. at 78.
Two cases from other circuits are instructive in assessing whether SK' s failure to comply was
substantially justified or is harmless. See Fed. R. Civ. P. 37(c)(1). In MicroStrategy Inc. v. Bus.
Objects. S.A., 429 F.3d 1344 (Fed. Cir. 2005), the Federal Circuit applied Fourth Circuit law and
affirmed the district court's disallowance, under Rule 37(c)(1), of plaintiff's non-expert damages
evidence. See id. at 1356-58. In Micro Strategy Inc., plaintiff disclosed that it intended to prove its
alleged damages through an expert's testimony and his three reports. Id. at 1353. Shortly before
trial, the district court excluded plaintiffs expert damages evidence, finding that the evidence was
based on "a flawed methodology ...." Id. After the district court excluded plaintiffs expert
damages evidence, plaintiff did not supplement its Rule 26(a)(I)(A)(iii) disclosure. Id. at 1356.
However, at trial, plaintiff attempted to introduce non-expert evidence to prove damages. Id. The
district court found that plaintiff had violated Rule 26(e) and disallowed the evidence pursuant to
Ru1e 37(c)(I). Id. On appeal, plaintiff argued that the district court abused its discretion under
Southern States and that the district court shou1d have admitted the proffered damages evidence. Id.
at 1356-57. The Federal Circuit disagreed, holding that plaintiffs new damages evidence surprised
and prejudiced defendant, that plaintiff "cou1d not cure the surprise without postponing trial and
reopening discovery," and that most ofthe proposed evidence had been in plaintiffs possession "for
over a year before trial." Id. at 1357. The Federal Circuit conceded that the proffered damages
evidence was of great importance to plaintiff; however, this fact did not "tip the scale in favor of
[plaintiff], particularly where [plaintiff] alone [was] to blame for creating [the] situation." Id.
The Fifth Circuit reached a similar result inCQ, Inc. v. TXU Mining Co .. L.P., 565 F.3d268,
279-80 (5th Cir. 2009). In CQ. Inc., after the district court excluded plaintiffs expert damages
evidence, the court granted defendant's motion in limine to prevent plaintiff from offering other,
non-expert damages evidence. Id. at 279. The district court did so after finding that plaintiff had
violated Rule 26(e) by failing "to provide notice of [its] alternative computations ...." Id. The
Fifth Circuit affirmed. Id. at 280. Considering factors similar to the Southern States factors, the
Fifth Circuit held that the district court did not abuse its discretion under Rule 37(c)(1). Id. 3 The
Fifth Circuit cited plaintiff s failure to "offer any justification for its failure to disclose the damages
calculations or their underlying evidence," and concluded that "given the advanced stage of the
litigation, permitting the new evidence would not have been harmless." Id. Like the Federal Circuit
in MicroStrategy Inc., the Fifth Circuit recognized the evidence's importance to plaintiff, but held
that this factor did not establish that the district court had abused its discretion when the evidence
was "not essential to [plaintiffs] underlying recovery." Id. 4
The court follows the Federal and Fifth Circuits and excludes SK's non-expert-based
damages evidence pursuant to Rule 37(c)(1). The Southern States factors support this result. See
S. States, 318 F.3d at 597.
First, SK's disclosure of a new damages computation more than two years after the close of
discovery and approximately one week before trial would surprise and prejudice Epic. See Def.'s
Mem. Supp. Mot. Exclude 5. In opposition to this conclusion, SK argues that Epic only "cursorily
alleges ... that it has been prejudiced" and that Epic "does not provide a single supporting fact."
Pl.'s Mem. Opp'n Mot. Exclude 14. However, SK's statement does not reflect Epic's argument.
Epic correctly states that it "has no notice of the amount of monetary damages SK may now claim
The Fifth Circuit considered four factors in determining whether the district court had
abused its discretion: "(1) [plaintiff s] explanation for its failure to disclose the evidence, (2) the
importance ofthe evidence, (3) the potential prejudice to [defendant] in allowing the evidence, and
(4) the availability of a continuance." CQ, Inc., 565 F.3d at 280.
The Fifth Circuit also affirmed the district court's allowing plaintiff to seek damages of
$110,419.17 because plaintiff, in addition to its dismissed expert damages computation, had timely
disclosed a proper damages computation reflecting that amount. CQ, Inc., 565 F.3d at 280 n.7.
