The Second Circuit Considers a $2.7 Million Discovery Sanction in a $20,000 Case

In Klipsch Group, Inc. v. ePRO E-Commerce Ltd., 880 F.3d 620 (2d Cir. Jan. 25, 2018), the Second Circuit provides a helpful reminder that sanctions for discovery misconduct must be proportional to the effect of the misconduct and not necessarily the value of the case.

In this case, the Defendant filed an interlocutory appeal of the District Court’s decision imposing discovery sanctions on it. The Defendant challenged the District Court’s imposition of approximately $2.7 million dollars in costs and fees (to compensate the Plaintiff), as well as several of the District Court’s specific “evidentiary rulings and factual findings” underpinning the imposition of sanctions.

Klipsch v ePRO Case Background

Over the course of the litigation, the Defendant “engaged in persistent discovery misconduct,” including:

. . . it failed to timely disclose the majority of the responsive documents in its possession, restricted a discovery vendor’s access to its electronic data, and failed to impose an adequate litigation hold even after the court directed it to do so, which omission allowed custodians of relevant electronic data to delete thousands of documents and significant quantities of data, sometimes permanently.

After some of these discovery failures came to light, the Magistrate Judge overseeing discovery authorized a second round of depositions by the Plaintiff to investigate the issues and ordered additional discovery to be completed by the Defendant. When further discovery issues were identified, the Magistrate Judge authorized the Plaintiff to obtain an independent forensic examination of the Defendant’s systems to be paid for initially by the Plaintiff with the potential for later recovery from the Defendant.

After this independent forensic examination, briefs were submitted and an evidentiary hearing was held to review all the evidence regarding the discovery issues. Based on this review, the District Court concluded that the Defendant “had willfully engaged in spoliation” and “that spoliation had resulted in some permanently unrecoverable files and data.” The Court also “inferred from [the Defendant’s] willful misconduct that the missing documents were relevant and that their absence prejudiced [the Plaintiff].”

Based on these findings, it imposed sanctions on the Defendant, including:

. . . (1) an instruction requiring the jury to find that [the Defendant] had destroyed relevant Unstructured ESI after its duty to preserve those documents had been triggered; (2) an instruction permitting the jury to presume that the destroyed evidence would have been favorable to [the Plaintiff]; and (3) reasonable costs and fees associated with the discovery motion, beginning with [the Plaintiff’s] second round of depositions in Hong Kong. [emphasis added]

After review of the relevant evidence about those costs and fees, the District Court awarded the Plaintiff “a total of $2.68 million as compensation for the additional discovery efforts occasioned by [the Defendant’s] misconduct.”

Argument and Analysis

The Defendant argued that these sanctions were “impermissibly punitive, primarily because they are disproportionate to the likely value of the case,” which the record at that point showed would “likely result in about $20,000 in damages” [emphasis added]. The Second Circuit rejected this argument, explaining:

That position, although superficially sympathetic given the amount of the sanction, overlooks the fact that [the Defendant] caused [the Plaintiff] to accrue those costs by failing to comply with its discovery obligations. Such compliance is not optional or negotiable; rather, the integrity of our civil litigation process requires that the parties before us, although adversarial to one another, carry out their duties to maintain and disclose the relevant information in their possession in good faith.

When, as a result of an opponent’s persistently uncooperative behavior, it appears reasonable ex ante to conduct expensive corrective discovery efforts, we see no reason why the party required to undertake those efforts should not be compensated simply because it eventually turned out that the obstructive conduct had hidden nothing of real value to the case. Those costs must be placed on the uncooperative opponent in order to deter recalcitrant parties from the cavalier destruction or concealment of materials that the law requires them to retain and disclose. [emphasis added]

The Second Circuit reviewed the assessment that had been conducted of the amount of costs and fees to be awarded, concluded it “was plainly proportionate – indeed, it was exactly equivalent – to the costs [the Defendant] inflicted on [the Plaintiff] in its reasonable efforts to remedy [the Defendant’s] misconduct,” and affirmed the District Court’s rulings.

Three Additional Points

First, in reaching its conclusion, the Second Circuit was careful to emphasize that this outcome was self-inflicted by the Defendant and that the Court was not opening the door to discovery gamesmanship or suggesting that the scale of discovery or discovery sanctions should routinely dwarf the value of cases: