Commercial Litigation and Arbitration

Rule 407 Applies in Contract Action — Bars Evidence of Post-Claim Change in Contract Language — OK to Grant New Trial Due to Error in Excluding Evidence under Rule 403 — Good Quote on Dangers of Limiting Cross

Reynolds v. Univ. of Pennsylvania, 2012 U.S. App. LEXIS 10641 (3d Cir. May 25, 2012):

Reynolds applied to and enrolled in the Executive Masters in Technology Management ("EMTM") program at the University of Pennsylvania in 2002 and claims that at that time he was told that the EMTM students would be considered graduates and alumni of Wharton, Penn Engineering and the University of Pennsylvania. Supplemental Appendix ("Supp. App.") 1941-61. In Fall 2003, Reynolds claims he was informed that he would be considered a graduate of Penn Engineering only and could not represent himself as a Wharton student or Wharton alumnus upon graduation. Supp. App. 1986-93.

Reynolds filed his complaint against the University of Pennsylvania and several individuals in the Philadelphia County Court of Common Pleas in March 2006 and Penn removed the case to the United States District Court for the Eastern District of Pennsylvania. Reynolds asserted claims for (1) breach of contract, (2) unjust enrichment, (3) negligence, (4) negligent misrepresentation, (5) intentional misrepresentation, (6) common law fraud, (7) violations of Pennsylvania's Unfair Trade Practices and Consumer Protection Law, 73 Pa. Cons. Stat. Ann. § 201-1 et seq., and (8) violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c), (d).

Another EMTM student, Anurag Harsh, filed a case alleging similar conduct and the cases proceeded together but were never consolidated. App. 3. During discovery, Penn alleges it found evidence that Harsh had modified documents that he relied on for his claim, namely a PowerPoint presentation given by EMTM Admissions Director Joel Adler to prospective students and an email to Harsh from Adler. Reynolds alleged in his complaint that he relied upon the PowerPoint presentation and incorporated Harsh's email exchange with Adler in his complaint as well. App. 124-25,128-29. Harsh filed a motion to dismiss his claims with prejudice, which was granted by the District Court on September 15, 2008. App. 5.

During discovery, Penn requested an admission from Reynolds that the Adobe Acrobat 6.0, Adobe Acrobat Distiller 6.0.1 and Adobe Acrobat PDFMaker 6.0 software that Penn's analysis showed had been used to save the PowerPoint slides that Reynolds alleged he relied on in 2002, were not available to the public until after April 1, 2003. Supp. App. 631-32. Reynolds initially refused to admit the request for admission based on lack of personal knowledge. Supp. App. 635. Penn then sent Reynolds an April 7, 2003 press release from Adobe announcing the upcoming introduction of the Adobe Acrobat 6.0 product line. Supp. App. 638-41. Penn informed Reynolds that if he refused to admit the release date of the software, it would travel to California to depose an Adobe representative and would seek to recover the costs of the deposition under Federal Rule of Civil Procedure 37(c)(2). Supp. App. 638-39. Penn did take the deposition of an Adobe representative, who stated that Adobe Acrobat 6.0 and related software were not available to the public until May 2003. App. 478-82. Penn read this testimony to the jury at the second trial. See App. 82 n.3.

The day before the start of the first trial, September 28, 2009, Reynolds moved to exclude the exhibits that Penn alleged to be fraudulent and any mention of Harsh and his lawsuit. The District Court granted the motion***. At the first trial, the jury found in favor of Reynolds on the breach of contract claim and awarded him $435,678. App. 2. On January 27, 2010, however, the District Court granted Penn's motion for a new trial, based on what the District Court determined to be its own erroneous exclusion of the allegedly altered documents. App. 1.