Despite SK's suggestion to the contrary, see Pl.'s Mem. Opp'n Mot. Exclude 11, SK has never
provided such an alternative computation to Epic.
or the calculations SK has used to determine that amount." Def.'s Mem. Supp. Mot. Exclude 5.
Rule 26(a)(l)(A)(iii) and Rule 26(e) are designed to provide an opponent that computation and
analysis during discovery. See A VX Corp., 252 F.R.D. at 79. The opposing party may then prepare
to meet that evidence via cross examination and via evidence in its rebuttal case (such as its own
expert witness). SK's failure to comply with Rule 26(a)( 1)(A)(iii) and Rule 26(e) has deprived Epic
of this opportunity, and thus has prejudiced Epic. Indeed, the prejudice to Epic is manifest if SK
were allowed to present at trial a damages computation never revealed to Epic before it came from
the witnesses' lips at trial. SK also argues that "Epic possesses the documents underlying SK's
damages claims" and therefore will not be surprised by SK's damages evidence at trial. See PI. 's
Mem. Opp'n Mot. Exclude 15-16. However, SK erroneously assumes that Epic should be able to
glean a computation of each category of SK's damages as to each claim from the "several million
pages of documents" disclosed during discovery. Id. 4 (emphasis omitted). The court rejects this
assumption and finds that Epic would be surprised and profoundly prejudiced by whatever new
computation of damages SK might seek to propound and support.
Second, the trial will begin on May 14, 2012. Witnesses are scheduled to come from
throughout the United States and Canada. Even if SK immediately provided Epic with a new
damages computation supported by documentary evidence, SK's new computation would not cure
Epic's surprise and prejudice. Rather, Epic undoubtedly would want to depose whoever these
witnesses are about these new computations and would want to have time for Beutel to analyze and
respond to the new computations. Discovery, however, is long closed, and the May 14,2012 trial
date is nigh. This court cannot cure the surprise SK's untimely disclosure would cause without
cancelling the trial and rescheduling it. The case has been pending since 2007 and the trial has been
set. Good cause simply does not exist to delay trial and reopen discovery. See MicroStrate~ Inc.,
429 F.3d at 1357 ("[Plaintiff] could not cure the surprise without postponing trial and reopening
Third, SK does not adequately explain its failure, either during discovery or in the almost five
months since the court issued its December 22, 2011 order excluding Lloyd and his reports, to
provide Epic with a damages computation in compliance with Rule 26(a)(1 )(A)(iii) and Rule 26(e).
Fourth, proving damages is admittedly important to SK' s case; therefore, the fourth Southern
States factor favors SK. However, this single factor does not tilt the scale in SK's favor when it "is
only one of five [factors] ... [and SK] alone is to blame for creating this situation," id., and when
the evidence "is not essential to [SK's] underlying recovery."
CQ. Inc., 565 F.3d at 280.
Accordingly, Southern States supports excluding evidence and argument ofSK's alleged damages
pursuant to Rule 37(c)(I).
In opposition to this conclusion, SK emphasizes that its failure to supplement its Rule
26(a)(I)(A)(iii) disclosure was not in bad faith. See Pl.'s Mem. Opp'n Mot. Exclude 12-14. Thus,
SK suggests that it is entitled to a warning and an opportunity to correct its mistake before the court
applies "a severe sanction" and grants Epic's motion. rd. In support, SK cites Mutual Federal
Savings & Loan Ass'n v. Richards & Associates. Inc., 872 F.2d 88 (4th Cir. 1989), and Hathcock
v. Navistar International Transportation Corp., 53 F.3d 36 (4th Cir. 1995), for the proposition that
the court must find that SK acted in bad faith before granting Epic's motion and that the court must
give SK an opportunity to cure the Rule 26 violation. See P1.'s Mem. Opp'n Mot. Exclude 12-14.
The cited cases do not help SK. Notably, in both cases, the Fourth Circuit considered
whether the district courts had made the findings necessary to support default judgment sanctions
under Rule 37(b). See Fed. R. Civ. P. 37(b)(2)(A)(vi); Hathcock, 53 F.3d at 40-41; Richards &
5 Had SK made such supplementation shortly after the court issued its December 22, 2011
order excluding Lloyd and his reports, or after Epic first sought to exclude SK's damages evidence
on January 13,2012 [D.E. 700], this court may have been able to craft a remedy short ofexclusion.
