Rekor Systems, Inc. v. Loughlin

Background

Rekor alleged that Suzanne Loughlin, Harry Rhulen, and James Satterfield defrauded it in connection with Rekor’s purchase of membership interests in Firestorm Solutions LLC and Firestorm Franchising LLC. Rekor also asserted claims involving breach of fiduciary duty, the Computer Fraud and Abuse Act, conversion, and trespass to chattels based on allegations that the defendants deleted corporate emails and failed to return corporate records. The opinion addresses only Rekor’s motion to strike two defense expert reports.

The court’s scheduling orders repeatedly required that all expert discovery—including disclosures, reports, production of supporting documents, and depositions—be completed by the stated deadline. The final deadline was April 8, 2022. Rekor served its expert reports on March 24 and 25. The defendants served the reports of Lawrence R. Chodor and Michael H. Seid on April 22, after the deadline. The defendants had previously stated that they did not intend to call experts and did not timely ask the court to extend the expert-discovery deadline.

The Court’s Analysis

The court held that its scheduling orders applied to all expert reports, including rebuttal reports. Although Federal Rule of Civil Procedure 26 generally allows a rebuttal report within 30 days after the opposing party’s disclosure, the court explained that a specific court order controls when one exists.

The court also concluded that Seid’s report was not a proper rebuttal report. A rebuttal report must respond to the same subject matter as the opposing expert’s report and may not introduce new arguments. Rekor’s expert, Martin S. Wilczynski, addressed financial accounting, materiality, and whether Firestorm’s financial disclosures would alert a potential buyer to undisclosed fee waivers. Seid’s report instead addressed franchise-disclosure regulations, franchising practices, and the adequacy of Rekor’s acquisition-related due diligence. The court found that these were new subjects, not responses to Wilczynski’s opinions. It also stated that compliance with federal or state franchise-disclosure requirements was not material to Rekor’s fraud claims as presented in the complaint.

The court applied Federal Rule of Civil Procedure 37(c)(1), which generally bars a party from using information or a witness disclosed in violation of the disclosure rules unless the violation was substantially justified or harmless. It considered the factors commonly used to decide whether to exclude late expert testimony: the explanation for the delay, the importance of the testimony, prejudice to the opposing party, and whether a continuance could solve the problem.

Disposition of the Reports

Seid Report

The court found no substantial justification for the late service of Seid’s report. The defendants had opportunities to request more time, including after receiving Rekor’s expert reports, but did not do so. The court also found that admitting the report would unfairly prejudice Rekor because it would require reopening discovery, deposing Seid, and potentially allowing Rekor to retain an expert on the new subjects. A continuance would not adequately serve the interests of substantial justice given the case’s age, prior extensions, and scheduled trial. The court therefore excluded the Seid Report.

Chodor Report

The court likewise found that Chodor’s report was late, not substantially justified, and not harmless. However, it reached a different result because Chodor addressed damages, which the court described as a critical issue at trial. Without an expert on damages, the defendants would be disadvantaged in challenging Rekor’s damages expert. The court found that the prejudice from the late disclosure could be addressed without a continuance.

The court allowed Rekor to depose Chodor within 30 days and to make a document request consistent with Rule 26(b)(4). It also reopened discovery for depositions of Loughlin and Rhulen, limited to one hour each, concerning declarations about the value of services they provided under their consulting agreements. The court stated that Loughlin and Rhulen could also be cross-examined at trial about that testimony.

Order

The court granted in part and denied in part Rekor’s motion to strike the defendants’ expert reports. The Seid Report was excluded; the Chodor Report was not excluded, subject to the additional discovery permitted by the court. The Clerk of Court was directed to close Dkt. No. 250.