This Sidley Update addresses the following recent developments and court decisions involving e-discovery issues:
- A Southern District of Indiana decision finding that the proportionality standards of Fed. R. Civ. P. 26 applied to a subpoena served on a nonparty under Fed. R. Civ. P. 45 and denying wide-ranging discovery requests for failure to satisfy those standards;
- A Northern District of California decision that applied the proportionality principles of Fed. R. Civ. P. 26 to a motion to compel, found on balance that the burden of the discovery requests outweighed their benefit but denied the motion without prejudice to await action by the presiding judge on outstanding and potentially dispositive legal issues; and
- A Northern District of California ruling that relied on the revised provisions of Fed. R. Civ. P. 37(e) and the court's inherent authority to order an adverse inference instruction in favor of plaintiff and preclude defendants from introducing spoliated evidence to support their trademark claim.
1. In Noble Roman's, Inc. v. Hattenhauer Distributing Co., 2016 WL 1162553 (S.D. Ind. Mar. 24, 2016), Magistrate Judge Debra McVicker Lynch ruled that the proportionality standards of Fed. R. Civ. P. 26 applied to a subpoena served on a nonparty under Fed. R. Civ. P. 45 and denied wide-ranging discovery requests for failure to satisfy that standard.
Noble Roman's brought an action against Hattenhauer to recover allegedly unpaid royalties, attorneys' fees and costs of collection, in addition to other claims. Hattenhauer issued a subpoena to Privet Fund, a shareholder of the publicly traded Noble Roman's. The subpoena sought production of 23 categories of documents relating to a wide range of issues regarding the Fund's ownership of Noble Roman's stock and Noble Roman's operations. Noble Roman's sought a protective order, contending that the subpoena was improper, was outside the bounds of permissible discovery and sought the same documents requested by Hattenhauer from Noble Roman's itself.
Hattenhauer made several points in response to Noble Roman's objections. First, it argued that Noble Roman's lacked standing to object to the subpoena served on a third party. Acknowledging court decisions that agreed with Hattenhauer, the court nonetheless rejected this argument, finding that Noble Roman's had "sufficient legitimate interest" to object to the subpoena. Id. at *2 (citing United States v. Raineri, 670 F.2d 702, 712 (7th Cir 1982). Specifically, if Hattenhauer were permitted to issue the subpoena, Noble Roman's would be required to devote time and resources to assisting in the response to such subpoena requests. In the magistrate judge's view, "[t]hese aren't trivial issues or interests." Noble Roman's, 2016 WL 1162553, at *2.
Second, Hattenhauer argued that the requested discovery was relevant to its claims. Magistrate Judge Lynch found this argument insufficient because Hattenhauer did not show why obtaining the requested documents was reasonably necessary or proportional to the needs of the case:
Hattenhauer beats the drum of "relevancy." It asserts that all of its deposition topics and document requests are "relevant." That's not good enough. Hattenhauer never attempts to demonstrate that the discovery is in any way proportional to the needs of this case, considering such things as the amount in controversy, the importance of the information in resolving contested issues, whether the burden of the discovery outweighs its likely benefits, whether the information can be obtained from other and more convenient sources, or whether the information is cumulative to other discovery Hattenhauer has obtained. Id. at *7.
The magistrate judge paid particular attention to the recent amendments to Rule 26, finding that the limits imposed on Rule 26 discovery also apply to discovery sought pursuant to Rule 45. Id. at *3. The amendments from December 2015 "were designed to protect against over-discovery and to emphasize judicial management of the discovery process," noted the magistrate judge. Id.
In this case, the magistrate judge found that Hattenhauer sought documents related to "every aspect of Noble Roman's business operations, finances, market plans, and management structure" and that the material sought from Privet Fund was "discovery run amok." Id. at *7. These requests were, in the magistrate judge's view, "too far afield from the contested issues in the case" and failed the proportionality test under Rule 26(b). Id. Accordingly, she issued the requested protective order.