However, SK's idleness until the eve oftrial ensures that the second and third Southern States factors
(Le., the ability ofEpic to cure the surprise and the extent to which a solution would disrupt the trial)
support granting Epic's motion.
Assocs., 872 F.2d at 92-94. But Rule 37(b) and Rule 37(c)(l) require different analyses. In
Southern States, the Fourth Circuit made clear that, unlike a default judgment sanction under Rule
37(b), an exclusion sanction under Rule 37(c)(l) need not be supported by a finding that the
nondisclosing party acted in bad faith. S. States, 318 F.3d at 596 ("[E]xcluding evidence only when
the nondisclosing party acted in bad faith would undermine the basic purpose of Rule 37(c)(l):
preventing surprise and prejudice to the opposing party[;] [a]nd, requiring proof that the
nondisclosing party acted in bad faith would improperly shift the burden of proof away from that
party on the exclusion issue." (citation omitted)); accord Design Strategy. Inc., 469 F.3d at 296.
Epic's motion to exclude rests on Rule 37(c)(I), not Rule 37(b). See Def.'s Mot. Exclude
1. Thus, Southern States, not Hathcock or Richards & Associates, controls the analysis. Moreover,
granting Epic's motion is not "tantamount to a dismissal" ofSK's claims, as SK suggests. See PI.' s
Mem. Opp'n Mot. Exclude 12. In addition to declaratory relief, see Compi. [D.E. 1] " 152-55, SK
may still seek and recover nominal damages on all ofits claims. Specifically, at trial, SK will assert
claims under North Carolina law for fraud, negligent misrepresentation, breach ofwarranty, breach
of contract (under common law and statute), and unfair competition (under common law and the
Unfair and Deceptive Trade Practices Act ("UDTPA")). See id." 93-104, 118-32, 140-51; Mar.
24,2011 Order [D.E. 605] 1-2. Under North Carolina law, "once a cause of action is established,
[a] plaintiff is entitled to recover, as a matter oflaw, nominal damages ...." Hawkins v. Hawkins,
331 N.C. 743, 745,417 S.E.2d 447,449 (1992) (quotation and alteration omitted); see also D.G. II.
LLCv. Nix, 713 S.E.2d 140, 149-50 (N.C. Ct.App. 2011)(discussinganawardofnominaldamages
in a breach ofcontract action); United Leasing Corp. v. Guthrie, 192 N.C. App. 623, 634, 666 S.E.2d
504,511 (2008) (discussing an award of nominal damages on fraud, negligent misrepresentation,
and UDTPA claims); Martin-Kahill Ford Lincoln Mercury. Inc. v. Skidmore, 62 N.C. App. 736,739,
303 S.E.2d 392,393-94 (1983) (discussing an award of nominal damages on a breach of warranty
claim). Thus, SK will be able to present evidence (~, testimony from one ofSK's officers) that
Epic's alleged conduct damaged SK, but will not be allowed to provide a computation of damages. 6
Moreover, in accordance with the North Carolina patternjury instructions, the court will instruct the
jury to award nominal damages (Le., SI.OO) on any claim that it finds that SK proved.
In opposing Epic's motion, SK also cites two district court opinions in which courts have
declined to exclude evidence under Rule 37(c)(l). See Pl.'s Mem. Opp'n Mot. Exclude 13-15.
However, the cited cases are distinguishable. In Millers Capital Insurance Co. v. Big Star Tobacco
Warehouse of Wilson. N.C., No. 5:00-CV-739-BO(2), 2001 WL 36105902 (E.D.N.C. Nov. 27,
2001) (unpublished), the court held that "exclusion of testimony under [Rule 37(c)(l) is] a severe
sanction, appropriate only for willful and substantial abuse of the discovery process." Id. at *6.
