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Director Peter Jackson filed a breach of contract claim against New Line Cinema and Katja Motion Pictures Corp., the producer and distributor of The Lord of the Rings trilogy, for not properly calculating payments to Jackson and for giving special treatment to affiliates of New Line in certain licensing deals. Over a two year period, plaintiff Wingnut Films (Jackson’s corporation) made several discovery requests for paper and electronic documents relating to The Lord of the Rings, including any audits conducted by New Line involving its licensees and audits conducted by any profit participant in connection with film, television, sound track and video game agreements. When New Line refused to produce relevant documents and repeatedly confirmed that it had fully complied with the discovery requests, Wingnut filed several motions to compel, most of which the court granted. After a series of motions and orders, Wingnut filed a motion for sanctions against New Line. Based in part on testimony provided by New Line’s “custodians of records,” the magistrate found that New Line did not conduct a reasonably diligent search for documents that were the subject of the court’s prior orders; did not conduct a reasonably diligent search for emails and electronic documents; and did not suspend its document destruction policy or take steps to preserve documents.

For example, New Line’s searches for documents occurred only on-site and did not include searches of files housed off-site; personnel searching for documents were instructed to collect only audit reports, claims and settlements, but not any correspondence, memoranda, emails or work papers relating to those audits; documents relating to a tax deal with New Zealand were limited to New Line’s outside counsel’s closing binders; searches for electronic documents were either not conducted, were limited to merchandising agreements, or were not diligent (“New Line likewise failed to conduct any search of the company’s email servers for email correspondence containing the phrase ‘Lord of the Rings’ or any other keywords”); and New Line did not suspend its document destruction policies which automatically deleted emails after 30 days and wiped clean the email backup tapes each week.

The magistrate ordered New Line to show cause why it should not be sanctioned in the amount of $125,000; ordered New Line to comply with all document requests within 21 days or else allow Wingnut to conduct an on-site search for relevant documents; and ordered the parties to select a third-party vendor to identify and collect emails from New Line’s computers and servers.