Circuit Court Rules E-Discovery Sanctions Not Limited by Amount in Controversy
Klipsch Group, Inc. v. ePRO E-Commerce (2d Cir. Jan. 25, 2018)
Why This Case is Important
Even with the enactment of Rule 37(e), which tries to curb when and how much e-discovery sanctions should be, the court can use its inherent authority to sanction parties as they see fit to make the non-offending party whole, regardless of the amount in controversy.
In this counterfeiting case, the plaintiff, Klipsch, moved for e-discovery sanctions against the defendant based on the alleged spoliation of discoverable information.
The goal for the plaintiff in discovery was to learn more about magnitude of the defendant's infringing sales by reviewing the defendant's actual sales data. As discovery began, it was evident that the defendant was not complying with its e-discovery obligations, showcased by:
Twice failing to place an adequate legal hold on electronic data including emails (initially after the start of litigation and subsequently after being reminded by the court)
Not disclosing 40,000 potentially relevant sales documents
Custodians "manually delet[ing] thousands of files and emails, us[ing] data-wiping software"
Based on these findings, the district court found that the defendant had "willfully spoliated relevant discoverable information," ordering an adverse inference jury instruction, and imposed $2.7 million in sanctions to cover the costs incurred by the plaintiff because of the discovery misconduct.
The defendants appealed the ruling, arguing that the $2.7 million sanction was disproportionate and impermissibly punitive considering the amount in damages was only likely to be around $20,000.
Defendant's Appeal Denied. In response to the defendant's interlocutory appeal, the Second Circuit unanimously upheld the district court's factual findings and sanction order, ruling that the sanction amount was not excessive.
Sanction Was Not Punitive. The $2.7 million sanction was justified because the defendant "overlooks the fact that ePRO (defendant) caused Klipsch (plaintiff) 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."
Good Faith Discovery Required. The court went on to state that when it comes to discovery obligations, "compliance is not optional or negotiable. Rather, the integrity of our civil litigation process requires that the parties before us, although adversarial to one another, carry out their duties to maintain and disclose the relevant information in their position in good faith."