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SPOLIATION AND SANCTIONS SID LEACH, Phoenix, AZ Snell & Wilmer L.L.P. State Bar of Texas 25 TH ANNUAL INTELLECTUAL PROPERTY LAW COURSE 2012 March 22-23, 2012 Houston CHAPTER 16

SID LEACH, Phoenix, AZ Snell & Wilmer L.L.P.Sid Leach Sid Leach has over 30 years of experience in litigating patent infringement actions. He is a partner in the law firm of Snell

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Page 1: SID LEACH, Phoenix, AZ Snell & Wilmer L.L.P.Sid Leach Sid Leach has over 30 years of experience in litigating patent infringement actions. He is a partner in the law firm of Snell

SPOLIATION AND SANCTIONS

SID LEACH, Phoenix, AZ

Snell & Wilmer L.L.P.

State Bar of Texas

25TH

ANNUAL

INTELLECTUAL PROPERTY LAW COURSE 2012 March 22-23, 2012

Houston

CHAPTER 16

Page 2: SID LEACH, Phoenix, AZ Snell & Wilmer L.L.P.Sid Leach Sid Leach has over 30 years of experience in litigating patent infringement actions. He is a partner in the law firm of Snell
Page 3: SID LEACH, Phoenix, AZ Snell & Wilmer L.L.P.Sid Leach Sid Leach has over 30 years of experience in litigating patent infringement actions. He is a partner in the law firm of Snell

Sid Leach

Sid Leach has over 30 years of experience in litigating patent infringement actions. He is a partner in the law firm of Snell & Wilmer, L.L.P. Recently, he served as lead counsel for Home Gambling Network in a patent infringement action, in which a magistrate judge issued a report and recommendation that default judgment be entered against the defendants based upon findings that the defendants had willfully violated the court’s discovery orders. Sid Leach successfully defended a trade secret case in New Hampshire state court that focused upon computer forensic evidence, in which the plaintiff alleged that a departing employee copied trade secret computer files before he turned in his company-provided laptop. In 2009, Mr. Leach obtained one of the seven largest jury verdicts in the State of Arizona for that year. The federal court in Arizona, in a 2011 order approving an award of attorneys’ fees in favor of Mr. Leach’s client, stated that “[t]he Court’s experience teaches it that Mr. Leach’s credentials and experience set him apart from many of the attorneys who practice before this Court.”

Sid Leach has successfully litigated patent infringement cases, proceedings before the International Trade Commission, and interference proceedings before the Patent and Trademark Office. He has handled a number of trade secret cases involving computer software and other technology. He has represented clients in trademark infringement cases and trademark opposition proceedings before the Patent and Trademark Office. He has appeared in courts across the nation in cases involving IP litigation, including Arizona, Texas, California, Pennsylvania, New York, New Jersey, Michigan, Ohio, Florida, Indiana, Oklahoma, Louisiana, Virginia, Illinois, Colorado, Nebraska, Kansas, Nevada, Maryland, Minnesota, Georgia, Oregon, New Hampshire, and Washington, D.C. Mr. Leach was selected as the 2012 Phoenix Lawyer of the Year in Patent Law by Best Lawyers In America. Mr. Leach received his J.D. degree from the University of Virginia Law School in 1978, and a B.S. in Electrical Engineering from the University of Alabama in 1975. He is admitted to practice in Arizona and Texas, and registered to practice before the United States Patent and Trademark Office.

Page 4: SID LEACH, Phoenix, AZ Snell & Wilmer L.L.P.Sid Leach Sid Leach has over 30 years of experience in litigating patent infringement actions. He is a partner in the law firm of Snell
Page 5: SID LEACH, Phoenix, AZ Snell & Wilmer L.L.P.Sid Leach Sid Leach has over 30 years of experience in litigating patent infringement actions. He is a partner in the law firm of Snell

Spoliation and Sanctions Chapter 16

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TABLE OF CONTENTS 

I.    THE DUTY TO PRESERVE EVIDENCE .................................................................................................................... 1 

II.     SPOLIATION ................................................................................................................................................................... 3 

III.    EXAMPLES OF SPOLIATION CASES INVOLVING ELECTRONICALLY STORED INFORMATION ........ 5 

IV.    A COURT’S POWER TO IMPOSE SANCTIONS ...................................................................................................... 7 

V.     DEFAULT JUDGMENT AS A SANCTION ................................................................................................................ 8 A.   The Public’s Interest In Expeditious Resolution Of Litigation ............................................................................... 9 B.   The Court’s Need To Manage Its Docket ................................................................................................................ 9 C.   The Risk Of Prejudice To The Other Party ............................................................................................................ 10 D. The Availability Of Less Drastic Sanctions............................................................................................................ 10 E.   The Public Policy Favoring Disposition Of Cases On Their Merits ..................................................................... 10 

VI.     STANDARD OF REVIEW ........................................................................................................................................... 11 

VII.    SANCTIONS BASED UPON A REPORT AND RECOMMENDATION FROM A MAGISTRATE JUDGE .. 11 A.    Consideration Of New Evidence Submitted With An Objection To A Report And Recommendation From A

Magistrate Judge ..................................................................................................................................................... 11 B.    Non-Specific Objections To A Magistrate Judge’s Report And Recommendation Are Functionally Equivalent

To No Objections At All ........................................................................................................................................ 12 C.    Consideration Of New Arguments Advanced For The First Time In A Party’s Objection To The Report And

Recommendation By A Magistrate Judge ............................................................................................................ 13 

VIII.   THE EFFECT OF A DEFAULT JUDGMENT ........................................................................................................... 13 

IX.     CONCLUSION............................................................................................................................................................... 14  APPENDIX ................................................................................................................................................................................... 17

Page 6: SID LEACH, Phoenix, AZ Snell & Wilmer L.L.P.Sid Leach Sid Leach has over 30 years of experience in litigating patent infringement actions. He is a partner in the law firm of Snell
Page 7: SID LEACH, Phoenix, AZ Snell & Wilmer L.L.P.Sid Leach Sid Leach has over 30 years of experience in litigating patent infringement actions. He is a partner in the law firm of Snell

Spoliation and Sanctions Chapter 16

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SPOLIATION AND SANCTIONS by Sid Leach

Snell & Wilmer L.L.P.

Recently, a Magistrate Judge in Las Vegas issued

a report and recommendation that a default judgment be entered against the defendants in a patent case as a

sanction for their failure to comply with discovery

orders compelling the production of electronically stored information. Home Gambling Network, Inc. v.

Piche, No. 2:05-cv-00610-DAE-LRL, slip opinion (D.

Nevada Aug. 12, 2011) [copy provided in Appendix]. This is a case in which the defendants claimed that

they did not have any ―documents‖ to produce, but

discovery later revealed that they were limiting the

meaning of the word ―documents‖ to paper documents only.

In our adversarial system of resolving disputes,

attorneys play an important role in the search for truth. In order for the system to work as intended, attorneys

must maintain a high standard of ethics in their

litigation conduct. ―An attorney is an ‗officer of the court‘ who, by virtue of his or her professional

position, undertakes certain ‗special duties ... to avoid

conduct that undermines the integrity of the

adjudicative process.‘‖ Federal Trade Commission v. Network Services Depot, Inc., 617 F.3d 1127, 1143

(9th Cir. 2010) (citation omitted). Unfortunately, there

are times when such high standards are not met, and in appropriate cases, sanctions are available against a

party and/or the party‘s counsel. This paper will

discuss sanctions in the context of spoliation of

evidence, particularly in the form of electronically stored information.

Today, virtually everyone uses a computer at

work, and a company‘s documents and business information are typically contained in electronically

stored files and databases. In modern litigation, the

relevant evidence is typically in the form of electronically stored information. For purposes of

discovery, it is well established that electronic data is

within the scope of discoverable material. In re

Pharmatrak, Inc., 329 F.3d 9, 17 (1st Cir. 2003); Antioch Co. v. Scrapbook Borders, Inc., 210 F.R.D.

645, 652 (D. Minn. 2002). Because of the relative ease

with which electronically stored information may be deleted, issues involving spoliation of evidence are

becoming commonplace in litigation.

Today, the legal profession faces the challenge of an exponentially increasing avalanche of electronically

stored information. The Sedona Conference,

Commentary on Achieving Quality in the E-Discovery

Process, at 4 (May 2009). In the words of one court, ―With the rapid and sweeping advent of electronic

discovery, the litigation landscape has been radically

altered in terms of scope, mechanism, cost, and

perplexity. This landscape may be littered with more casualties than successes…‖. PSEG Power New York,

Inc. v. Alberici Constructors, Inc., No. 1:05-CV-657

(DNH/RFT), 2007 U.S. Dist. LEXIS 66767, at *1 (N.D.N.Y. Sept. 7, 2007).

I. THE DUTY TO PRESERVE EVIDENCE

―The preservation obligation runs first to counsel, who has a duty to advise his client of the type of

information potentially relevant to the lawsuit and of

the necessity of preventing its destruction.‖ Surowiec v.

Capital Title Agency, Inc., 790 F. Supp.2d 997, 1006 (D. Ariz. 2011); see Richard Green (Fine Paintings) v.

McClendon, 262 F.R.D. 284, 290 (S.D.N.Y. 2009).

The duty to preserve evidence ―is a duty owed to the court, not to the party‘s potential adversary.‖ Surowiec,

790 F. Supp.2d at 1006, quoting from Ashton v. Knight

Transp., Inc., 772 F. Supp.2d 772 (N.D. Tex. 2011). The duty to preserve evidence arises when a party

reasonably anticipates litigation. Pension Committee of

the University of Montreal Pension Plan v Banc of

America Securities, LLC, 685 F. Supp.2d 456, 466 (S.D.N.Y. 2010) (―It is well established that the duty to

preserve evidence arises when a party reasonably

anticipates litigation.‖). ―Once a party reasonably anticipates litigation, it must suspend its routine

document retention/destruction policy and put in place

a ‗litigation hold‘ to ensure the preservation of relevant

documents.‖ Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212, 218 (S.D.N.Y. 2003)(―Zubulake IV‖);

Pension Committee, 685 F. Supp.2d at 466.

It is well established that the ―duty to preserve arises when a party knows or should know that certain

evidence is relevant to pending or future litigation.‖

Ashton v. Knight Transp., Inc., 772 F. Supp.2d 772 (N.D. Tex. 2011) (emphasis added). Stated differently,

the duty to preserve is triggered ―not only during

litigation, but also extends to the period before

litigation when a party should reasonably know that evidence may be relevant to anticipated litigation.‖

Morford v. Wal-Mart Stores, Inc., No. 2:09-cv-02251-

RLH-PAL, 2011 U.S. Dist. LEXIS 21039, 2011 WL 635220, at *3 (D. Nev. Feb. 11, 2011); Surowiec v.

Capital Title Agency, Inc., 790 F. Supp.2d 997, 1005

(D. Ariz. 2011); see Zublake IV, 220 F.R.D. at 216; In re Napster, Inc. Copyright Litig., 462 F. Supp.2d 1060,

1067-68 (N.D. Cal. 2006).

An immediate ―litigation hold‖ should be

promptly issued after notice of a claim is received. See, e.g., ACORN v. County of Nassau, 2009 U.S. Dist.

LEXIS 19459 (E.D.N.Y. Mar. 9, 2009) (holding that

failure to issue a litigation hold once you have notice of a claim will serve as the necessary culpable state of

mind to sustain a claim of spoliation.); Zubulake IV,

220 F.R.D. at 218.

Page 8: SID LEACH, Phoenix, AZ Snell & Wilmer L.L.P.Sid Leach Sid Leach has over 30 years of experience in litigating patent infringement actions. He is a partner in the law firm of Snell

Spoliation and Sanctions Chapter 16

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Where a ―letter openly threatens litigation, then

the recipient is on notice that litigation is reasonably foreseeable and the duty to preserve evidence relevant

to that dispute is triggered.‖ Goodman v. Praxair

Servs., Inc., 632 F. Supp.2d 494, 511 (D. Md. 2009); Surowiec, 790 F. Supp.2d at 1006.

For example, when in-house counsel receives a

letter threatening litigation, he or she is ―obligated to suspend [the company‘s] document

retention/destruction policy and implement a ‗litigation

hold‘ to ensure the preservation of relevant

documents.‖ Surowiec, 790 F. Supp.2d at 1006, quoting from Goodman, 632 F. Supp.2d at 511; see

also Thompson v. U.S. Department of Housing &

Urban Dev., 219 F.R.D. 93, 100 (D. Md. 2003). ―A party or anticipated party must retain all

relevant documents ... in existence at the time the duty

to preserve attaches, and any relevant documents created thereafter.‖ Zubulake v. UBS Warburg LLC,

220 F.R.D. 212, 218 (S.D.N.Y. 2003).

However, a party‘s obligations for preservation of

evidence do not end with a ―litigation hold.‖ The ―litigation hold‖ is only the beginning. Zubulake v.

UBS Warburg, LLC, 229 F.R.D. 422, 432 (S.D.N.Y.

2004) (―Zubulake V‖) (―A party's discovery obligations do not end with the implementation of a ‗litigation

hold‘ - to the contrary, that‘s only the beginning.

Counsel must oversee compliance with the litigation

hold, monitoring the party‘s efforts to retain and produce the relevant documents.‖).

The attorneys representing a party in litigation are

responsible for making sufficient inquiries to determine what electronically stored information is

available on the party‘s computer system. See

G.T.F.M., Inc. v. Wal-Mart Stores, Inc., 2000 U.S. Dist. LEXIS 3804 (S.D.N.Y. 2000) (court-imposed

monetary sanctions on Wal-Mart for electronic

discovery abuses and further found that counsel‘s

inquiries about the defendant‘s computer capacity were certainly deficient.).

Although there may be a ―multitude‖ of ways to

comply with the duty to preserve evidence, ―a mirror-image of the computer system taken at the time the

duty to preserve attaches‖ is one way that a litigant can

preserve evidence. Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y. 2003). A mirror image,

also referred to as a forensic image, of a computer

storage device is an exact replica, bit for bit, of the

contents of the original storage device. New Hampshire Ball Bearings, Inc. v. Jackson, 158 N.H. 421, 424, 969

A.2d 351, 356 (2009) (―A forensic image is an exact

replica, bit for bit, of the original storage device that allows investigation of past use without altering the

original evidence.‖).

