Formosa Plastics Corporation, Usa v. Kajima International, Inc. ( 2004 )

  NUMBER 13-02-385-CV

  COURT OF APPEALS

THIRTEENTH DISTRICT OF TEXAS

CORPUS CHRISTI - EDINBURG   

FORMOSA PLASTICS

CORPORATION, USA,                                                                Appellant,

v.

KAJIMA INTERNATIONAL, INC.,                                               Appellee.

On appeal from the 135th District Court of Calhoun County, Texas.

O P I N I O N

Before Justices Hinojosa, Yañez, and Castillo

Opinion by Justice Yañez

          Following a jury trial in this suit for fraud, the trial court rendered judgment in favor of appellee, Kajima International, Inc. (“Kajima”). Appellant, Formosa Plastics Corporation, USA (“Formosa”), challenges the trial court’s judgment by nine issues. We sustain appellant’s third issue and hold that the trial court erred in refusing to disqualify Kajima’s expert witness, A. W. “Chip” Hutchison (“Hutchison”) and his firm, A. W. Hutchison & Associates, Inc., (“AWH”) on the basis of “side-switching.” Accordingly, we reverse the trial court’s judgment and remand for a new trial.

I. Background

          In 1993, Kajima sued Formosa for breach of contract, fraud, quantum meruit, and negligent representation arising from construction contracts for work Kajima performed at Formosa’s expansion plant project in Point Comfort, Texas. In 1997, following a jury trial, the trial court rendered judgment for Kajima for $5,591,066.65. Kajima appealed, contending, among other things, that the trial court erred in refusing to submit a broad form fraud question. This Court reversed and remanded to the trial court for a new trial. See Kajima Int’l, Inc. v. Formosa Plastics Corp., 15 S.W.3d 289, 294 (Tex. App.–Corpus Christi 2000, pet. denied).

          On remand, Kajima non-suited all of its claims except fraud. Following a jury trial, the trial court rendered judgment in favor of Kajima and awarded it $15,432,123.45 in actual damages, plus pre-judgment interest of $14,210,269.65 and $403,156.86 in costs. This appeal followed.

II. Disqualification of Kajima’s Expert Witness

A. Background Facts of “Side-Switching” Issue

          In its third issue, Formosa contends the trial court erred in refusing to disqualify Hutchison as Kajima’s expert witness because of “side-switching.” In 1993, Formosa’s former outside counsel, Jones, Day, Reavis & Pogue (“Jones Day”), retained Steve Huyghe, an associate of Hutchison’s at AWH, and AWH as Formosa’s consulting experts in connection with the Kajima lawsuit. On October 4, 1993, Huyghe and an associate met with lawyers at Jones Day to discuss the suit. Over the next few months, Huyghe and AWH performed work for Formosa. By the end of December 1993, Formosa had paid AWH $20,875.89 for work done on the Kajima case.

          In December 1993, Formosa transferred its defense from Jones Day to Porter & Hedges. On December 3, 1993, Huyghe met with lawyers from Jones Day and Porter & Hedges to discuss the case. In April 1994, Porter & Hedges told Huyghe that his work for Formosa was “on hold.”

          A few months later, in August 1994, Kajima’s lead counsel contacted Huyghe about AWH working on the case for Kajima. Huyghe notified Margaret Kelihar, an attorney at Jones Day, Formosa’s former counsel, that he had been contacted by Kajima. Kelihar testified she told Huyghe his knowledge and involvement in the case “would make it difficult for him to represent the other side” and advised him to notify Porter & Hedges. Huyghe did not notify Porter & Hedges or Formosa. Formosa did not learn that Hutchison and Brian Rogers (also of AWH) had been designated as Kajima’s testifying experts until September 19, 1995. Several weeks later, on October 4, 1995, Formosa filed a motion to strike Hutchison and AWH as Kajima’s expert witnesses for “side-switching.” Following a hearing, the trial court denied Formosa’s motion.

