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Preservation Demands and Third Party Subpoenas: What’s

Your Client’s Obligation?Megan Scheiderer

April 21, 2017

10th Annual “Return to Green” CLE

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Preservation Triggers

Reasonable Anticipation of Litigation– Includes affirmative

actions Service of a Rule 45

Subpoena/Government Subpoena

Notice “plus” Contract or Special Relationship

Court Order Statute/Regulation

But what about preservation demand letters?

We will come back to this!

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FRCP 45 Subpoenas Typically used by parties to a lawsuit to obtain evidence from

non-parties Governed by FRCP 45 Subpoena can command appearance and testimony and/or

production of documents Today is about documents, specifically, how to handle receipt

of a subpoena for documents:– Subpoena Basics– Steps Involved in Compliance– Other Issues to Consider– Challenging a Subpoena– FAQs

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FRCP 45. Subpoena Basics Subpoena must contain (a)(1)(A):

– Issuing Court (where case is pending (a)(2))

– Title of the action

– Set out text of FRCP 45 re rights/duties

– Command action (testify or produce documents)

Time/place for production

Categories sought

– Issuer’s signature (clerk or attorney) (a)(3)

Subpoena may contain:

– Request format of production (a)(1)(C)

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FRCP 45. Subpoena Basics Requires delivery of a copy to the named person (b)(1)

Production must be made within 100 miles (b)(2)

– Need not appear unless also giving testimony (d)(2)(A)

Reasonable steps to avoid imposing undue burden orexpense (d)(1)

– Sanctions for failure to comply

If object within 14 days, serving party has to move to compel (d)(2)(B)

Can move to quash/modify (d)(3)

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FRCP 45. Subpoena Basics Documents (e)(1)(A)

– As kept in ordinary course of business OR– Must organize and label to correspond to categories

ESI (e)(1)(B)– If subpoena does not specify form: Ordinarily maintained Reasonably usable form or forms

“Not reasonably accessible information” is not discoverable (e)(1)(D)

Can claim privilege (e)(2) Can be held in contempt for failure to comply (g)

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Step 1:Identify Responsive Materials

Real first step is calendaring objection deadline!!! 14 days!

Confirm timeframe of categories in subpoena

Identify custodians of subpoenaed information– Fact custodians v. Source custodians– Third parties:

“Possession, Custody, Control” rule – Control often means “practical ability to obtain”– Did you ask for it

» BUT – non‐party?

Determine physical location of data and analyze whether it is subject to upcoming deletion/alteration

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When do I do Step 1? ANSWER: QUICKLY!

QUESTION: But I’ll be busy objecting/negotiating?

ANSWER: You can’t properly object or negotiate without the information in Step 1

Reality – the process of objecting/negotiating and getting your arms around your preservation duty will be happening at the same time. You cannot properly do both within the necessary timeframe otherwise. Get an extension on the objections.

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Step 2:Initiate Preservation

**receipt/service of subpoena triggers duty to preserve under common law**

Prepare written hold with instructions to– Custodians (fact and source)– IT personnel

Collect to preserve– Consider likelihood that custodians will have troublesome

documents– Data that is subject to frequent and quick

alteration/deletion

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Step 3:Negotiate and/or Object

First, upon receipt, initiate discussions with opposing counsel to:

– Extend 14 day rule

– Narrow/eliminate categories, custodians, or time frame

– Form of production

– Extend compliance date

– Clarify/remove instructions/definitions

– Confidentiality and Privilege

Then, serve objections, move to quash, or take whatever formal action is necessary

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Step 4:Collect, Filter, Search

Monitor closely efforts to “self-collect”

Use caution when employing searches on traditional email/file servers

– Or tell the other side that is what you are doing

More sophisticated on-prem email and document solutions allow for searching

Negotiate search terms

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Steps 5 and 6:Review and Produce Make sure reviewers understand specifications for

– Responsiveness– Protection– Privilege

Production Format– Documents (e)(1)(A)

As kept in ordinary course of business OR Must organize and label to correspond to categories

– ESI (e)(1)(B) If subpoena does not specify form:

– Ordinarily maintained » Native

– Reasonably usable form or forms» Images with load files (metadata) and text extract = need a document review tool» Searchable PDFs?  Arguably not.» Non‐searchable PDFs?  NO!

– Inspection Produce only to the party that served you

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Consider: Cost-Shifting Interest in outcome of the litigation? Scope of request Invasiveness of request Expense and time associated with compliance Privilege Ability of nonparty to bear the costs Relative resources of the parties Nonparty’s normal cost of doing business? Efforts minimize burden Reasonableness of costs sought Public importance of litigation

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Consider: Protection Ensure that Protective Order in case is sufficient

Consider

– Tiers of protection and what they mean

– Third party access (i.e., experts)

– How documents will be used

– What will happen to documents after litigation is over

502(d)

Privilege – what types of privileged material might you encounter? Avoid undue expense of privilege log and negotiate categorical logging (or omitting altogether)

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Consider: Not Reasonably Accessible

This information is not discoverable, but what is it?

– Undue burden

– Undue expense

Legacy systems, back-up tapes, deleted/fragmented files, etc.

Court can order for good cause shown, but terms that protect from undue burden

Position on “NRA” should be part of early negotiations/objections

– Tip – always send a letter objecting to NRA and set forth what you consider those items to be

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Challenging a Third Party Subpoena Object to “any or all” Move to quash (d)(3)

MUST Quash when– Fails to allow a reasonable time to comply

– Requires disclosure of privileged or other protected matter

– Undue Burden

» Burden, relevance, breadth, need

MAY Quash when– Disclosure of trade secret/confidential information

– Disclosure of unretained expert info

Informal Negotiations Adverse Party – let them attempt to quash

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FAQs When do I object v. file a motion to quash?

How long do I have to preserve the information after it has been produced?

What about a letter demanding preservation?

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Preservation Triggers

Reasonable Anticipation of Litigation– Includes affirmative

actions Service of a Rule 45

Subpoena/Government Subpoena

Notice “plus” Contract or Special Relationship

Court Order Statute/Regulation

But what about preservation demand letters?

• Depends on:

• Reasonable anticipation of litigation?

• Contract or special relationship?

