Our next few blog posts will discuss cases addressing the imposition of sanctions. Our first case – Klipsch Group Inc. v ePRO E-Commerce (2d Cir. Jan. 25, 2018) – decided by the Second Circuit, remains good law and is important insofar as the circuit court ruled that eDiscovery sanctions are not limited by the amount in controversy. This is an important case because even with the enactment of Rule 37(e), which tries to limit when discovery sanctions may be imposed, this case reminds us that the courts can use their inherent authority to sanction parties to make the non-offending party whole, irrespective of the amount in controversy. The case also serves as a good reminder that litigators are expected to comply in good faith with their discovery obligations.
Klipsch was a counterfeiting case where the plaintiff moved for eDiscovery sanctions based on the alleged spoliation of discoverable information. Indeed, as discovery proceeded it became apparent that defendant: twice failed[1] to implement a proper legal hold on electronic data, failed to disclose 40,000 potentially relevant sales documents (relevant to determining the magnitude of infringing sales), and allowed custodians to “manually delete thousands of files and emails,” using data-wiping software. Based on these findings, the district court found defendant “willfully spoliated” relevant information, ordered an adverse jury instruction and imposed a $2.7 million sanction to cover plaintiff’s costs incurred by the discovery misconduct.
Defendant filed an interlocutory appeal arguing the $2.7 million sanction was disproportionate and punitive in light of the fact that the amount of damages at issue in the dispute was approximately $20,000.
The Second Circuit unanimously upheld the district court’s factual findings and sanction order, concluding the sanction was not excessive. Rather, the circuit court noted that defendant “overlooks the fact that [it] caused Klipsch to accrue those costs by failing to comply with its discovery obligations.” The court added, “the proportionality that matters here is that the amount of the sanctions was plainly proportionate – indeed, it was exactly equivalent—to the costs ePRO inflicted on Klipsch in its reasonable efforts to remedy ePRO’s misconduct.” As the court detailed, when it comes to discovery “compliance is not optional or negotiable. Rather, the integrity of our civil litigation practice requires that the parties before us, although adversarial to one another, carry out their duties to maintain and disclose the relevant information in their possession in good faith.”
And so, the next time you are drafting discovery responses or identifying custodians likely to be in possession of responsive information, remember Klipsch and the circuit court’s directive that attorneys must comply with their discovery obligations in good faith.
[1] The first failure was at the onset of the litigation; the second failure was after having been reminded by the district court of its preservation obligations.