The Risks of “Failed” Spoliation Efforts: The Southern District of New York Finds Severe Sanctions Available Under Rule 37(b)(2) and Inherent Authority for “Incompetent Spoliators”

We have previously blogged on the controversy regarding whether a court may still sanction a party for spoliation of ESI pursuant to its inherent authority following the amendments to Rule 37(e). But what happens when the attempted spoliation ultimately fails because the discovery is located and produced often after much unnecessary effort and expense by the requesting party?

Abbott Laboratories v. Adelphia Supply USA involved just such a situation. The court’s decision reinforced that even when spoliation efforts are ultimately unsuccessful, and therefore Rule 37(e) does not apply because information is not “lost,” sanctions remain available under Rule 37(b)(2) and the court’s inherent authority to address litigant misconduct, including outright fraud on the court. This decision confirms that where improperly withheld documents are ultimately produced courts can “nevertheless exercise inherent authority to remedy spoliation under the circumstances presented.” CAT3, LLC v. Black Lineage, Inc., No. 14 Civ. 5511, 2016 WL 154116 (S.D.N.Y. Jan. 12, 2016).

Plaintiffs Abbott Laboratories, Abbott Diabetes Care Inc., and Abbott Diabetes Care Sales Corp. (collectively “Plaintiffs”) filed a motion for case-ending sanctions against Defendants H&H Wholesale Services, Inc. (“H&H”), Howard Goldman, and Lori Goldman (collectively the “H&H Defendants”) based on electronic discovery-related violations of Federal Rule of Civil Procedure 37. The court referred Plaintiffs’ motion to the Honorable Magistrate Judge Lois Bloom for a report and recommendation. Magistrate Judge Bloom recommended that Plaintiffs’ motion for sanctions be granted and a default judgment be entered against Defendants for committing discovery violations and for having perpetrated a fraud upon the court. In imposing such sanctions, the court did not limit itself to sanctions under Rule 37(b)(2) for failure to obey the court’s orders, but rather considered the motion in the context of the court’s “broader inherent power, because such power ‘extends to a full range of litigation abuses,’ most importantly, to fraud upon the court.” Subsequently, District Judge Carol Bagley Amon adopted the recommendations and granted Plaintiffs’ motion for sanctions and entered a default judgment against the H&H Defendants.

Plaintiffs filed this trademark action in 2015 against hundreds of defendants, including the H&H Defendants, alleging that they had violated Abbott’s rights by selling the international version of Abbott’s diabetes test strips in the United States. Pursuant to a discovery order, the H&H Defendants represented to the court that they were in possession of approximately 6,000 responsive documents and subsequently produced 314 emails and a collection of invoices. Plaintiffs objected to this production on the grounds that the documents were printed “in hard copy, scan[ed] … all together, and produc[ed] … in a single” PDF file. After the court ordered the H&H Defendants to produce electronic copies of certain emails, they electronically produced 4,074 pages of responsive documents.

Thereafter, in 2017, Plaintiffs commenced a related counterfeiting action against the H&H Defendants (“Abbott II”), alleging that defendants were selling test strips repackaged into counterfeit U.S. boxes. The court entered a seizure order allowing Abbott to seize, inter alia, a copy of H&H Defendants’ email server. Following its examination of the H&H email server, Abbott “had the proverbial smoking gun and raised its concerns anew that defendants had failed to comply with the Court’s Order to produce responsive documents” in the 2015 action.

In determining the motion for sanctions, the court found that “there [was] clear and convincing evidence that defendants have perpetrated a fraud upon the court” based on the actions taken by the H&H Defendants throughout discovery. For example, the court found that the H&H Defendants used search terms that were designed to fail so that the defendants could withhold responsive documents. The Defendants also made several misrepresentations to the court regarding how many documents were actually responsive. Further, the H&H Defendants intentionally withheld groups of clearly relevant documents. Particularly troubling to the court was the absence of any documents concerning Howard Goldman, the owner and president of H&H Defendants, and Lori Goldman, who was involved in H&H’s business activities. Defendants first explained that the documents were not produced due to technical glitches, then tried to shift the blame to their former counsel. The court did not buy it, noting Defendants “no longer [had] an escape from responsibility for their bad faith conduct” and that the discovery misconduct was not an isolated instance, but rather “was a calculated pattern of pervasive misconduct that started early on and continued even after defendants were caught red handed.”

The court further found that the H&H Defendants’ bad faith could be inferred from their perjury, as well as deceptive and evasive deposition testimony. The court specifically referred key depositions that were riddled with evasion, inconsistencies, and contradictions. Taking all of these facts together, the court found that the H&H Defendants committed a fraud upon the court that warranted the harshest of sanctions.

This case is noteworthy as it reminds litigants that spoliation efforts themselves can always result in severe sanctions, even where those efforts fail to accomplish their nefarious goal. The courts have several options here; sufficiently egregious misconduct – however ultimately incompetent – can be addressed by resort to both the sanctions provided in Rule 37(b)(2) and/or the court’s inherent authority. With all the focus on the strict parameters of amended Rule 37(a) to address actual spoliation of ESI, it is easy to lose sight of the fact that even failed efforts to withhold electronic discovery can have devastating consequences for your case. “No harm, no foul” may not carry the day.