• Otherwise, no trigger absent a subpoena

• Even if obligation is triggered, does not mean obligation is dictated by contents of letter

• Letter neither constrains nor extends scope of obligation

• See common law

Best Practice – send a response stating what you will/won’t do

Bailey Industries, Inc. v. CLJP, Inc., 270 F.R.D. 662 (2010)

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KeyCite Yellow Flag - Negative Treatment

 Distinguished by Miami-Dade County v. Johnson Controls, Inc.,

S.D.Fla., April 21, 2011

270 F.R.D. 662United States District Court,

N.D. Florida,Pensacola Division.

BAILEY INDUSTRIES, INC., Plaintiff,v.

CLJP, INC., Defendant.

No. 3:10mc64/MCR/EMT.|

Sept. 30, 2010.

SynopsisBackground: Proponent of subpoena duces tecum, whichsought information relevant to underlying litigationalleging breach of exclusive distribution agreement,initiated action against nonparty recipient of subpoena byfiling motion to compel responsive documents.

Holdings: The District Court, Elizabeth M. Timothy,United States Magistrate Judge, held that:

[1] nonparty recipient of subpoena waived objection tosubpoena on basis of proprietary information or tradesecret;

[2] redacted invoices and spreadsheet disclosed bynonparty recipient were inadequate;

[3] nonparty recipient could produce invoices requested byproponent without revealing proprietary or confidentialinformation, or trade secrets;

[4] e-mails disclosed by nonparty recipient wereincomplete and inadequate;

[5] proponent of subpoena did not impose undue burdenor expense on nonparty recipient, and thus imposition ofsanctions upon proponent was not warranted;

[6] nonparty recipient did not fail without adequate excuseto obey subpoena, and thus sanctions for noncompliancewere not warranted; and

[7] proponent of subpoena was not entitled to award ofattorney's fees or costs incurred in bringing motion tocompel.

Motion granted.

West Headnotes (12)

[1] WitnessesSubpoena duces tecum

410 Witnesses410I In General410k16 Subpoena duces tecum

A subpoena duces tecum directed to anonparty may be quashed if it calls forclearly irrelevant matter, but the court neednot determine the admissibility of documentsprior to trial or quash a subpoena demandingtheir production if there is any ground onwhich they might be relevant. Fed.RulesCiv.Proc.Rule 45, 28 U.S.C.A.

4 Cases that cite this headnote

[2] WitnessesSubpoena duces tecum

410 Witnesses410I In General410k16 Subpoena duces tecum

Courts construe relevancy of documentsrequested in subpoena duces tecum broadly toencompass any matter that bears on, or thatreasonably could lead to other matters thatcould bear on, any issue that is or may bein the case. Fed.Rules Civ.Proc.Rule 45, 28U.S.C.A.

1 Cases that cite this headnote

[3] Privileged Communications andConfidentiality

Trade secrets; commercial information

WitnessesSubpoena duces tecum

Bailey Industries, Inc. v. CLJP, Inc., 270 F.R.D. 662 (2010)

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311H Privileged Communications andConfidentiality311HVII Other Privileges311Hk402 Trade secrets; commercialinformation410 Witnesses410I In General410k16 Subpoena duces tecum

Nonparty recipient of subpoena duces tecumwaived any objection to subpoena on basisof proprietary information or trade secret byfailing to submit timely written objection tosubpoena or motion to quash; e-mail fromnonparty recipient's counsel to subpoena'sproponent, which indicated he might need toredact certain information from nonparty'sresponse if it felt information was proprietary,was, at most, indication that objection mightbe forthcoming, and redacted documentsthat were disclosed were not themselvesproper written objection since they stated noobjection and provided no explanation forredactions. Fed.Rules Civ.Proc.Rules 33, 34,45, 28 U.S.C.A.

5 Cases that cite this headnote

[4] Federal Civil ProcedureGrounds and Objections

Federal Civil ProcedureObjections and grounds for refusal

Federal Civil ProcedureObjections and Grounds for Refusal

170A Federal Civil Procedure170AX Depositions and Discovery170AX(A) In General170Ak1269 Grounds and Objections170Ak1269.1 In general170A Federal Civil Procedure170AX Depositions and Discovery170AX(D) Written Interrogatories to Parties170AX(D)1 In General170Ak1483 Objections and grounds for refusal170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)1 In General170Ak1558 Objections and Grounds forRefusal

170Ak1558.1 In general

As a general rule, when a party fails to timelyobject to interrogatories, production requests,or other discovery efforts, the objections aredeemed waived; this is so even though aparty had an objection to make. Fed.RulesCiv.Proc.Rules 33, 34, 28 U.S.C.A.

5 Cases that cite this headnote

[5] WitnessesSubpoena duces tecum

410 Witnesses410I In General410k16 Subpoena duces tecum

Redacted invoices and spreadsheet disclosedby nonparty recipient of subpoena ducestecum were inadequate response toproponent's request for invoices relevantto underlying litigation alleging breach ofexclusive distribution agreement for saleof cabinetry in particular geographic area;redacted invoices were of little or no useto proponent, since they did not identifylocation of sale or amount of sale, andredacted spreadsheet did not identify type ofproducts nonparty sold or amounts of eachindividual sale. Fed.Rules Civ.Proc.Rule 45,28 U.S.C.A.

Cases that cite this headnote

[6] Privileged Communications andConfidentiality

Trade secrets; commercial information

WitnessesSubpoena duces tecum

311H Privileged Communications andConfidentiality311HVII Other Privileges311Hk402 Trade secrets; commercialinformation410 Witnesses410I In General410k16 Subpoena duces tecum

Nonparty recipient of subpoena duces tecumissued in connection with underlying litigationalleging breach of exclusive distributionagreement for sale of cabinetry could produce

Bailey Industries, Inc. v. CLJP, Inc., 270 F.R.D. 662 (2010)

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invoices for its sale of cabinetry in particulargeographic area, as requested by subpoena'sproponent, without revealing proprietaryinformation, confidential information, ortrade secrets; danger of customer solicitationdid not exist since proponent did not seeknames of nonparty's customers, monetaryfigure reflecting total of a particular salewould not reveal nonparty's underlyingpricing structure, and protective agreementwas available to alleviate any concernthat proponent might learn of nonparty'spricing structure or other alleged confidentialinformation. Fed.Rules Civ.Proc.Rule 45, 28U.S.C.A.