B. Kajima’s Arguments

          In response to Formosa’s “side-switching” argument, Kajima argues the trial court was not required to disqualify Hutchison because: (1) even though Formosa initially shared some non-confidential information with Huyghe, who worked for A. W. Hutchison of California, no conflict exists between the work initially performed by Huyghe for Formosa and the work later performed by Hutchison for Kajima because Hutchison worked for AWH, a separate corporate entity based in Atlanta; (2) any information given to Huyghe by Formosa was discoverable and thus was not confidential; (3) Formosa did not directly share confidential information with Hutchison or Huyghe; and (4) the attorney vicarious-qualification rules do not apply to expert firms.

C. Standard of Review and Applicable Law

          We review a trial court’s decision on whether to disqualify an expert witness for an abuse of discretion. See Koch Ref. Co. v. Jennifer L. Boudreaux MV, 85 F.3d 1178, 1181 (5th Cir. 1997). Disqualification of an expert that switches sides in a lawsuit is an issue of first impression in Texas. However, the Fifth Circuit has addressed the test courts should apply when determining whether to disqualify an expert witness who has previously been retained to consult with another party. See id.

          In Koch, the Fifth Circuit adopted the two-part test adopted by the majority of courts that have considered the issue: (1) was it objectively reasonable for the first party who claims to have retained the expert to conclude that a confidential relationship existed between that party and the expert; and (2) did the first party disclose any confidential or privileged information to the expert? Id.; see also, e.g., Turner v. Thiel, 553 S.E.2d 765, 768 (Va. 2001) (adopting and applying two-part test to disqualify expert in medical malpractice case); Mitchell v. Wilmore, 981 P.2d 172, 175-77 (Colo. 1999) (applying two-part analysis to disqualify car accident reconstruction expert); Nelson v. McCreary, 694 A.2d 897, 903-04 (D.C. 1997) (applying two-part test to deny disqualification of medical expert who had been paid by both sides, due to lack of confidential or privileged information).

          Courts have the inherent power to disqualify experts. Koch, 85 F.3d at 1181. That power derives from the necessity to protect privileges which may be breached when an expert switches sides, and from the necessity to preserve public confidence in the fairness and integrity of judicial proceedings. Paul v. Rawlings Sporting Goods Co., 123 F.R.D. 271, 277-78 (S.D. Ohio 1988).

          Accordingly, we adopt the two-part expert-qualification test outlined in Koch. See Koch, 85 F.3d at 1181. The party seeking disqualification bears the burden of proving both elements of the test. Id.

          In Koch, the Fifth Circuit noted that in cases where an expert has switched sides,

no one would seriously contend that a court should permit a consultant to serve as one party's expert where it is undisputed that the consultant was previously retained as an expert by the adverse party in the same litigation and had received confidential information from the adverse party pursuant to the earlier retention. This is a clear case for disqualification.

Id. (quoting Wang Lab., Inc. v. Toshiba Corp., 762 F. Supp. 1246, 1248 (E.D.Va.1991) (citations omitted) (emphasis added)). The Koch court notes that the two-part test thus applies to “disqualification cases other than those in which the expert clearly switched sides.” Id. (emphasis added). In the present case, Kajima disputes whether Formosa’s earlier retention and passage of confidential information occurred. Thus, we apply the two-part test outlined in Koch. See id.               

D. Analysis

          We begin by addressing the first part of the two-part test outlined in Koch: whether it was objectively reasonable for Formosa to conclude that it had established a confidential relationship with Huyghe and AWH. We conclude that it was.

