Exact Software North America, Inc. v. Infocon, Inc.

Filing 379

Order : defendant Infocon's motions to preclude expert testimony, strike summary exhibit and preclude evidence about treatment of settlement proceeds for tax purposes are overruled, as provided herein. (Related Doc # 365 )(Related Doc # 366 )(Related Doc # 367 ). Judge James G. Carr on 10/19/2011.(S,AL)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OHIO
WESTERN DIVISION

Exact Software NA,

Case No. 3:03CV7183
Plaintiff

v.

ORDER

Infocon Systems, Inc.,
Defendant

This case began as a collection action by a software manufacturer, Exact Software NA,
against one of its “resellers” (i.e., distributors), Infocon Systems, Inc. After protracted proceedings,
Exact and Infocon settled for a payment of $4,000,000 by Exact to Infocon.
Shortly after reaching (but not yet disclosing) the settlement, Infocon notified its attorneys,
J. Fox DeMoisey, of Louisville, Ky., and John Carey, of Toledo, Ohio, that it was terminating their
services. Infocon provided no explanation for that action.
DeMoisey and Carey first learned of the settlement when Infocon’s successor counsel
notified the undersigned that the parties had settled the case. Immediately on learning of the
settlement, DeMoisey filed a charging lien with this court.
Infocon opposed that action and asked that I allow it to receive the entire proceeds of the
settlement forthwith. I declined to do so, ordering a portion of the settlement proceeds to be paid into
this court’s escrow account. I have released some of those funds to DeMoisey and Carey.
Infocon opposes release of any of the remaining fund to DeMoisey. In prior orders, I have
agreed with it that no contingent fee agreement existed between it and him. Thus, to the extent that

DeMoisey is entitled to additional funds for his services, he must establish his entitlement on a
quantum meruit basis.1
Pending are three motions in limine that Infocon has filed, in which it seeks to: 1) preclude
expert testimony by three attorneys on DeMoisey’s witness list (Doc. 365); 2) strike DeMoisey’s
summary exhibit representing the time he and his associate spent while representing Infocon (Doc.
366); and 3) preclude evidence about how the two principals of Infocon treated the settlement
proceeds for tax purposes. (Doc. 367).
For the reasons that follow, I deny the motions – though, as to one, denial is conditional on
DeMoisey’s providing discovery as requested by Infocon.
With regard to the motion to preclude expert testimony by three attorneys, DeMoisey has
stated he will be calling only one of those attorneys – namely, Mr. Carey, his former co-counsel. I
see no basis on which to exclude his testimony in toto, as Infocon demands. That motion is
overruled.
I likewise overrule the motion to strike the time and task summary. Infocon challenges the
reliability of the data on which DeMoisey bases that exhibit. The basis for its challenge is the
undisputed fact that DeMoisey’s record of time and task underlying the summary is to a considerable
extent a post hoc reconstruction, rather than being composed of contemporaneous entries.
That fact goes to weight, not admissibility. In other circumstances, the law permits a party
to work backwards from disparate data to a conclusion. See U.S. v. Hart, 70 F.3d 854, *860 n.8 (6th
Cir. 1995) (referencing computation of defendant’s tax liability by “net worth” method).

1

As I have also previously ruled, I will adjudicate this dispute without a jury.
2

Infocon complains that it does not have access to the underlying data on which DeMoisey
bases his reconstruction. DeMoisey resists disclosure of that data on, inter alia, grounds of privilege
and burdensomeness.
I do not find his contentions well-taken.
With regard to burdensomeness, he will have to do no more work than he had to do in the
first instance to prepare the data on which he bases his summary. If he did not record what he used
and where he found it, he should have done so. Given the unusual circumstance of presenting a
reconstruction, at least in part, of his time and tasks, he should have foreseen Infocon’s demand for
access to the underlying data.
With regard to DeMoisey’s claim of privilege, the materials that Infocon wants, and which
alone are pertinent, are records relating solely to DeMoisey’s work for Infocon. As the client, it was
entitled ab initio to such information; as an adversary, it is entitled to such information in due course
in pretrial discovery. There is no need for DeMoisey to disclose information about any other clients,
the time he spent working for them, or the work he did for them. Disclosure contravenes no
privilege.
While I deny the motion to strike, I do so conditioned on production of the underlying data
on which DeMoisey bases his summary of his time and tasks.
Finally, I overruled the motion to preclude evidence as to the tax treatment of the settlement
proceeds. Most broadly viewed, DeMoisey claims that Infocon’s two principals engaged in a scheme
to deprive not just himself, but others – including the IRS – of funds to which he and they were
entitled. According to him, that scheme, involved, in part, taking different positions at different
times as to the nature of the settlement.

3

According to DeMoisey, Infocon’s principals at one time took the position that the settlement
proceeds were for damages, and did not involve an asset sale by Infocon.
That occurred during malpractice litigation between Exact and one of its former attorneys.2
Later, however, Infocon’s principals treated the funds for tax purposes as proceeds of an asset sale.
Thereby, they obtained capital gains, rather than ordinary income treatment.
I conclude that, in light of DeMoisey’s contentions, evidence as to variant statements by
Infocon’s principals as to the nature of the settlement bears on their plan, scheme, motive and intent
in their dealings with DeMoisey and opposing effort to secure additional compensation.
Allowing DeMoisey to question the principals about former testimony under oath and
statements on income tax returns will not, as Infocon alleges, convert this into a tax case. Whether
the tax returns were accurate does not matter. What matters is whether, under different
circumstances, either or both the principals characterized the nature of the settlement differently in
different circumstances.
If one or both of the principals stated inconsistent views about the nature of the settlement
(damages vs. asset sale), that fact bears on DeMoisey’s contention that they intended to deprive
DeMoisey of his fair share of the settlement proceeds. As such, this evidence is admissible under
Fed. R. Evid. 404(b).

2

As a result of certain actions and inaction on the part of the former attorney, I had, at one
point in this case, stricken Exact’s complaint and entered judgment by default in favor of Infocon
on its counterclaim against Exact. This led to Exact’s malpractice suit against the lawyer.
Apparently, her law firm contributed to the $4,000,000 settlement of the underlying litigation in this
case. It did so, according to DeMoisey, in part on the basis of the representation by Infocon that the
settlement represented an award of damages.
4

Such inconsistency, if established, will bear as well, of course, on the credibility of whatever
other testimony the principals will offer at trial.
At most, this line of inquiry should be brief and straightforward. Namely, proof of any
testimony about how individuals viewed the settlement proceeds and copies of how they treated the
proceeds for income tax purposes.
In light of the foregoing, it is hereby
ORDERED THAT defendant Infocon’s motions to preclude expert testimony (Doc. 365),
strike summary exhibit (Doc. 366) and preclude evidence about treatment of settlement proceeds
for tax purposes (Doc. 367) be, and the same hereby are overruled, as provided herein.
So ordered.

/s/ James G. Carr
Sr. United States District Judge

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