However, this is usually an expensive procedure

requiring trained personnel and special forensic

software. Cf. State v. Plude, 2007 Wisc. App. LEXIS

194, at *10 (Wis. Ct. App. March 6, 2007) (Forensic software ―makes a mirror image copy of a hard drive,

without altering the original drive.‖). Making forensic

images of computer hard drives is not practical in a large corporation that faces frequent threats of

litigation. No reported decision has been found in

which a party was sanctioned for failing to make mirror images of its computers upon notice of

threatened litigation.

But in some high stakes litigation, making mirror

images of relevant computers may be required at some point. In a case where deleted files, metadata, or

temporary files stored on a computer system are highly

relevant, a party‘s computers may have relevant information that is lost through normal use of the

computers. Antioch Co. v. Scrapbook Borders, Inc.,

210 F.R.D. 645, 652 (D. Minn. 2002) (ordering defendants to allow plaintiff‘s expert to make a mirror

image of defendants‘ computer hard drives because the

computers may have relevant information which is

being lost through normal use of the computers); State v. Butler, 2005 Tenn. Crim. App. LEXIS 302, at *8

(Tenn. Ct. Crim. App. March 30, 2005) (computer

expert ―agreed that in the process of booting up the Windows operating system the contents of the hard

drive would be changed‖); State v. Plude, 2007 Wisc.

App. LEXIS 194, at *10 (Wis. Ct. App. March 6,

2007) (―every time a computer is even turned on, some change, however small, is made to the hard drive‖).

A forensic image of a hard drive will preserve

evidence available in unallocated space on the hard drive concerning files and data that were once stored

on the hard drive, and then permanently deleted, as

long as the space on the hard drive has not been over-written. It is well-settled that discoverable ―documents‘

within the meaning of Rule 34 of the Federal Rules of

Evidence include computer records that have been

―deleted.‖ Simon Property Group L.P. v. mySimon, Inc., 194 F.R.D. 639, 640 (S.D. Ind. 2000) (―First,

computer records, including records that have been

‗deleted,‘ are documents discoverable under Fed.R.Civ.P. 34.‖). In addition, electronic evidence

that is discoverable includes relevant metadata. Nova

Measuring Instruments Ltd. v. Nanometrics, Inc., 417 F. Supp.2d 1121 (N.D. Cal. 2006) (compelling

production of documents in electronic format complete

with metadata); Williams v. Sprint/United Management

Co., 230 F.R.D. 640, 653 (D. Kan. 2005); In re Honeywell International, Inc., 230 F.R.D. 293, 296

(S.D.N.Y. 2003).

―In general, metadata is relevant when the process by which a document was created is in issue or there

are questions concerning a document‘s authenticity;

metadata may reveal when a document was created,

how many times it was edited, when it was edited and

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Spoliation and Sanctions Chapter 16

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the nature of the edits.‖ Kingsway Financial Services,

Inc. v. Pricewaterhouse-Coopers, LLP, 2008 WL 5423316, at *6 (S.D.N.Y. 2008).

On the other hand, obtaining forensic images of

an adversary‘s computers has provided evidence of spoliation in some cases. A computer forensic expert

can analyze a forensic image of a storage device to

determine what was stored on the device, what files were accessed, and when the files were last accessed or

modified. In addition, a forensic image of a PC hard

drive includes data from which an investigator can

determine what peripheral devices had been connected to the PC. New Hampshire Ball Bearings, Inc. v.

Jackson, 158 N.H. 421, 424-25, 969 A.2d 351, 356

(2009) (―Analysis of the forensic image with forensic software allows an investigator to determine what

peripheral devices have been connected to the device,

what a user accessed, what has been stored on the device, and when it was last accessed or modified.

Because deleted files are not actually erased from

storage media, analysts are able to determine both

current and deleted files so long as the latter have not been completely overwritten with new data.‖).

Because electronic discovery can easily become

broad and intrusive, ―[c]ourts have been cautious in requiring the mirror imaging of computers where the

request is extremely broad in nature and the connection

between the computers and the claims in the lawsuit

are unduly vague or unsubstantiated in nature.‖ Balboa Threadworks, Inc. v. Stucky, No. 05-1157-JTM-DWB,

2006 U.S. Dist. LEXIS 29265, 2006 WL 763668, at *3

(D. Kan. Mar. 24, 2006). Without a sufficient showing of relevance and need, courts disallow the ―drastic

discovery measure‖ of permitting a party to image all

of an opponent‘s computers and electronic media. McCurdy Group v. American Biomedical Group, Inc.,

9 Fed. Appx. 822, 831 (10th Cir. 2001); New

Hampshire Ball Bearings, Inc. v. Jackson, 158 N.H.

421, 969 A.2d 351 (2009) (sustained trial court refusal to allow plaintiff to image 250 computers and all

servers at a competitor, where trial court had allowed

narrower request to image 35 computers of potentially relevant employees and ordered production of back-up

tapes for the servers). Courts are more receptive,

however, to circumscribed requests limited to specified individuals or computers expected to produce relevant

information. See Rowe Entertainment v. William

Morris Agency, 205 F.R.D. 421, 427-28, 432-33

(S.D.N.Y. 2002) (granting revised and limited request for defendants‘ backup tapes and emails and

prescribing protocols for imaging); Simon Property

Group L.P. v. mySimon, Inc., 194 F.R.D. 639, 641 (S.D. Ind. 2000) (granting access to computers used by

four named individuals); Playboy Enterprises, Inc. v.

Welles, 60 F. Supp.2d 1050, 1053 (S.D. Cal. 1999)

(granting access to defendant‘s personal computer).

The case of AdvantaCare Health Partners, L.P. v.

Access IV, 2004 WL 1837997 (N.D. Cal. Aug. 17, 2004), is one example of how forensic images of a

defendant‘s computers provided proof of spoliation of

evidence. In that case, two employees resigned and began a competing business. The defendants were

served with a TRO on the afternoon of October 6,

2003. The TRO prohibited the defendants from using, copying, or destroying any of the plaintiff‘s data, and

required the defendants to permit the plaintiff to make

forensic copies of the hard drives and network servers

of their new company. After forensic images were made of the

defendants‘ hard drives, the plaintiff‘s computer

forensics expert was able to show that one of the defendants had accessed his former employer‘s

computer network and copied a large number of the

company‘s files containing proprietary data prior to leaving. The forensic expert also determined that the

defendant tried to conceal his copying activities by

deleting copied files from his hard drive. A forensic

examination of the defendants‘ computers showed that, after being served with the TRO, one of the defendants

visited numerous websites searching for computer data

deleting software. Immediately after being served, the defendant obtained anti-forensic wiping software, and

over the next four days deleted more than 13,000 files

from his home computer. Id., at *2. Based on the

evidence developed by the computer forensic expert, the plaintiff obtained a sanction instructing the jury

that they must find that the defendants copied all of the

files on the plaintiff‘s computers. Id., at *11.

II. SPOLIATION

―The failure to preserve electronic or other records, once the duty to do so has been triggered,

raises the issue of spoliation of evidence and its

consequences.‖ Thompson v. U.S. Department of

Housing & Urban Dev., 219 F.R.D. 93, 100 (D. Md. 2003). ―Spoliation is the destruction or material

alteration of evidence, or the failure to otherwise

preserve evidence, for another‘s use in litigation.‖ Surowiec v Capital Title Agency, Inc., 790 F. Supp.2d

997, 1005 (D. Ariz. 2011); see Ashton v. Knight

Transp., Inc., 772 F. Supp.2d 772 (N.D. Tex. 2011). ―A party seeking sanctions for spoliation of

evidence must prove the following elements: (1) the

party having control over the evidence had an

obligation to preserve it when it was destroyed or altered; (2) the destruction or loss was accompanied by

a ‗culpable state of mind;‘ and (3) the evidence that

was destroyed or altered was ‗relevant‘ to the claims or defenses of the party that sought the discovery of the

spoliated evidence[.]‖ Goodman v. Praxair Servs., Inc.,

632 F. Supp.2d 494, 509 (D. Md. 2009) (quoting

Thompson, 219 F.R.D. at 101); see Surowiec v Capital

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Spoliation and Sanctions Chapter 16

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Title Agency, Inc., 790 F. Supp.2d 997, 1005 (D. Ariz.

2011); Victor Stanley, Inc. v. Creative Pipe, Inc., ("Victor Stanley II"), 269 F.R.D. 497, 520-21 (D. Md.

2010); In re Napster, Inc. Copyright Litig., 462 F.

Supp.2d 1060, 1070-78 (N.D. Cal. 2006); Zublake v. UBS Warburg LLC ("Zublake IV"), 220 F.R.D. 212,

216 (S.D.N.Y. 2003).

―Courts have not been uniform in defining the level of culpability – be it negligence, gross

negligence, willfulness, or bad faith – that is required

before sanctions are appropriate[.]"Surowiec, 790 F.

Supp.2d at 1006, quoting from Ashton, 2011 U.S. Dist. LEXIS 17569, 2011 WL 734282, at *26. ―Nor is there

consensus as to how the level of culpability is to be

determined, or what prejudice, if any, may be presumed from culpable conduct.‖ Surowiec, 790 F.

Supp.2d at 1006-07.

One case held, in a decision issued six years after the Zubulake V opinion, that the failure to issue a

written litigation hold is now considered to be ―gross

negligence because that failure is likely to result in the

destruction of relevant information.‖ Pension Committee of the University of Montreal Pension Plan

v Banc of America Securities, LLC, 685 F. Supp.2d

456, 465 (S.D.N.Y. 2010) (―By now, it should be abundantly clear that the duty to preserve means what

it says and that a failure to preserve records -- paper or

electronic - and to search in the right places for those

records, will inevitably result in the spoliation of evidence.‖). Judge Scheindlin, the author of the

Pension Committee and Zubulake opinions, is the co-

author of ―Electronic Discovery and Digital Evidence‖ (West 2008), was a member of the Judicial Conference

of the United States Advisory Committee on Rules of

Civil Procedure from 1998 to 2006, where she was actively involved in drafting the e-discovery

amendments to the Federal Rules of Civil Procedure, is

an Observer to The Sedona Conference Working

Group on Electronic Document Retention and Production, and serves on The Sedona Conference

Advisory Board.

However, Judge Scheindlin‘s per se rule has been criticized by other courts. See, e.g., Surowiec v. Capital

Title Agency, Inc., 790 F. Supp.2d 997, 1005 (D. Ariz.

2011) (―The Court disagrees with Pension Committee’s holding that a failure to issue a litigation hold

constitutes gross negligence per se. Per se rules are too

inflexible for this factually complex area of the law

where a wide variety of circumstances may lead to spoliation accusations. An allegedly spoliating party‘s

culpability must be determined case-by-case.‖). Other

courts have found the failure to implement a litigation hold to be an important factor in determining

culpability, but not per se evidence of culpable conduct

giving rise to a presumption of relevance and

prejudice. See, e.g., Hayes v. Dart, No. 08 C 4834,

2010 U.S. Dist. LEXIS 1901, 2010 WL 140387, at *4

(N.D. Ill. Jan. 11, 2010); Sampson v. City of Cambridge, 251 F.R.D. 172, 181-82 (D. Md. 2008);

see also Victor Stanley, Inc. v. Creative Pipe, Inc., 269

F.R.D. 497, 524, 529-31 (D. Md. 2010) ("Victor Stanley II") (discussing how courts differ in the fault

they assign where a party fails to implement a litigation

hold). One court noted, ―Judge Scheindlin‘s views, while

widely quoted and cited, are not always followed by

other judges in her district.‖ Point Blank Solutions, Inc.

v. Toyobo America, Inc., 2011 U.S. Dist. L:EXIS 42239, at *11-12 n.3 (S.D. Fla. April 5, 2011). See

Orbit One Communications, Inc. v. Numerex Corp.,

271 F.R.D. 429, 440 (S.D.N.Y. 2010) (analyzing Judge Scheindlin‘s opinion in Pension Committee and

―respectfully disagree[ing] if the ‗implication‘ from a

‗fair reading‘ of‖ Judge Scheindlin‘s opinion in Pension Committee is that ―some sanctions are

warranted even if the lost information did not have

discovery relevance and even if there has been no

showing that the information was likely to have helped the innocent party.‖).

In Rimkus Consulting Group, Inc. v. Cammarata,

688 F. Supp.2d 598 (S.D. Tex. 2010), the court declined to follow the approach taken in Pension

Committee of presuming relevance and prejudice when

the spoliating party is grossly negligent, noting that

requiring ―a showing that the lost information is relevant and prejudicial is an important check on

spoliation allegations and sanctions motions.‖ 688 F.

Supp.2d at 616-17. Rimkus also made clear, however, that when ―the evidence in the case as a whole would

allow a reasonable fact finder to conclude that the

missing evidence would have helped the requesting party support its claims or defenses, that may be a

sufficient showing of both relevance and prejudice to

make [sanctions] appropriate.‖ Id. at 617.

In the Fifth Circuit, destruction or deletion of information subject to a preservation obligation is not

sufficient for sanctions. Bad faith is required. A severe

sanction such as a default judgment or an adverse inference instruction requires bad faith and prejudice.

See Condrey v. SunTrust Bank of Ga., 431 F.3d 191,

203 (5th Cir.2005); Yeldon v. Phi, Inc., No. 09-3144C, 2011 U.S. Dist. LEXIS 140936, at *53-54 (E.D. La.

Dec. 7, 2011); Consolidated Aluminum Corp. v. Alcoa,

Inc., No. 03-1055-C-M2, 2006 U.S. Dist. LEXIS

66642, at *22-23 n.14 (M.D. La. July 19, 2006) (―[A]lthough courts in other circuits may permit the

imposition of an adverse inference instruction based

upon the gross negligence of the spoliating party, the Fifth Circuit has held that such a sanction may only be

imposed upon a showing of ‗bad faith‘ or intentional

conduct by the spoliating party.‖).