          Kelihar testified at the hearing on Formosa’s motion to strike that in 1993, Formosa retained Huyghe and AWH, but that a confidentiality agreement was not considered necessary because Jones Day had “used [Huyghe] as an expert before.” The record contains copies of invoices to Jones Day from AWH for services rendered for Formosa, including preparation of a “work plan,” compilation of “key project documents,” review of “project documentation,” and “discussion with staff.” The record also contains a copy of a check from Formosa, dated December 21, 1993, in the amount of $20,875.89 to AWH at its Atlanta office for work on the “Kajima case.” A January 7, 1994 letter to Huyghe from Formosa refers to invoices from AWH “for services provided to Formosa as requested by Jones, Day, Reavis & Pogue” and asks about the location of “the work product your company produced.” In response, a letter from Huyghe identifies the “work product” produced by the firm as including an “original claims work plan prepared to outline our proposed method for evaluating the performance of Kajima,” and an “index and review of documents received to date” from Kajima. An April 15, 1994 letter from Huyghe to an attorney at Porter & Hedges notes that the “initial assignment” to “review and critique Kajima’s claim and to research the Formosa records, identifying pertinent documents” has been completed. Based on this evidence, we hold that it was objectively reasonable for Formosa to conclude that a confidential relationship existed with Huyghe and AWH.

          Next, we consider whether Formosa disclosed confidential information to Huyghe. Kelihar testified that in several meetings, she discussed with Huyghe: (1) Formosa’s “strategies for this case and what kind of defense we ought to establish;” (2) information gathered from interviews of potential witnesses for Formosa and what testimony such witnesses could provide; (3) which witnesses might be “good” and “bad” for Formosa; and (4) the amount of money Formosa was willing to expend to settle Kajima’s claims. A letter dated October 19, 1993 from Huyghe to Jones Day describes AWH’s initial budget estimate for additional services based on its “knowledge gained to date” from reviewing Formosa documents and its development of a “claims work plan.” The October 19, 1993 letter is labeled “Privileged & Confidential.”

           Ken Alexander, a partner with Porter & Hedges, testified that on December 3, 1993, following Formosa’s transfer of its defense from Jones Day to Porter & Hedges, he met with Huyghe and several of the Jones Day attorneys. At the meeting, Huyghe said he had been retained by Formosa. Alexander understood that Formosa had retained AWH and that Huyghe worked for the firm. Alexander testified that at the meeting, Huyghe made a case for “what A.W. Hutchison had to offer,” and said that Chip Hutchison had “expertise to offer to the lawyers in whatever way it was needed to assist with the defense of the case.” Alexander said that they discussed Kajima’s claims and “the ways in which we would go about responding to those claims.” Alexander said he considered the information exchanged at the meeting confidential. Similarly, at the trial in the present case, Alexander testified that at the meeting, he discussed confidential information with Huyghe, including Formosa’s probable defenses to Kajima’s claims, evidence that might be developed and had been developed up to that time, matters pertaining to potential witnesses, “strategies,” and various other confidential matters.

          Kajima argues that no confidential information was shared with Huyghe, and even if it was, that such information cannot be imputed to Hutchison. Kajima points to the fact that Kelihar failed to identify specific confidential documents that Formosa provided to Huyghe and to Huyghe’s testimony that in all of his meetings with Formosa’s attorneys, he was not exposed to and did not discuss any information he considered confidential. Kajima argues that Huyghe’s work for Formosa was limited to the preparation of a document index.

          Kajima’s arguments are not persuasive. Huyghe’s statement that he did not discuss anything with Formosa that he considered confidential is conclusory. See In re Amer. Home Prods. Corp., 985 S.W.2d 68, 74 (Tex. 1998) (conclusory opinions of witnesses regarding what is “confidential information” does not raise fact issue). Kelihar’s uncontroverted testimony that Huyghe discussed Formosa’s defense strategies, potential witnesses, and willingness to settle establishes that Formosa provided confidential information to Huyghe. See Koch, 85 F.3d at 1182 (“confidential information” includes discussion of a party’s strategies in litigation, the kind of experts that the retaining party expected to employ, a party’s view of the strengths and weaknesses of each side’s case, the role of each party’s witnesses to be hired, and anticipated defenses).

          Kajima also argues that even if confidential information was disclosed to Huyghe, the trial court did not err in allowing Hutchison to testify for Kajima because Huyghe was employed by A.W. Hutchison of California, Inc., which was a separate entity from Hutchison’s firm, AWH, in Atlanta.

