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Karum Holdings LLC v. Lowe's Companies, Inc.

United States Court of Appeals, Seventh Circuit

July 13, 2018

Karum Holdings LLC, et al., and Karum Latin America S. de R.L. de C. V., Plaintiffs-Appellants,
Lowe's Companies, Incorporated, et al., Defendants-Appellees.

          Argued May 29, 2018

          Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 15 c 380 - John Z. Lee, Judge.

          Before Bauer, Barrett, and St. Eve, Circuit Judges.

          Bauer, Circuit Judge.

         When Lowe's Companies, Inc. (Lowe's Inc.) expanded its retail home improvement stores into Mexico, Lowe's Companies Mexico, S. de R.L. de C.V. (Lowe's Mexico) contracted with Karum Holdings LLC and a few of its subsidiaries, Karum Group LLC, and Karum Card Services S.A. de C.V., SOFOM, E.N.R. (collectively, Karum), to provide private-label credit card services there. The program failed to meet expectations, and Karum brought this lawsuit against both Lowe's Inc. and Lowe's Mexico (collectively, Lowe's) claiming breach of contract.

         The focus of this appeal is Karum's proof of damages and expert disclosures, or lack thereof. Early on, Karum disclosed its summary "damages model," a 37-page estimate of damages with hundreds of figures contained in charts and graphs. Karum intended to have its Chairman and former CEO Peter Johnson and/or its current CEO and CFO Russell Ouchida present the damages model at trial as lay opinion testimony; Karum never retained a damages expert. Two months before trial, Lowe's filed a motion in limine to preclude Johnson and Ouchida from testifying as to the damages model because any testimony regarding the model required the specialized knowledge of an expert. The district court granted the motion, finding that Karum had never properly disclosed an expert pursuant to Federal Rule of Civil Procedure 26(a)(2). Since this was a case-dispositive sanction, the court granted judgment in favor of Lowe's and Karum appealed. We affirm.

         I. BACKGROUND

         A. The Agreements Between Lowe's and Karum

         Lowe's Inc. is the second largest home improvement store in the United States, and in 2010, it expanded its North American presence into Mexico by opening two stores. Prior to opening those stores, Lowe's Mexico entered into the "Private Label Credit Card Program Agreement" ("Program Agreement") with Karum. The term of the agreement was seven years, and it could only be terminated if certain conditions were met, or by mutual consent. The parties initially agreed to jointly fund the credit portfolio 50/50, but changed course in 2014 resulting in the "Profit Sharing and Funding Agreement" (the "Funding Agreement"), whereby Lowe's Mexico agreed to fund 99%. Karum Card Services was an entity created as a joint venture by Lowe's Mexico and Karum Group to manage and operate the program, i.e., issue credit cards to customers in Mexico. In turn, Karum Card Services also had a separate "Masters Credit Services Agreement" (the "Services Agreement") with Karum Latin America S. de L.A. de C.V. (Karum LA), a subsidiary of Karum Group, to further carry out the program in Mexico.

         The arrangement failed to meet Lowe's expectations, and Lowe's sought to terminate its relationship with Karum in 2014. After mediation proved unsuccessful, Karum and Karum LA filed this lawsuit on January 14, 2015. Karum alleged that a contractual relationship between Lowe's and Karum was reflected in all three agreements described above, and that Lowe's had unilaterally terminated the agreements. Lowe's filed a motion to dismiss all claims relating to the Services Agreement since Lowe's was not a party to that particular agreement, and dismiss Karum LA, because it was not a party to any agreement to which Lowe's was a party. The district court granted Lowe's motion without prejudice, and Karum's amended complaint removed Karum LA as a party and any claims for breach of contract of the Services Agreement.

         B. Karum's Witness Disclosures, Damages Model, and Procedural History

         Karum made its initial Rule 26(a) disclosures on March 13, 2015. Karum provided Lowe's, pursuant to Rule 26(a)(1)(A), with a list of names likely to have "discoverable information relevant to disputed facts," which included both Johnson and Ouchida. Karum's disclosures did not designate any potential witnesses as experts under Rule 26(a)(2).

         In April 2015, Karum produced a 37-page summary "damages model," as required by Rule 26(a)(1)(A)(iii). The model had two components: (1) the "Portfolio Component," which, according to Karum, projected its share of the estimated value of the portfolio in the absence of Lowe's breach; and (2) the "Services Component," which projected service fees that non-party Karum entities, such as Karum LA, would have received from Karum Card Services pursuant to the Services Agreement. Karum designated both Johnson and Ouchida as its Rule 30(b)(6) witnesses on damages, and Lowe's deposed both in April 2016. Notably, the damages model never referred to Johnson or Ouchida, nor summarized what they would say regarding its content.[1] Lowe's filed a motion for partial summary judgment with respect to the Services Component, and the district court granted Lowe's motion on March 28, 2017, thus striking that component from the damages model.

         Following the grant of partial summary judgment in favor of Lowe's, the district court held a status hearing on April 12, 2017, in order to set expert disclosure deadlines and a trial date. During the hearing, Karum sought to supplement a revised damages model in order to conform to the court's summary judgment ruling, which the court granted. The court then asked Karum's counsel whether it intended to offer "an affirmative expert on damages" to which Karum's counsel replied "No, Your Honor. The plaintiff will testify to it himself. He is the expert on it." Relying on this statement, the court set a deadline for Lowe's expert disclosures under Rule 26(a)(2), but made no similar deadline for Karum. The court set a trial date for November, but later changed that date to December 11, 2017.

         Karum's supplemental damages model substantially altered the Portfolio Component and added a new component that had not been previously disclosed or subject to discovery. Lowe's swiftly moved to strike the supplemental model as untimely under Rule 26 and prejudicial. In its memorandum in opposition to Lowe's motion to strike, Karum discussed how it intended to present the damages model at trial. Karum told the court that it had "advised Lowe's that it did not intend to use a retained expert to present damages, but rather would rely on opinion testimony through … Johnson." In a footnote to that sentence, Karum elaborated further on Johnson's testimony:

Johnson can opine as a lay witness under Federal Rule of Evidence 701 on the subject of Karum's estimated damages by virtue of his perception of Karum's business gained through his management of that business. But he might also qualify as an expert under Federal Rule of Evidence 702, through the knowledge and experience he has gathered from decades in the credit business. In fact, Johnson has served on the audit committees of multiple public companies, and as such, is recognized by the SEC to have financial expertise. Either way, Lowe's knows Johnson and will not be surprised by his testimony.

(emphasis added).

         The court granted Lowe's motion to strike the supplemental damages model on September 6, 2017, and Karum's damages model for trial was reduced to the original Portfolio Component from April 2015. During a status hearing the following day, the parties updated the court on their expert disclosures. Lowe's counsel stated that its retained expert would produce a report by the end of the month. In the court's minute entry, the court reconfirmed that Karum's counsel "[did] not anticipate offering an expert at trial but may offer a rebuttal expert after [reviewing Lowe's] experts report."

         C. Lowe's Motion In Limine To Exclude ...

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