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March 2012

R&R Sails, Inc. v. Insurance Company of the State of Pennsylvania - Precluding Evidence of Brandt Fees Based on Insured's Failure to Comply with Rule 26 First Required a Finding of Willfulness, Fault, or Bad Faith.

District Court Did Not Abuse its Discretion in Finding that Insured Violated Rule 26 by Failing to Produce Invoices in Support of its Brandt Fees Claim but the Imposition of Terminating Sanctions Required a Finding of Willfulness, Fault, or Bad Faith.

(March 21, 2012) ___ F.3d ____; 12 C.D.O.S. 3330

The Ninth Circuit Court of Appeals reversed a district court's ruling excluding evidence of Brandt fees, which had the effect of a terminating sanction.  The court held that the insured's failure to produce invoices in support of its Brandt fees request did not support terminating sanctions absent a finding of willfulness, fault, or bad faith.

R&R Sails, Inc. ("R&R") owns Hobie Cat Australasia Pty. Ltd. ("Hobie Cat"), an Australian corporation that manufactures and distributes watercraft.  In December 2001, a wildfire damaged Hobie Cat's facility.  At the time of the wildfire, R&R held an insurance policy from The Insurance Company of Pennsylvania, a subsidiary of American International Group, Inc. ("AIG").  R&R submitted a claim for the loss; AIG paid some portions of the claim but declined to pay others.

R&R sued AIG, asserting breach of contract, unfair competition, and tortious bad faith denial of an insurance claim.  R&R sought to recover punitive damages and Brandt fees. 

R&R served its initial disclosures under Federal Rule of Civil Procedure 26, in which R&R disclosed that it sought $350,000 in Brandt fees.  R&R did not produce invoices supporting the fees, however.  R&R ultimately revised its estimate of Brandt fees to reflect a sum in excess of $450,000 and advised AIG that it would support its request with invoices reflecting the attorneys' fees and costs incurred. 

AIG's counsel repeatedly requested the invoices, to no avail.  Shortly before the final pretrial conference, AIG paid R&R $1,127,246 in full satisfaction of R&R's outstanding claims for benefits under the insurance policy, plus interest.  The payment resolved R&R's contract claim and the district court previously granted summary judgment on R&R's unfair competition claim, leaving only R&R's bad faith tort claim and its request for Brandt fees and punitive damages.

AIG filed a motion in limine seeking to preclude R&R from introducing any evidence in support of its Brandt fees claim at trial.  The district court granted AIG's motion, ruling that R&R had violated Rules 26(a) and 26(e) and the violation was not harmless.  The district court excluded R&R's Brandt fees evidence as a sanction pursuant to Federal Rule of Civil Procedure 37(c)(1).

The district court later granted AIG's subsequent motion for judgment as a matter of law on R&R's bad faith tort claim, finding that, without the Brandt fees evidence, R&R could present no evidence of compensatory damages.  The court concluded that R&R's punitive damages claim also failed because R&R could present no evidence of compensatory damages to support an award of punitive damages, as required by California Civil Code § 3294. R&R appealed.

The Ninth Circuit reversed and remanded, holding the district court erred in excluding R&R's Brandt fees evidence absent a finding of willfulness, fault or bad faith.  While there was no abuse of discretion in the district court's finding that R&R violated Rule 26, the Ninth Circuit concluded the district court failed to make findings sufficient to support its preclusion of the invoices under Rule 37(c)(1).  Under Ninth Circuit law, because the sanction amounted to dismissal of a claim, the district court was required to consider whether the claimed noncompliance involved willfulness, fault or bad faith, and also consider the availability of lesser sanctions.  Because it appeared the district court did not conduct this inquiry and did not make the requisite findings, it erred in excluding the invoices under Rule 37(c)(1). 

Please click here for the opinion. 

This opinion is not final.  It may be modified on rehearing or review may be granted by the United States Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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Jordan S. Altura