          Huyghe’s own testimony contradicts Kajima’s argument. Huyghe testified that A.W. Hutchison & Associates, Inc. of California and AWH were both owned by Chip Hutchison. At the hearing on the motion to strike, Huyghe also testified as follows:

Q [Formosa’s counsel]: And, again, when you talk about “our professional team,” you’re including Mr. Chip Hutchison in that, correct?

A [Huyghe]: Yes. We have— our company is broken into divisions. We have an Industrial Division, a team of experts, who have got twenty to thirty years. And—

Q: And, Mr. Chip Hutchison is part of that team of experts, correct?

A: Yes.

. . . .

Q: Okay. If you look down on your little logo and so forth on the bottom there, it says, in big letters, “A.W. Hutchison and Associates, Incorporated,” and, then, you’ve got, “Atlanta, Los Angeles, Washington, D.C.” under that, correct?

A: Correct.

Q: And, these are all part of A.W. Hutchison and Associates, Inc., correct?

A: Yes.

          In addition, Huyghe’s June 14, 1993 and October 19, 1993 (marked “Privileged and Confidential”) letters to Jones Day and his April 15, 1994 letter to Porter & Hedges were copied to Hutchison. Kelihar testified that Huyghe said that by hiring the firm, Formosa was retaining the option of having Hutchison available to testify, if Formosa so chose. Similarly, Alexander testified that Huyghe represented that Hutchison’s expertise was available to Formosa “in whatever way it was needed to assist with the defense of the case.” Based on this evidence, it is reasonable to conclude that the information provided to Huyghe was provided to AWH and to Hutchison.

          At the hearing on Formosa’s motion to strike, former Supreme Court Justice Eugene Cook testified for Formosa as an expert on rules concerning conflicts of interest and disqualification of experts and the public policy reasons for such rules. Justice Cook provided the following testimony:

Q [Formosa’s counsel]: Justice Cook, what is the general rule regarding disqualifications?

A [Justice Cook]: It’s really pretty simple. An expert, like an attorney, is not permitted to change sides in the middle of a lawsuit.

Q: Why is that?

A: There’s several reasons. Probably, one of the most fundamental reasons is that it— it adversely effects public confidence in your entire legal system. If the people out there perceive that you can hire an expert and, later, he can change sides, it’s going to lower the overall esteem that people have for the lawyers in this Country and, in fact, the entire system of justice. It’s fundamentally unfair for one side to hire an expert and for another side to later come in and hire the same expert to testify against them. And, probably, a third reason, this is a very simple reason, if it doesn’t pass the smell test. Lawyers and judges are supposed to avoid the appearance of impropriety. This clearly does not pass that smell test.

. . . .

Q: What conclusion have you reached, in your own mind, about whether A.W. Hutchison and Associates has such a conflict of interest that requires disqualification?

A: My opinion is that it has such a disqualification. My opinion is based upon the following factors: First, there was testimony, today, that the settlement authority was disclosed, that the defenses were disclosed. This, clearly, is confidential information. One of the letters from A. W. Hutchison is stamped, “privileged and confidential,” which is an admission. In listening to Mr. Huyghe testify, he talked about a short involvement. He talked about a copy of everything that comes out of our file goes to the corporate . . .Mr. Chip Hutchison. He talks about the fact that he was paid over Twenty Thousand Dollars. He understood his services would be on hold. And, the original assignment, from what I took down, was to review and critique the Plaintiff’s claims. If you allow this sort of conduct to stand and for him to testify, you’re going to create serious doubt on the entire integrity of our legal system.

          Hutchison’s testimony involved all aspects of Kajima’s case, including liability, causation, and damages. He testified that Formosa defrauded Kajima, that Formosa knew of significant problems with the drawings before it signed contracts with Kajima, that the problems caused delays, and that the delays resulted in losses to Kajima. Hutchison also testified regarding the method for calculating Kajima’s damages. We conclude that Hutchison’s testimony was critical to Kajima’s case. We hold that without his testimony, the judgment must be reversed and the case remanded for a new trial.

