Rule 26(a)(1)(A)(iii) Mandatory Damages Disclosure Does Not Extend to Disgorgement Because It Is An Equitable, And Not A Damages, Remedy

 Northern Nat. Gas Co. v. L.D. Drilling, Inc., 405 F. Supp. 3d 981 (D. Kan. 2019):

A number of the motions are before the court in the present dispute over the effects of the migration of natural gas which plaintiff Northern Natural Gas injected into a storage field. The gas subsequently migrated to other property. Northern brings claims for private nuisance against the Producer defendants who obtained the gas, based on the allegation that the production caused an unreasonable interference with its storage field. It also brings a claim for unjust enrichment against other interest owner defendants, alleging that they unfairly profited from the extraction. The parties have filed motions which seek to exclude certain evidence, as well as motions for summary judgment on various  [*991]  aspects of the case. The court first addresses the evidentiary motions.

  1. Evidentiary Motions
    ***
  2. Motion to Exclude Disgorgement Evidence

In the Pretrial Order (Dkt. 275, at 38), Northern explains its claim for Unjust Enrichment this way:

UNJUST ENRICHMENT: Northern seeks disgorgement of profits [**20]  realized by all defendants from the unjust production and sale of gas drawn to defendants' Extension Area wells (save and except Nash's Holland 1-26 and J.C. 1 wells) from the Cunningham Storage  [*998]  Field. Northern estimates Defendants' cumulative total profit from the sale of gas from the Extension Area wells to be in excess of $30 million. When Defendants' production of gas at their wells became unjust is a question of fact for the jury and is when Defendants knew or reasonably should have known their wells were producing storage gas drawn from the Cunningham Storage Field and/or interfering with or damaging the Cunningham Storage Field. Northern thus seeks disgorgement of all net profits realized from and after the date and/or dates on which the jury determines Defendants' production was wrongful and retention of profits was unjust.

The defendants seek exclusion of any evidence relating to disgorgement of profits, arguing that Northern violated its obligation to support that claim in its Rule 26 disclosures, in its answers to interrogatories, the Rule 30(b)(6) deposition of its corporate representative, or in his expert report.

In its disclosures of August 6, 2009 and July 21, 2016, Northern indicated that [**21]  it sought the disgorgement of "more than $75,000" from sums gained by defendants through unjust enrichment. In 2016, defendants submitted Rule 33 interrogatories asking Northern for the amount of damages it sought under each Count in the Third Amended Complaint. Northern responded that "this discovery request will be the subject of expert testimony and will be supplemented with expert reports per the Court's rules and schedule."

On April 12, 2017, Defendants served a Rule 30(b)(6) deposition notice upon Northern requiring it to designate a corporate representative to address "the amounts Northern claims for disgorgement of profits realized by the defendants." Northern then designated geologist Thomas Cook to address the issue.

Cook testified on the issue on May 9, 2017 as the plaintiff's designated corporate representative.

  1. What time span you -- does Northern include in its calculations for disgorgement of profits?
  2. It would be from when the wells initially started producing in roughly 2003 up through shut-in, which for Nash, I believe, was 2010, and February 2011 for L.D. Drilling.

....

  1. [D]o you see the topic number 12...Looking at Exhibit 1 the topic asks for the amounts Northern claims for disgorgement[**22]  of profits you're working on that, but you can't give us those numbers today, correct?
  2. That's right, yes, sir.

....

  1. In terms of Topic 12 and the L.D. Drilling Group, tell me how much the amount Northern claims for disgorgement of profits realized by L.D. Drilling for their alleged wrongful production of storage gas?
  2. I don't have that number today.

Cook was asked about how he calculated the amount of net profits, and explained that he was "in the process of reviewing all of the income statements and expense statements or revenue statements and expense statements" provided in discovery by the defendants. He stated he was "still in the process of running the numbers essentially. There is quite a . . . bit of information on a monthly basis." Cook agreed that at that point he "simply ha[d] reviewed revenue statements and expense statements for the individual producers."

 [*999]  Q. What time span did you -- does Northern include in its calculation for disgorgement of profits?

