United States District Court, N.D. Illinois, Eastern Division
September 20, 2004.
LAWRENCE E. JAFFE PENSION PLAN, on behalf of itself and all others similarly situated, Plaintiff,
HOUSEHOLD INTERNATIONAL, INC, et al., Defendants.
The opinion of the court was delivered by: NAN NOLAN, Magistrate Judge
MEMORANDUM OPINION AND ORDER
In this proposed class action, plaintiffs, who purchased or
otherwise acquired defendant Household International, Inc.'s
("Household") equity and debt securities, allege that defendants
made materially false representations and omissions concerning
Household, its operations and its financial condition, and in
doing so violated Section 10(b) of the Securities Act of 1934 and
Section 11 of the Securities Act of 1933. This matter is before
the court for ruling on Defendants' Motion to Compel Lead
Plaintiffs to Comply with their Initial Disclosure Obligations
under Federal Rule of Civil Procedure 26(a)(1) ("motion to
compel"). For the reasons explained below, the court grants the
motion to compel in part and denies it in part.
In their motion, defendants ask the court to compel plaintiffs
to provide the amount of their claimed damages, a computation on
which their damages claims are based, and all evidence on which
their damages claim is based. (Mot. at 4.) Plaintiffs oppose the
motion, arguing that defendants' motion is premature because (i)
damages in securities fraud cases is a matter for expert analysis and opinion, so plaintiffs' damages need not be
disclosed until the expert phase of discovery, and (ii) any
computation of damages plaintiffs currently have is the work
product of non-testifying experts that is protected from
disclosure. At the hearing on August 30, 2004, the court ruled
that at this stage in the litigation, defendants were not
entitled to the breadth of damages information they were seeking.
The court's ruling was based partially on the fact that damages
in securities fraud cases are generally an issue addressed by
experts. The ruling was also based on the fact that discovery in
this matter is bifurcated, with class discovery preceding merits
discovery. The court, however, also ruled that defendants were
entitled to some information relating to the class certification
issue. Specifically, the court agreed that defendants were
entitled to plaintiffs' underlying theory of damage liability.
(Tr. of 8.30.04 hearing at 17:13-21.) Accordingly, the court
directed plaintiffs to submit a brief explaining their damages
theory, and gave defendants the opportunity to file a written
response to plaintiffs' submission to identify whatever other
information defendants thought they needed for the class
In plaintiffs' submission, they explained that their measure of
damages for their Section 10(b) claim is the same as the standard
measure of damages for securities fraud, namely "the difference
between the price of the stock and its value on the date of the
transaction if the full truth were known." Assoc. Randall Bank
v. Griffin, Kubik, Stephens & Thompson, Inc., 3 F.3d 208, 214
(7th Cir. 1993). Moreover, the value of the stock if the full
truth were known, or the fair value of the stock, is the subject
of expert analysis. "The determination of damages sustained by
individual class members in securities class action suits is
often a mechanical task involving the administration of a formula
determined on a common basis for the class[.]" Newberg on Class Actions § 10.8 (4th Ed. 2002) (explaining that "these
necessary mechanics do not bar certification"). As for their
Section 11 claim, plaintiffs stated that the measure of damages
will be the statutory formula set forth in Section 11(e). In
addition to providing a written submission of their general
damages theory, plaintiffs have also produced documents that
provide information regarding the lead plaintiffs' purchases and
sales of Household securities.
Defendants argue that plaintiffs' explanation of their damages
theory is insufficient, and that defendants are entitled to know
plaintiffs' specific methodology for computing damages. In other
words, defendants now seek the damages formula plaintiffs intend
to use in this litigation. Specifically, defendants ask the court
to "order plaintiffs to disclose their methodology for
calculating damages or, in the alternative, [to] preclude
plaintiffs from saying anything else with respect to damages in
their reply briefs on the motion for class certification."
(Defs.' Resp. to Pls.'s Submission at 2.) Defendants' position is
overreaching. It is unreasonable for defendants to expect the
exact damages formula from initial disclosures in a securities
fraud action where expert analysis is undoubtedly necessary. A
primary purpose of Rule 26(a)(1) "is to accelerate the exchange
of basic information about the case and to eliminate the paper
work involved in requesting such information, and the rule should
be applied in a manner to achieve those objectives." Crouse
Cartage Co. v. Nat'l Warehouse Inv. Co., No. IP02-071CTK, 2003
WL 23142182, at *1 (S.D. Ind. Jan. 13, 2003) (citation omitted).