Before the second trial, the District Court granted Penn's motion to exclude as inadmissible under Federal Rule of Evidence 407 as subsequent remedial measures evidence of a November 1, 2003 Town Hall meeting of students and Penn administrators, where administrators explained the place of the EMTM program within the University and then took questions from students about the nature of the program, and a version of Penn's website revised in 2004, in which Penn clarified the benefits it expected to grant EMTM students. ***

The jury in the second trial found that Penn had been unjustly enriched and awarded Reynolds $66,000. App. 35. Reynolds moved for a new trial based on the exclusion of the Town Hall meeting and revised website evidence, which the District Court denied. App. 34. Penn moved for judgment as a matter of law on the unjust enrichment claim, which the District Court granted because an express contract governed the relationship between the parties. App. 34. Reynolds timely appealed. ***



Reynolds contends the District Court erred when it ordered a new trial based on its evidentiary ruling under Federal Rule of Evidence 403 to exclude all references to the Harsh case and the allegedly altered documents in the first trial. ***

During discovery, Penn uncovered evidence that it contends shows that the versions of the documents incorporated into Reynolds's complaint had been altered. Penn argues the PowerPoint presentation that Reynolds alleges he relied on in 2002, when deciding whether to enroll in the EMTM program, contains a Wharton logo that was not available until March 2003. Penn also argues that the PowerPoint presentation was saved using Adobe software that was not available until 2003. Finally, Penn alleges that its expert found several versions of the email from Adler to Harsh on Reynolds's computer that were altered from the version on Adler's computer.

Federal Rule of Evidence 403 allows the court to exclude relevant evidence "if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence." The District Court found that the probative value of this evidence was high because the evidence bore directly on Reynolds's credibility. Reynolds's complaint incorporated the allegedly altered documents, the PowerPoint presentation, and an email from Adler to Harsh. App. 124-25, 128-31. At his February 6, 2007 deposition, Reynolds identified specific elements of the PowerPoint presentation on which he relied. Supp. App. 738-46. The District Court found that Reynolds's case depended on his recollection of the agreement he had with Penn and the alleged breach of that agreement. The District Court further found that the probative value of the excluded evidence was not substantially outweighed by the danger of unfair prejudice. Fed. R. Evid. 403; see also Harbor Ins. Co. v. Schnabel Foundation Co., 946 F.2d 930, 935 (D.C. Cir. 1991) ("Particularly where a party is seeking to impeach a witness whose credibility could have an important influence on the outcome of the trial, the district court should be cautious in limiting cross-examination.").

Thus, "[h]aving identified this incorrect evidentiary ruling, the trial judge was required . . . to grant a new trial unless it was 'highly probable' that the error did not affect any 'substantial rights.'" Bhaya, 922 F.2d at 189 (citation omitted). The District Court did not abuse its discretion when it determined that Penn's substantial rights were affected when it was not allowed to probe Reynolds's credibility on documents that he relied on initially to support his claim. ***



Reynolds contends the District Court erred when it excluded under Federal Rule of Evidence 407 as subsequent remedial measures evidence of the November 1, 2003 Town Hall meeting and alterations to Penn's website in 2004. ***

Federal Rule of Evidence 407 provides:

When measures are taken that would have made an earlier injury or harm less likely to occur, evidence of the subsequent measures is not admissible to prove:

o negligence;

o culpable conduct;

o a defect in a product or its design; or

o a need for a warning or instruction.

But the court may admit this evidence for another purpose, such as impeachment or — if disputed — proving ownership, control, or the feasibility of precautionary measures.

The District Court relied on the "plain text" of Rule 407, noting that the Rule used "culpable conduct" rather than a more narrow phrase such as "tortious conduct," and therefore the Rule applied in contract cases in addition to tort cases. App. 55. Black's Law Dictionary (9th ed. 2009) defines culpable as "guilty; blameworthy" and as "[i]nvolving the breach of a duty."