Cases that cite this headnote

[7] WitnessesSubpoena duces tecum

410 Witnesses410I In General410k16 Subpoena duces tecum

E-mails disclosed by nonparty recipient ofsubpoena duces tecum were incomplete andinadequate response to proponent's requestfor all correspondence between nonparty anddefendant in underlying litigation allegingbreach of exclusive distribution agreementfor sale of cabinetry; precise nature ofsearch nonparty's IT expert performed toretrieve all responsive e-mails was unclear andsearch failed to include relevant search terms,timeline of events and nonparty's actionssuggested an effort by it to “hide the ball,”proponent demonstrated that more than tworesponsive e-mails existed, and nonparty'scertification did not permit determination thatinformation requested either did not existor had already been produced. Fed.RulesCiv.Proc.Rule 45, 28 U.S.C.A.

Cases that cite this headnote

[8] WitnessesSubpoena duces tecum

410 Witnesses410I In General410k16 Subpoena duces tecum

When it reasonably appears that a nonparty'sresponse to a subpoena duces tecum isincomplete the court may require certificationthat the nonparty has conducted a search forthe information reasonably available to themthrough their agents, attorneys, or otherssubject to their control and has determinedthat the information requested either does notexist or that it has been produced. Fed.RulesCiv.Proc.Rule 45, 28 U.S.C.A.

Cases that cite this headnote

[9] WitnessesSubpoena duces tecum

410 Witnesses410I In General410k16 Subpoena duces tecum

Proponent of nonparty subpoena ducestecum did not impose undue burden orexpense on nonparty recipient of subpoena,which requested invoices and correspondencerelevant to underlying litigation allegingbreach of exclusive distribution agreementfor sale of cabinetry, as required to warrantimposition of sanctions upon proponent;proponent's subpoena was not overly-broad,called for production of correspondence andelectronically stored information (ESI) thatwould have reasonably been expected to havebeen retained by recipient, and concernedlimited time frame and subject matterrelevant to underlying litigation. Fed.RulesCiv.Proc.Rule 45, 28 U.S.C.A.

2 Cases that cite this headnote

[10] WitnessesSubpoena duces tecum

WitnessesDamages and penalties for failure to

obey subpoena

410 Witnesses410I In General410k16 Subpoena duces tecum410 Witnesses410I In General410k22 Damages and penalties for failure toobey subpoena

Bailey Industries, Inc. v. CLJP, Inc., 270 F.R.D. 662 (2010)

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Nonparty recipient of subpoena duces tecumissued in connection with underlying litigationalleging breach of exclusive distributionagreement for sale of cabinetry did not failwithout adequate excuse to obey subpoena,within meaning of rule governing subpoenas,and thus sanctions for noncompliancewith subpoena were not warranted, eventhough nonparty's responses were incomplete.Fed.Rules Civ.Proc.Rule 45, 28 U.S.C.A.

Cases that cite this headnote

[11] WitnessesDamages and penalties for failure to

obey subpoena

410 Witnesses410I In General410k22 Damages and penalties for failure toobey subpoena

Rule governing subpoenas did not providefor award of expenses for bringing motionto compel production or inspection ofdocuments requested by subpoena, and thusproponent of nonparty subpoena duces tecumwas not entitled to award of attorney's feesor costs incurred in bringing motion tocompel documents responsive to subpoenarequesting invoices and correspondencerelevant to underlying litigation allegingbreach of exclusive distribution agreementfor sale of cabinetry, even though proponentprevailed on its motion to compel. Fed.RulesCiv.Proc.Rule 45, 28 U.S.C.A.

6 Cases that cite this headnote

[12] WitnessesCompensation

410 Witnesses410I In General410k23 Compensation410k24 In general

Nonparty recipient of subpoena ducestecum issued in connection with underlyinglitigation alleging breach of exclusivedistribution agreement for sale of cabinetrywas entitled to reasonable costs for itsproduction of responsive invoices and e-mails,

including reasonable copying costs and costsrequired for additional computer searchesfor electronically stored information (ESI).Fed.Rules Civ.Proc.Rule 45, 28 U.S.C.A.

Cases that cite this headnote

Attorneys and Law Firms

*664 Thomas Marriott Wood, Burr & Forman LLP,Mobile, AL, for Plaintiff.

Stephen Marshall Cozart, Kubicki Draper PA, Pensacola,FL, for Defendant.

ORDER

ELIZABETH M. TIMOTHY, United States MagistrateJudge.

On August 18, 2010, Plaintiff Bailey Industries, Inc.(“Bailey”) initiated an action in this district by filing amotion to compel documents responsive to a subpoenait issued to Defendant CLJP, Inc. (“CLJP”) (Doc. 1).The subpoena was issued in connection with a lawsuitbetween Bailey and Legacy Cabinets, Inc. (“Legacy”),which lawsuit is pending in the United States DistrictCourt for the Northern District of Alabama (Case No.2:09 cv1574/VEH). Also before this court are other filingssubmitted by Bailey, CLJP, and Legacy, all of which relateto the motion to compel (see Docs. 8, 10–12, 14–15, 17–19, 22, 24). As set forth below, the court grants Bailey'smotion.

BACKGROUND 1

1 The dispute between Bailey and CLJP is explainedin detail in the motion to compel (Doc. 1), CLJP'sresponse thereto (Doc. 8), and Bailey's reply (Doc.14). A detailed explanation need not be repeated here.Thus, this order contains only a brief outline of therelevant aspects of the dispute.