Defendants have received the basic information they know
plaintiffs' general theory of damages (and likely should have
known the theory without a written submission) and have documents
demonstrating plaintiffs' purchases and sales of the Household
securities. To the extent plaintiffs have preliminary damages
calculations, those are the calculations of non-testifying
experts, and thus need not be disclosed under Rule 26(b)(4) of the Federal Rules of Civil Procedure. See
id. at *2-3.
Defendants' arguments to the contrary, and the cases they rely
upon, do not persuade the court otherwise.*fn1 For example,
although defendants seem to concede (at least for purposes of
this motion) that determination of damages can be a mechanical
task if there is a "formula determined on a common basis for the
class," defendants point out that plaintiffs have not yet
provided a formula. Relying on Newton v. Merrill Lynch,
259 F.3d 154, 187-190 (3d Cir. 2001) and Wilcox Dev. Co. v. First
Interstate Bank of Oregon, 97 F.R.D. 440, 447 (D. Oregon 1983),
defendants argue that without proof that such a formula exists,
class certification is improper. Neither Newton nor Wilcox,
however, held that a class cannot be certified if plaintiffs have
not disclosed a damages formula.
In Newton, plaintiffs alleged that their broker-dealers
failed to execute trades under "the most favorable terms
reasonably available" by failing to investigate whether there
were better prices than those offered on the central National
Best Bid and Offer ("NBBO") system. Newton, 259 F.3d at 162.
The issue that prevented class certification was not related to
calculation of damages. Rather, the Third Circuit affirmed the
district court's decision to deny class certification because it was not clear whether each of the
plaintiffs actually suffered economic injury. Id. at 190. The
issue in Newton was not "the calculation of damages but whether
or not class members have any claims at all." Id. at 189. The
court explained that in securities fraud cases involving
excessive price markups or fraud-on-the-market, "injury
necessarily flow[s] from defendant's conduct and reliance and
injury [can] be presumed. In those cases, if defendant's conduct
was held fraudulent, a claim of loss necessarily followed." Id.
at 190. In contrast, economic loss could not be presumed for the
Newton plaintiffs because the defendants' "execution of
plaintiffs' trades at the NBBO listed price did not necessarily
injure each class member." Id. at 180. (In other words, for
some trades, the NBBO price may have been the best price.) As a
result, the court found that "ascertaining which class members
have sustained injury mean[t] individual issues predominate over
common ones." Id. at 190. Proof of damage is a different issue
than the "mere calculation of damages." Id. at 188. "While
obstacles to calculating damages may not preclude class
certification, the putative class must first demonstrate economic
loss on a common basis." Id. at 189. Defendants here have not
challenged plaintiffs' ability to establish a common economic
loss; defendants focus solely on calculation of damages. Given
that the facts in Newton differ from those in a typical
securities action,*fn2 id. at 173, the court finds
defendants' reliance on that decision misplaced.
Plaintiff's reliance on Wilcox is similarly unpersuasive. In
Wilcox, a case involving claims under RICO and the Sherman Act, the court found that
individual issues of class membership, injury in fact, and
damages predominated, making class certification inappropriate.
Wilcox, 97 F.R.D. at 447. Specifically, the court found it
unlikely that plaintiffs would ever be able to develop a damages
formula that would permit mechanical calculation of damages.
Id. Here, on the other hand, defendants have offered the court
no reason to be concerned about plaintiffs' ability to develop a
damages formula. Moreover, in Wilcox, as in Newton, there was
no presumption of economic injury available for the plaintiffs,
so proof of injury had to be established on an individual basis.
Id. Conversely, in many securities fraud cases, there is a
presumption of economic injury. Newton, 259 F.3d at 179-180.
As for defendants' request to bar plaintiffs "from saying
anything else with respect to damages in their reply briefs,"
(Defs.' Resp. at 2), the court declines to issue such a broad
order. In opposing class certification, if defendants argue that
individual damages issues dominate or create manageability
problems, for example, plaintiffs have a right to respond.
Defendants' real concern seems to be that plaintiffs will respond
with a common formula or methodology that they are currently
withholding. That strikes the court as unlikely, but the court
will address the situation if and when it happens.*fn3
For the reasons explained above, the court denies defendants'
motion to compel in part and grants the motion solely to the
extent that the court previously ordered plaintiffs to submit a written explanation of their damages theory.*fn4