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Use of Falsified Information in Financial Statements by Damages Expert Does Not Entitle Defendant to Relief from Judgment

05-1537
August 07, 2006
Alexander, Cortney S.

Decision icon Decision

Last Month at the Federal Circuit - September 2006

Judges: Linn, Dyk (author), Prost

[Appealed from: E.D. Mich., Judge Cohn]

In Venture Industries Corp. v. Autoliv ASP, Inc., No. 05-1537 (Fed. Cir. Aug. 7, 2006), the Federal Circuit affirmed-in-part and vacated-in-part the district court’s denial of Autoliv ASP, Inc.’s (“Autoliv”) motion for new trial under Fed. R. Civ. P. 60(b)(2) and (3).

In 1995, Venture Industries Corporation (“Venture”) and Autoliv settled a patent dispute. As part of the settlement, they executed a supply agreement under which Autoliv was obligated to purchase airbag covers from Venture so long as Venture’s bids were “reasonably competitive” with the bids of other suppliers. In 1999, Venture sued Autoliv for breach of the supply agreement, alleging that Autoliv did not allow Venture to bid on certain projects or rejected its reasonably competitive bids. Venture also made several patent law claims in its complaint.

During discovery, Autoliv requested financial information from Venture, including internal and external financial statements and depositions of various representatives. Venture objected to these requests, and Autoliv filed several motions to compel. Ultimately, the district court ordered production of Venture’s monthly, quarterly, and annual financial statements, but the SM and district court denied the remaining requests. Autoliv did not challenge or seek reconsideration of these rulings, nor did it submit further requests for the information or alert the district court to any further problems with discovery of Venture’s financial information.

Trial on Venture’s action for breach of the supply agreement began in November 2003, during which Venture’s expert, Aron Levko, offered testimony on damages. Levko relied on financial information from a manufacturing facility in Grand Blanc, Michigan, operated by a Venture subsidiary (“the Grand Blanc facility”), which would have produced the airbag covers had Autoliv awarded Venture the projects at issue. In his damages calculation, Levko also relied on actual bids, third-party bids, and two independent studies previously commissioned by Venture. In December 2003, the trial concluded with the jury’s return of a verdict finding that Autoliv breached the supply agreement and award of $27,576,001 in damages to Venture. A month later, the district court entered final judgment against Autoliv in the amount of the jury’s verdict.

During discovery, Venture filed for reorganization under the Bankruptcy Code, and a forensic accounting firm, Doeren Mayhew & Company, P.C. (“Doeren”), was appointed by the bankruptcy court to investigate Venture’s finances. After entry of final judgment in the breach of supply agreement litigation, Doeren issued a pair of reports stating that its preliminary investigation called into question representations in Venture’s firmwide financial statements and plant-wide statements from Grand Blanc, including accounting irregularities. The books and records of the Grand Blanc facility were among the materials used by Venture’s expert in calculating damages. In April 2004, Venture filed a SEC form disclosing that its financial information previously publicly reported dating back at least to 1998 was unreliable.

Neither party immediately called Doeren’s reports to the district court’s attention. Several months after the Court entered judgment, however, Autoliv filed a motion for new trial pursuant to Fed. R. Civ. P. 60(b) based on the Doeren reports. The district court conducted an evidentiary hearing on Autoliv’s motion, at which Levko testified that Doeren’s conclusions had no effect on his trial testimony. The district court denied Autoliv’s motion under Rule 60(b)(2), concluding that Autoliv failed to prove that the newly discovered financial information would have had an effect on the jury’s damages award. The district court also denied the motion with regard to Rule 60(b)(3), holding that Venture did not commit discovery misconduct by failing to produce financial information that Autoliv contended would have disclosed the misrepresentations later found by Doeren. Because Autoliv never challenged the discovery rulings regarding this information or make additional requests, the district court concluded there was no discovery misconduct. The district court did not address Autoliv’s argument that Levko’s testimony entitled it to a new trial under Rule 60(b)(3).

On appeal, the Federal Circuit first addressed the timeliness of Autoliv’s motion. The Court explained that the rule provides that a Rule 60(b) motion “shall be made within a reasonable time,” not more than one year after judgment. Applying Sixth Circuit law, the Court observed that Venture made no colorable claim that it was prejudiced by Autoliv’s nine-month delay in filing its motion. Therefore, the Court dismissed Autoliv’s untimeliness argument.

Turning to the merits of Autoliv’s motion under Rule 60(b)(2), the Federal Circuit affirmed the district court’s denial. The Court found no error in the district court’s finding that Levko’s opinion was grounded in data that antedated December 2001, and there is no evidence that accounting irregularities at Grand Blanc affected such data. The Court also found no error in the district court’s conclusion that any changes in the financial statements that Levko did rely on did not affect his opinions. The Court also noted that the district court properly reviewed the factual record in the light of the newly discovered evidence and made findings as to the weight of that evidence to determine the likely effect on the jury, which was that the jury’s decision would not be altered.

With regard to Autoliv’s motion under Rule 60(b)(3) alleging discovery misconduct, the Federal Circuit affirmed the district court’s ruling that Autoliv was not entitled to a new trial based on Venture’s failure to produce the corrected financial statements. The Court observed that Autoliv did not allege that Venture had not complied with the discovery requests as limited by the magistrate judge, and that Autoliv had ample opportunity to seek relief if it felt that its discovery requests were not being met. Thus, the district court did not abuse its discretion in holding that Venture had not committed discovery misconduct.

Finally, the Federal Circuit addressed Autoliv’s claim under Rule 60(b)(3) that Levko’s testimony, which was based on the incorrect financial statements, was fraud, misrepresentation, or misconduct entitling it to a new trial. The Court noted that, while the district court did not expressly address this argument, it did hold that Autoliv failed to establish that it was prejudiced according to the Rule 60(b)(2) standard. Thus, the Court deduced that even if Autoliv could establish that Levko’s testimony was fraud, misrepresentation, or misconduct, it would not be entitled to a new trial unless the prejudice required under Rule 60(b)(3) is different than that of Rule 60(b)(2). The Court observed that while in some circuits the standard for prejudice under Rule 60(b)(3) is similar to the Rule 60(b)(2) standard, requiring the movant to show that fraud or misconduct prevented the movant from fully presenting its case, the Sixth Circuit differs. In the Sixth Circuit, prejudice is presumed if fraud, misconduct, or misrepresentation is shown, at which point the burden shifts to the nonmoving party to show by clear and convincing evidence that the misbehavior had no prejudicial effect. Accordingly, the Court remanded the case for the district court to determine whether fraud, misrepresentation, or misconduct occurred and, if so, whether Venture had shown by clear and convincing evidence that no prejudice occurred.