The Court of Appeals for the Seventh Circuit has applied Rule 407 in a contract case. Pastor v. State Farm Mutual Automobile Insurance Company, 487 F.3d 1042 (7th Cir. 2007). In Pastor, the plaintiff sought to represent a class of individuals insured by State Farm who received payment for damage to their cars, but not under the clause in the policy that provided that State Farm would pay $10 per day if the insured did not rent a car while their car was not usable. Id. at 1044. The plaintiff sought to introduce evidence that in subsequent versions of its policy State Farm explicitly stated that "day" meant 24 hours. Id. at 1045. The plaintiff argued that the change in the policy was a "confession" that her interpretation of the clause in the prior policy — that "day" meant any part of a day —- was correct. Id. The court in Pastor held that "to use at trial a revision in a contract to argue the meaning of the original version would violate Rule 407 . . . by discouraging efforts to clarify contractual obligations, thus perpetuating any confusion caused by unclarified language in the contract." Id. It held that "Rule 407 is not limited to 'repair' in the literal sense." Id. "[The plaintiff] wants to use the evidence that State Farm, to avert future liability to persons in the position of the plaintiff, changed the policy, to establish State Farm's 'culpable conduct.' That is one of the grounds that evidence of subsequent corrective action may not be used to establish." Id. In addition, the Court of Appeals for the Tenth Circuit in Hickman v. Gem Insurance Company, 299 F.3d 1208 (10th Cir. 2002), similarly held that Rule 407 barred the admission of evidence of subsequent changes to an insurance contract. Id. at 1214 (holding that medical benefits insurer's change in reimbursement policy was not admissible to establish liability for abusing its discretion under the federal pension statute in applying prior plan's language). Likewise in our case, admitting the Town Hall meeting and website revisions would discourage those in Penn's situation from clarifying contractual obligations and thus would perpetuate confusion.

Footnote 2. Changes in contract language may be considered subsequent remedial measures or "repairs," pursuant to Rule 407. Two cases from our sister courts of appeals held that changes made to subsequent contracts that contained allegedly unlawful provisions could not be introduced, as they were subsequent remedial measures. R.M. Perlman, Inc. v. New York Coat, Suit, Dresses, Rainwear & Allied Workers' Union Local 89-22-1, 33 F.3d 145, 156 (2d Cir. 1994) (holding that letter with suggested revisions to standard form contract was a subsequent remedial measure and could not be used to show Union's intent to apply the contract to the employer-plaintiff in an unlawful way, constituting an unfair labor practice); Noble v. McClatchy Newspapers, 533 F.2d 1081, 1090 (9th Cir. 1975) ("It was not error to exclude evidence that McClatchy deleted allegedly anticompetitive provisions in the distributorship contracts after plaintiffs' termination. Plaintiffs argue that 'an inference of guilt or wrongdoing may be drawn' from such evidence; but it is well settled that evidence of subsequent remedial measures is not admissible to prove culpability of prior conduct."). Although in these cases the evidence was being introduced to prove an unfair labor practice and an antitrust violation, respectively, rather than a breach of contract, these cases support the argument that changes to contract language may be considered subsequent repairs and may be barred by Rule 407 when introduced for an impermissible purpose.

Footnote 3. The Court of Appeals for the Eighth Circuit held that Rule 407 did not bar a jury instruction permitting evidence of a later improved design as proof of a defective product under the defendant's express warranty in a breach of warranty cause of action because "plaintiffs were not required to establish that [the defendant] was negligent or engaged in culpable conduct in order to establish a breach of [the defendant's] warranty." R.W. Murray, Co. v. Shatterproof Glass Corp., 758 F.2d 266, 274 (8th Cir. 1985). The Court relied on its precedents that held that Rule 407 did not apply in products liability cases because those cases did not require proof of negligence or culpable conduct. Id. However, Rule 407 was amended in 1997 to reflect the majority view that it is to be applied in products liability cases. Fed. R. Evid. 407 advisory comm. note (1997); see also Kelly v. Crown Equip. Co., 970 F.2d 1273, 1275 (3d Cir. 1992) ("This court has consistently held that Rule 407 applies to strict liability suits even though the language in the rule refers to inadmissibility to prove negligent or culpable conduct.").

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