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Spoliation and Sanctions Chapter 16

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In the Ninth Circuit, sanctions may be imposed

even for negligent failures to provide discovery. Fjelstad vs. American Honda Motor Co., 762 F.2d

1334, 1343 (9th Cir. 1985). The moving party need not

demonstrate prejudice in order to obtain an award of sanctions. Torres vs. City of Los Angeles, 548 F.3d

1197, 1213 (9th Cir. 2008). At the same time, a

showing of prejudice can be taken into account in determining appropriate sanctions. However, in order

to impose the sanction of a default judgment, ―the

losing party‘s non-compliance must be due to

willfulness, fault or bad faith.‖ Henry v. Gill Industries, Inc., 983 F.2d 943, 946 (9th Cir. 1993)

(citation omitted). See also Electronics for Imaging,

Inc. v. Photoscript Group Ltd., No. C98-2759 SI (MED), 1999 U.S. Dist. LEXIS 7395, at *13-14 (N.D.

Cal. 1999) (―Defendants' repeated violations of this

Court's orders and applicable local rules, including Defendants' failure to participate in the case

management and discovery processes, plainly

constitute bad faith conduct or, at best, gross

negligence.‖). ―Disobedient conduct not shown to be outside the control of the litigant is all that is required

to demonstrate willfulness, bad faith, or fault.‖ Davis v.

Calvin, No. CIV S-07-1383 FCD EFB P, 2009 U.S. Dist. LEXIS 34066, at *4 (E.D. Cal. April 17, 2009)

(citations and internal quotes omitted), aff’d, 398 Fed.

Appx. 268 (9th Cir. 2010); Henry v. Gill Industries,

Inc., 983 F.2d at 948; Fjelstad v. American Honda Motor Co., 762 F.2d 1334, 1337 (9th Cir. 1985).

In Victor Stanley, Inc. v. Creative Pipe, Inc., 269

F.R.D. 497, 542 (D. Md. 2010), the court summarized, in a chart at the end of the opinion, the law in each

circuit relating to spoliation sanctions by a court,

including the culpability and prejudice requirements.

III. EXAMPLES OF SPOLIATION CASES

INVOLVING ELECTRONICALLY STORED

INFORMATION Spoliation cases involve many types of

electronically stored information. In addition to

documents stored on a hard drive, and emails, electronically stored information involved in spoliation

cases has included voicemail, text messages, photos

posted on Facebook, deleted files, swap files maintained by Windows, the contents of the Windows

print spool file, PDA synchronized data, records

maintained by Windows of searches performed,

records maintained by Windows of websites visited, data maintained in the Windows registry files of thumb

drives that were attached to the computer, blogs, email

―PST‖ files left on a hard drive after the computer was used to access ISP email accounts like Yahoo, Hot

Mail, AOL, etc., and metadata associated with stored

files, such as last access time, file creation time, and

last modified time.

In the recent case of Lester v. Allied Concrete Co.,

No. CL08-150, 2010 Va. Cir. LEXIS 132 (Va. Cir. Ct. Oct. 21, 2011), the plaintiff was advised by his

attorney to remove a photo posted to his Facebook

account before e-discovery began in his wrongful death case. A picture of the plaintiff wearing an ―I [heart] hot

moms‖ t-shirt, with beer in hand, was destroyed and

never produced to the opposing party in a wrongful death lawsuit on behalf of his slain wife, who died

when an Allied Concrete truck slammed into his car.

According to reports, the plaintiff‘s attorney told

him in an email, ―Don‘t worry about sanctions. If we get sanctioned, after the trial, you‘ll have plenty of

money to pay for it.‖ The evidence of spoliation came

to light after the conclusion of the trial. The deletion of the photo will reportedly cost the plaintiff $4.13

million. His attorney was ordered to pay $542,000 of

an award of attorneys fees to the defendant. Forensic experts were able to independently

recover 15 deleted photos, because cloud services like

Facebook have data retention periods and disaster

recovery programs that back up content posted on Facebook. Once something has been stored on a cloud

server, it is almost impossible to permanently delete it

or to destroy all evidence of its existence. In Wisconsin v. Huggett, 324 Wis.2d 786, 783

N.W.2d 675 (Ct. App. 2010), second-degree

intentional homicide charges against the defendant

were dismissed because the state failed to preserve voicemail messages left on two cell phones. The

voicemail messages were apparently exculpatory

evidence of threats against the defendant and his girl friend supporting his affirmative defense of self-

defense. The police were aware of the apparently

exculpatory value of the evidence, and confiscated the defendant‘s cell phone and his girl friend‘s cell phone

as part of the investigation. The defendant was not

charged with any crime until nearly four months after

the incident, and by then, the voice recordings had been automatically deleted by the cell phone provider.

In the case of Flagg v. City of Detroit, 2008 WL

3895470 (E.D. Mich Aug. 22, 2008), the court held that text messages of certain city employees were

discoverable. In addition, the court held that the

defendant had ―possession‖ of the text messages because of its control over the information maintained

through its contractual relationship with the non-party

service provider.

In the case of Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497 (D. Md. 2010), a forensic

examination of the registry files on the defendant‘s

computer showed that thousands of files were deleted from the defendant‘s computers on the eve of a

discovery hearing, and the defendant knew that the

plaintiff‘s interest in imaging his computers was at

issue. 269 F.R.D. at 509. The court had previously

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entered an evidence preservation order, and found that

the files were deleted intentionally by the defendant. Id. at 510.

Of course, email is commonly involved in

spoliation cases. Metropolitan Opera Ass'n, Inc. v. Local 100, Hotel Employees & Rest, 212 F.R.D. 178

(S.D.N.Y. 2003) (Sanctions were imposed where the

spoliating party had failed to comply with its discovery obligations from the very outset of the litigation by

failing to retrieve deleted emails and to implement a

document retention policy, misrepresenting to the court

information regarding the production of documents, willfully delaying and frustrating a court-ordered

deposition, and replacing computers after agreeing to

have a forensic computer expert retrieve emails from those computers).

Emails commonly include attachments.

Attachments to email messages must also be produced when production of the email is required. United States

v. New York Metropolitan Transportation Authority,

No. CV-2004-4237(SLT)(MDG), 2006 WL 3833120,

at *3 (E.D.N.Y. Dec. 29, 2006) (―attachments must be produced.‖); CP Solutions PTE, Ltd. v. General

Electric Co., No. 3:04cv2150(JBA)(WIG), 2006 U.S.

Dist. LEXIS 27053, at *14 (D. Conn. Feb. 6, 2006) (―Attachments should have been produced with their

corresponding emails.).

Email programs like Microsoft Outlook create a

―PST‖ file when email is accessed using a computer. The ‗PST‖ file is a data file where electronic copies of

email are stored on a hard drive. The ―PST‖ file also

includes copies of attachments to email messages. A ―PST‖ file is searchable by a forensic expert, and can

be used to locate email messages that are sent to

specified people, that use specified words, that were sent within a given date range, as well as other search

parameters. The ―PST‖ file can be used to match up

attachments with emails. CP Solutions, at *11 n.4

(―Each of the hundred of thousands of e-mail communications and the attachments bears a

fingerprint identifiable by its date of creation, author,

recipient(s), subject, body, attachments, and related information. This identifying information is the e-

mail‘s PST file. This is the same identifying

information which Plaintiff would use in creating a document index, which could then be used to sort,

review, and analyze these documents.‖). In addition,

the ―PST‖ may reveal that emails were intentionally

deleted if it indicates that a reply was sent to an incoming message, but no corresponding message

appears in the sent folder. Optowave Co. v. Nikitin, No.

6:05-cv-1083-Orl-22DAB, 2006 U.S. Dist. LEXIS 81345, at *28-29 (M.D. Fla. Nov. 7, 2006) (―[T]he

PST file indicated certain messages had been

intentionally deleted, where the ‗inbox‘ folder

indicated that a reply had been sent to an incoming

message, but no such outgoing message existed in the

‗sent‘ folder.‖). In some cases, parties seeking discovery have

been successful in compelling an adversary to produce

electronic ―PST‖ files. See Optowave Co. v. Nikitin, No. 6:05-cv-1803-Orl-22DAB, 2006 WL 3231422, at

*9 (M.D. Fla. 2006) (compelling production of ―PST‖

file containing email). If a company-owned computer is used to log onto

a personal email server, such as a Yahoo! account,

Outlook will make a ―PST‖ file for that email server. A

former employee‘s personal email can be retrieved from the hard drive if the company-owned computer

was used to send and receive personal email. There

have been cases where a departing employee used his personal email account to send email relating to his or

her planned departure and job interviews. If the

company-owned laptop is used to access the departing employee‘s personal email from home, Outlook will

create a ―PST‖ file for the personal email account. That

―PST‖ file will still be on the laptop when the

departing employee returns the company-owned laptop to his former employer. The former employer will be

able to retrieve the former employee‘s personal email

from the hard drive, and read every email, including any emails in the inbox folder, sent folder, or deleted

folder.

In the case of PSEG Power New York, Inc. v.

Alberici Constructors, Inc., No. 1:05-CV-657 (DNH/RFT), 2007 U.S. Dist. LEXIS 66767, at *32-33

(N.D.N.Y. Sept. 7, 2007), the plaintiff was required to

re-produce 3000 emails and their corresponding attachments co-joined at an estimated cost of $37,500,

because the potential for discovery outweighed the

cost. In one remarkable case, the defendant ―deleted‖

three files from his hard drive, and in so doing, actually

preserved the files. New Hampshire Ball Bearings, Inc.

v. Jackson, 158 N.H. 421, 426, 969 A.2d 351, 357 (2009) (―Jackson testified that after receiving a phone

call about the suit on May 5, 2006, he had difficulty

sleeping and searched his computer at 4:00 a.m. for any NHBB files he may have accidentally copied,

found three, and placed them in the recycling bin —

where they remained — with instructions not to erase them.‖). When a file is deleted in Windows, the file is

normally only moved from the folder where it was

previously located to the Recycle Bin. The file is not

actually deleted, and the space where the file is physically located on the hard disk continues to be

regarded as used space that cannot be over-written by

the operating system. In addition, a file in the Recycle Bin cannot be opened or used, and Windows retains a

record of every file moved into and out of the Recycle

Bin since the last time that the Recycle Bin was

emptied. Thus, a file moved to the Recycle Bin is

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actually preserved, cannot be used or opened, and can

later be completely restored. If a departing employee prints out documents

from his or her company-owned laptop before turning

it back in, a forensic examination of the laptop will usually show the last documents that were printed. A

typical printer will print at a speed that is much slower

than the rate at which the data to be printed can be sent to the printer. When a document is printed, Windows

usually sends a copy of the document to a print spooler

so that the PC is not tied up and unable to respond

while the document is printing. After a document has been printed, a copy of the

document remains in the print spooler. The last

document printed can be retrieved from the print spooler, even if the original document itself was

deleted from the computer. The copy of the printed

document remains in the print spooler until the data in the print spooler is over-written by subsequent

documents that are printed.

A departing employee may use the company-

owned laptop to burn a CD in order to copy files from the company-owned laptop. However, the CD burning

process usually makes a temporary copy on the hard

drive of the files being burned. The CD burning process also creates a ―project‖ or ―session‖ for the

contents of the CD. The burning software may also

keep its own log of the CD, or at least a record that a

CD was made, (even if the contents of what was copied are not known).

Windows stores a record of the searches that were

performed searching for files of documents using the ―Search‖ function available on the ―Start‖ menu. The

date each search was performed is also available.

Windows stores Internet history files and temporary Internet files that contain temporary copies

of web pages accessed when someone uses Internet

Explorer to browse the Internet. A forensic

examination of a computer can reveal the Internet websites visited by a user, and reconstruct copies of the

actual web pages that were viewed, and determine

when they were viewed. See Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497, 514 (D. Md.

2010) (deleted temporary Internet files would have

shown the Internet sites that the defendant had accessed). A forensic expert can determine what search

terms were used to search the Internet. For example, if

a defendant searched the Internet to find wiping

software to use for the purpose of cleaning off of his or her hard drive any traces of misappropriated trade

secret data, a computer forensic expert can detect what

websites were visited, what wiping software was purchased, installed, and used, and how much data was

wiped from the hard drive. See AdvantaCare Health

Partners, L.P. v. Access IV, 2004 WL 1837997, at *1-2

(N.D. Cal. Aug. 17, 2004) (computer expert

determined when the ex-employee visited websites and

what websites were visited, what wiping software he installed, and when he used the wiping software to

delete data from his computer).

If an employee uses his or her company-owned PC to synch a PDA, such as a Palm Pilot, the PC hard

drive will have a copy of the synched files stored on it.

Thus, relevant information contained on a former employee‘s PDA may, under those circumstances, be

obtained even if discovery of the contents of the PDA

is not possible, because the information was

subsequently erased or modified by the ex-employee. Wiping software can be used to remove all traces

of electronic data that may have once been stored on a

hard drive or thumb drive. The entire hard drive can be wiped, or the wiping process can be limited to only the

unallocated storage space. However, if a hard drive has

been wiped, the use of wiping software can be detected. Most wiping software will leave a

characteristic pattern on the wiped storage space of the

hard drive; and this pattern will be different from the

expected contents of a new hard drive that has never been used. If wiping software has been installed on a

PC, the registry file will usually reveal that fact. In

addition, the ―accessed date‖ for the ―exe‖ program files of the wiping software program will usually be the

date that the wiping software was last used. The

registry file may also contain the date the wiping

software was installed on the computer. A computer forensic expert can examine a PC to determine whether

wiping software has ever been used on the PC.

Disk defragmentation software can also remove evidence of deleted files. Microsoft Window‘s disk

defragmentation program is a system utility that

consolidates fragmented files and folders on a computer‘s hard disk, so that each occupies a single,

contiguous space in the system. ―To consolidate

fragmented files, the program moves the file fragments

together by ‗overwriting all those places‘ where space in the system was occupied by deleted files. As a

result, ‗the ability to recover deleted items virtually ...

disappears‘ because the same is occupied by other files. Cutting through all the techno-speak, it is

foreseeable that the running of a disk defragmentation

program … can result in the loss of files that were recoverable before the defragmentation occurred.‖

Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D.

