Free Response to Motion - District Court of Colorado - Colorado

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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, v. OCWEN FINANCIAL CORPORATION, a Florida corporation; OCWEN FEDERAL BANK FSB, a subsidiary of OCWEN FINANCIAL CORPORATION, and, OCWEN LOAN SERVICING, in its capacity as successor-in-interest to OCWEN FEDERAL BANK, FSB, Defendants.

DEFENDANTS' RESPONSE TO PLAINTIFF'S MOTION FOR DIRECTION Defendants, Ocwen Financial Corporation ("OFC"), Ocwen Federal Bank FSB (the "Bank"), and Ocwen Loan Servicing ("OLS") (collectively, "Defendants"), respectfully submit the following response in opposition to plaintiff Cartel Asset Management, Inc.'s ("Cartel") Motion for Direction from District Judge Respecting Plaintiff's Request to Conduct Additional Discovery Relating to the Period Following the Initial Trial (docket no. 483) (the "Motion for Direction") filed on May 27, 2008. INTRODUCTION The Motion for Direction is, as a matter of law, a Rule 72(a) objection to the Magistrate Judge's denial of Cartel's Revised and Renewed Motion to Conduct Additional Discovery (docket no. 466) (the "Second Discovery Motion") filed on March 28, 2008. The Motion for Direction fails because Cartel cannot prove the

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Magistrate Judge abused his discretion in denying the Second Discovery Motion. The Magistrate Judge correctly determined that Cartel failed to prove the "manifest injustice" without which Cartel may not modify the June 4, 2004 Amended Final Pretrial Order (the "Final Pretrial Order") in this action and, therefore, Cartel may not reopen discovery. (Defendants acknowledge that the form of the Final Pretrial Order will need to be modified to comply with REB Civ. Practice Standard IV.A.2.) Regardless of the applicable legal standard, Cartel is not entitled to additional discovery four years after the first trial in this case. The Court of Appeals remanded this matter for a retrial on the two narrow issues identified in its November 21 Order ­ whether Cartel is entitled to any damages on its trade secrets claim and, if so, the amount of such damages. The first trial was not a mere dress rehearsal intended to reveal the fatal flaws in Cartel's case so Cartel could rectify them before the curtain lifted on a second trial. The damages theory Cartel attempted, without success, to prove at the first trial is predicated on the four years Cartel argued it would have taken the Bank to build a nationwide broker database had the Bank not allegedly misappropriated Cartel's trade secrets. Cartel's expert, James TenBrook ("TenBrook"), testified at trial that the relevant time period for Cartel's damages model was from 2001 to 2004. Cartel's proposed new discovery seeks information and documents that are irrelevant under Cartel's own damages theory. For these reasons, as explained further below, Cartel is not entitled to reopen discovery.

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PROCEDURAL HISTORY The procedural history of this case is described in detail in Defendants' Motion for Ruling Limiting Scope of Second Trial (the "Motion for Ruling") (docket no. 484). See Motion for Ruling at 2-11. Such narrative is incorporated herein by reference. At the conclusion of the first trial, the jury awarded Cartel $4.9 million in actual damages and $3.9 million in punitive damages on Cartel's claim for misappropriation of trade secrets. See id. at 6. On July 16, 2004, Judge Figa set aside the damages verdict on the trade secrets claim on the grounds that it was premised on speculative opinion testimony. See id. The Court of Appeals affirmed the invalidation of the jury's award, see id. at 7, and remanded for a new trial on the damages component of Cartel's trade secret claim. See id. at 8. The Court of Appeals explained: "[T]he amount of actual damages (if any) and the amount of punitive damages (if actuals are proved) are proper issues for consideration on remand." Nov. 21, 2007 Order at 1.1 On February 12, 2008, following remand, Cartel filed a Motion to: (i) Conduct Limited Additional Discovery, (ii) Require Defendants to Supplement Disclosures and Discovery Responses, and (iii) Reserve the Right to Produce Different and/or Additional Evidence at Retrial (docket no. 456) (the "First Discovery Motion"). Cartel did not support the First Discovery Motion with specific proposed discovery requests. At a hearing conducted on March 24, 2008, the Magistrate Judge denied the First Discovery
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Cartel is incorrect in suggesting that the Court of Appeals directed this Court to reopen discovery. See Motion for Direction at 5. The Court of Appeals stated that this Court would need to determine "within the exercise of discretion" whether "manifest injustice" would result if discovery were not reopened. See Cartel Asset Mgmt. v. Ocwen Fin. Corp., slip op., Nos. 04-1502 and 04-1517 at 38-39 (10th Cir. Sept. 18, 2007).