III. The Dissent’s Waiver Argument

          The dissent contends that Formosa waived its right to seek disqualification of Hutchison and AWH by failing to assert a claim of confidentiality over information Formosa provided to and the work product created by Huyghe. The dissent argues that “Formosa had at least five opportunities” to establish the confidentiality of information it provided to Huyghe, and that by failing to do so, Formosa waived its right to assert a claim of confidentiality.

          The dissent argues Formosa initially failed to address the confidentiality issue at several points during the fall of 1993 when Huyghe was performing work for Formosa at the request of Jones Day. According to the dissent, Formosa missed a fourth “opportunity” when it transferred its defense from Jones Day to Porter & Hedges in December 1993, and Porter & Hedges failed to clearly establish confidentiality over information provided to and work product created by Huyghe. Finally, the dissent argues, Formosa missed its fifth “opportunity” when it failed to object after “Huyghe reported the initial contact by Kajima.”

          With respect to Formosa’s failure to address the confidentiality issue with Huyghe at the outset, we note that Kelihar testified at the hearing on Formosa’s motion to strike that in 1993, Formosa retained Huyghe and AWH in connection with the Kajima lawsuit. She also testified that it “wasn’t necessary for us to enter into a confidentiality agreement with [Huyghe] before we disclosed confidential information” because Jones Day had “used [Huyghe] as an expert before.”

          With regard to the fourth “opportunity,” when Porter & Hedges assumed Formosa’s defense, Alexander testified he understood that AWH had been retained by Formosa and that Huyghe worked for the firm. He also testified that until he learned in late September 1995 that Kajima had named Hutchison as its expert, he believed Formosa still retained the option of using Hutchison in whatever capacity it chose.

          The dissent contends Formosa missed a fifth “opportunity” when it failed to object after Huyghe “reported the initial contact by Kajima.” The record reflects, however, that in 1994, Huyghe “reported” that he had been contacted by Kajima only to Kelihar at Jones Day, Formosa’s former counsel. Kelihar testified that Huyghe said he had been approached by Kajima to be an expert and asked her opinion regarding whether the work he and the firm had earlier performed for Formosa could result in a conflict. Kelihar told Huyghe she thought he “knew some things that . . . would make it difficult for him to represent the other side” and that he should contact Porter & Hedges. Huyghe admitted that he never called Porter & Hedges to let Formosa know that AWH had signed up with Kajima. Formosa learned that Hutchison and Brian Rogers (also of AWH) had been designated as Kajima’s testifying experts on September 19, 1995, when Formosa received Kajima’s supplemental interrogatory responses. Approximately two weeks later, on October 4, 1995, Formosa filed its motion to strike. The trial court held a hearing on Formosa’s motion on October 12, 1995.

          By filing its motion to strike only a few weeks after learning of Kajima’s designation of experts, Formosa preserved its right to seek disqualification of Hutchison and AWH. See In re Amer. Home Prods. Corp., 985 S.W.2d at 73 (delay of less than two months in filing motion to disqualify counsel did not constitute waiver of right to disqualify) (citing Rio Hondo Implement Co. v. Euresti, 903 S.W.2d 128, 131 (Tex. App.–Corpus Christi 1995, orig. proceeding) (holding that two and one-half month delay does not constitute waiver of right to disqualify)).

IV. Conclusion

           We hold Formosa met its burden of establishing that: (1) it reasonably concluded that it had a confidential relationship with Huyghe and AWH; and (2) it disclosed confidential information to Huyghe and AWH. See Koch, 85 F.3d at 1181. Accordingly, we hold that the trial court abused its discretion in refusing to disqualify Hutchison as an expert witness for Kajima. We reverse the judgment of the trial court and remand this case for a new trial in which neither Hutchison nor any other AWH employee will be permitted to testify as an expert witness.  

                                                               LINDA REYNA YAÑEZ

                                                                           Justice

Dissenting opinion by

Justice Errlinda Castillo

Opinion delivered and filed this the

10th day of November, 2004.