497, 504 n.14 (D. Md. 2010).

IV. A COURT’S POWER TO IMPOSE

SANCTIONS

There are two primary sources that supply a court with authority to impose sanctions against a party for

spoliation of evidence. Victor Stanley, Inc. v. Creative

Pipe, Inc., 269 F.R.D. 497, 517 (D. Md. 2010).

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First, a court may impose sanctions based on its

inherent power to manage its docket and its cases. Chambers v. NASCO, Inc., 501 U.S. 32, 46 (1991); In

re Mroz, 65 F.3d 1567, 1575 (11th Cir. 1995);

Residential Funding Corp. v. Degeorge Fin. Corp., 306 F.3d 99, 106-07 (2nd Cir. 2002) (court has the

―inherent power to manage its own affairs‖ via

sanctions); Methode Electronics, Inc. v. Adam Technologies, Inc., 371 F.3d 923, 927 (7th Cir. 2004)

(district courts have ―inherent power to impose

sanctions for abuse of the judicial system.‖); Adkins v.

Wolever, 554 F.3d 650, 652 (6th Cir. 2009); Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006);

Victor Stanley, 269 F.R.D. at 517 (a court‘s inherent

power to control the judicial process and litigation provides the court with the power that is necessary to

redress conduct which abuses the judicial process.). In

Chambers v. NASCO, Inc., 501 U.S. 32, 49 (1991), the Supreme Court held that ―the inherent power of a court

can be invoked even if procedural rules exist which

sanction the same conduct.‖

In a case where sanctions are authorized by statute or rule, but the statute or rule does not include within

its scope a person who is responsible for the

sanctionable conduct, a court may rely upon its inherent power in order to sanction the person. Lockary

v. Kayfetz, 974 F.2d 1166 (9th Cir. 1992).

A finding of bad faith, however, is usually

required to impose sanctions based on the Court‘s inherent powers. Victor Stanley, 269 F.R.D. at 518 (a

court‘s inherent authority may only be exercised to

sanction bad-faith conduct); In re Mroz, 65 F.3d at 1575; In re Pennie & Edmonds, LLP, 323 F.3d 86, 89-

90 (2nd Cir. 2002); Barber v. Miller, 146 F.3d 707,

711 (9th Cir. 1998). But see Young v. City of Providence ex rel. Napolitano, 404 F.3d 33, 40 (1st

Cir. 2005).

―Second, if the spoliation violates a specific court

order or disrupts the court‘s discovery plan, sanctions also may be imposed under Fed. R. Civ. P. 37.‖ Victor

Stanley, 269 F.R.D. at 517. Rule 37(b)(2)(A) provides

a list of sanctions that a court may impose for not obeying a discovery order. The available sanctions

include an order directing that designated facts be

taken as established, an order prohibiting the disobedient party from introducing designated matters

in evidence, and rendering a default judgment. Rule

37(b)(2)(A), Fed.R.Civ.P.

Rule 37 permits sanctions for disobedience of an order to provide or permit discovery, and does not

expressly include an order to preserve evidence.

However, the rule has been interpreted as including sanctions for evidence preservation orders. Victor

Stanley, 269 F.R.D. at 519 (―[I]t cannot seriously be

questioned that a court order to preserve information,

including ESI, has as its core purpose the objective of

ensuring that the ESI can be ‗provided‘ during

discovery, and is intended to ‗permit‘ that discovery.‖). A court may impose sanctions on its own

initiative without any motion for sanctions being filed.

See, e.g., Methode Electronics, Inc. v. Adam Technologies, Inc., 371 F.3d 923 (7th Cir. 2004). If the

court does so, a show cause order will normally be

issued directing the party in question to show cause why sanctions should not be imposed. A show cause

order does not shift the burden of proof for the

imposition of sanctions, but instead facilitates due

process requirements for notice. Cook v. American Steamship Co., 134 F.3d 771, 776 (6th Cir. 1998) (―[A]

show cause order only acts as notice to the relevant

party by informing the party what conduct is alleged to be sanctionable, and allows the party an opportunity to

respond, by presenting evidence and arguments why

sanctions should not be imposed, the party has the opportunity to ‗persuade‘ the court that sanctions are

not warranted.‖).

A district can impose sanctions even if the court

has determined that it does not have subject matter jurisdiction over a case. Willy v. Coastal Corp., 503

U.S. 131, 137 & 140 (1992)(―[T]he interest in having

the rules of procedure obeyed ... does not disappear upon a subsequent determination that the court was

without subject matter jurisdiction.‖).

V. DEFAULT JUDGMENT AS A SANCTION The entry of a default judgment may be imposed

as a sanction for failing to comply with a court‘s

discovery orders. Rio Properties, Inc. v. Rio International Interlink, 284 F.3d 1007, 1022-23 (9th

Cir. 2002). A default judgment may also be entered as

a sanction for the intentional destruction of evidence. Telectron, Inc. v. Overhead Door Corp., 116 F.R.D.

107 (S.D. Fla.1987) (default judgment entered where

corporate counsel for the defendant ordered the

destruction of all the pricing documents he believed would be damaging to the corporate defendant);

Helmac Products Corp. v. Roth (Plastics) Corp., 814

F. Supp. 560, 572 (E.D. Mich. 1992) (default judgment entered against defendant who had destroyed

documents intentionally to prevent fair adjudication of

the dispute). It is appropriate for the court to consider all of a

party‘s discovery conduct in deciding whether a default

judgment should be entered. Henry v. Gill Industries, Inc.,

983 F.2d 943, 947 (9th Cir. 1993) (―Henry appears to suggest that only so much of his discovery conduct as

occurred after the court‘s imposition of monetary

sanctions should have been considered in deciding whether dismissal was warranted. This circuit‘s law is to

the contrary.‖); Adriana Int'l Corp. v. Thoeren, 913 F.2d

1406, 1411 (9th Cir. 1990) (district court properly

considered all of defendant's discovery conduct in

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ordering default judgment: ―In evaluating the propriety of

sanctions, we look at all incidents of a party‘s misconduct.‖), cert. denied, 111 S. Ct. 1019 (1991);

Halaco Eng'g Co. v. Costle, 843 F.2d 376, 381 n.2 (9th

Cir. 1988) (The ―court may indeed consider prior conduct that has already been subject to sanction, when it is

weighing a subsequent sanction motion.‖).

Normally, a court should make an express finding of willfulness, fault or bad faith before imposing the sanction

of a default judgment. See Electronics for Imaging, Inc. v.

Photoscript Group Ltd., No. C98-2759 SI (MED), 1999

U.S. Dist. LEXIS 7395, at *13-14 (N.D. Cal. 1999) (―Defendants' repeated violations of this Court‘s orders

and applicable local rules, including Defendants' failure to

participate in the case management and discovery processes, plainly constitute bad faith conduct or, at best,

gross negligence.‖). In cases where dismissal sanctions are

imposed, ―the losing party‘s non-compliance must be due to willfulness, fault or bad faith.‖ Henry v. Gill Industries,

Inc., 983 F.2d 943, 946 (9th Cir. 1993) (citation omitted).

―Disobedient conduct not shown to be outside the control

of the litigant is all that is required to demonstrate willfulness, bad faith, or fault.‖ Davis v. Calvin, No. CIV

S-07-1383 FCD EFB P, 2009 U.S. Dist. LEXIS 34066, at

*4 (E.D. Cal. April 17, 2009) (citations and internal quotes omitted), aff’d, 398 Fed. Appx. 268 (9th Cir. 2010). See

also Henry v. Gill Industries, Inc., 983 F.2d at 948;

Fjelstad v. American Honda Motor Co., 762 F.2d 1334,

1337 (9th Cir. 1985). Belated compliance with discovery orders does not

preclude imposition of a default judgment as a sanction.

Payne v. Exxon Corp., 121 F.3d 503, 508 (9th Cir. 1997) (noting that last-minute tender of documents does not cure

prejudice or restore other litigants on a crowded docket to

the opportunity to use the courts); North American Watch Corp. v. Princess Ermine Jewels, 786 F.2d 1447, 1451

(9th Cir. 1986) (order of dismissal affirmed: ―Belated

compliance with discovery orders does not preclude the

imposition of sanctions.‖); G-K Properties v. Redevelopment Agency of San Jose, 577 F.2d 645, 647-48

(9th Cir. 1978) (order of dismissal affirmed: ―last minute

tender‖ of discovery does not cure effects of discovery misconduct); Henry v. Gill Industries, Inc., 983 F.2d 943,

947-49 (9th Cir. 1993) (affirming dismissal after a failure

to answer interrogatories or to submit to deposition for eight months); In re Phenylpropanolamine (PPA)

Products Liability Litigation, 460 F.3d 1217, 1238 (9th

Cir. 2006) (―[S]ubstantially complete Fact Sheets were not

submitted until after the motion to dismiss was filed two years after originally due. This neither excuses, nor cures,

prejudice.‖).

A district court should consider five factors before imposing the sanction of a default judgment. (1) the

public‘s interest in expeditious resolution of litigation; (2)

the court‘s need to manage its docket; (3) the risk of

prejudice to the party seeking dismissal; (4) the public

policy favoring disposition of cases on their merits; and

(5) the availability of less drastic sanctions. Rio Properties, Inc. v. Rio International Interlink, 284 F.3d

1007, 1022 (9th Cir. 2002); Construction Laborers Trust

Funds v. Rosal, No. CV 07-6508-AHM(Ex), 2008 U.S. Dist. LEXIS 79677, at *6 (C.D. Cal. Oct. 6, 2008). While

it can always be said, in every case, that ―the public policy

favoring disposition of cases on their merits weighs against default judgment, that single factor is not enough

to preclude imposition of this sanction when the other four

factors weigh in its favor.‖ Rio Properties, 284 F.3d at

1022.

A. The Public’s Interest In Expeditious Resolution

Of Litigation

In a case in which the defendant‘s violation of a

court‘s discovery orders and litigation misconduct forces

the opposing party to invest a substantial amount of time,

effort and attorneys fees in a continuing attempt to obtain relevant and useful discovery, the expeditious resolution

of litigation requires that such conduct be deterred. If

parties in other litigation who are similarly situated got the message that they could engage in the same type of

conduct and escape harsh sanctions, the public policy in

favor of the expeditious resolution of litigation would be

undermined. The public‘s interest in the expeditious resolution of

litigation favors terminating sanctions under

circumstances where the case has been pending for a lengthy period of time due to one party‘s spoliation of

evidence or failure to comply with discovery obligations.

B. The Court’s Need To Manage Its Docket

If every defendant in every case was allowed to get

away with a pattern of delay and non-compliance, a

court‘s docket would likely grind to a halt. As the Ninth

Circuit has noted, ―[d]isregard of the [court‘s] order would undermine the court‘s ability to control its docket, disrupt

the agreed-upon course of the litigation, and reward the

indolent and the cavalier.‖ Johnson v. Mammoth Recreations Inc., 975 F.2d 604, 610 (9th Cir. 1992). The

efficient treatment and resolution of cases will only be

successful if a court‘s orders are taken seriously, and the best way to achieve that is to enforce the court‘s orders

and impose severe sanctions for continued non-

compliance. Wong v. Regents of the University of

California, 410 F.3d 1052, 1060 (9th Cir. 2005)(―In these days of heavy caseloads, trial courts in both the federal

and state systems routinely set schedules and establish

deadlines to foster the efficient treatment and resolution of cases. Those efforts will be successful only if the

deadlines are taken seriously by the parties, and the best

way to encourage that is to enforce the deadlines.‖).

In order to manage a court‘s docket, it is imperative that a court enforces its discovery orders with appropriate

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sanctions. The court‘s need to manage its docket is a

factor that usually weighs in favor of sanctions under such circumstances.

C. The Risk Of Prejudice To The Other Party

The innocent party is usually prejudiced by an

opposing party‘s discovery abuse. This is more true when

the information sought during discovery was central,

rather than peripheral, to the issues in the case. See Construction Laborers Trust Funds v. Rosal, No. CV 07-

6508-AHM(Ex), 2008 U.S. Dist. LEXIS 79677, at *7

(C.D. Cal. Oct. 6, 2008).

Typically, a party‘s non-compliance with the court‘s discovery orders will force the opposing party to invest a

substantial amount of time, effort and attorneys fees in a

continuing attempt to obtain relevant and useful discovery. A party‘s discovery abuse may make the opposing party‘s

trial preparation practically impossible. See Construction

Laborers Trust Funds v. Rosal, supra, 2008 U.S. Dist. LEXIS 79677, at *7 (Default judgment granted against

defendant where ―Defendant's discovery abuse has made

Plaintiff's trial preparation practically impossible.‖).

The absence of timely discovery may deprive a party of the potential opportunity to pursue a motion for

summary judgment or summary adjudication of issues.

See Payne v. Exxon Corporation, 121 F.3d 503, 508 (9th Cir. 1997) (finding prejudice where parties‘ ―repeated

failure to provide documents and information in a timely

fashion prejudiced the ability of [the opposing parties] to prepare their case for trial‖).

The delays occasioned by a party‘s discovery abuse

may result in protracted litigation. See In re Exxon Valdez,

102 F.3d 429, 433 (9th Cir. 1996) (parties‘ ―total failure to respond to discovery and the time consumed by

attempting to secure compliance‖ show prejudice).

An opposing party will be prejudiced if a court does not enforce its orders with effective sanctions. Cf. Welch v.

Professional Transit Management of Tucson, Inc., No. CV

03-631-TUC-CKJ, 2005 U.S. Dist. LEXIS 26577, at *24

n.2 (D. Ariz. Nov. 2, 2005)(―Defendant would be prejudiced [because] Defendant would be forced to

expend additional time and money defending Plaintiff's

claim.‖). Enforcement of a court‘s orders is necessary to preserve the integrity of the discovery process, and to

deter others from attempting the same type of discovery

abuse.