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Motion, on the grounds that Cartel had failed to prove that "manifest injustice" would result if discovery were not reopened. Tr. of Mar. 24, 2008 hearing at 51:11-52:13; 53:2-6. (Relevant pages from the transcript of the March 24, 2008 hearing are submitted herewith as Exhibit A.)2 The Court, however, granted Cartel leave to file a second motion to reopen discovery, together with proposed discovery requests, by the end of the week. Id. at 52:14-53:1; 72:5-7. Cartel filed the Second Discovery Motion and draft discovery requests on March 28, 2008.3 At a hearing conducted on May 16, 2008, the Magistrate Judge again found that Cartel had failed to prove "manifest injustice," see tr. of May 16, 2008 hearing (the "May Transcript") at 41:14-23, and denied Cartel's Second Discovery Motion. See id. at 39:11-41:23. (A complete copy of the May Transcript, which reflects the Magistrate Judge's reasoning in denying the Second Discovery Motion, is submitted herewith as Exhibit B.)

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To the extent the Motion for Direction includes Rule 72(a) objections to the Magistrate Judge's ruling on the First Discovery Motion, it is untimely. See Fed. R. Civ. P. 72(a) (objections to Magistrate Judge's ruling on a nondispositive matter must be filed within ten days).
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Cartel contends it is entitled to discovery regarding the sale of the Bank's Fort Lee, New Jersey branch; the assignment of certain Bank assets to OLS; the dissolution of the Bank; and the "going private" offer for OFC. See Motion for Direction at 2-3. None of these matters relates in any way to Cartel's damage claim, however. See Defs.' Resp. to Revised and Renewed Mot. to Conduct Additional Disc. (docket no. 472) at 58. Furthermore, Cartel fails to advise the Court that the "going private" offer for OFC was withdrawn. See id. at 7.

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During the May 16 hearing, the Magistrate Judge pressed Cartel's counsel as to how Cartel could be entitled to further discovery when its own damage calculations were premised on a four year period ending in 2004: THE COURT: [T]he whole thrust of your complaint alleged that the . . . theft of these names and identifying information occurred prior to or contemporaneous in 2001. MR. MERRICK: Well ­ THE COURT: I went back and . . . read everything. And the original complaint alleged ­ the original complaint was filed in 2001. And it alleged at the time of the complaint, the misappropriation had already occurred. By 2001 with the filing of the original complaint, Cartel was alleging that whatever trade secret information it had in the forms of these names and identifying information had already occurred. MR. MERRICK: Okay. THE COURT: . . . [E]ssentially, Mr. Tenbrook was saying: We are entitled to four years' worth of damages because that's what it would have taken. Ocwen ­ If Ocwen was building its own business, it would have taken them four years, and so they were unjustly enriched because their process of building this business was accelerated. Now what you're saying is you want to go another four years, from 2004 to present. I don't see how I can reconcile that discovery with the Tenth Circuit decision that it has to be directly traceable. You are not allowed to fish, Mr. Merrick. Id. at 9:8-10:9 (emphasis added). The Magistrate Judge further stated: What you are saying is . . . that you would like me to permit this discovery. You are then saying, armed with this discovery, Tenbrook would then be in a position to go back and reformulate his opinions. You're saying: Look, armed with discovery . . . from 2004 to present, Tenbrook might then be able to formulate an opinion which says that I was wrong, that it takes more than four years. It takes six years or eight years.

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Now, the problem that I've got is that when we are dealing with experts and expert reports, the case law is very clear that an expert is supposed to draft a complete and comprehensive report. Rule 26(a)(2)(b) does not contemplate that an expert will dribble out opinions. You are supposed to come up with one complete and comprehensive report. Id. at 33:22-34:12 (emphasis added). The Magistrate Judge held open the possibility that Cartel could reopen discovery, but only if "Judge Blackburn believes as you believe that the measure of damages goes well beyond Mr. TenBrook's report and the measure of damages goes well past beyond 2004 . . . ." Id. at 37:3-13. The Magistrate Judge encouraged Cartel to seek a determination from the District Court Judge that Cartel is entitled to "introduce at trial evidence of unjust enrichment beyond 2004." Id. at 38:22-23. At no time, however, did the Magistrate Judge direct Cartel to file a motion "respecting the appropriateness of conducting additional discovery relating to the period at and following the initial trial." See Motion for Direction at 1. To the contrary, the Magistrate Judge made clear that he would determine whether Cartel was entitled to reopen discovery, but only if the District Court allowed Cartel to change its theory of damages. See May Transcript at 37:21-38:10; 42:9-13.4

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Defendants address in the Motion for Ruling the issues the Magistrate Judge indicated this Court needs to resolve before the second trial can be set. See Motion for Ruling at 11-14.

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ARGUMENT I. THE MAGISTRATE JUDGE'S RULING ON THE SECOND DISCOVERY MOTION CANNOT BE SET ASIDE ABSENT PROOF OF ABUSE OF DISCRETION. Cartel asks this Court to rule on the identical issue the Magistrate Judge decided against Cartel on March 24 and May 16 ­ whether Cartel is entitled to reopen discovery. For this reason, this Court must review the Magistrate Judge's ruling under the standards embodied in Rule 72(a).5 Under Rule 72(a), a Magistrate Judge's nondispositive order may be set aside only if "clearly erroneous or . . . contrary to law." Fed. R. Civ. P. 72(a); see Hutchinson v. Pfeil, 105 F.3d 562, 566 (10th Cir. 1997). A District Court should affirm the decision of a Magistrate Judge pursuant to Rule 72(a) "unless `on the entire evidence [one] is left with the definite and firm conviction that a mistake has been committed.'" Ariza v. U.S. W. Commc'ns Inc., 167 F.R.D. 131, 133 (D. Colo. 1996) (quoting Ocelot Oil Corp. v. Sparrow Indus., 847 F.2d 1458, 1464 (10th Cir. 1988)). "Because a magistrate judge is afforded broad discretion in the resolution of non-dispositive discovery disputes, the court will overrule the magistrate's determination only if this discretion is abused." Id. (quoting Comeau v. Rupp, 142 F.R.D. 683, 684-85 (D. Kan. 1992)) (emphasis added). As Judge Kane so colorfully stated, a Magistrate Judge's ruling on a nondispositive motion must stand unless it "strike[s] me as wrong with the force of a five-week-old, unrefrigerated dead fish." Ariza, 167 F.R.D. at 134 (quoting Nat'l Excess Ins. Co. v.
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In addition to failing to establish an abuse of discretion under Rule 72(a), the Motion for Direction must be denied because Cartel did not comply with D.C.COLO.LCivR 7.1(A).

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Civerolo, 139 F.R.D. 401, 402 (D.N.M. 1991)). As explained below, the Magistrate Judge's ruling on the Second Discovery Motion comes nowhere near running afoul of the "dead fish" test. II. CARTEL IS NOT ENTITLED TO TAKE DISCOVERY INCONSISTENT WITH TENBROOK'S THEORY OF DAMAGES. As a matter of law, Cartel may not change damages theories unless it can prove "manifest injustice" would result if the Final Pretrial Order is not modified. See Fed. R. Civ. P. 16(e); Final Pretrial Order at 24. Not only does Cartel fail to address the Rule 72(a) standard that governs the Motion for Direction, as explained in Section I above, but Cartel nowhere reveals the alleged "manifest injustice" that would justify modification of the Final Pretrial Order and a post-trial shift in damage theories. In addressing amendments of final pretrial orders prior to retrial, the Tenth Circuit admonished that, as here, the first trial typically affords parties "ample time for discovery and investigation." Cleveland v. Piper Aircraft Corp., 985 F.2d 1438, 1449 (10th Cir. 1993). "[R]emand for a new trial [is] not an invitation to reopen discovery for newly retained expert witnesses [or] to enlarge trial time unnecessarily through the addition of totally new exhibits and testimony." Id. Moreover, the Tenth Circuit specifically prohibits amendments to a final pretrial order to serve "a lawyer's theory of how to `plug the holes' of a case." Id. at 1450. It is always easy in hindsight for counsel to realize there may be a better way to try a case the second time around. Hindsight advantage necessarily inures to both sides, but this does not mean a court [. . .] must allow either side to introduce totally new expert witnesses to bolster or impeach earlier evidence.

