Free Reply to Response to Motion - District Court of Colorado - Colorado


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Case 1:01-cv-01644-REB-CBS

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Civil Action No. 01-cv-1644-REB-CBS CARTEL ASSET MANAGEMENT, a Colorado corporation, Plaintiff, vs. OCWEN FINANCIAL CORPORATION, a Florida corporation; and OCWEN FEDERAL BANK FSB, a subsidiary of OCWEN FINANCIAL CORPORATION, Defendants.

REPLY IN SUPPORT OF "MOTION FOR DIRECTION FROM DISTRICT JUDGE RESPECTING PLAINTIFF'S REQUEST TO CONDUCT ADDITIONAL DISCOVERY RELATING TO THE PERIOD FOLLOWING THE INITIAL TRIAL"

Plaintiff, Cartel Asset Management ("Cartel"), through its undersigned counsel, G.W. MERRICK & ASSOCIATES, LLC, respectfully submits this Reply in support of its "Motion for Direction from District Judge Respecting Plaintiff's Request to Conduct Additional Discovery Relating to the Period Following the Initial Trial" filed on May 27, 2008 (the "Motion for Directions").

I.

Introduction

The captioned case is before this Court on remand from the Tenth Circuit. The appellate court affirmed the jury's findings that: (i) Ocwen Federal Bank brazenly

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stole Cartel's highly-valuable trade secret, 1 and (ii) did so under circumstances that justified an award of punitive damages (this being found beyond a reasonable doubt). The Tenth Circuit expressly adopted Cartel's damage theory -- which requires that the thief to disgorge to Cartel all of its ill-gotten gains and/or unjust enrichment. The case was remanded to this Court for a trial to determine the amount of the ill-gotten gains/unjust enrichment. Upon return of the case to this Court, Cartel moved for limited additional discovery. The proposed discovery targets evidence of the ill-gotten gains/unjust

enrichment realized by the Bank and its assigns in the period following the initial trial (in 2004). The Ocwen Defendants have vigorously resisted Cartel's discovery and all efforts to uncover evidence of ill-gotten gains/unjust enrichment accruing in the period following the initial trial. They have done so by arguing that Cartel is "altering" or "modifying" its damage theory from that set forth in the original Pretrial Order -- and may not do so without demonstrating "manifest injustice" under Fed.R.Civ.P. 16 [citing Cleveland v. Piper Aircraft Corp., 985 F.2d 1438 (10th Cir. 1993)]. Response to Motion for Directions at pp. 8-10. But this is a ploy advanced by the Ocwen Defendants. The damage theory remains identical to that tried in the first case measurement and recovery of all of the ill-gotten gains/unjust enrichment that resulted from the theft of Cartel's valuable trade

The trade secret was a listing of real estate professionals who were ready, willing and able to provide specialized valuations of residential real property on a highly expedited basis at a very low cost ("BPOs"). The listing was national in scope and sorted by residential zip codes. The BPOs are sold at substantial profit to residential lenders and institutions that purchase mortgage chattel paper in the secondary market.

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secret. 2 The issue is whether the thief (the Bank and its assigns) enjoy immunity from recovery of ill-gotten gains/unjust enrichment accruing in the period following the original trial. Magistrate Judge Craig Shaffer, believing that he is constrained by the original Pretrial Order (which, of course, was limited to evidence which existed prior to the original trial), preliminarily denied the proposed discovery. But the Magistrate Judge was troubled by this result, and urged that Cartel file this Motion for Directions with the District Judge (seeking directions respecting the scope of the proof of damages to be permitted on retrial). Specifically, in addressing counsel for the Ocwen Defendants, the Magistrate Judge suggested the filing of the Motion for Directions: I mean, as soon as Mr. Merrick [Cartel's lawyer] -- and I understand exactly why he is doing it and if I were Mr. Merrick I would be doing the exact same thing. He clearly wants to expand the universe of damages that his client can recover. Nothing wrong with that. That's what any plaintiff's attorney would do. I would do the exact same thing. *** See, that's where you missed the boat. I seriously would have just sat down and said: I know exactly where Merrick is going. This is not a fight about discovery. This is fundamentally a fight about the total universe of recoverable damages. So I'm going to redefine Merrick's dispute. Merrick wants to make this a battle about discovery. I'm going to redefine the dispute and make it a battle about the scope of the retrial.
Of course, measurement of the ill-gotten gains/unjust enrichment is not a mathematically precise exercise. At the first trial, Cartel's expert witness, James Tenbrook, estimated the ill-gotten gains/unjust enrichment by calculating an estimate profit from the sale of BPOs realized by Ocwen Federal Bank during a four year period ending in 2004 (this assumes that without the theft of Cartel's valuable trade secret it would have taken the Bank four years to develop a national network of real estate professionals who are ready, willing and able to produce BPOs). Obviously, however, if there were other ill-gotten gains that accrued as a result of the theft of Cartel's trade secret in the period after the trial (such as increases in the value of the Bank's valuation business line of products) these could not have been discovered or made known to Mr. Tenbrook to include in his calculations for the first trial. The accrual of gains/benefits following the initial trial is the target of Cartel's discovery request prior to the retrial.
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*** That's what I would have done, because, for all I know, Mr. Merrick is exactly right. The scope of discovery will be broader because the scope of recoverable damages will be broader. But it's a chicken and egg situation. Trans. of May 16, 2008 Hearing at pp. 50-51 (emphasis supplied).

II.

The Motion for Directions Does Not Object to the Magistrate Judge's Order The Ocwen Defendants argue that the Motion for Directions "objects" to

Magistrate Judge Shaffer's May 16, 2008 ruling, and is therefore governed by Fed.R.Civ.P. 72(a). Response to Motion for Directions at pp. 7-8. That is clearly incorrect. To the contrary, Cartel accepts Magistrate Judge Shaffer's ruling -- and in filing the Motion for Directions complied with his express suggestion in filing a request for directions from the District Judge respecting the scope of the damages proof on retrial. First, Magistrate Judge Shaffer made it abundantly clear that his ruling was narrow and preliminary: And beyond that -- I mean, all -- at this point, all I'm going to do is to deny without prejudice document 466, that is plaintiff's renewed -- revised and renewed motion to conduct additional discovery for the reasons stated on the record. I am not persuaded that plaintiffs have demonstrated manifest injustice contemplated by Rule 16. I recognize, however, that the Court may be required to revisit that ruling, depending upon any subsequent determination or future determination by Judge Blackburn on the scope of a retrial and the scope of damages. Trans. of May 16 hearing at pp. 53-54 (emphasis supplied).

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In order to understand this preliminary ruling, and the Motion for Directions which was filed in its wake, one must review Magistrate Judge Shaffer's remarks earlier in the May 16 hearing. In addressing Cartel's counsel he stated: Now, if in fact, ... Judge Blackburn believes as you believe that the measure of damages goes well beyond Mr. Tenbrook's report and the measure of damages goes past 2004. And if he was going to say yes, I will allow the plaintiff to introduce evidence post2004 as to benefits derived, consistent of their theory of unjust enrichment. Then you are in a much stronger position to come back to me and say: Since Judge Blackburn is going to allow me to present evidence and to argue for damages that exceed 2004, I should be entitled to conduct limited discovery ... *** what I'm saying is, essentially, what I would have done -- to make the strongest argument possible, what I would have done is I would have filed some appropriate paper with Judge Blackburn. It says: Since the Tenth Circuit has allowed me to recover unjust enrichment, Judge, I want a determination from you that we will be entitled to introduce at trial evidence of unjust enrichment beyond 2004. Id. at pp. 37-38. And if Judge Blackburn says that the scope of damages is not defined by the four-year period outlined in Mr. Tenbrook's opinion, I would certainly expect and would understand completely your desire to come back to me here. Id. at p. 42. Next, Magistrate Judge Shaffer directed his comments to counsel for the Ocwen Defendants: I just told Mr. Merrick that I understand his arguments about unjust enrichment. I understand his view that the scope of duration of the unjust enrichment can go beyond Mr. Tenbrook's initial opinions. That's why I told Mr. Merrick if it had been what I would have done is filed a motion asking the Court to endorse this view. Judge, I believe in light of the Tenth Circuit's ruling Cartel is entitled to recovery damage that to beyond the specified period of

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four years, which is what Mr. Tenbrook originally opined. Now, if Judge Blackburn said: In light of the Tenth Circuit ruling and in light of the common law understanding of unjust enrichment, I agree with you, Mr. Merrick, you are not in any way constrained to a four-year period. Then I told Mr. Merrick his request for additional discovery might have greater weight and validity. Id. at pp. 47-48. In sum, Cartel has not objected to Magistrate Judge Shaffer's May 16 ruling. Instead, Cartel embraced his recommendation. In its Motion for Directions Cartel has placed before the District Judge the issue of whether Cartel's recoverable damages -under its "unjust enrichment" or "ill-gotten gains" theory of damages which was expressly endorsed by the Tenth Circuit on appeal -- is artificially limited to the four year period immediately preceding the initial trial. If not (as Cartel vigorously urges)

additional discovery targeting the period following the initial trial is justified.

