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2nd Circuit on the Proportionality of Discovery Sanctions

Today in Klipsch Grp. Inc. v. ePRO E-Commerce Ltd., 2018 NYLJ LEXIS 257, the 2nd Circuit affirmed a district court’s sanctions on the defendant for issuing an inadequate litigation hold. $2.7 million in fines were imposed to compensate the plaintiff for costs incurred due to discovery misconduct and $5 million of ePro’s assets were also restrained in addition to an order making it post a $2.3 million bond. The 2nd Circuit rejected an appeal that the sanctions were disproportionate to the value of the case. It also denied a cross appeal for an adverse inference to be imposed because ePro failed to backup its live sales database.

The district court found that ePro had engaged in spoliation because the failure to issue a litigation hold allowed custodians to delete ESI, and also because it did not timely produce documentation, or allow a vendor full access to its electronic data. Judge Gerard Lynch stated in his opinion that, "that discovery sanctions should be commensurate with the costs unnecessarily created by the sanctionable behavior. A monetary sanction in the amount of the cost of discovery efforts that appeared to be reasonable to undertake ex ante does not become impermissibly punitive simply because those efforts did not ultimately uncover more significant spoliation and fraud, or increase the likely damages in the underlying case." [Id. at 3-4].

At the time Klipsch was preparing for depositions, ePro had only produced 500 documents and spreadsheets summarizing sales that were prepared specifically for the case. A deposition revealed that ePro had more sales data than it had produced. After FTI conducted a keyword search of its data, 40,000 documents were produced. It was later revealed that ePro 'artificially' limited FTI's search and also failed to issue an adequate litigation hold in response to a magistrate judge's order.

The plaintiffs engaged iDiscovery Services which found that key custodians had deleted files and emails, and that the live sales database had been edited. It detected wiping software had been used shortly before its forensic examination started. Updates to operating systems removed data on how often programs were used. 31 emails were permanently lost, but it was unlikely that the failure to back up the lives sales database resulted in the loss of otherwise undetectable data.

Judge Lynch noted that the district court did not rely on FRCP 37 in imposing sanctions, but instead used its inherent power. The sanctions were deemed appropriate because the plaintiff was being compensated by for the costs it incurred directly in relation to ePro's misconduct. Discovery sanctions can be imposed without consideration of the ultimate merits of the case and the amount in controversy. "a party that disregards its obligations may create a reasonable suspicion that further investigation is warranted, and thereby imposes costs on its adversary that would never have been incurred had the party complied with its obligations in the first instance. . . the attorney is compelled to defend against frivolous motions and to make motions to compel compliance with routine discovery demands, or to respond to unreasonable demands of the court for briefing or for wasteful, time-consuming court appearances, the hours required to litigate even a simple matter can expand enormously. It is therefore difficult to generalize about the appropriate size of the fee in relation to the amount in controversy" [Id. at 33-34].

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