D. The Availability Of Less Drastic Sanctions

Normally, a court should attempt to secure

compliance using less drastic sanctions, before imposing

the sanction of a default judgment. A default judgment is warranted where it is clear that less drastic sanctions will

not achieve compliance. Toth v. Trans World Airlines,

Inc., 862 F.2d 1381, 1385 (9th Cir. 1988) (―The district court considered, and indeed instigated, less drastic

sanctions, but to no avail.‖); Davis v. Calvin, No. CIV S-

07-1383 FCD EFB P, 2009 U.S. Dist. LEXIS 34066, at *8 (E.D. Cal. April 17, 2009) (‗[T]here is no indication that

additional sanctions or another order from the court will

result in plaintiff‘s compliance.‖), aff’d, 398 Fed. Appx. 268 (9th Cir. 2010); Blundell v. County of Los Angeles,

No. CV 08-2212-DDP(Ex), 2009 U.S. Dist. LEXIS

124279, at *14-15 (C.D. Cal. Dec. 1, 2009) (―[T]he Court previously imposed less drastic sanctions for Plaintiff's

discovery abuses, without any apparent effect. More than

once, the Court ordered discovery compliance, imposed

monetary sanctions, and warned of a terminating sanction upon further noncompliance. Nevertheless,

noncompliance continued, suggesting the futility of

sanctions lesser than a terminating sanction.‖).

E. The Public Policy Favoring Disposition Of Cases

On Their Merits

The public policy favoring disposition of cases on their merits ―is not enough to preclude imposition of this

sanction [of default judgment] when the other four factors

weigh in its favor.‖ Rio Properties, Inc. v. Rio

International Interlink, 284 F.3d 1007, 1022 (9th Cir. 2002).

However, when a party is responsible for evidence

spoliation that effectively prevents a court from reaching the merits of the case, the misconduct may preclude a case

from being decided on the merits. When a court‘s inability

to reach a disposition of this case on the merits is a direct result of a party‘s pattern of delay, evasiveness and non-

compliance with the court‘s orders, the offending party

cannot rely on this factor. Blundell v. County of Los

Angeles, No. CV 08-2212-DDP(Ex), 2009 U.S. Dist. LEXIS 124279, at *14 (C.D. Cal. Dec. 1, 2009) (―[T]he

fourth factor is entitled to little weight where a plaintiff

completely refuses to cooperate in discovery.‖). ―[A] case that is stalled or unreasonably delayed by a

party‘s failure to comply with deadlines and discovery

obligations cannot move forward toward resolution on the

merits.‖ In re Phenylpropanolamine (PPA) Products Liability Litigation, 460 F.3d 1217, 1228 (9th Cir. 2006).

Therefore, the fourth factor ―lends little support to a party

whose responsibility it is to move a case toward disposition on the merits but whose conduct impedes

progress in that direction.‖ Id. (citation and internal

quotations omitted). This factor is entitled to little or no weight under

circumstances where there is a total failure to provide

discovery. In re Exxon Valdez, 102 F.3d 429, 433 (9th Cir.

1996) (policy favoring disposition on merits of little weight in light of parties‘ ―total refusal to provide

discovery‖).

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VI. STANDARD OF REVIEW

A district court‘s imposition of terminating sanctions is reviewed for abuse of discretion. Rio Properties, Inc. v.

Rio International Interlink, 284 F.3d 1007, 1022 (9th Cir.

2002) (―We review for an abuse of discretion the district court's decision under Rule 37, and we will overturn a

dismissal sanction only with a definite conviction that it

was clearly outside the acceptable range of sanctions.‖); Toth v. Trans World Airlines, Inc., 862 F.2d 1381, 1385

(9th Cir. 1988).

VII. SANCTIONS BASED UPON A REPORT

AND RECOMMENDATION FROM A

MAGISTRATE JUDGE

The imposition of sanctions, especially the

ultimate sanction of a default judgment, usually mandates

a hearing and the development of an adequate record. Especially where electronically stored information is

involved, the evidentiary hearing may be conducted by a

magistrate judge who prepares a report and recommendation based upon evidentiary findings.

The procedures relating to reports and

recommendations by magistrate judges raises certain issues worthy of discussion.

A. Consideration Of New Evidence Submitted With

An Objection To A Report And Recommendation

From A Magistrate Judge

Under 28 U.S.C. § 636(b)(1), when an objection is

filed to a report and recommendation of a magistrate judge, the district judge ―shall make a de novo

determination of those portions of the report or specified

proposed findings or recommendations to which objection

is made.‖ A district judge ―may accept, reject, or modify, in whole or in part, the findings or recommendations made

by the magistrate judge.‖ Id. Under the statute, ―[t]he

judge may also receive further evidence or recommit the matter to the magistrate judge with instructions.‖ Id.

In United States v. Howell, 231 F.3d 615 (9th Cir.

2000), cert. denied, 534 U.S. 831 (2001), the district court

had refused to consider new factual allegations that were presented for the first time in an objection to the

magistrate judge‘s recommendation. The appellant argued

that the district court was required to consider new evidence filed with an objection, because the statute says

that the judge ―shall make a de novo determination‖ of the

magistrate judge‘s recommendation. The Ninth Circuit rejected that argument. In doing so, the Ninth Circuit

quoted from the legislative history of the statute as

follows:

The use of the words ―de novo‖ determination

is not intended to require the judge actually

conduct a new hearing on contested issues. Normally, the judge, on application, will

consider the record which has been developed

before the magistrate and make his own

determination on the basis of that record, without being bound to adopt the findings and

conclusions of the magistrate.

H.R. Rep. No. 1609, 94th Cong., 2d Sess. 3, reprinted in

1976 U.S.C.C.A.N. at 6163, quoted in United States v.

Howell, 231 F.3d at 622 (emphasis added). The legislative history indicates Congress intended

that a district judge‘s review would normally be based

upon the record developed before the magistrate judge.

The statute provides that a district court judge ―may‖ receive further evidence, however it is apparent that this

should only occur when the objecting party shows that the

new evidence was not available at the time the magistrate judge issued his report and recommendation, or that there

are other extraordinary circumstances that make it

necessary for the district judge to take additional evidence. In the Howell case, the Ninth Circuit noted that this

issue had been addressed in other circuits, and ―[t]he First

and Fifth Circuit say that a district court may, but is not

required to, consider evidence presented for the first time in a party‘s objection to the magistrate judge‘s

recommendation.‖ 231 F.3d at 621. Rejecting the law of

the Fourth Circuit, the Ninth Circuit held, ―[l]ike the First and Fifth Circuits, we conclude that a district court has

discretion, but is not required, to consider evidence

presented for the time in a party‘s objection to a magistrate

judge‘s recommendation.‖ Id. In adopting the law of the First Circuit, the Ninth

Circuit cited Paterson-Leitch Co. v. Massachusetts Mun.

Wholesale Elec. Co., 840 F.2d 985, 990-91 (1st Cir. 1988) (―We hold categorically that an unsuccessful party is not

entitled as of right to de novo review by the judge of an

argument never seasonably raised before the magistrate.‖). In the Paterson-Leitch case, the First Circuit held that the

requirement of a ―de novo determination‖ by the district

judge does not mean that ―an entirely new hand is dealt

when objection is lodged to a recommendation.‖ 840 F.2d at 990. In the words of the court, ―[a]t most, the party

aggrieved is entitled to a review of the bidding rather than

to a fresh deal.‖ The court explained:

The role played by magistrates within the

federal judicial framework is an important one. They exist to assume some of the burden

imposed on the district courts by a burgeoning

caseload. The system is premised on the notion

that magistrates will relieve courts of unnecessary work. Systemic efficiencies would

be frustrated and the magistrate‘s role reduced

to that of a mere dress rehearser if a party were allowed to feint and weave at the initial hearing,

and save its knockout punch for the second

round. In addition, it would be fundamentally

unfair to permit a litigant to set its case in

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motion before the magistrate, wait to see which

way the wind was blowing, and -- having received an unfavorable recommendation --

shift gears before the district judge. Such a fast

shuffling of the orderly processes of federal litigation should not be encouraged.

In a nutshell, the argument upon which [the appellant] belatedly places such stock could

have been, but inexplicably was not, presented

to the magistrate in the first instance. The

appellant is not entitled to yet another nibble at this particular apple. We conclude without

hesitation that the district judge did not abuse

his discretion in declining to entertain the [new argument].

Paterson-Leitch Co. v. Massachusetts Mun. Wholesale Elec. Co., 840 F.2d at 990-91 (citations, internal quotes

and bracketing omitted).

The Ninth Circuit also cited the Paterson-Leitch case

to support its explanation of why the rule makes prudential sense:

The magistrate judge system was designed to alleviate the workload of district courts. To

require a district court to consider evidence not

previously presented to the magistrate judge

would effectively nullify the magistrate judge‘s consideration of the matter and would not help

to relieve the workload of the district court.

Systemic efficiencies would be frustrated and the magistrate judge‘s role reduced to that of a

mere dress rehearser if a party were allowed to

feint and weave at the initial hearing, and save its knockout punch for the second round.

Equally important, requiring the district court to

hear evidence not previously presented to the

magistrate judge might encourage sandbagging. It would be fundamentally unfair to permit a

litigant to set its case in motion before the

magistrate, wait to see which way the wind was blowing, and - having received an unfavorable

recommendation - shift gears before the district

judge.

United States v. Howell, 231 F.3d at 622 (citations and

internal quotes omitted).

In adopting the law of the Fifth Circuit, the Ninth Circuit cited Freeman v. County of Bexar, 142 F.3d 848

(5th Cir. 1998). In the Freeman case, the Fifth Circuit

noted that in exercising its discretion to allow the objecting party to offer new or amplified evidence, ―the

district court should not be compelled to ignore that the

parties had a full and fair opportunity to present their best

evidence to the magistrate judge.‖ 142 F.3d at 852. The

Fifth Circuit said the general nature of the inquiry is

similar to a motion for reconsideration, and a district court should consider, among other things, whether the evidence

was available to the party before she responded to the

motion, or before the evidentiary hearing. See id. at 852-53. The Fifth Circuit also said a district court should

consider ―the reasons for the moving party‘s default‖ in

timely presenting the evidence. 142 F.3d at 853. A district court judge has discretion to refuse to

consider evidence offered for the first time in a party‘s

objections to a magistrate judge‘s report and

recommendation. Stringham v. Bick, 2007 U.S. Dist. LEXIS 18227, at *2 (―It is within this court‘s discretion

‗not to consider evidence offered for the first time in a

party‘s objections to a magistrate judge‘s proposed findings and recommendations…‘.‖) (E.D. Cal. March 15,

2007), quoting from Jones v. Blanas, 393 F.3d 918, 935

(9th Cir. 2004).

B. Non-Specific Objections To A Magistrate Judge’s

Report And Recommendation Are Functionally

Equivalent To No Objections At All

―Failure to object to a magistrate judge‘s recommendation waives all objections to the judge‘s

findings of fact.‖ Jones v. Wood, 207 F.3d 557, 562 n.2

(9th Cir. 2000). In the absence of any objection, a district court may adopt a magistrate judge‘s report and

recommendation without a de novo review. United States

v. Reyna-Tapia, 328 F.3d 1114, 1121 (9th Cir. 2003)

(―The statute makes it clear that the district judge must review the magistrate judge‘s findings and

recommendations de novo if objection is made, but not

otherwise.‖) (en banc). In addition, if objections are filed, a de novo review is triggered only for those portions of the

report and recommendation to which an objection is made.

It is well-settled that ―[d]istrict courts are not required to conduct ‗any review at all . . . of any issue that is not the

subject of objection.‘‖ Ward v. Chavez, 2009 U.S. Dist.

LEXIS 76744, at *2-3 (D. Ariz. Aug. 27, 2009), quoting

from Thomas v. Arn, 474 U.S. 140, 149, (1985). Accord, Lopez v. Yamhill County, 2011 U.S. Dist. LEXIS 90391,

at *2 (Aug. 12, 2011) (―[T]he court is not required to

review, under a de novo or any other standard, the factual or legal conclusions of the magistrate judge as to those

portions of the F&R to which no objections are

addressed.‖) (citations omitted). A district court need not review any part of a

magistrate judge‘s report and recommendation that was

not the subject of a specific objection. Ross v. Goddard,

2006 U.S. Dist. LEXIS 65903, at *8 (D. Ariz. Sept. 14, 2006). Broad non-specific objections to a magistrate

judge‘s report and recommendation, such as it would be a

―miscarriage of justice,‖ are ―too broad to mandate de novo review.‖ Id. at *11.

A primary reason that district courts may accept

magistrate court recommendations without explanation

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when no party objects is to encourage judicial economy and efficiency. Allowing general objections to trigger de novo review of a magistrate court’s recommendation would vitiate the purpose of such recommendations. Non-specific objections to a magistrate’s recommendation are functionally equivalent to no objections at all.

Ross v. Goddard, 2006 U.S. Dist. LEXIS 65903, at *11 (citations omitted).

C. Consideration Of New Arguments Advanced For The First Time In A Party’s Objection To The Report And Recommendation By A Magistrate Judge A party objecting to a report and recommendation of

a magistrate judge should not be allowed to advance new legal arguments that were not made to the magistrate judge. World Triathalon Corp. v. Dunbar, 539 F. Supp.2d 1270, 1278 n.13 (D. Haw. 2008) (“Defendants cannot raise entirely new arguments for the first time on an objection to a Special Master’s Report.”); Aggers v. Tyson, 2011 U.S. Dist. LEXIS 83894, at *3 (E.D. Cal. Aug. 1, 2011) (“As an initial matter, the Court notes that Plaintiff raises a new argument in his objections to the findings and recommendation… A district court is not required to consider arguments that are presented for the first time in objections to a U.S. Magistrate Judge’s findings and recommendations.”) (citation omitted); Ross v. Goddard, 2006 U.S. Dist. LEXIS 65903, at *15 (“The Ninth Circuit has held that a district court need not consider arguments raised for the first time in an objection to a recommendation.”) (citation omitted); Borden v. Secretary of Health & Human Services, 836 F.2d 4, 6 (1st Cir. 1987) (“Appellant was entitled to a de novo review by the district court of the [magistrate judge’s] recommendations to which he objected, however he was not entitled to a de novo review of an argument never raised.”) (citation omitted); Freeman v. County of Bexar, 142 F.3d at 851 (“A party who objects to the magistrate judge’s report waives legal arguments not made in the first instance before the magistrate judge”); see Brown v. Roe, 279 F.3d 742, 745-46 (9th Cir. 2002) (“[W]e do not go as far as the Fourth Circuit, which has held that a district court must consider new arguments raised for the first time in an objection to a magistrate judge’s findings and recommendation.”) (emphasis in original and citation omitted).