Legacy, as plaintiff in the underlying lawsuit, fileda complaint against Bailey alleging various claims—including breach of contract, action on open account,and unjust enrichment—based upon Bailey's allegedtermination of certain distribution agreements relating

Bailey Industries, Inc. v. CLJP, Inc., 270 F.R.D. 662 (2010)

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to Legacy's products (including an agreement regardingBailey's distribution of Legacy's cabinet products inNew Orleans, Louisiana), as well as Bailey's allegedrefusal to make payments for Legacy's products (see,e.g., N.D. Ala. Case No. 2:09cv1574/VEH (doc. 1 at7–16)). In relevant part, the New Orleans distributoragreement requires that Bailey refrain from distributing,marketing, or selling cabinets made by anyone other thanLegacy in the “Sales Area,” unless a cabinet productor style is not offered by Legacy and such sales donot exceed more than 10% of Bailey's overall cabinetsales in the “Sales Area” (which area is defined in theagreement as “New Orleans, Louisiana”) (see id. at 9–

10). 2 Bailey then filed counterclaims against Legacy, 3

including breach of contract and warranty, fraudulentmisrepresentation and/or omission, promissory fraudand/or fraudulent inducement, tortuous interference, andconspiracy claims (id., (doc. 19)). In support of itscounterclaims, Bailey alleges in relevant part that itagreed to “take over” operation *665 of the Legacydistribution center in New Orleans and in doing sorelied on Legacy's representations as to the center's priorsales volumes under Legacy management and control,but Legacy's sales-volume representations were false (id.).Bailey further alleges that Legacy's products were ofinferior quality or damaged and that Legacy failed tocure the product defects upon request, in violation ofits contractual agreements (id.). Moreover, Bailey alleges,Legacy began filling orders directly to Bailey's customers,solicited customers in the New Orleans area, and licensed

or empowered new distributors, such as CLJP, 4 todistribute Legacy products in the New Orleans sales areas,thereby competing directly against Bailey in that marketin violation of its contractual agreements (see id.).

2 The page references used in this Order reflect thepage numbers as enumerated in this court's electronicdocketing system (and the Northern District ofAlabama's system) rather than those the parties mayhave assigned.

3 Bailey also asserted claims against a third entity,which claims are not directly relevant to the instantdispute.

4 CLJP is a distributor of Legacy products, and itsregistered agent is in Destin, Florida.

On or about June 24, 2010, Bailey issued to CLJP asubpoena from this court which commanded productionof three categories of documents (see Doc. 1, Ex. A at 3).

Two of the three categories are in dispute here and are asfollows:

—Any and all correspondence, including, butnot limited to, written correspondence and e-mailcorrespondence with Legacy Cabinets, Inc. from March1, 2008 to the present that address or relates, in any way,to Bailey Industries, Inc. or Legacy's contracts/dealingswith Bailey Industries, Inc. [hereafter referred to as the“email request”]; and,

—Any and all documents including, but not limited to,invoices, purchase orders, billing statements, pertainingto purchases of cabinets from Legacy Cabinets, DebutCabinetry and/or Alliant Cabinets Direct betweenMarch 1, 2008 and August 13, 2009 in the stateof Louisiana [hereafter referred to as the “invoicerequest”].

(Doc. 1, Ex. A).

In initially responding to Bailey's email request, CLJPproduced two emails; and in initially responding toBailey's invoice request, CLJP produced approximately115 pages of invoices. Bailey contends, in essence, thatCJLP's response to the email request is incomplete(in part because additional emails—responsive to theemail request and known by Bailey to exist—were notproduced), and the response to the invoice request isinadequate because it provides no useful information toBailey due to CLJP's extensive redaction of the invoices(see, e.g., Doc. 1). In an effort to resolve the instantdisputes, however, Bailey indicated to CLJP that issuesrelated to the email request may be rendered moot ifCLJP's information technology (“IT”) expert providedan amended affidavit, explaining in greater detail thecomputer search he conducted when he first searchedCLJP's computers for emails responsive to Bailey's

request 5 (see, e.g., Doc. 14 at 2). Although CLJP declinedto provide an amended affidavit as Bailey suggested, theundersigned directed that CLJP do so, and an amendedaffidavit has now been filed with the court (see Docs.16, 19, 22). Similarly, Bailey indicated to CLJP thatissues related to the invoice request may be resolvedif CLJP provided unredacted invoices (or invoices withfar less redaction than those initially produced), andfurther, Bailey agreed to narrow the scope of the invoicerequest to require the production of information relatingto sales in the New Orleans area only (instead of theentire state of Louisiana) (see Doc. 14 at 3, 7). CLJP

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then provided redacted spreadsheets, on which additionalsales information was provided (see, e.g., Doc. 12 at 4;Doc. 14 at 6–7), but Bailey maintains that the informationremains of little or no use to Bailey due to the extent of the

redaction on the spreadsheets. 6

5 In its response to Bailey's Motion to Compel, CLJPattached an affidavit from its IT expert purporting toclarify the efforts he made to locate emails responsiveto Bailey's email request and to substantiate theposition taken by CLJP that a thorough computersearch had been performed and that all responsiveemails (i.e., two) had been produced (see Doc. 8).Thereafter, Bailey requested the amended affidavitreferenced here.

6 In response to an order of this court, Baileyhas provided representative samples of theredacted invoices and spreadsheets for the court'sconsideration (see Docs. 16–18).

CLJP asserts that the invoices and spreadsheets havebeen redacted to preserve the confidentiality of CLJP'sproprietary information, *666 including its pricingstructure (which, CLJP contends, is a “trade secret”), andCLJP further asserts that the release of such informationto Bailey, “a fierce competitor” of CLJP, would beharmful to CLJP because Bailey could underbid CLJPif it learns of CLJP's pricing structure (Doc. 8 at 1–2).With regard to the email request, CLJP asserts it hasfully complied with Bailey's request because its IT experthas thoroughly searched the email system and producedall responsive emails he was able to locate (id. at 6).Moreover, CLJP seeks an order requiring Bailey to paycertain costs associated with its production of documentsresponsive to Bailey's subpoena (Doc. 11). Bailey opposesthe order CLJP seeks regarding costs, noting that Baileyhas yet to provide adequate responses to the subpoena(but adding that it will compensate CLJP once CLJP hascomplied with the subpoena) (see Doc. 14 at 10).

LEGAL STANDARDSRule 45(a) of the Federal Rules of Civil Procedureauthorizes the issuance of a subpoena duces tecum seekingthe production of documents (or other materials) froma nonparty, such as CLJP. See, e.g., Fisher v. MarubeniCotton Corp., 526 F.2d 1338, 1341 (8th Cir.1975)(subpoena duces tecum is only way to compel a nonpartyto produce documents or other materials); SoutheasternMechanical Services, Inc. v. Brody, Case No. 1:09cv86/

GET/SSC, 2009 WL 3095642, at *2 (N.D.Ga. June 22,2009) (same, and noting that Rule 45, as revised in 2006,also provides for the production of electronically storedinformation (“ESI”) by a nonparty). The subpoena should“designate with reasonable particularity the documents,things, and [ESI] that are to be produced by the partyupon whom it is served.” 9A Wright & Miller, FederalPractice & Procedure: Civil 3d § 2457 (2008) (notingthat cases discussing Fed.R.Civ.P. 34—which sets forthprocedures for requesting documents from a party—provide helpful analogies regarding how specific thedesignation of documents must be). Rule 45(c) providesmeans by which a person or nonparty subject to asubpoena may be protected. Specifically, Rule 45(c)(2)and (3) provide in relevant part as follows:

(2) Command to Produce Materials or Permit Inspection.

