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Case shelved under Proportionality

Circuit Court Rules E-Discovery Sanctions Not Limited by Amount in Controversy

Klipsch Group, Inc. v. ePRO E-Commerce
2nd. Cir. January 25, 2018
Why This Case Is Important

Even with the enactment of Rule 37(e), which tries to curb when and how much e-discovery sanctions should be, the court can use its inherent authority to sanction parties as they see fit to make the non-offending party whole, regardless of the amount in controversy.

Overview:

In this counterfeiting case, the plaintiff, Klipsch, moved for e-discovery sanctions against the defendant based on the alleged spoliation of discoverable information.

The goal for the plaintiff in discovery was to learn more about magnitude of the defendant’s infringing sales by reviewing the defendant’s actual sales data. As discovery began, it was evident that the defendant was not complying with its e-discovery obligations, showcased by:

  • Twice failing to place an adequate legal hold on electronic data including emails (initially after the start of litigation and subsequently after being reminded by the court)
  • Not disclosing 40,000 potentially relevant sales documents
  • Custodians “manually delet[ing] thousands of files and emails, us[ing] data-wiping software”

Based on these findings, the district court found that the defendant had “willfully spoliated relevant discoverable information,” ordering an adverse inference jury instruction, and imposed $2.7 million in sanctions to cover the costs incurred by the plaintiff because of the discovery misconduct.

The defendants appealed the ruling, arguing that the $2.7 million sanction was disproportionate and impermissibly punitive considering the amount in damages was only likely to be around $20,000/

Ruling:
  • Defendant’s Appeal Denied. In response to the defendant’s interlocutory appeal, the Second Circuit unanimously upheld the district court’s factual findings and sanction order, ruling that the sanction amount was not excessive.
  • Sanction Was Not Punitive. The $2.7 million sanction was justified because the defendant “overlooks the fact that ePRO (defendant) caused Klipsch (plaintiff) to accrue those costs by failing to comply with its discovery obligations.” The court added, “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.”
  • Good Faith Discovery Required. The court went on to state that when it comes to discovery obligations, “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 position in good faith.”
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Legal Analysis
On Klipsch Group, Inc. v. ePRO E-Commerce
David Cohen, Esq., Chair - E-Discovery Group, Reed Smith LLP
BY
David Cohen, Esq., Chair - E-Discovery Group, Reed Smith LLP

This case is a “poster-child” for implementing sound legal hold and production practices even in smaller cases. Sanctions for the willful failure to preserve and produce relevant evidence need not be proportional to the amount in dispute. Here the awarded costs and fees were more than 100x the likely damages.

David's Bio
relevant resource
Case Law Tip: Want to prevent e-discovery sanctions? Download this infographic, “How to Create a REASONABLE Preservation Process Under Rule 37(e).”
Infographic
How to Create a REASONABLE Preservation Process Under Rule 37(e)
How to Create a REASONABLE Preservation Process Under Rule 37(e)
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