Is a $2.7 Million Dollar E-Discovery Sanction Appropriate In a Lawsuit Valued at $20,000? The Second Circuit Says, Yes.
March 14, 2018
In 2012, Klipsch Group Inc. (“Klipsch”), a manufacturer of sound equipment, filed a complaint against ePRO E-Commerce Ltd. (“ePRO”), alleging an ePRO subsidiary was selling counterfeit headphones. Through discovery demands, Klipsch called for the production of information relevant to the sale of the allegedly infringing product, including emails and specific sales data. Eventually, however, it became clear that ePRO was not engaging in a cooperative discovery process but instead was avoiding its discovery obligations. For example, ePRO: failed to implement an appropriate legal hold notice even after having been directed by the Trial Court to do so; limited vendor access to electronic data; failed to produce many responsive documents; and (as demonstrated by a forensic examination authorized by the Court) engaged in routine and systematic deletion of thousands of files and emails using a data wiping software long after the suit had commenced.
Because of the numerous and continuous discovery failures, Klipsch moved for sanctions and ultimately filed an ex parte motion seeking additional relief. The District Court concluded that ePRO willfully spoliated evidence and it imposed various sanctions on ePRO including:
(1) a jury instruction requiring the jury find that ePRO destroyed relevant emails and related data;
(2) a jury instruction permitting the jury to infer that the destroyed evidence would have been favorable to Klipsch; and
(3) Klipsch’s reasonable costs and fees, which the Court ultimately concluded was $2.7 million necessitated by ePRO’s obstructionist behavior.
ePRO filed an interlocutory appeal, arguing that the District Court’s $2.7 million sanction in the case where damages were, at most, $20,000 was impermissibly punitive and grossly disproportionate.
In January, the Second Circuit upheld the District Court’s sanction. In doing so, the Circuit held that discovery sanctions should be commensurate with the costs occasioned by the sanctionable behavior, not the value attributable to the alleged (or even proven) compensatory damages. To allow otherwise would, according to the Circuit, force a litigant to a small value dispute to beat risk to suffer blatant and egregious discovery misconduct. And so, sanctions must be proportionate to the costs inflicted on a party – irrespective of total case value – by virtue of that party having to remediate discovery misconduct by its adversary.
Consistent with the theme of cooperative discovery, the Second Circuit noted that “the integrity of our civil litigation process requires that the parties….carry out their duties to maintain and disclose the relevant information in their possession in good faith.” Like the countless other cases I have blogged about since December 2015, this decision serves as another reminder that judges expect cooperation between the parties and their attorneys during the litigation process to achieve orderly and cost-effective discovery; indeed, it is a priority. Had ePRO and its counsel simply cooperated with their adversary and engaged in good faith discovery, the outcome here would have been entirely different.*
* Cooperation among counsel is critically important and the means to insure compliance with Rule 1’s mandate that the parties are responsible for securing the “just, speedy and inexpensive determination” of a civil litigation. Indeed, the revised committee notes state, “[m]ost lawyers and parties to cooperate to achieve these ends” and “[e]ffective advocacy is consistent with – and indeed depends upon – cooperative and proportional use of procedure.”