(A) Appearance Not Required. A person commandedto produce documents, electronically storedinformation, or tangible things, or to permit theinspection of premises, need not appear in personat the place of production or inspection unless alsocommanded to appear for a deposition, hearing, ortrial.

(B) Objections. A person commanded to producedocuments or tangible things or to permit inspectionmay serve on the party or attorney designated in thesubpoena a written objection to inspecting, copying,testing or sampling any or all of the materialsor to inspecting the premises—or to producingelectronically stored information in the form or formsrequested. The objection must be served before theearlier of the time specified for compliance or 14 daysafter the subpoena is served. If an objection is made,the following rules apply:

(i) At any time, on notice to the commandedperson, the serving party may move the issuingcourt for an order compelling production orinspection.

(ii) These acts may be required only as directedin the order, and the order must protect a personwho is neither a party nor a party's officer fromsignificant expense resulting from compliance.

(3) Quashing or Modifying a Subpoena.

Bailey Industries, Inc. v. CLJP, Inc., 270 F.R.D. 662 (2010)

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(A) When Required. On timely motion, the issuingcourt must quash or modify a subpoena that:

(i) fails to allow a reasonable time to comply;

* * *

(iii) requires disclosure of privileged or otherprotected matter, if no exception or waiver applies;or

(iv) subjects a person to undue burden.

(B) When Permitted. To protect a person subject toor affected by a subpoena, the issuing court may, onmotion, quash or modify the subpoena if it requires:

*667 (i) disclosing a trade secret or otherconfidential research, development, or commercialinformation;

* * *

(C) Specifying Conditions as an Alternative. In thecircumstances described in Rule 45(c)(3)(B), the courtmay, instead of quashing or modifying a subpoena,order appearance or production under specifiedconditions if the serving party:

(i) shows a substantial need for the testimony ormaterial that cannot be otherwise met withoutundue hardship; and

(ii) ensures that the subpoenaed person will bereasonably compensated.

Fed.R.Civ.P. 45(c)(2), (3).

[1] [2] A subpoena may be quashed if it calls for “clearlyirrelevant” matter, Herron v. Blackford, 264 F.2d 723,

725 (5th Cir.1959), 7 but the court need not determinethe admissibility of documents prior to trial or quasha subpoena demanding their production if there is anyground on which they might be relevant. 9A Wright &Miller, Federal Practice & Procedure: Civil 3d § 2459(2008). Courts construe relevancy “broadly to encompassany matter that bears on, or that reasonably could leadto other matter[s] that could bear on, any issue that is ormay be in the case.” Oppenheimer Fund, Inc. v. Sanders,437 U.S. 340, 351, 98 S.Ct. 2380, 57 L.Ed.2d 253 (1978)(citing Hickman v. Taylor, 329 U.S. 495, 501, 67 S.Ct. 385,

91 L.Ed. 451 (1947)). See also Wagner v. Viacost.com, CaseNo. 06–81113–Civ, 2007 WL 1879914, at *1–2 (S.D.Fla.June 29, 2007) (applying relevance standard of Rule 26(b)to subpoena duces tecum seeking employment recordsfrom the plaintiff's current employer in deciding suchrecords were not relevant in a FLSA case).

7 In Bonner v. City of Prichard, 661 F.2d 1206, 1209(11th Cir.1981), the Eleventh Circuit adopted asbinding precedent decisions handed down by theformer Fifth Circuit before October 1, 1981.

DISCUSSIONBailey served its subpoena duces tecum on nonparty CLJPon or about June 24, 2010 (see, e.g., Doc. 8). The subpoenadirected compliance on or before July 9, 2010 (see Doc. 1,Ex. A). On July 2, 2010, CLJP “alerted Bailey that it wasin the process of gathering the responsive documentation,that CLJP might redact confidential business informationfrom some of the documentation, and that CLJP wantedto join [in] the ... protective order entered into betweenBailey and Legacy in the Alabama litigation” (Doc. 1at 3 & Ex. B (email from CLJP's counsel reflectingsame)) (emphasis added). On July 19, 2010, CLJP mailedits document production to Bailey, and the productionwas received by Bailey on July 24, 2010 (Doc. 1 at 3& Ex. C). As noted supra, the production consisted ofapproximately 115 pages of redacted invoices and twoemails, and the instant motion to compel concerns thoseproductions, each of which will be discussed separately inthis order, as follows.

CLJP's Response to Bailey's Invoice Request[3] [4] Initially, the court notes that CLJP's response to

the invoice request failed to comply with Rule 45 in severalrespects. First, any objection to producing the invoicesmust have been made in writing and served on Bailey onor before the date of compliance specified on the subpoena(that is, July 9, 2010). See Fed.R.Civ.P. 45(c)(2)(B). Theindication by CLJP's counsel in an email on July 2, thathe might need to redact “certain information if [his] clientfeels it is proprietary,” but “[he's] not sure this will benecessary depending on what [his] clients give [him]” (seeDoc. 1, Ex. B) is not a written objection; at most, it isan indication that an objection might be forthcoming.Second, the redacted invoices themselves, produced on orabout July 19, 2010, cannot be construed as a “writtenobjection” to Bailey's invoice request, as they state no