2. In Dao v. Liberty Life Assurance Company of Boston, 2016 WL 796095 (N.D.Cal. Feb. 23, 2016), Magistrate Judge Elizabeth D. Laporte applied the proportionality principles of the amended Federal Rules to a motion to compel in a pending matter, found on balance that the burden of the discovery outweighed its benefit but denied the motion without prejudice to await action by the presiding judge on outstanding and potentially dispositive legal issues.
Plaintiff filed suit against her insurer alleging wrongful denial of a long-term disability benefits claim. Id. at *1. During discovery, plaintiff filed a motion to compel responses to three interrogatories. Id. at *1-2. Defendant insurance company objected to each of these interrogatories on several bases, including relevance, scope and burden. Id. at*3-*6.
Before discussing the merits of the matter, the magistrate judge noted that the plaintiff's motion to compel was filed on November 20, 2015, 10 days prior to the December 1, 2015, changes to Rule 26(b)(1). Id. at *2. The magistrate judge examined whether to apply the amended rules to the pending case, citing a recent case stating that the new rules were to govern in pending proceedings unless their application would be unjust or impracticable. Id. (citing CAT3, LLC v. Black Lineage, Inc., 2016 WL 154116, at *4-5 (S.D.N.Y. Jan 12, 2016)).
Using this standard, the magistrate judge examined the differences between the new and old versions of Rule 26, as well as the advisory committee's comments on the new rules, and cited the advisory committee statement that "[r]estoring the proportionality calculation to Rule 26(b)(1) does not change the existing responsibilities of the court and the parties to consider proportionality." Id. at *3 (citing Fed. R. Civ. P. 26, advisory committee's note to 2015 amendment). Relying on the advisory committee's guidance, Magistrate Judge Laporte ruled that while the language of Rule 26 had changed, the amended rule did not actually place a greater burden on the parties with respect to their discovery obligations, including the obligation to consider proportionality, than did the previous version of Rule 26. Id. Therefore, she concluded that it would not be "unjust" or "inequitable" to apply the amended version of Rule 26 to this discovery dispute and proceeded to do so. Id.
The disputed discovery involved three interrogatories regarding defendant's disability policies, the discretion granted defendant under those policies and reductions in disability payments upon receipt of Social Security disability payments. Id. at *3-*6. The defendant cited the burden of the requests, stating it would require individual review of 1,000 California disability policies to respond to one interrogatory and review of 160,000 policies to determine whether Social Security offsets had occurred. Id. at *4. The magistrate judge pointed out that neither party had adequately addressed the proportionality factors and conducted her own analysis. She found that this case was a "straightforward individual benefits determination challenge, not a civil rights, First Amendment or other case implicating important public rights on a broad scale," with a "modest" amount in controversy of $2,000. Id. at *5. She also indicated that it was "not clear that the discovery sought is necessary or even especially important to resolving the issues in this litigation" and cited the "great" burden of production. On the other hand, as to the relative resources of the parties, she found that plaintiff was a disabled individual while the defendant was a large insurance company, and it was likely the plaintiff would not have access to the information if discovery were not ordered. Having considered these proportionality concepts, she stated that "[o]n balance, it appears that the burden and expense of the broad discovery as propounded outweighs its likely benefit." Id.
Having stated this view, the magistrate judge determined that she did not need to resolve the discovery issues at that time because pending motions on legal issues before the presiding judge handling the case might resolve the outstanding issues. If the district court decided the Social Security offset provision and discretionary authority questions in favor of the defendant, then the discovery requests on those issues would no longer be relevant. If the district court ruled that the offset provision or discretionary authority were not legal, then the discovery "may arguably have marginal relevance to Plaintiff's claim for bad faith and enhanced damages." Id. The magistrate judge noted that neither plaintiff nor defendant had made any proposal to "focus" the requests, and she stated that application of the proportionality factors would depend "in the first instance on how the presiding judge rules on the overarching legal question." Id. Accordingly she ruled that the motion would be denied without prejudice until the presiding judge ruled. Id.