  1. It would be from when the wells initially started producing in roughly 2003 up through shut-in, which for Nash, I believe, was 2010, and February 2011 for L.D. Drilling.
  2. Okay. Now, the Nash Young well began producing[**23]  in, I believe, December of '94, so why is it that you don't begin your calculation until 2003?
  3. Well, for the assessment that I've done so far I do not have had any of Nash Oil & Gas's records from 1994 to 2001, I believe. So, I guess, to back up from Nash's purpose -- Nash Oil & Gas I started in 2001 when I had records from them.

....

  1. [W]hy is it that you include revenue and expenses prior to June 2010 in your calculations?
  2. I think that's a legal question as far as when - when the break is. . . . [A]ll I'm doing right now is running revenue from 2001 to when the wells were shut-in. And how that is divided up will be in my expert report and legal decision.

.....

  1. [D]o you think it's fair to seek disgorgement of profits from the producers for a time period prior to FERC finding enough evidence that the Extension Area wells were producing storage gas?
  2. Once it became - once it appears the operators knew that they were producing storage gas then I would say, yes, [from] that point on.
  3. Okay. At what point in time does Northern believe the operators knew they were producing storage gas?
  4. I haven't pinpointed that[,] that's still in my expert report, I don't have an exact date at[**24]  this point.
  5. Do you believe it's as far back as 2001?
  6. No.
  7. Okay. Do you believe it's as far back as 2005?
  8. Possibly.

....

  1. And what is Northern's understanding as to what is the alleged wrongful production of storage gas by the defendant producers?
  2. That would be when they became aware they were producing storage gas and continued to produce it.
  3. Okay. But you've told me that you can't tell us when the producers became aware they were producing storage gas, correct?
  4. Not today, no, sir.
  5. [Y]ou would agree with me that the defendant producers did not know they were producing storage gas as far back as 2001, right?
  6. Well, I don't know if they knew back in 2001, but you know, whenever they started - their actions started acting like they were producing storage gas is what I am ultimately looking at.

....

  1. I'm asking you right now because you're offered as a witness on behalf of Northern on a particular issue and I'm asking you what is the wrongful conduct or wrongful production that you're referring to?
  2. That would be when the actions of the operators indicated that they [*1000]  were reasonably sure they were producing storage gas.

The course of the May 2017 deposition established the [**25]  parties were in conflict as to the need for the plaintiff to articulate at that time the extent of the amount of profits which should be disgorged. Defendants thought Northern was required to do so; Northern stated that the amount could not then be determined, that it had yet to receive its expert report, but that the defendants should be required to relinquish their profits once they manifested a knowledge they were producing storage gas. Counsel for one of the defendants responded that "whether that was inherent in and required to answer the question No. 12 we'll take up with the judge."

Northern represented that Cook would address the issue in his expert report, which was presented May 26, 2017. Northern subsequently produced reports by the geologist Cook, as well as by Randal Brush and geochemist Dr. Paul Boehm.

In his report, Cook writes that "the amount of net profit received from the LD and Nash operated wells in the 2010 Extension Area from pulling and producing storage gas from the Field is calculated at $32,217,938.23." Cook supplemented that report on June 27, 2017, presenting net profits attributable to each individual defendant.

Brush wrote that "[a] reasonable operator would [**26]  have recognized its wells were producing storage gas at an early date (prior to January 2006) because of the anomalous well production behavior, among other indicators." He wrote:

The Defendant wells' anomalous gas production rate trends clearly, and quickly, demonstrated their close connection to the Cunningham Storage Field. The trends were obviously abnormal. Every well's rates increased, rather than decreased, with time, and exhibited large cyclical changes in concert with the Cunningham Storage Field gas inventory, rather than uniform declining trend typical of native gas production wells.

....

A reasonable operator would be aware of this abnormal behavior at an early date, prior to drilling a well in the case of LD [2003] and Val [2008]. One of the first actions of a reasonable operator before drilling a new well is to study the production from existing wells. A reasonable operator drilling wells in the 2010 Extension Area would have obtained the publicly-available production data [from existing Nash wells] to determine the potential recovery of the new wells, and would have noted these abnormal behaviors.

Brush states that "the Defendants should have known they were causing the [**27]  migration of storage gas from the Cunningham Storage Field" by January of 2006.