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objection and provide no explanation for the redactions.Moreover, by July 19, the time for asserting an objection

had passed. 8 Thus, the undersigned *668 concludes thatany objection to Bailey's invoice request on the basis of“proprietary information” or “trade secret” is deemedwaived by CLJP. Cf. Fed.R.Civ.P. 33(b)(4) (stating that“[a]ny ground [for an objection to an interrogatory] notstated in a timely objection [i.e., thirty days] is waivedunless the party's failure to object is excused by thecourt for good cause shown”) (emphasis added). Rule 34contains a similar requirement that objections to requestsfor production be timely and stated with reasons, and theAdvisory Committee Notes to the 1970 Amendment statethat this subdivision “is essentially the same as that inRule 33....” Thus, as a general rule, when a party fails totimely object to interrogatories, production requests, orother discovery efforts, the objections are deemed waived.See In re United States, 864 F.2d 1153, 1156 (5th Cir.1989).This is so even though a party had an objection to make.See Jaffe v. Grant, 793 F.2d 1182, 1190 n. 6 (11th Cir.1986)(objection based on Fifth Amendment waived by failure totimely assert such privilege in response to discovery); Peat,Marwick, Mitchell & Co. v. West, 748 F.2d 540, 542 (10thCir.1984) (same as to work product). Likewise, CLJPfailed to avail itself of the procedures set forth in Rule45(c)(3)(A), which specifically provide that a subpoenamay be quashed, “on motion,” if it calls for the disclosureof a trade secret or other confidential information. CLJP,however, has not filed a motion to quash the subpoenaissued by Bailey. Thus, because CLJP has waived anyobjection to Bailey's invoice request, Bailey's motion tocompel responses to the invoice request is due to begranted on this basis alone.

8 Although an email from Bailey's counsel to CLJP'scounsel, dated June 15, 2010, states that a two-weekextension (to June 29) “for CLJP to respond to thesubpoena is fine” (see Doc. 1, Ex. B), the extensionwas granted after the time for filing an objectionhad passed, and it appears the extension was grantedduring a time Bailey expected CLJP to fully complywith the subpoena.

[5] Even if the court considers the merits of CLJP'sobjections to the invoice request, however, the courtlikewise finds that Bailey's motion is due to be granted.First, the information Bailey seeks is relevant to someof its counterclaims against Legacy in the underlyinglitigation (e.g., the claims that Bailey's competitors(such as CLJP) were making sales or soliciting Bailey's

customers within the New Orleans sales area, Bailey'sprotected market, and/or were empowered or licensedby Legacy to make such sales, in violation of Legacy'srepresentations or contractual agreements). Second, theredacted documents produced by CLJP are indeed oflittle or no use to Bailey. For example, the redactedinvoices (produced by CLJP in its initial response) listonly the type of product sold (e.g., “Dover Toast cabinetsfor kitchen and bathroom”), the method of delivery,invoice and order numbers, invoice and order dates, andthe salesperson's identification number (see Doc. 18, Ex.B). The redacted invoices do not identify the locationof the sale, so it is impossible to discern whether thesale occurred within the New Orleans sales area. Andthe invoices do not reflect the amount of the sale, sothey provide no relevant information regarding Bailey'scounterclaims for damages (id.). See, e.g., MarshwoodCo. v. Jamie Mills, Inc., 10 F.R.D. 590 (N.D.Ohio1950) (where it appeared that plaintiff would have topresent his full case including the evidence on damages,at one hearing, plaintiff was entitled to have recordsrequested in subpoena so as to present an intelligent andaccurate picture of its damages). Similarly, the spreadsheet(produced by CLJP in its supplemental response) is nothelpful in its redacted form. The spreadsheet reflects onlyan inventory number, inventory date, the New Orleansarea to which the inventory was shipped, and the totalamount of sales (that is, $176,265.15) (see Doc. 18, Ex. A).Thus, it is impossible to determine the type of productsCLJP sold (and correspondingly, whether the sales ofthose products violate Bailey's distributor agreement orotherwise support Bailey's claims against Legacy, such asits fraudulent misrepresentation claim) or the amounts of

each individual sale. 9 In sum, based on this *669 court'sreview of (a representative sample of) the documentsproduced by CLJP, the court is convinced that CLJP'sresponse to the invoice request is inadequate.

9 Counsel for Bailey asserts that the spreadsheet“lumps” together all Louisiana sales, making itimpossible to discern which sales occurred within theprotected market area of New Orleans (see Doc. 14at 4). The court notes, however, that the spreadsheetreflects sales in Harvey, Metairie, and Saint Bernard,Louisiana (in addition to New Orleans), which areasare all in the vicinity of New Orleans (the court,however, does not and need not determine if theseareas are part of the New Orleans “sales area,” asthat term is defined in the distributor agreement). Thecourt makes this observation only to point out that

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the spreadsheet is responsive to Bailey's narrowedinvoice request, insofar as it appears to reflect sales inthe New Orleans area, as opposed to the entire stateof Louisiana.

[6] The court also finds that any claim by CLJPthat the invoices cannot be produced (other thanin the form previously produced) without revealing“proprietary information,” “confidential information,”or “trade secrets” is unpersuasive. Bailey does not seekto discover the names of CLJP's customers, so there isno danger of Bailey soliciting CLJP's clients. Moreover,a monetary figure reflecting the total of a particularsale simply does not reveal CLJP's underlying pricingstructure, and a “lump sum” figure of all sales in Harvey,Metairie, Saint Bernard, and New Orleans, Louisiana—while helpful—does not establish Bailey's damages.Indeed, such a figure may overstate Bailey's damages ifsome of the sales are deemed to have occurred outside theNew Orleans sales area or otherwise deemed to have beennon-violative of Legacy's representations or contractualagreements. Finally, a protective agreement is in place(or easily could be in place) to alleviate any concern thatBailey may learn of CLJP's pricing structure or otheralleged confidential information (see, e.g., Doc. 1 at 4–5

& Exs. C, D, F, G). 10 See Dean v. Anderson, Case No.01–2599–JAR, 2002 WL 1377729, at *2 (D.Kan. June 6,2002) (“it is well settled that confidentiality does not act asa bar to discovery and is generally not grounds to withholddocuments from discovery”); Mackey v. IBP, Inc., 167F.R.D. 186, 196 (D.Kan.1996) (confidentiality concernsin many cases may be addressed with an appropriateprotective order).

10 It is not evident that an amended protective orderor confidentiality agreement is actually in place. Theundersigned notes, however, that a Protective Orderwas entered in the underlying case (see Case No.2:09cv1574/VEH (docs. 29, 30)), and CLJP expressed

to Bailey its desire to join in the same confidentialityagreement that underlies that order and/or the orderitself (see Doc. 1, Ex. B). Thereafter, on July 19,2010, Bailey's counsel provided to CLJP a proposedprotective order, after which CLJP provided its initialresponse to Bailey's invoice request (see Doc. 1 at 3& Ex. C). To the extent the agreement was not signedor a protective order was not entered, the court notesthat counsel for Bailey agreed that CLJP's sales datawould be “for attorneys' eyes only” until a protectiveorder or agreement was executed, and the court seesno reason why such an order or agreement could noteasily be in place (if none is now) (see Doc. 14 at 6–7 & Doc. 1, Ex. C).

