Magistrate Judge Imposes Monetary Sanctions and Recommends Adverse Inference Instruction, but not Dismissal, for “Reckless and Egregious Discovery Misconduct”

Keithley v. Home, Inc., 2008 WL 3833384 (N.D. Cal. Aug. 12, 2008)

In this patent infringement case, plaintiffs sought terminating, evidentiary and monetary sanctions based upon defendants’ spoliation of evidence.  Plaintiffs argued that defendants had destroyed three types of evidence:  (1) source code; (2) early architectural, design and implementation documents; and (3) reports.  Plaintiffs contended that the spoliation of these materials impacted plaintiffs’ ability to meet their burden of proving infringement.

The court held several hearings and received extensive briefing on the spoliation issue, which the court observed “became a moving target because of Defendants’ belated production of evidence that it had previously stated was either nonexistent or destroyed.”  In the end, the magistrate judge imposed a monetary sanction of fees and costs associated with defendants’ discovery misconduct, and recommended that the district court give an adverse inference jury instruction to address the spoliation that occurred.  Although the magistrate judge found that the discovery misconduct by defendants in the case was "among the most egregious" the court had seen, she declined to recommend terminating sanctions because there was no evidence that defendants engaged in deliberate spoliation, and because the extreme sanction of dismissal would go beyond what was necessary to cure the prejudice to plaintiffs.

Some examples of defendants’ “reckless and egregious discovery misconduct” include the following:

• Representations to plaintiffs that turned out to be false or misleading

• Material misstatements to the court on more than one occasion, e.g., defendants produced 480,000 files containing reports two weeks after they stated in court in response to the court’s questioning that no reports existed, and approximately sixteen months after the court had ordered production of reports

• No litigation hold.  Although defendants initially contended that they followed proper document retention policies, they later conceded that there was no written litigation hold policy in place during any of the relevant time periods.  “Indeed, no written policy exists even today.  Nor was there any evidence, other than oral testimony, of what employees were told with respect to preservation of documents relevant to this case.  The lack of a written document retention and litigation hold policy and procedures for its implementation, including timely reminders or even a single e-mail notice to relevant employees, exemplifies Defendants’ lackadaisical attitude with respect to discovery of these important documents.”

• “The harm caused by the lack of a preservation policy was compounded by an egregious failure to diligently search for responsive documents in alternate locations until well after the eleventh hour, in the wake of the initial hearing on the motion for sanctions for spoliation.”

• At least some spoliation, “although the extent of that destruction was not as extensive as was once thought, due to Defendants’ very belated production of responsive documents from alternative sources that it only recently bothered to identify and search.”

• Destruction of earlier versions of source code by technical personnel who had not been informed of defendants’ preservation duties:  “The ignorance of the technical personnel of the importance of the old source code to Defendants’ preservation obligation is not, of course, a legitimate excuse.  Defendants had a duty to notify and periodically remind technical personnel of Defendants’ preservation obligation and ensure that they took adequate steps to safeguard the data.  At a minimum, Defendants were reckless in their conduct regarding the Development Computer.  Had Defendants imposed a proper litigation hold in this case, the evidence on the Development Computer, in particular, the log of changes to the websites’ source code, would have been preserved.  Instead, evidence of prior versions of source code was destroyed.”

• Failure to adequately search for and produce the relevant documents that the court ordered be produced

• Unduly narrow reading of the court’s order granting plaintiffs’ motion as to website documents other than source code

• Conflicting and confusing declarations from key technical personnel regarding the different versions of source code, and defendants’ prior contrary representations on the subject, “[did] not give the Court confidence that all source code has been produced.  To the contrary, the Court is left with the impression that Defendants are not exactly sure how to interpret their own source code system, and that the true dates have not been discovered.”

• Inadequate production of source code and the attendant design documents:  “The Court is frankly shocked that when searching for source code to be produced pursuant to an unambiguous court order issued in December 2006, Defendants apparently waited until April 2008 to consult with the person . . . who was responsible for pouring over the files from the Development Computer to the new source code control system to determine whether she had responsive electronically stored information.  Defendants do not dispute that the archive CD was responsive, and they have provided no adequate explanation, and the Court can fathom none, for why the CD was not found and produced earlier.  Apparently, neither normal discovery obligations that apply even in the absence of a court order, nor even a court order, nor a pending motion for sanctions for spoliation, were sufficient to get Defendants’ attention.  Instead, only the very slowly dawning realization that serious sanctions would be imposed finally resulted in a key IT employee searching a readily accessible office drawer for the archive CD containing source code.”

• Original production of source code in the format of TIFF images, rather than the more useful format of DVDs as expressly required by the court’s order

Accordingly, the court found that defendants’ reckless conduct warranted sanctions under Rule 37, which does not have a bad faith requirement, and also under the court’s inherent power.  Besides reasonable fees and expenses incurred with respect to the motion, the court also imposed sanctions representing future expenses plaintiffs expected to incur as a result of the need to “do over” certain tasks due to defendants’ belated production of documents and ESI, including $135,000 for expert fees, subject to in camera review of documentation of that amount.  Of the $292,585.50 plaintiffs sought for future attorneys’ fees, the court awarded one-third, or $97,528.50, of the total amount sought because such fees had not yet been incurred.  The court deferred a further award of attorney’s fees until such time as plaintiffs actually incurred them and were able to show their justification more specifically.

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