Dr. Boehm opined that in his opinion, "[a]ny operator in the area to the north of the Cunningham Field ... would have known no later than 2006 that ... most wells [in the area] were producing storage gas or a mixture of storage and native gas."

Likewise, in his expert report, Mr. Cook, consistent with the testimony provided on Northern's behalf weeks earlier, provided several conclusions regarding when a reasonable operator would have known they were producing storage gas. Cook indicated that a reasonable operator would have known the Holland 1-26 and Young 1-26 wells were producing storage gas possibly as early as 1994, or in 2002-2003. He states his opinion that Nash should have known its extension area wells were producing gas from the Cunningham Storage Field  [*1001]  by 1999, and that L.D. Drilling's actions indicated it was aware it was producing such gas by April, 2005.

On December 26, 2018, the defendants moved (Dkt. 702) for summary judgment on Northern's unjust enrichment claim, arguing that it was barred by the statute of limitations. In responding to the motion, Northern wrote:

Defendants' interpretation [**28]  of and reliance on the June 27, 2017 Supplement ... is incorrect. Contrary to the opinion of Defendants' expert C.P.A., George N. Keeney, III, the "calculations contained in Mr. Cook's Supplement" do not represent "the Plaintiff's ("Northern") claims for unjust enrichment damages against the various non-operating owners/defendants described therein." Rather, the Cook Supplement calculations represent Northern's effort and its experts' opinion regarding total profits realized from production at all wells that are the subject of this lawsuit, from inception to plugging and/or abandonment, to be utilized as needed as evidence at trial. Northern does not seek disgorgement of all profits realized by Defendants. Rather, Northern seeks disgorgement of profits realized by Defendants relating to production at the Young #1-26 well from and after the date on which L.D. Drilling's production activities evidenced intentional, deliberate, and wrongful interference with the Cunningham Storage Field for the purpose of drawing storage gas from the field to L.D. Drilling's wells—January 2006.

(Dkt. 707 at 2-3) (emphasis in original, docket citations omitted)

Cook was deposed again on March 12, 2019. He [**29]  testified he was never asked to calculate the amount that Northern claims for disgorgement of profits, that he never made any such calculation, and that the numbers set forth in his expert report focused on net profits numbers. He stated that he understood the earlier deposition was focused on describing the "net profits realized by each operator," and did not understand he was addressing the disgorgement claim. Cook testified that he could testify as to the "actual number of the net profits" of the defendants, but could not then "give ... the amount that Northern is claiming for disgorgement of profits as against any particular defendant."

Defendant's expert Keeney testified that calculations as to the defendants' net profits should look to "[g]ross, taxes, royalty, override, operating expense, drilling costs, whatever components of expenditure occurred, basically a P&L by well by month," and that "Mr. Cook's calculations ... did include those things."

As noted earlier, the defendants argue that Northern's failure to define the amount of their profits it seeks to disgorge violated its obligation to make appropriate disclosure under Rule 26(a). They also contend that Northern again violated its [**30]  duties under Rule 30(b)(6) when Cook, its designated corporate representative, failed to address the issue of disgorgement in his deposition, or in his subsequent report. The defendants suggest that the testimony by Cook in his 2019 deposition reflects an attempt by Northern to evade the effect of their motion for summary judgment on the statute of limitations by to trying to create a factual issue on when the defendants allegedly knew they were capturing storage gas.

Northern argues that it violated none of the rules of discovery, contending that is not making a legal "claim" for disgorgement of profits which it was required to precisely define early in the litigation. Rather, according to Northern, it is asserting an equitable claim for unjust enrichment,  [*1002]  and that the disgorgement of improper profits is simply one remedy for that claim. It was not required to produce detailed information on the defendants' profits under Rule 30(b) because the information was not then available. And, it argues, even if there was a violation of any discovery rule, the court should not employ the heavy sanction of excluding Northern's ability to recover.2