Thus, in conclusion, CLJP has waived any objectionto that part of Bailey's subpoena duces tecum seekingsales documents “pertaining to purchases of cabinetsfrom Legacy Cabinets, Debut Cabinetry and/or AlliantCabinets Direct between March 1, 2008 and August13, 2009” in the New Orleans area. Moreover, evenif the merits of CLJP's untimely objections areconsidered, Bailey's motion is nevertheless due to begranted. Accordingly, Bailey's motion to compel shall beGRANTED with regard to its invoice request. Specifically,CLJP shall be required to provide an amended responseto the invoice request as outlined at the conclusion of thisorder.

CLJP's Response to Bailey's Email Request[7] The email dispute may be characterized quite simply:

CLJP contends it has fully responded to Bailey's emailrequest, but Bailey maintains that CLJP's response isinadequate. The events preceding the current positions ofthe parties, however, are not so simple. Therefore, a brieftime line of the relevant events is helpful to understandingand resolving the email dispute; it is as follows (dates areapproximate):

June 24, 2010

Bailey's subpoena served on CLJP.

July 19, 2010

CLJP mailed its response toBailey.

July 26, 2010

Bailey received CLJP's response (which consisted of twoemails).

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July 26, 2010

Bailey contacted CLJP and voiced objections to the emailproduction, noting in relevant part Bailey's strong beliefthat additionalresponsive emails existed (whichbelief was based on discoveryBailey received from Legacy in the underlying lawsuit,as well as deposition testimony); Bailey asked that CLJP“double check its search parameters” to confirm that ameaningful computer search was conducted (see Doc. 1at 4 & Ex. D).

July 27, 2010

Bailey provided to CLJP a sample email it had receivedfrom Legacy, which was responsive to the subpoenabut not produced by CLJP; Bailey also suggested that acomputer search using the following search terms wouldlikely reveal the existence of additional responsive emails:Bailey, Alliant,Pensacola, Rodney Suggs, MikeO'Riley, Jon Reddell, CarlosAnsoategui, and Mobile (Doc. 1 at 4 & Ex. E). Further,Bailey indicated that the computer search should concernthe time frame of January 2008 through September 2009(Doc. 1, Ex. E). 11

August 6, 2010

CLJP stated it would participate in no further discoveryuntil the “Clawback Agreement” was signed and/or aProtective Agreement was in place (see Doc. 1 at 4& Ex. F). CLJP also requested that Bailey provide acopy of all emails already in its possession (referring tothose produced by Legacy in discovery in the underlyinglawsuit), “which you [Bailey] believe are responsive to[the] subpoena so that I [CLJP's counsel] can perform anaccurate review of the system,” and CLJP suggested thatuntil it received those emails nothing else would be donewith regard to the subpoena (see Doc. 1, Ex. F).

August 10, 2010

Bailey advised CLJP that an agreement already existedto protect CLJP's confidentiality concerns (and Baileyprovided to CLJP another such agreement) and, therefore,CLJP's position that it would no longer participate indiscovery was without merit (see Doc. 1 at 4–5 & Ex. G).Bailey also indicated that it had no obligation to provide toCLJP emails it previously received from Legacy (id.).

August 17, 2010

CLJP advised Bailey that it had “requested, in good faith,any and all correspondence which you[Bailey] allege supports your position that additional emailsexist” (Doc. 1, Ex. H). CLJP also stated it had performedan “in-house” search of its computer system and found “noadditional emails which it believes comply, [and] no furtherexpense will be undertaken to hire an outside IT retrievalexpert” (id.). Lastly, CLJP advised Bailey that “until [it] fullycomplies with CLJP's requests, CLJP will take no further

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action to attempt to comply with the underlying subpoenawhich CLJP considers satisfied at this time” (id.).

August 18, 2010

Bailey filed the instant motion to compel.

August 23, 2010

This court issued orders directing the parties to meet andconfer in a good-faith effort to resolve thedispute (Docs. 3, 4).

August 26, 2010

CLJP filed a response to the motion to compel, notingthe dispute had not been resolved (Doc. 8). Additionally,to demonstrate that a thorough email search had beenconducted, CLJP attached to itsresponse an affidavit from Brian Keith Schultz, its ITexpert, dated August 26, 2010 (see Doc. 8, Attach.).CLJP asserted that any further search would entail “anexpensive ($5,000.00) forensic analysis of the CLJPcomputer system which would have a dubious likelihoodof success,” and that as a nonparty CLJP should not haveto go to such lengths to respond to Bailey's subpoena (seeDoc. 8 at 7).

August 31, 2010

Bailey filed a reply to CLJP's response (Doc. 14). Inrelevant part Bailey suggested (as it had previouslysuggested to CLJP) that an amended affidavit from Mr.Schultz may establish that a thoroughcomputer search had indeed been conducted (see Doc. 14at 7–9).

September 9, 2010

This court ordered that CLJP provide an amended affidavitfrom Mr. Schultz and identified information that must beincluded in the amended affidavit (see Doc. 16).

September 15, 2010

CLJP filed an amended affidavit from Mr. Schultz, which isdated September 15, 2010 (Docs. 19, 22).

September 16, 2010

This court ordered Bailey to advise whether the amendedaffidavit satisfied its concerns regarding the computersearch (Doc. 23).

September 21, 2010

Bailey filed a notice indicating that it remained unsatisfied(see Doc. 24).

11 The court notes here that the subpoena established aslightly different time frame, that is, from March 1,2008, “to the present” (see Doc. 1, Ex. A at 3).

*670 As can be seen from the foregoing, and asmentioned supra, the question before the court is quite

simple: Did CLJP properly respond to Bailey's subpoenaby producing documents responsive to Bailey's command(that is, “Any and all correspondence, including, butnot limited to, written correspondence and e-mailcorrespondence with Legacy Cabinets, Inc. from March

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1, 2008 to the present that address or relates, in any way,to Bailey Industries, Inc. or Legacy's contracts *671 /dealings with Bailey Industries, Inc.”)? But answering thequestion is not so simple.

