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Discovery Sanctions of $2.7 million Awarded for Case with $20,000 in Expected Damages

In Klipsch Group, Inc. v. ePRO E-Commerce Limited et al., Case No. 16-3637 (2nd Cir. 2018)(Available Here), the Court of Appeals for the Second Circuit concluded that the monetary sanctions awarded by the district court for discovery misconduct was awarded properly to compensate Klipsch Group, Inc. (“Klipsch”) for the corrective discovery efforts it undertook with court permission in response to ePRO’s E- Commerce Limited et al. (“ePRO”) misconduct.

In defending against claims that it sold counterfeit products, ePRO engaged in persistent discovery misconduct. It failed to timely disclose the majority of its responsive documents, restricted a discovery vendor’s access to electronic data, and failed to impose an adequate litigation hold, even after ordered by the Court, which permitted thousands of documents and data to be deleted. The district court found that ePRO had willfully engaged in spoliation and granted Klipsch $2.7 million monetary sanction and an asset restraint in that amount, and an additional $2.3 million bond to preserve Klipsch’s ability to recover damages and fees at the end of the case. ePRO brought an interlocutory appeal contending that the sanctions are impermissibly punitive and disproportionate to the likely value of the case.

The Court of Appeals for the Second Circuit found that the district court did not err in its careful factual findings, nor did it base any aspect of its decision on an incorrect legal standard. The primary argument advance by ePRO involves the discrepancy in the $2.7 million in sanctions in a case that will likely result in about $20,000 in damages. The Court of Appeals found that the award properly reflects the additional costs ePRO imposed on its opponent by refusing to comply with discovery obligations.

The district court found five methods of spoliation: (1) 4,596 responsive files or emails were manually deleted (although all were eventually recovered), (2) seven employees used data-wiping programs shortly before the forensic examination began resulting in 31 permanently unrecoverable files, (3) eighteen employees ran operating system upgrades during the litigation hold period, which resulted in the loss of their program data, (4) ePRO failed to provide access to the email accounts of seven employees who had worked on its email direct marketing homepage, but were no longer employed with the company, and deleted or failed to provide access to the email accounts of twelve other custodians of discoverable data, and (5) 32 out of 36 identified custodians, including the ePRO’s CFO and employee coordinating data access, refused to permit access to their accounts on a private messaging system, which, although primarily used for personal communication, were listed on their corporate email signatures.

The Court affirmed the district court’s sanctions finding that 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. “The proportionality that matters here is that the amount of the sanctions was plainly proportionate- indeed, it was exactly equivalent- to the costs ePRO inflicted on Klipsch in its reasonable efforts to remedy ePRO’s misconduct.”


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