The court finds that the defendants' motion should be denied. The defendants [**31]  correctly note that Kansas courts have frequently observed that "the proper measure of damages for unjust enrichment is restitution of the benefit conferred upon the defendant." See, e.g., Estate of Hetrick v. Cessna Aircraft Co., 208 P.3d 808, 2009 WL 1692025, *6 (Kan. App. 2009). But in all cases cited by defendants, the court is merely addressing the general measure of how damages are measured and proven; none involve how a claim for disgorgement must be presented and defined under Rules 26 and 30. Cases which have addressed the issue have concluded that Rule 26(a)(1)(A)(iii) does not require a party seeking disgorgement to detail its calculations in its initial disclosures. See SEC v. Montano, 2019 U.S. Dist. LEXIS 89823, 2019 WL 2254946, at *3 (M.D. Fla. Mar. 5, 2019) ("Rule 26(a)(1)(A)(iii) does not apply to disgorgement or civil penalties, as neither are a damages remedy"); United States v. Stinson, 2016 U.S. Dist. LEXIS 185771, 2016 WL 8488241, at *7 (M.D. Fla. Nov. 22, 2016) ("Disgorgement is not a damages remedy").3 This conclusion is consistent with the practical nature of the federal rules of procedure — unlike a claim for legal damages, a equitable claim for disgorgement of profits will typically depend upon information not under the control of the plaintiff at the time of initial disclosures.

The court also finds Northern did not violate Rule 30(b)(6). Cook gave an estimate of the estimated net profits of the defendants in his Rule 30(b)(6) deposition, but had not made a separate [**32]  calculation of the profits which Northern sought to be disgorged. The issue of net profits was addressed in his subsequent report, as well as the reports of two other Northern experts. Under the circumstances of the  [*1003]  case, the court concludes that no violation of Rule 30(b)(6) occurred.

[D]isgorgement of profits ... is not an issue of damages in the conventional sense. ([Defendant] has a far better grip on its actual profits than any information it could glean from [Plaintiff's] estimates [presented in the Rule 30(b)(6) deposition of its Chief Financial Officer]). Disgorgement is mostly an equitable remedy reserved for the court....

The lesson is fairly simple. If after considering the relief due to Explorica under one or all of the three other proposed remedies, the court concludes that justice has not been done, it may order an accounting and award Explorica some or all of defendant's profits. This, however, is a consideration for the court, not for a Rule 30(b)(6) witness.

Explorica, Inc. v. Elderhostel, Inc., 2010 U.S. Dist. LEXIS 36186, [WL] at *1 (D. Mass. Apr. 13, 2010).

However, even if Northern had failed to comply with the requirements for earlier disclosure under Rule 30(b)(6), the court would in any event deny defendants' request to bar the plaintiff's claim for unjust enrichment. Whether to sanction a failure to comply with [**33]  Rule 30(b)(6) is discretionary with the court. See Fed.R.Civ.P. 37(d)(1) ("The court where the action is pending may, on motion, order sanctions...") (emphasis added).4 In determining whether to issue sanctions, the court will look to factors including:

(1) the degree of actual prejudice to the [defending party]; (2) the amount of interference with the judicial process; (3) the culpability of the litigant; (4) whether the court warned the party in advance that dismissal of the action would be a likely sanction for noncompliance; and (5) the efficacy of lesser sanctions.

Ehrenhaus v. Reynolds, 965 F.2d 916, 921 (10th Cir.1992) (internal quotation marks, ellipsis, and citations omitted).

Here, multiple factors strongly support the denial of the sanction of exclusion. First, any hypothetical violation by Northern of Rule 30(b)(6) falls outside of the heartland of the evil the Rule is designed to combat.

Foremost among the purposes of Rule 30(b)(6) is to curb the bandying by which officers or managing agents of a corporation are deposed in turn but each disclaims knowledge of facts that are clearly known to persons in the organization and thereby to it. A party does not fulfill its obligations at the Rule 30(b)(6) deposition by stating it has no knowledge or position with respect to a set of facts or area of inquiry [**34]  within its knowledge or reasonably available.

  1. Ala. Fabricating Co. v. Bedeschi Mid-West Conveyor Co., LLC, 2018 U.S. Dist. LEXIS 756, 2018 WL 276772, at *6 (D. Kan. Jan. 3, 2018) (citations and internal quotation omitted).