The language in the statute, i.e., that a district judge “shall make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made,” 28 U.S.C. § 636(b)(1) (emphasis added), limits the de novo review to issues in the report and recommendation. De novo review does not encompass new arguments and legal theories that were never raised before the magistrate judge, and which consequently are not addressed in the report. The Seventh

Circuit explained the policy considerations underlying this rule:

[T]here are good reasons for the rule that district courts should not consider arguments not raised initially before the magistrate judge, even though their review in cases governed by 28 U.S.C. § 636(b)(1) is de novo. Failure to raise arguments will often mean that facts relevant to their resolution will not have been developed; one of the parties may be prejudiced by the untimely introduction of an argument… Additionally, a willingness to consider new arguments at the district court level would undercut the rule that the findings in a magistrate judge’s report and recommendation are taken as established unless the party files objections to them.

United States v. Melgar, 227 F.3d 1038, 1040 (7th Cir. 2000).

VIII. THE EFFECT OF A DEFAULT JUDGMENT Upon entry of a default judgment, the factual

allegations of the complaint are deemed true. Rio Properties, Inc. v. Rio International Interlink, 284 F.3d 1007, 1023 (9th Cir. 2002); TeleVideo Systems, Inc. v. Heidenthal, 826 F.2d 915, 917-18 (9th Cir. 1987). Therefore, it is useful to have sufficient factual allegations in the complaint to support a judgment on the merits. If the pleading does not contain sufficient factual allegations, it may be necessary for the court to conduct a hearing to establish the truth of allegations by evidence. Rule 55(b)(2)(C), Fed.R.Civ.P.

The allegations in the complaint have an important impact upon the damages and other relief available on a default judgment. Under Rule 54(c), Fed.R.Civ.P., a default judgment must not differ in kind from, or exceed in amount, what is demanded in the pleadings. If the complaint demands a sum certain, or a sum can be made certain by computation, the clerk can enter judgment for that amount. In all other cases, a party must apply to the court for a default judgment. Rule 55(b), Fed.R.Civ.P. The court may conduct hearings, or refer the matter to a magistrate judge, to determine the amount of damages. Rule 55(b)(2), Fed.R.Civ.P.

Normally, the entry of a default judgment based upon a party’s bad faith, intentional misconduct, or violations of a court’s discovery orders, will also result in an award of attorneys fees.

In a patent case, the statutory provisions of 35 U.S.C. §285 authorize a court, in an “exceptional” case, to award reasonable attorneys fees to the prevailing party. Litigation misconduct may suffice, by itself, to make a case exceptional under §285. Rambus Inc. v. Infineon

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Technologies AG, 318 F.3d 1081, 1106 (Fed. Cir.) (―[T]he

district court found that Rambus's misconduct alone supported the determination that this case was

exceptional‖), cert. denied, 540 U.S. 874 (2003);

Telecommunication Systems, Inc. v. Mobile 365, Inc., No. 3:06CV485, 2008 U.S. Dist. LEXIS 112753, at *36-37

(E.D. Va. Sept. 25, 2008), appeal dismissed by stipulation,

363 Fed. Appx. 743 (Fed. Cir. 2009) (settlement). In cases deemed exceptional only on the basis of litigation

misconduct, however, the amount of the award must bear

some relation to the extent of the misconduct. Rambus

Inc., 318 at 1106. ―The trial court has broad discretion in the criteria by which it decides to award attorney fees.‖

Ncube Corp. v. Seachange Int’l, Inc., 436 F.3d 1317, 1325

(Fed. Cir. 2006).

An award of attorneys‘ fees under Section 285 has two purposes. First, an award of fees is designed to

―reimburse a party injured when forced to undergo an

exceptional case.‖ Mathis v. Spears, 857 F.2d 749, 753 (Fed. Cir. 1988). But an award of attorneys‘ fees under

§ 285 also has another purpose. An award of attorneys‘

fees is a sanction that is designed to deter other parties from engaging in similar litigation misconduct. Mathis,

857 F.2d at 754; Samsung Electronics Co. v. Rambus

Inc., No. 3:05cv406, 2006 U.S. Dist. LEXIS 50074, at

*14-17 (E.D. Va. July 18, 2006); cf. Merriman v. Security Insurance Co., 100 F.3d 1187, 1194 (5th Cir.

1996) (―[T]he award of attorneys‘ fees is explicitly

targeted to deterrence of litigation abuse.‖).

―The purpose of sanctions goes beyond

reimbursing parties for expenses incurred responding to unjustified or vexatious claims.

Rather, sanctions are designed to punish a

party who has already violated the court‘s

rules.‖

Perkins v. General Motors Corp., 965 F.2d 597, 599 (8th Cir.), cert. denied, 506 U.S. 1020 (1992).

In an action involving both patent and non-patent

claims, recovery is available under section 285 for the

non-patent claims if the issues involved are intertwined

with the patent issues. Beckman Instruments, Inc. v.

LKB Produkter AB, 892 F.2d 1547, 1552 n.2 (Fed. Cir. 1989); Finkelstein v. Bergna, 804 F. Supp. 1235, 1238-

39 (N.D. Ca. 1992) (No reduction in legal fees where

―all of the legal theories put forward arose from the same nucleus of operative facts,‖ and could not be

viewed as discrete claims because they involved ―a

common core of facts.‖); see Stickle v. Heublein, Inc., 716 F.2d 1550, 1564 (Fed. Cir. 1983) (fees are

available where the evidence is material to both patent

and non-patent issues). In the case of Nikko Materials

USA, Inc. v. R.E. Service Co., No. C 03-2549 SBA,

2006 U.S. Dist. LEXIS 3750, at *29-30 (N.D. Cal. Jan.

13, 2006), the court rejected the argument that an attorneys‘ fee award under 35 U.S.C. § 285 should be

allocated between the patent infringement claims and

counterclaims, and instead awarded the prevailing party all of its requested fees and costs without

reduction. In reaching this result, the Nikko court held

that § 285 is intended to compensate the prevailing party ―for its monetary outlays‖ in defense of the suit,

and includes ―the recovery of all reasonable expenses

incurred in prosecuting the entire action.‖ Id. at *16

(emphasis added), citing Central Soya Co. v. Geo. A. Hormel & Co., 723 F.2d 1573, 1578 (Fed. Cir. 1983).

Awards under section 285 are not limited to

attorneys‘ fees. Mathis v. Spears, 857 F.2d 749, 754 (Fed. Cir. 1988) (In awarding fees under § 285, ―courts

should not be, and have not been, limited to ordinary

reimbursement of only those amounts paid by the injured party for purely legal services of lawyers, or

precluded from ordinary reimbursement of legitimate

expenses defendant was unfairly forced to pay.‖).

Section 285 permits the recovery of reasonable costs, including postage, fax, photocopy, electronic research,

telephone, court reporter, and travel. GT Development

Corp. v. Temco Metal Products Co., No. C04-0451Z, 2005 U.S. Dist. LEXIS 37501, at *8 (W.D. Wash.

August 31, 2005).

Under Section 285, it is proper to include in the

award of attorneys‘ fees the attorney time expended in connection with the claim for attorneys‘ fees. Central

Soya Co. v. Geo. A. Hormel & Co., 723 F.2d 1573,

1577-78 (Fed. Cir. 1983); Mathis v. Spears, No. CV 80-4481 MRP, 1986 U.S. Dist. LEXIS 23590, at *10-

11 (C.D. Cal. June 26, 1986), aff’d without opinion,

818 F.2d 874 (Fed. Cir. 1987), cert. denied, 484 U.S. 826 (1987).

Rule 37(b)(2)(C) of the Federal Rules of Civil

Procedure also provides the Court with authority to award

reasonable attorneys fees and expenses caused by a party‘s failure to comply with the court‘s discovery orders. This

provides an additional basis for an award of attorneys‘

fees subsequent to the date of the court‘s order compelling

discovery.

IX. CONCLUSION

It is now abundantly clear that appropriate efforts must be taken in order to avoid the spoliation of

electronic evidence. Pension Committee of the

University of Montreal Pension Plan v Banc of

America Securities, LLC, No. 05 Civ. 9016 (SAS), slip op. at 2 (S.D.N.Y. Jan. 11, 2010) (―By now, it should

be abundantly clear that the duty to preserve means

what it says and that a failure to preserve records – paper or electronic – and to search in the right places

for those records, will inevitably result in the spoliation

of evidence.‖).

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In an ever-growing trend, courts expect the parties

to work out electronic discovery issues as much as possible without court intervention. Covad

Communications Co. v. Revonet, Inc., 254 F.R.D. 147,

151 (D.D.C. 2008) (―[T]he courts have reached the limits of their patience with having to resolve

electronic discovery controversies that are expensive,

time consuming, and so easily avoided by the lawyers‘ conferring with each other on such a fundamental

question as the format of their productions of

electronically stored information.‖). With the growing

importance of electronic discovery, courts are at risk of being swamped with too many discovery disputes if

the courts do not require counsel to resolve routine

issues themselves; and the imposition of sanctions is seen as a way of providing the incentive to approach

discovery in a different way. Mancia v. Mayflower

Textile Services Company, 253 F.R.D. 354, 361 (D. Md. 2008) (―[C]ourts repeatedly have noted the need

for attorneys to work cooperatively to conduct

electronic discovery, and sanctioned lawyers and

parties for failing to do so.‖).

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UNITED STATES DISTRICT COURT

DISTRICT OF NEVADA

* * *

HOME GAMBLING NETWORK, INC., et al., ))

Plaintiffs, )) 2:05-cv-00610-DAE-LRL

v. ))

CHRIS PICHE, et al., ))

Defendants. ) )

REPORT & RECOMMENDATION

This matter comes before the court on plaintiffs’ Request for an Expedited Status

Conference/Evidentiary Hearing Regarding the CWC Defendants’ Database (#241). Pursuant to the

court’s order (#242), defendants timely filed a six-page Response (#243) on August 13, 2010. On

August 23, 2010, plaintiffs filed a nineteen-page Reply (#244), in which they asserted detailed legal and

factual arguments in support of a demand for default judgment as a sanction against defendants for their

alleged wrongful conduct. The court therefore permitted defendants to file a responsive Sur-Reply

(#250). Minute Order (#249). On December 7, 2010, the court scheduled a status conference for

Wednesday, December 22, 2010. Thereafter, the court conducted an evidentiary hearing on February

17, 2011. The parties submitted post-hearing briefs on March 15, 2011.

Relevant Background

This is an action for patent infringement and related state law claims brought by plaintiffs Home

Gambling Network, Inc. and Melvin Molnick (collectively “plaintiffs”), alleging that defendants

Inversiones VC Dos Mil, S.A., et al. (the “CWC defendants”) are violating United States Patent No.

5,800,268 (the “Method Patent”) by operation of an online gambling website and the production and

distribution of online gambling software. On July 10, 2006, plaintiffs filed a First Amended Complaint

Case 2:05-cv-00610-DAE-LRL Document 262 Filed 08/12/11 Page 1 of 15

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smolina
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(#98), alleging among other things that the CWC defendants infringed its Method Patent through

operation of an online gambling website and the production and distribution of online gambling

software that permit sports betting, lottery, keno, and bingo games in violation of the parties’ agreement.

Although recognizing that the CWC defendants were granted the right to sub-license to CWC Resellers,

CWC Licensees, and End Users, plaintiffs assert that the CWC defendants sub-licensed its software to

its licensees without excluding bingo, keno, lottery and sports betting.

The instant motion stems from a discovery dispute that began with plaintiffs’ February 12, 2007

request for production of documents. Plaintiffs’ first motion to compel (#147) was filed on July 31,

2007. The court granted plaintiffs’ motion (#147) on February 12, 2008, and ordered the defendants

to produce all responsive documents by March 11, 2008, with the exception of one item, which was to

be produced subject to entry of a protective order. Order (#154).

On March 11, 2008, the CWC defendants provided supplemental responses to plaintiffs’ First

request for production of documents, in which the CWC defendants claimed to have no responsive

documents for some of the requests. Dissatisfied, plaintiffs filed a Motion for Sanctions (#156) on

March 31, 2008. On June 27, 2008, the court held a hearing on plaintiffs’ motion and again ordered the

CWC defendants to produce the materials that were at issue and subject to the February 12, 2008 Order

(#154); or defendant Chris Piche (“Piche”) was to provide a detailed explanation in a sworn affidavit

as to why the documents or other materials had not been produced. Minutes (#168). Moreover, a

response that documents did not exist had to be supported by a sufficient explanation. Id. The CWC

defendants continued to claim that they had no documents to produce.

On September 5, 2008, plaintiffs requested a status conference regarding the progress of

discovery. Mot. (#178). A hearing was held on September 22, 2008. Minutes (#183). At that time,

the court made explicit its “serious concerns” as to whether the CWC defendants were behaving in the

spirit of the Rules of Civil Procedure. See Transcript (#186) at 19. The court authorized plaintiffs to

depose Piche, who was designated as defendants’ person most knowledgeable. The court warned, “if

there’s somebody else to whom [Mr. Piche] would have to defer, who is not available because he lives

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in Costa Rica or he is in parts unknown, then it’s up to Mr. Piche to educate himself so that he’s able

to answer all these questions on all these subjects.” Id. at 40. On November 3, 2008, Piche was

deposed. The deposition revealed that the CWC defendants apparently had construed “documents” to

mean only paper documents, and had thus excluded relevant electronically stored information. See

Reply (#244) at 9.