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Id. at 1449-50 (emphasis in original); see also Kennedy v. Joy Techs., Inc., No. 2:05CV00030, 2008 WL 1985231, at *2 (W.D. Va. May 7, 2008) (denying plaintiff's postremand request to reopen the record and to disclose additional expert opinions); Whitehead v. K Mart Corp., 173 F. Supp. 2d 553, 564-65 (S.D. Miss. 2000) (refusing defendant's request to designate new expert on the issue of damages because this was a matter "which easily could have been pursued prior to the first trial"). Cartel's effort to plug the holes that doomed its trade secret claim at the first trial cannot be squared with these authorities. The Motion for Direction represents an improper attempt to bolster Cartel's case, based on the benefit of post-trial hindsight. See Clark v. R.E.L. Prods., No. 90-4121-R, 1993 U.S. Dist. LEXIS 4788, at *2-7 (D. Kan. Mar. 4, 1993) (magistrate judge properly barred plaintiff's attempt to designate additional expert witnesses in the second trial for the sole purpose of rebutting testimony by defendant's expert witnesses in the first trial); William A. Graham Co., v. Haughey, No. 05-612, 2007 U.S. Dist. LEXIS 86060, at *1-4 (E.D. Pa. Nov. 21, 2007) (precluding defendants from introducing testimony of three witnesses and an expert witness in damages trial, because the additional testimony would simply bolster defendants' case and lead to additional discovery "with no quick end in sight"). The above cases teach that Cartel may not adopt a new theory of damages for the second trial simply because Cartel was unable at the first trial to present competent evidence in support of TenBrook's four-year model. Cartel is not entitled to a series of trials at which it tries on different damages models for size until it finally stumbles upon

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a theory that fits the facts. Cartel is bound by the damages theory it disclosed in the Final Pretrial Order and in its Rule 26(a)(2)(B) disclosures. See Final Pretrial Order, Ex. 1, at 15 (docket no. 281) (TenBrook's report identified as a Cartel exhibit); attachment to Cartel's Supplemental Disclosure of Expert Testimony (the "Supplemental Disclosure") dated May 7, 2004, at 7-8. (A copy of the Supplemental Disclosure is attached hereto as Exhibit C.) Furthermore, Cartel's efforts to reopen discovery cannot be squared with TenBrook's four-year damages theory. See attachment to Supplemental Disclosure at 8. If Cartel's purported damages stopped at the conclusion of 2004, as TenBrook advised the jury, then information and documents relating to a subsequent time period are irrelevant and, therefore, are not discoverable. See Fed. R. Civ. P. 26(b)(1) (only relevant information discoverable). The mere passage of time since the first trial does not entitle Cartel to disavow its damages theory. The Magistrate Judge did not abuse his discretion in denying the Second Discovery Motion because Cartel cannot establish the "manifest injustice" without which it is bound by the witnesses, exhibits, damage theories, and legal theories embodied in the Final Pretrial Order. Thus, there is no basis under Rule 72(a) for setting aside the Magistrate Judge's decision on the Second Discovery Motion.6
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Cartel may not take discovery from OFC under any circumstances, because OFC was rejoined as a party-defendant on March 24, 2008 solely in its capacity as guarantor of the Bank's obligations. See Minute Order dated Mar. 27, 2008 (docket no. 465) at 2 (the date on the first page of the Minute Order is incorrect; the proper date of the hearing is set forth on the second page of the Minute Order). OFC prevailed at trial on Cartel's original claims against OFC. See Cartel's Mot. to Join Ocwen Fin. Corp. as a Party Def. Under Fed. R. Civ. P. 18(b) and 20(a) (docket no. 453) at 1 n.1. 10

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CONCLUSION For the reasons set forth above, Defendants respectfully request that this Court deny the Motion for Direction. Respectfully submitted this 16th day of June, 2008.

/s/ Lino S. Lipinsky de Orlov Lino S. Lipinsky de Orlov Sandra B. Wick Mulvany MCKENNA LONG & ALDRIDGE LLP 1875 Lawrence Street, Suite 200 Denver, Colorado 80202 Tel: (303) 634-4000 Fax: (303) 634-4400 ATTORNEYS FOR DEFENDANTS, OCWEN FINANCIAL CORPORATION, OCWEN FEDERAL BANK FSB, AND OCWEN LOAN SERVICING, LLC

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CERTIFICATE OF SERVICE I hereby certify that on this 16th day of June, 2008, a true and correct copy of the foregoing DEFENDANTS' RESPONSE TO PLAINTIFF'S MOTION FOR DIRECTION was electronically filed with the clerk of court using the CM/ECF System, which will send notification of such filing to the following: Glenn W. Merrick, Esq. G.W. Merrick & Associates, LLC 5445 DTC Parkway, Suite 912 Greenwood Village, CO 80111 [email protected]

/s/ Lino S. Lipinsky de Orlov_________
DN:32142998.5

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