Here, Cook did not state he had no knowledge of the issue or refuse to address facts available to him. He provided testimony, later supplemented in his report, relating to the defendants' net profits. He also expressly testified that he believed the defendants would be responsible for the profits obtained from storage gas from "whenever [they] started acting like they were producing storage gas." This was again echoed in the reports of  [*1004]  other Northern experts who indicated that the extent of profits to be disgorged would turn on factual issues of the defendants' knowledge. Viewed in terms of the entire circumstances of the case, the court finds that Northern bears little if any culpability for not defining the full extent of its disgorgement claims in Cook's 2017 deposition.

In contrast, the court finds that to the extent the judicial process has suffered interference, the defendants bear a relatively larger responsibility. It was clear at the time of the 2017 deposition that Northern and the defendants were in sharp disagreement as to whether Cook was required to testify as to some bottom-line disgorgement [**35]  calculation. So sharp was the disagreement that one attorney for defendant stated that whether Cook was required to address disgorgement was an issue "we'll take up with the judge." None of the defendants, however, raised the issue with the court. Indeed, defendants never raised the issue of an alleged failure to comply with Rule 30(b)(6) for the next two years, until the present motion. Given the explicit evidence offered by Cook, Brush, and Boehm that the defendants should be forced to disgorge profits earned from the point they were aware they were producing storage gas, the court finds no justification for the delay in raising the issue.

Finally, the court finds no substantial prejudice to the defendants. The substance of Cook's profits testimony is derived from the defendant's own financial information. And, as noted earlier, Cook's methodology of calculating defendants' profits is consistent with that of the defendant's own expert, Keeney.

***

Northern argues that it is not claiming as a part of its case-in-chief that defendants must disgorge any certain amount. Rather, "[o]nce the jury has determined Defendants were unjustly enriched and identified the date on which such unjust enrichment began, Northern, by and through Mr. Cook, should be permitted to testify ... regarding the amount of ill-gotten gains." (Dkt. 748 at 29 n. 11). But Northern also states that evidence of the scale and timing of defendants' net profits is independently admissible because it shows an intent to interfere (an element of its nuisance claim), and the unjustness of any retention of profits (an element of the equitable claim). ****

See also United States v. RaPower-3, LLC, 2018 U.S. Dist. LEXIS 58007, 2018 WL 1581994, *1 n. 6 (D. Utah. March 14, 2018) (citing Stinson, and agreeing that Rule 26(a)(1)(A)(iii) does not require disclosure of disgorgement calculations); SEC v. Razmilovic, 2010 U.S. Dist. LEXIS 59612, 2010 WL 2540762, at *2 (E.D.N.Y. June 14, 2010) ("the disclosure requirement of Rule 26(a)(1)(A)(iii) [i]s inapplicable to the ... claims seeking disgorgement ... because such remedies were not 'damages' within the meaning of that statute"); Consumer Fin. Prot. Bureau v. Borders & Borders, PLC, 2017 U.S. Dist. LEXIS 108384, 2017 WL 2989183, *8 n. 1 (W.D. Ky. July 13, 2017) (rejecting argument plaintiff was required to give "a computation of the disgorgement remedy," since "Federal Rule of Civil Procedure 26(a) provides only that a party must disclose damages at issue in the case"); SEC v. Cavanagh, 445 F.3d 105, 117 (2d Cir. 2006) (equitable remedy of disgorgement "is a method of forcing a defendant to give up the amount by which he was unjustly enriched"); Scott v. City of Phoenix, No. CV-09-0875-PHX-JAT, 2011 U.S. Dist. LEXIS 31739, 2011 WL 1085992, at *4 (D. Ariz. Mar. 24, 2011) ("equitable remedies ... are not capable of the 'computation' required for the Rule 26(a)(1)(A)(iii) initial disclosure").

Rule 37(c)(1) sanctions the failure to comply with Rule 26(a) by providing that the missing evidence will be excluded "unless the failure was substantially justified or is harmless," and the court may require payment of expenses, instruct the jury on the failure, or issue other relief "[i]n addition or instead of" the sanction of exclusion. Rule 37(c)(1) offers defendants no relief here because the strong weight of authority holding that Rule 26(a) does not require disgorgement calculations in initial disclosures.

[Ed. NoteSee also Henderson v. Skyview Satellite Networks, 474 F. Supp. 3d 893, 909 (W.D. Ky. 2020) (alternate holding: no requirement to disclose disgorgement amount under Rule 26(a)(1))]

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