3. In InternMatch, Inc. v. Nxtbigthing, LLC, 2016 WL 491483 (N.D. Cal. Feb. 8, 2016), District Judge John Tigar relied on the revised terms of Fed. R. Civ. P. 37(e) and the court's inherent authority in granting plaintiff an adverse inference instruction as well as precluding defendants from introducing spoliated evidence to support their trademark claim.
A key issue in this trademark dispute over use of the trademark "INTERNMATCH" was whether defendant Nxtbigthing (owned by defendant Chad Batterman) had continually and extensively used the disputed mark. Defendants claimed that they had extensively used the mark in prior years but responded to plaintiff's document request related to prior use by stating that electronic copies of potentially responsive documents had been "irretrievably lost" due to a lighting strike and a power surge years later, following which Batterman's wife discarded the devices containing the electronically stored information damaged by the surge. Id. at *2. The only remaining evidence defendants had of its alleged prior use was some hard-copy documents printed before the power surge. Id. at *5. Plaintiff moved for a terminating sanction for defendant's destruction of evidence or, in the alternative, for an adverse inference instruction and a preclusion order.
District Judge John S. Tigar explained that the court's authority to sanction a party for spoliation rested on both its inherent authority to levy sanctions in response to abusive litigation practices as well as Fed. R. Civ. P. 37. As recent amendments to Rule 37 "were `designed to provide a uniform standard in federal court for use of these serious measures when addressing failure to preserve electronically stored information,'" it was an open issue whether the court needed to make the findings set forth in Rule 37(e) before exercising its inherent authority to sanction abusive litigation conduct. Id. at *4 n.6 (quoting 2015 Advisory Committee Note).
Judge Tigar declined to resolve the issue because he found that he could sanction defendants under either his inherent authority or under Rule 37, as defendants had willfully and in bad faith "`acted with the intent to deprive [plaintiff] of the information's use in the litigation.'" InternMatch, 2016 WL 491483, at *4 (quoting revised Rule 37(e)(2)). The Judge noted Batterman's unusual statements and conduct about the power surge -- including the facts that (i) he had asked his insurer about coverage for damage due to a power surge a week before the surge allegedly occurred; (ii) his insurer paid a portion of his claim but denied additional payments citing "concealment or fraud" as the reason for the exclusion; (iii) he did not explore the process of recovering information from the allegedly damaged devices; (iv) the devices containing defendants' business records (computers and external drives) were discarded by Batterman's spouse, who found their smell after the power surge objectionable, and Batterman discarded his personal computers for the same reason; and (v) he could not remember at his deposition the name of the electrician called after the power surge to do repairs on his home even though that electrician had known Batterman for several years, had done work at this home, had distributed marketing materials for defendants' company for "several years" and was identified in defendants' Rule 26(a)(1) initial disclosures as a person "likely to have knowledge of issues related to the use of the trademark." Id. at *6-*11. On these facts, Judge Tigar found defendants' "evidence that the surge occurred in the first place to be unbelievable" and found that they "willfully spoliated evidence." Id. at *11.
Judge Tigar reviewed the plaintiff's request for a terminating sanction under the five-factor test set forth in Leon v. IDX Sys. Corp., 464 F.3d 951 (9th Cir. 2006). InternMatch, 2016 WL 491483, at *12. Although some of the factors favored entry of default judgment, he ultimately declined to impose a terminating sanction because the case could still be resolved on the merits. Id. at *13. Plaintiff's registration of the mark provided a prima facie case that its mark was valid, and the adverse inference instruction would allow plaintiff to argue prior use of the mark. Any prejudice to the plaintiff would be largely if not entirely cured by the instructions that defendants had destroyed evidence in bad faith and that such evidence would have been favorable to plaintiff and by an order that defendants could not offer argument or testimony that the destroyed evidence or any hard copy or other version thereof supported defendants' claims that they had priority to the trademark. Id. at *13-*14. Judge Tigar thus granted plaintiff's alternative request for the adverse inference instruction and related evidentiary order. Id. at *14. In light of the court's finding of bad faith, it also granted plaintiff attorneys' fees associated with filing the motion for terminating sanctions but denied its request for attorneys' fees for the entire litigation. Id.