Because the court found that defendant's failure to timely disclose its expert witnesses' reports under
Rule 26(a)(2)(B) had been a negligent mistake that defendant was willing and able to correct well
before the yet-to-be-scheduled trial, the court denied plaintiffs motion to exclude defendant's
experts from testifying. Id. However, Millers Capital predated the Fourth Circuit's decision in
Southern States. In Southern States, the Fourth Circuit effectively overruled the portion of the
Millers Capital court's opinion requiring a finding of"willful and substantial abuse ofthe discovery
process" to invoke Rule 37(c)(l). Compare Millers Capital, 2001 WL 36105902, at *6, with S.
States, 318 F.3d at 597-98. 7
The amount of such evidence that SK will be allowed to introduce at trial will be subject
to the court's discretion under Federal Rule of Evidence 403 given that SK is limited to recovering
nominal damages on each of its claims.
Millers Capital is factually distinguishable. In Millers Capital, the court rested
its decision in part on defendant's willingness to immediately disclose the evidence at issue, and the
fact that plaintiff would receive this evidence well before trial. See Millers Capital, 2001 WL
36105902, at *5-6. Here, in contrast, SK has known that its Rule 26(a)(l)(A)(iii) disclosure was
inaccurate since the court issued its order excluding Lloyd and his reports on December 22, 2011.
Moreover, SK has known of Epic's alleged prejudice from SK's failure to disclose an alternative
damages computation since Epic first sought to exclude evidence ofand argument on SK's damages
on January 13, 2012 [D .E. 700]. Nonetheless, SK still has not provided a new damages computation
to Epic, and the trial will begin on May 14, 2012. SK suggests that it is willing and able to
Additionally, SK relies on Carotek. Inc. v. Textron Fastening Systems. Inc., Civil Action No.
3:0S-CV-39S-MKR-DCK, 2008 WL 1777829 (W.D.N.C. Apr. 16,2008) (unpublished). See PPs
Mem. Opp'n Mot. Exclude 15. In Carotek. Inc., the court applied the Southern States factors and
determined that defendant's failure to disclose certain documents that plaintiff had requested during
discovery did not support excluding those documents. Carotek, Inc., 2008 WL 1777829, at *3-4.
The court found that plaintiff could have mitigated any surprise that it incurred by "avail[ingJ itself
ofdiscovery mechanisms ... in a more timely fashion" and that defendant's failure to disclose the
documents stemmed from defendant's good faith and reasonable belief that plaintiff already
possessed the documents. Id. In addition, the case had yet to be scheduled for trial. Id. at *4.
Unlike in Carotek. Inc., discovery here had ended when SK's Rule 26(a)(1)(A)(iii) disclosure
became inadequate. Accordingly, Epic's only remedy for SK's failure to attempt to supplement its
disclosure was Epic's Rule 37(c)(1) motion, which Epic made promptly. Moreover, as noted, after
the court issued its order excluding Lloyd and his reports, SK could not have credibly believed that
its Rule 26(a)(1 )(A)(iii) disclosure was adequate. Carotek. Inc. merely reflects the principle that the
outcome ofSouthem States's prescribed balancing test is fact-specific. The facts here, unlike those
in Carotek. Inc., support exclusion.
Finally, nothing in this order precludes SK from presenting financial information or other
evidence to undercut Epic's damages calculations. Notably, at oral argument on the motion to
exclude, the parties discussed whether certain money that SK received from Microsoft was revenue
or a loan. They also referenced certain costs that may arguably be deducted in calculating Epic's
supplement its Rule 26(a)(I)(A)(iii) disclosure "if the Court believes that SK should somehow
provide further information regarding its damages to Epic before trial ...." PI.' s Mem. Opp' n Mot.
Exclude 16. SK's belated attemptto supplement its Rule 26(a)(1 )(A)(iii) disclosure, however, falls
short. Unlike the Millers Capital defendant's credible statement that it would cure its Rule 26
violation in a way that would mitigate plaintiff's prejudice, SK's offer to supplement its Rule
26(a)(I)(A)(iii) disclosure would not cure the obvious prejudice to Epic.
damages on its copyright counterclaim. Nothing in this order prevents SK from presenting relevant
evidence on damages in defending against any of Epic's counterclaims.
In sum, in accordance with this order, the court GRANTS IN PART Epic's motion to exclude
evidence of and argument on damages from SK [D.E. 721]. The court DENIES AS MOOT Epic's
motion for leave to file a motion in limine [D.E. 700].
SO ORDERED. This
-+- day of May 2012.
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