III.

Discovery of Gains/Benefits Following the Original Trial is Compelling In describing the measure of damages under Colorado law for theft of

Cartel's valuable trade secret the Tenth Circuit did not confine the ill-gotten gains/unjust enrichment damages to a limited (4 year) time frame. To the contrary, "'The Colorado Uniform Trade Secrets Act permits plaintiff to recover for both compensatory damages and [all of] the defendant's profits from the misappropriation." Cartel Asset

Management v. Ocwen Federal Bank, 249 Fed.Appx. 63, 73 (10th Cir. 2007), quoting Sonoco Prods. Co. v. Johnson, 23 P.3d 1287, 1289 (Colo.App. 2001). Accord, Mineral Deposits, Ltd. v. Zigan, 773 P.2d 606, 608 (Colo.App. 1988). As this Court has observed, "[d]amages in trade secret appropriation cases are often difficult to ascertain with certainty." NxGen, LLC v. DeJonge, 2007 U.S. Dist.

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LEXIS 70170 at p. *8 (Sept. 20, 2007). "The fact that such damages may be difficult to pin down should not militate in favor of the wrongdoer." Telex Corp. v. Intern'l Bus. Machines Corp., 510 F.2d 894, 932 (10th Cir. 1975). The discovery proposed by Cartel should be permitted for at least two very good and compelling reasons -- and to avoid manifest injustice. 3 First, the discovery relates directly to the ill-gotten gains/unjust enrichment derived by the Bank and its successors from the misappropriation of Cartel's valuable trade secret. It recognizes that these gains/enrichment can be derived over a period of time that extends beyond the date of the original trial in the captioned case. 4 Second, the discovery is directly relevant to the accuracy and reliability of Mr. Tenbrook's assumption (as part of his estimation of the ill-gotten gains) as to how long it would require for Ocwen Federal Bank to construct a national network of BPO providers independent of the theft of Cartel's trade secret. WHEREFORE, consistent with the recommendation of the Magistrate Judge at the May 16, 2008 hearing, Cartel respectfully moves this Court for an Order: (i) directing that Cartel is entitled to conduct discovery relating to the ill-gotten gains, unjust enrichment and benefit realized by the Bank from its theft of Cartel's trade secret during the period at and following the trial, and (ii) approving service of the written discovery

The Tenth Circuit instructed in this case: "if a party makes a timely motion to produce new and material evidence which was not otherwise readily accessible or known, the court should, within the exercise of discretion, consider whether denial of the new evidence would create a manifest injustice." Cartel Asset Management v. Ocwen Federal Bank, 2007 U.S.App. LEXIS 22346 at **50-51. Of course, the "benefit" arising from the theft of Cartel's network of real estate professionals includes benefits that accrued to the Bank at and after the initial trial. Some of the components of that benefit include: (i) acceleration in the building of a database of real estate professionals who are willing to provide BPOs for the Bank that is national (or larger) in scope (ii) increased profitability of the Bank's valuation product lines, (iii) increase in value of the Bank's various valuation product lines, and (iv) increased value of the Bank and/or the Bank's business. The discovery proposed by Cartel is targeted at discovering and valuing these benefits accruing to or for the benefit of the Bank.
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attached to the Motion for Directions, and (iii) approving the conduct of a Rule 30(b)(6) examination of the Defendants to address the same subject matter. Respectfully submitted this 26th day of June, 2008.

/s/ Glenn W. Merrick Glenn W. Merrick Brian S. Emeson G.W. MERRICK & ASSOCIATES, LLC 5445 DTC Parkway, Suite 912 Greenwood Village, Colorado 80111 Telephone: (303) 831-9400 Facsimile: (303) 771-5803 ATTORNEYS FOR PLAINTIFF

CERTIFICATE OF SERVICE I hereby certify that on the 26th day of June, 2008, a true and correct copy of the foregoing REPLY IN SUPPORT OF "MOTION FOR DIRECTION FROM DISTRICT JUDGE RESPECTING PLAINTIFF'S REQUEST TO CONDUCT ADDITIONAL DISCOVERY RELATING TO THE PERIOD FOLLOWING THE INITIAL TRIAL" was electronically filed with the clerk of court using the CM/ECF System: Lino S. Lipinsky de Orlov, Esq. Sandra Wick Mulvany, Esq. McKENNA LONG & ALDERIDGE LLP 1875 Lawrence Street, Suite 200 Denver, Colorado 80202

/s/ Sabrina Marymee___________________

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