Plaintiffs once again sought the court’s assistance in obtaining the CWC defendants’ compliance

with the court’s Order (#154). On February 9, 2009, they filed a Sealed Status Report regarding

Defendants [sic] Non-Compliance with Court Orders (#188), seeking a variety of sanctions pursuant

to Rule 37(b)(2) against the CWC defendants for their noncompliance with the court’s Order (#154).

After full briefing, the court held a hearing on the matter. On July 20, 2009, the court issued its Order

(#210) granting plaintiffs’ Motion (#188). There the court stated:

[T]he CWC defendants have abused the discovery process through a pattern of delay,evasiveness and non-compliance with this court orders. Such behavior has forcedplaintiffs to invest a substantial amount of time, effort and attorneys fees in a continuingattempt to obtain relevant and useful discovery. Despite repeated document demandsand court orders, and repeated assurances that all responsive documents were beingproduced, the CWC defendants have still not produced relevant and responsivedocuments during the more than 2-year discovery period. If the CWC defendants hadpreviously been handed less severe sanctions for their failure to produce, one or moreof the harsh evidentiary sanctions authorized by Rule 37(b) would now be appropriate. Fairness, however, requires that the CWC defendants be given, and are hereby put onclear notice that their failure to comply with this court’s orders will result in severeevidentiary sanctions. The CWC defendants are also given notice that their continuedfailure to respond fully to plaintiffs’ discovery requests will invite the type of sanctionsplaintiffs currently seek. 1

Order (#210) at 9-10.

The CWC defendants filed a Request for Review of Magistrate Judge Decision re #210 Order

(#211) on July 31, 2009. The presiding district judge, the Honorable David A. Ezra, held a hearing on

the motion (#211) on August 5, 2009. Judge Ezra affirmed Order (#210) and ordered the CWC

defendants to comply fully with Order (#154) not later than September 7, 2009, by turning over an

The CWC defendants were ordered to pay the reasonable expenses, including attorney’s fees and costs, incurred1

by plaintiffs in making filings ## 147, 150, 156, 157, 160, 173, 178, 188, 194, 195, and 196; conducting the discovery

compliance deposition of Piche on November 3, 2008; and preparing for and participating in the September 22, 2008 and

March 2, 2009 discovery hearings. Order (#210).

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“identical mirror image copy of the backup database . . . without any alterations, modifications or

deletions, together with any necessary passwords required to access the information contained in the

database.” See Order (#219). At the hearing, he warned defendants, “If it turns out that there is any

manipulation of that data in any way, shape or form, the Court will consider that to be not only a civilly

punishable matter, but the Court would look at that as a criminally contemptible matter because it would

amount to obstruction of justice, if you want to put it in the bluntest way possible.” Mot. (#241) at Exh.

1, Transcript of Aug. 5, 2009 Hearing at 13. He explained that should defendants “run into some

significant technical difficulty that would require a short extension of that time, then you best file a

motion, serve it on counsel, and you better have some expert computer people signing off on it.... I am

not going to have any of this chicanery here.” Id. at 17. While acknowledging that he had bent over

backward to be fair, id. at 21, Judge Ezra quite explicit: “Warning: Next sanction, judgment for the

plaintiff.” Id. at 17. Minutes of that proceeding were filed that day and a written Order (#219) was

issued on August 24, 2009. On August 25, 2009, the CWC defendants took the database offline to make

the copy, and the copy was made on September 4, 2009.

Immediately following Judge Ezra’s Order (#219), the CWC defendants filed an Emergency

Motion to Amend Protective Order (#221), which this court granted on December 7, 2009. The

Protective Order (#233) was entered on December 21, 2009. The CWC defendants produced the

database on December 29, 2009. On April 15, 2010, plaintiffs’ expert, Chris Beall, received a sealed

copy of the database from plaintiffs’ counsel, Craig A. Marquiz. Beall Aff., Exh. A to Doc. (#240) at

¶ 6. Before he could access the database and analyze its contents, Beall needed certain information,

such as what version of Oracle had been used, which Marquiz obtained from defense counsel, Jacob A.

Reynolds. After accessing the drive, Beall opened the README file for instructions. The file

contained three lines of text. Id. at 4. Because Beall had expected more information, he contacted

Marquiz to determine if defendants had provided any other instructions. Marquiz confirmed that

defense counsel advised that everything necessary to access the database was in the README file.

Beall examined the database and concluded that it had been altered, modified, manipulated, or otherwise

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contained errors. Beall Aff., Exh. A to Doc. (#240) at ¶ 59. Beall based this opinion, at least in part,

on various error messages that were generated as the result of certain queries. He stated, for example,

that “based upon my ability to extract a portion of data from the CUSTOMER table without obtaining

the . . . error messages, I can conclude to a reasonable degree of scientific certainty that the CWC

defendants CUSTOMER table has been altered, modified, manipulated or otherwise contains errors.”

Id. at ¶ 59. In his opinion, absent alteration, modification, manipulation or errors, his queries would have

generated responsive data absent the error messages. Id. at ¶ 60.

Marquiz sent a letter to Reynolds dated May 26, 2010, explaining, “the database behaves as if

the two most important tables in the database have been manipulated or tampered with. For example,2

the database will not allow us to print out or query the table for the players’ accounts. As a result, we

cannot obtain from the database information such as wagering histories and IP addresses that would

allow us to identify and quantify wagers that were made by players in the United States.” Exh. C to Dkt.

(#240). Marquiz stated that plaintiffs had done their best to eliminate possible alternatives that might

explain the behavior of the database, and wanted “to give your client an opportunity to explain what is

wrong with the database produced to us, and if there is some crucial configuration information that your

client has withheld from us, to give them an opportunity to disclose it.” Id. On May 27, 2010, Reynolds

responded that he was scheduling an appointment with Piche to discuss the matter and further

suggested, “If your expert is Oracle certified then that would eliminate some of the concerns and we

might have to visit the issue.” Exh D. to Dkt. (#240). Marquiz replied that day, noting that Reynolds

had failed to address the questions raised in Marquiz’s letter. Reynolds responded with a link to a

Wikipedia page about Oracle certification and asked once more whether Beall had Oracle database

certification. Id.

Unable to obtain helpful information from the CWC defendants, plaintiffs addressed the issue

These are the CUSTOMERID and USERSESSION tables, which are located in an offline file named,2

“user12.dbf.”

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with Judge Ezra during a telephonic status conference on July 28, 2010. There, plaintiffs expressed

concern that the CWC defendants’ database appeared to have been altered, modified, manipulated or

produced with errors. Judge Ezra referred the matter to the undersigned. Thereafter, plaintiffs filed

their Request for an Expedited Status Conference/Evidentiary Hearing Regarding the CWC Defendants’

Database (#241) on August 5, 2010, in which they asked the court to schedule a hearing regarding

possible alteration, modification, manipulation or errors within the CWC defendants’ database.

On August 13, 2010, the CWC defendants filed a Response (#243), wherein they explained for

the first time that the database did contain errors, allegedly resulting from a power failure that occurred

while the servers were writing data and/or resulting from several instances when the Oracle database

ran out of disk space while writing to its disk drives. Ech. 3 to Response (#243), Piche Decl. at ¶ 5.

Because defendants had been advised by counsel to not alter or modify the database in anyway, the

database was produced with errors in it. According to Piche, the errors are not the result of tampering

but are resident in the database that is used by CWC, “including an error or errors related to the

CUSTOMER table. According to Piche, the server was down for a few days in early August 2009, then

brought back online until taken offline again on August 25, 2009, to make the mirror image copy

ordered by the court. Piche contends that relevant data could still be extracted using appropriate3

queries, and he provided purported examples of such queries.

Plaintiffs maintain, however, that the database is searchable only if “you limited your search,

for example, to certain partial incomplete searches of only a limited number of records.” Brief (#260)

at 5. This because an “offline” file, user12.dbf, has made certain files inaccessible. Plaintiffs further

doubt that defendants produced a copy of their actual production database, because they find it

incredible that the CWC defendants were using the corrupted database from August 9, 2009 through

August 25, 2009 as Piche claims. The CWC defendants assert that plaintiffs’ call for sanctions is

nothing more than gamesmanship, and “plaintiffs have never seriously been seeking to obtain discovery

Beall determined that the server crashed on August 5, 2009. Brief (#260) at 7. Piche testified that it worked as3

a production database from August 9, 2009 through August 25, 2009. Tr. (#259) at 112-113.

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of facts necessary to their case.” Brief (#261) at 2. The CWC defendants further maintain that they

have not acted in bad faith, insofar as they produced the drive with errors native to it, in compliance

with the Federal Rules and the court’s order. Finally, the CWC defendants maintain that relatively few

files – approximately 1.4% – are inaccessible and are thus “simply not consequential enough to alter

the outcome of the action.” Id. at 3.

DISCUSSION

If a party “fails to obey an order to provide or permit discovery ... the court where the action is

pending may issue further just orders,” including, (i) directing that the matters embraced in the order

or other designated facts be taken as established for purposes of the action, as the prevailing party

claims; (ii) prohibiting the disobedient party from supporting or opposing designated claims or defenses,

or from introducing designated matters in evidence; (iii) striking pleadings in whole or in part; (iv)

staying further proceedings until the order is obeyed; (v) dismissing the action or proceeding in whole

or in part; (vi) rendering a default judgment against the disobedient party; or (vii) treating as contempt

of court the failure to obey any order except an order to submit to a physical or mental examination.

Fed.R.Civ.P. 37(b)(2)(A).

A district court also has inherent power to sanction a party or attorney for acting in bad faith,

vexatiously, wantonly, or for oppressive reasons. Chambers v. Nasco, Inc., 501 U.S. 32, 45-46 & n.10

(1991); Roadway Express, Inc. v. Piper, 447 U.S. 772, 766 (1980); F.J. Hanshaw Enter., Inc. v.

Emerald River Dev., Inc., 244 F.3d 1128, 1136-1137 (9th Cir.2001); Fink v. Gomez, 239 F.3d 989, 991

(9th Cir. 2001). “[W]hen there is bad-faith conduct in the course of litigation that could be adequately

sanctioned under the Rules, the court ordinarily should rely on the Rules rather than its inherent power.

But if in the informed discretion of the court, neither the statute nor the Rules are up to the task, the

court may safely rely on its inherent power.” Chambers, 501 U.S. at 50 (holding that the district court

did not abuse its discretion in imposing sanctions under its inherent power where conduct sanctionable

under the federal rules “was intertwined with conduct that only the inherent power could address”).

Cases involving sanctions under Rule 37 and the court’s inherent power may be used “interchangeably.”

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Adriana Int’l Corp. v. Thoeren, 913 F.2d 1406, 1412 n. 4 (9th Cir.1990), cert. denied, 498 U.S. 1109

(1991). Because a terminating sanction is severe, it may be justified only where there is “wilfulness,

bad faith, and fault.” Jorgensen v. Cassiday, 320 F.3d 906, 912 (9th Cir. 2003). “‘Disobedient conduct

not shown to be outside the control of the litigant’ is all that is required to demonstrate willfulness, bad

faith or fault.’”Henry, 983 F.2d at 948.

A. Whether the CWC Defendants Have Wilfully Violated the Court’s Orders

The CWC defendants acknowledge that the database contained errors. They represent, however,

that the database was produced with errors in it because counsel had directed them not to alter or modify

the database in any way. According to Piche, the errors were not the result of tampering; rather, they

were resident in the database and resulted from one or more separate events, including a crash that

occurred sometime in early August 2009, when the server lost power while writing to the disk drives.

Plaintiffs’ expert, Beall, determined that the crash occurred on August 5, 2009, within four hours of

Judge Ezra’s order to produce the database, and within three hours of the electronic filing of the minutes

of the August 5, 2009 hearing and notification of the minutes of the hearing. See Brief (#260) at 7.

The source of the alleged power failure is something of a mystery, but the CWC defendants

admit that the server was down until August 9, 2009. At the February 15, 2011 hearing, Piche

confirmed that the server, which is located in Costa Rica, was connected to a UPS battery backup power

supply, which was connected to a stand alone power generator, and the generator was connected to the

city’s power grid. The UPS backup alone was capable of supplying power to the servers for two hours,

but if necessary, the generator could supply ten hours of power when fully fueled.

Piche admitted, however, that there was no general power outage in Costa Rica on August 5,

2009. Nor did the UPS malfunction. Apparently, “all of [the CWC defendants’] other computers and

systems continued to operate normally.” Tr. (#259) at 120. Piche represented that the CWC defendants

contacted the vendor of the equipment, but the vendor could not find any defect that would have caused

the server to lose power. Piche had not experienced this issue with any similar equipment. He further

testified, “A second reason [defendants think an internal power failure occurred] is that there are

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actually some -- some kind of internal log files in the storage area network that I’m not -- I’m not

personally -- I don’t have an expert level of familiarity with them, but there are some log files inside this

storage area network that we looked at, which suggested to us that this had happened. As a matter of

fact, I believe that -- it’s been awhile, but if I recall correctly I think it was also -- I think our

interpretation of the log files was confirmed by Pillar Data, although we couldn’t figure out why it had

happened. [] Which is why they ended up sending the replacement part.” Tr. (#259) at 120.

Courts have the inherent discretionary power to make appropriate evidentiary rulings in response

to the destruction or spoliation of relevant evidence. See Glover v. BIC Corp., 6 F.3d 1318, 1329 (9th

Cir.1993). Common sense dictates that “when a party has relevant evidence within his control which

he fails to produce, that failure gives rise to an inference that the evidence is unfavorable to him.” Int’l

International Union, United Auto., Aerospace and Agr. Implement Workers of America (UAW) v.

N.L.R.B., 459 F.2d 1329, 1335 (9th Cir. 1972). The court also has the inherent power to sanction a party

for destroying relevant evidence which it knows or should have known it had a duty to preserve even

absent a preservation order. Leon v. IDX Syst. Corp., 464 F.3d 951, 958-59 (9th Cir. 2006).

Here, one reasonably would expect the CWC defendants to promptly notify plaintiffs and/or the

court of the alleged four day long equipment failure and damage to the server, particularly in light of

Judge Ezra’s express warning that the court would consider any manipulation of the data in any way,

shape or form, not only a civilly punishable matter, but a criminally contemptible matter that would

amount to obstruction of justice. Yet, the CWC defendants did not mention the alleged corrupting event

when it occurred on August 5, 2009; nor in connection with their September 2, 2009 motion to amend

protective order; nor in their communication with plaintiffs in May 2010, as plaintiffs attempted to

ascertain what the problem was with the database; nor even during the July 28, 2010 status conference

with Judge Ezra. The first mention of such an event came when they filed their Response (#243) to

plaintiffs’ Request for a Status Conference (#241), over a year after the power failure allegedly occurred.

This despite plaintiffs’ continued complaints and Judge Ezra’s instructions that if anything should go

wrong, defendants better let the court know about it, complete with “computer people” signing off.

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Even if the court were to assume that the four-day power failure, which began within hours of

Judge Ezra’s August 5, 2009 order to produce the database, was a complete coincidence, the CWC

defendants engaged in wasteful and needless gamesmanship by repeatedly chiding plaintiffs for their

choice of expert, and not revealing the alleged power failure until filing its Response (#243) to the

motion now before the court. The court need not pause, however, over the prospect that the alleged

power failure was a mere coincidence.

At the evidentiary hearing, the CWC defendants produced several expert witnesses, including

one in Belarus, to testified telephonically regarding the importance of the offline file, the extent of data

it affected, and the ability to recover data. What they didn’t do was produce a single witness or

declaration from anyone other than Piche to substantiate the power failure story. The CWC defendants’

own expert did testify, however, that data loss can be caused by a “hard shutdown,” such as where “you

pull the plug from the wall.” Tr. (#259) at 51. With that kind of shutdown, the “disks literally stop in

their tracks,” so “a file may remain offline because of the fact it was shutdown hard.” Id. at 51, 48.

Although Piche admitted he did not have the expertise to explain the issue, he testified it was

his belief that the defendants’ interpretation of a sudden internal power failure was confirmed by Pillar

Data. Yet the defendants provided no expert witness or declaration from such an expert or technician

from Pillar Data. Nor did they produce any witness other than Piche to describe or elaborate on the

alleged power failure. Notably, Piche was nowhere near the equipment in Costa Rica on August 5,

2009; he was in Vancouver, British Columbia at the time of the alleged equipment failure. Nor did

defendants offer witnesses or evidence to explain what might cause such a sudden failure. While

defendants’ invoices demonstrate that a consultation occurred on August 7, 2009, they do not state what

the consultation concerned. See Brief (#261) at Ech. L. Given the unexplained failure of the CWC

defendants to produce live witnesses or even written declarations concerning the alleged power failure,

the court infers that such testimony, if produced, would be unfavorable to them. Sparkman v. C.I.R.,

509 F.3d 1149, 1156 (9th Cir. 2007) (“Where the burden of production rests on a party, a court may,

at its discretion, presume or infer from that party’s failure to call a witness that the testimony the witness

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would have offered would not favor that party.”); see also Underwriters Labs. Inc. v. NLRB, 147 F.3d

1048, 1054 (9th Cir.1998) (same).

Based on the foregoing facts and circumstances and the reasonable inferences to be drawn

therefrom, the court finds that the CWC defendants’ efforts to blame its corrupted server on a

coincidental and sudden power failure on August 5, 2009 are unsupported by credible evidence. The

court further finds that the CWC defendants took some deliberate action on August 5, 2009, to

intentionally corrupt the server at issue in willful defiance of this court’s orders. The defendants’

argument that they produced a copy of the database as it existed on the date it was copied, September

4, 2009, simply sidesteps the central issue of the circumstances surrounding the August 5, 2009

corrupting event. Moreover, that “only 1.4%” of the files are inaccessible does not ameliorate the issue,

inasmuch as it is unknown what import the inaccessible data has in this case. See Leon v. IDX Sys.

Corp., 464 F.3d at 960 (“any number of the 2,200 [spoliated] files could have been relevant to IDX’s

claims or defenses, although it is impossible to identify which files and how they might have been

used.”). The court further finds that the CWC defendants’ noncompliance with the discovery rules and

court orders was willful or in bad faith because they knowingly made false statements of material fact

to plaintiffs and to the court to conceal their actions. Cf. Anheuser-Busch, Inc. v. Natural Beverage

Distrib., 151 F.R.D. 346, 351-353 (N.D. Cal.1993) (dismissing a counterclaim as a sanction for willful,

bad faith violation of discovery rules where, among other things, the defendant was aware that some of

her business records had survived a warehouse fire in legible form and falsely testified about her

knowledge of those documents, their existence, and their condition).

B. Whether Terminating Sanctions Are Appropriate

In determining whether to impose a case dispositive sanction, the court applies a non-

mechanical five factor test: (1) the public’s interest in expeditious resolution of litigation; (2) the court’s

need to manage its docket; (3) the risk of prejudice to the party seeking sanctions; (4) the public policy

favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions.

Connecticut Gen. Life Ins. Co. v. New Images of Beverly Hills, 482 F.3d 1091, 1096 (9th Cir.2007); see

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Valley Eng’rs Inc. v. Elec. Eng’g Co., 158 F.3d 1051, 1056-1057 (9th Cir.1998), cert. denied, 526 U.S.

1064 (1999). The first two factors favor the imposition of sanctions, while the fourth factor cuts against

a dismissal or default sanction in most cases. Thus, the key factors are the third and fifth factors –

prejudice and the availability of lesser sanctions. Henry v. Gill, 983 F.2d 943, 948 (9th Cir. 1993) (citing

Wanderer v. Johnson, 910 F.2d 652, 656 (9th Cir.1990)); see also Computer Task Group, Inc. v. Brotby,

364 F.3d 1112, 1115 (9th Cir. 2004) (“Where a court order is violated, the first and second factors will

favor sanctions....”).

The first factor clearly favors imposing a sanction of dismissal or default. This action was filed

in May 2005, discovery commenced in November 2006, plaintiffs first motion to compel (#147) on this

issue was filed in July 2007. The court’s Order (#154) granting that motion was filed in February 2008.

The CWC defendants have yet to comply with that order, despite repeated attempts by plaintiffs and the

court to obtain their compliance. Rather, the CWC defendants’ disingenuousness, dishonesty, disregard

of discovery obligations, and disobedience of court orders undeniably have frustrated the interest in

orderly and expeditious resolution of this litigation. See Pagtalunan v. Galaza, 291 F.3d 639, 642 (9th

Cir. 2002), cert. denied, 538 U.S. 909 (2003); see In re PPA Products Liab. Litig., 460 F.3d at 1227

(“Orderly and expeditious resolution of disputes is of great importance to the rule of law. By the same

token, delay in reaching the merits ... is costly in money, memory, manageability, and confidence in the

process.”).

The court’s need to manage its docket likewise favors imposition of default. See Ferdik v.

Bonzelet, 963 F.2d 1258, 1261 (9th Cir. 1992) (noting that “[i]t is incumbent upon us to preserve the

district courts’ power to manage their dockets without being subject to the endless vexatious

noncompliance of litigants” like the plaintiff in that case), cert. denied, 506 U.S. 915 (1992).

Defendants’ ongoing noncompliance with its discovery obligations and this court’s discovery orders left

plaintiffs with little choice but to bring successive, meritorious motions and the court to conduct

repeated status conferences and hearings in an attempt to gain their compliance and deter further

noncompliance. Hence defendants’ conduct needlessly congested the court’s docket, consumed scarce

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judicial resources, and multiplied the proceedings in this case. Payne v. Exxon Corp., 121 F.3d 503,

507 (9th Cir.1997).

A party suffers prejudice if its opponent’s actions “impair [its] ability to go to trial or threaten

to interfere with the rightful decision of the case.” Adriana Int'l Corp., 913 F.2d at 1412 (holding that

the plaintiff's repeated failure to appear at depositions and continuing refusal to comply with

court-ordered production of documents interfered with the rightful decision of the case and therefore

was prejudicial) (citing S.E.C. v. Seaboard Corp., 666 F.2d 414, 417 (9th Cir.1982)); see In re Exxon

Valdez, 102 F.3d at 433 (holding that the plaintiffs’ failure to respond to discovery and the time

consumed in attempting to secure compliance prejudiced defendants). “Standing alone, failure to

produce documents as ordered is considered sufficient prejudice to justify” a terminating sanction. See

Anheuser-Busch, Inc., 151 F.R.D. at 347, 353-354 (affirming Rule 37 dismissal sanction where the

defendant failed to produce relevant documents until two months before trial) (quoting Adriana Int'l

Corp., 913 F.2d at 1412); see also Adriana Int'l Corp., 913 F.2d at 1411-1412 (affirming dismissal

sanction under Rule 37 due to the plaintiffs’ willful “continuing refusal” to comply fully with orders

for the production of documents).

When considering prejudice, the court may consider a party’s conduct as a whole throughout the

discovery process. Adriana Int'l Corp., 913 F.2d at 1412. The record in this case demonstrates a

consistent pattern of discovery delay and obstruction by the CWC defendants directed at preventing

plaintiffs from obtaining relevant evidence. Defendants’ dilatory and obstructive discovery conduct

began with their failure to produce documents in response to plaintiffs’ requests for production in 2007,

and they have willfully violated the court’s production orders since that time. See In re PPA, 460 F.3d

at 1227 (“The law also presumes prejudice from unreasonable delay.”). Any number of files, now

inaccessible due to defendants’ willful obstruction, could have been relevant to the litigation, although

now it isn’t possible to determine which files and how they affect other relevant data resident on the

database. See Leon, 464 F.3d at 960 (citing United States ex rel. Wiltec Guam, Inc. v. Kahaluu Constr.

Co., 857 F.2d 600, 604 (9th Cir.1988). Defendants’ continuing refusal to comply with court-ordered

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production, defendants’ evasions, and defendants’ corruption of the database clearly have interfered

with the rightful decision in this case. Adriana Int'l Corp., 913 F.2d at 1412.

The fourth factor – the public policy favoring disposition of cases on their merits – usually

weighs against a terminating sanction. Pagtalunan, 291 F.3d at 643 (citing Hernandez v. City of El

Monte, 138 F.3d 393, 399 (9th Cir.1998)). “Although there is indeed a policy favoring disposition on

the merits, it is the responsibility of the [nonmoving] party to move towards that disposition at a

reasonable pace, and to refrain from dilatory and evasive tactics.” In re Eisen, 31 F.3d 1447, 1454 (9th

Cir.1994) (quoting Morris v. Morgan Stanley & Co., 942 F.2d 648, 652 (9th Cir.1991)). Because the

CWC defendants have flouted that responsibility through their ongoing obfuscation and dilatory

discovery tactics, the court finds that this factor weighs neither against nor for terminating sanctions.

As for the availability of lesser sanctions, the record in this case reflects that such sanctions have

not been successful in reforming defendants’ conduct. Defendants have continued to engage willfully

in dilatory and obstructive discovery tactics. While a sanction of dismissal would be unfair where a

party could not have realized it was in jeopardy of such a severe sanction, Valley Eng’rs, 158 F.3d at

1057, here the CWC defendants were warned by both the undersigned Magistrate Judge and the

presiding District Judge that they were on the verge of a dismissal sanction. The court previously found,

“the CWC defendants have abused the discovery process through a pattern of delay, evasiveness and

non-compliance with this court’s orders.” Order (#210) at 9. The court further explained in its Order

(#210), “if the CWC defendants had previously been handed less severe sanctions for their failure to

produce, one or more of the harsh evidentiary sanctions authorized by Rule 37(b) would now be

appropriate.” Id. Thus, in the interest of fairness, the court declined to impose one of the harsher Rule

37(b) sanctions but warned that a continued failure to comply with the court’s orders or to respond fully

to plaintiffs’ discovery requests “will invite the type of sanction plaintiffs currently seek.” Id. Judge

Ezra also made clear at the August 5, 2009 hearing, that should the CWC defendants continue on a path

of evasiveness and chicanery the next step would be “judgment for the plaintiff.” Despite these prior

warnings and sanctions, the CWC defendants continued their pattern of delay and non-compliance,

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evidencing that lesser sanctions have had little to no effect on defendants’ behavior in this case. There

is no reason to expect the CWC defendants would respond any more satisfactorily to another round of

intermediate sanctions and warnings. Henry, 983 F.2d at 948.

Any sanction imposed under Rule 37(b) or the court's inherent power must be “just” and, in

order to comport with due process principles, must specifically relate to the particular claim or defense

that was at issue in the order to provide discovery. The Sunrider Corp. v. Bountiful Biotech Corp., 2010

WL 4590766 at *32 (C.D. Cal. Oct. 8, 2010) (citing Ins. Corp. of Ireland, Ltd. v. Compagnie des

Bauxite de Guinee, 456 U.S. 694, 707 (1982)). When a party’s failure or inability to comply with a

pretrial discovery order was caused “by its own conduct [or] by circumstances within its control,” the

court may strike the party’s answer and render a default judgment as a sanction, consistent with due

process, because a permissible presumption [arises] that the refusal to produce material evidence “was

but an admission of the want of merit in the asserted defense.” See Adriana Int’l Corp., 913 F.2d at

1413 n.6. “A proper application of Rule 37(b)(2) will, as a matter of law, support such a presumption.”

Sunrider Corp., 2010 WL 4590766 at *32 (quoting Ins. Co. of Ireland, Ltd., 456 U.S. at 706). That

presumption is applicable in this case, making entry of a default judgment just, as well as consistent

with due process principles.4

RECOMMENDATION

Based on the foregoing, it is the recommendation of the undersigned United States Magistrate

Judge that plaintiffs’ motion for terminating sanctions should be granted, the CWC defendants’ answer

should be stricken and a default judgment should be entered against the CWC defendants.

DATED this 12th day of August, 2011.

LAWRENCE R. LEAVITTUNITED STATES MAGISTRATE JUDGE

Plaintiffs request additional relief pursuant to 35 U.S.C. §§271 and 285, and an order allowing the plaintiffs to4

submit information regarding recovery of attorneys’ fees. Brief (#260) at 20-24. Those issues are not properly before the

court at this time, and are therefore not considered in this report and recommendation.

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