It was the expectation of the court that Mr. Schultz'samended affidavit would clarify the precise nature ofthe computer search he performed, and correspondingly,would permit the court to ascertain whether anyadditional search(es) would be fruitful or non-fruitfuland unnecessarily burdensome. Even after reviewing twoaffidavits from Mr. Schultz, however, the court concludesthat the precise nature of the search he performed remainsunclear. Moreover, the time line of events and certainactions by CLJP suggest to this court an effort by CLJP to“hide the ball” or otherwise fail to properly respond to thesubpoena without substantial justification. Therefore, it islogical to draw the conclusion that additional responsivedocuments exist and were not produced by CLJP. Indrawing this conclusion the court has considered, amongother factors, the following four factors.

First, to the extent CLJP refused to disclose anydocuments or otherwise participate in discovery due tothe lack of a confidentiality agreement, it is evident thatan agreement was readily available to CLJP, but CLJPfailed to execute it. Moreover, CLJP has not objected tothe email request based on any confidentiality concerns,so even if its refusal (that is, its refusal to respond toBailey's subpoena without a confidentiality agreement inplace) was justified, the refusal should have extendedonly to Bailey's invoice request, not the email request.Second, the court is quite troubled by CLJP's failureto cooperate further unless or until Bailey provided allemails it had already received from Legacy (and whichBailey deemed responsive to the subpoena). Bailey hadno obligation to do so. While CLJP suggests it neededthose emails as “proof” that additional, responsive emailsexisted, the court sees the request as a possible effortby CLJP to thwart the subpoena by producing onlythose emails already in Bailey's possession. Third, it isevident that CLJP's response is incomplete, as Baileyhas demonstrated to this court and to CLJP that morethan two responsive emails exist. Moreover, Bailey'srequest concerns a time period of greater than twoyears and calls for “all correspondence,” that concernsBailey or Legacy's dealings with Bailey, including emailsand written correspondence. Thus, even without Bailey'sdemonstration, it is reasonable to believe that additional

correspondence between CLJP and Legacy (regardingBailey) was created (and should still exist), since CLJPwas selling Legacy products in the New Orleans areaduring the relevant time (as evidenced by the invoices andspreadsheets), and Legacy knew the area was Bailey's sales

area. 12 Fourth, the search conducted by CLJP did notinclude obviously relevant search terms, such as the term“Alliant” (see Doc. 1, Ex. A; Doc. 22 at 2 ¶ 6).

12 The court does not suggest that such correspondencewill necessarily evidence any wrongdoing by Legacyand/or CLJP. For example, the correspondencemight simply explain the terms of Bailey's NewOrleans distributor agreement. The point is that suchcorrespondence likely exists, and if so, it is responsiveto the subpoena and should have been produced.

[8] Thus, sufficient reason exists to believe that CLJP'sresponse is incomplete. Cf. Gray v. Faulkner, 148 F.R.D.220, 223 (N.D.Ind.1992) (“The fact that a party maydisbelieve or disagree with a response to a discoveryrequest ... is not a recognized ground for compellingdiscovery, absent some indication beyond mere suspicionthat the response is incomplete or incorrect.”). See also A.Farber and Partners, Inc. v. Garber, 234 F.R.D. 186, 189(C.D.Cal.2006) (an earmark of a recipient's inadequateinquiry is the obvious absence of documents and otherwritten materials that the recipient reasonably would beexpected to have retained in the ordinary course of itsbusiness); In re Equitable Plan Co., 185 F.Supp. 57, 59(S.D.N.Y.1960) ( “There is a rebuttable presumptionthat a bank or other corporation is in possession andcontrol of its own books and records.”). Moreover,when it reasonably appears that a response is incompletethe court may require—as this court has—certificationthat the nonparty has “conducted a search for theinformation reasonably available to them through theiragents, attorneys, or others subject to their control andhas[ ] determined that the information requested eitherdoes not exist or *672 that it has been produced.” Gray,148 F.R.D. at 224. Because the certification here (that is,the affidavit and amended affidavit of Mr. Schultz) doesnot permit a determination that the requested informationrequested either does not exist or has been produced,the court shall require that CLJP conduct additionalsearches. Accordingly, Bailey's motion to compel shall beGRANTED with regard to its email request to the extentoutlined at the conclusion of this order.

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FEES ASSOCIATED WITH THE MOTION TOCOMPEL and COSTS INCURRED BY CLJP INRESPONDING TO THE SUBPOENA

Fees[9] [10] Rule 45 contains only two provisions that allow

for the imposition of expenses or sanctions, and neitheris applicable here. First, Rule 45(c)(1) provides that thecourt must impose sanctions, “which may include lostearnings and reasonable attorney's fees—on a party orattorney” who fails to “take reasonable steps to avoidimposing undue burden or expense on a person subjectto the subpoena.” Second, Rule 45(e) provides in relevantpart that the issuing court “may hold in contempt a personwho, having been served, fails without adequate excuseto obey the subpoena.” Here, as to the first provision,the court concludes that Bailey did not impose an undueburden or expense on CLJP, such that an award ofsanctions is warranted. Bailey's subpoena was not overly-broad; it called for the production of correspondenceand ESI that would have reasonably been expected tohave been retained by CLJP in the ordinary course ofbusiness and reasonably expected to have been retrievablewithout imposing an undue burden on CLJP; and itconcerned a limited time frame and subject matter, bothof which are relevant to Bailey's counterclaims in theunderlying lawsuit. Thus, CLJP is not entitled to anaward of lost earnings or attorney's fees, such as those

sought in its motion for costs (see Doc. 11 & Attachs.). 13

As to the second provision, the court finds that CLJP“obeyed” Bailey's subpoena even though its responseswere incomplete. Thus, because CLJP did not fail torespond to the subpoena “without adequate excuse,” nobasis exists for imposing sanctions against CLJP underRule 45(e).

13 Indeed, many of CLJP's expenses, including itsattorney's fees, could have been avoided or minimizedhad CLJP fully complied with Bailey's subpoenaor accepted any of Bailey's offers to resolve thedisputed issues, which offers the undersigned deemsreasonable, appropriate, and fair.

[11] Although Rule 45(c)(2)(B)(i) authorizes the servingparty to “move the issuing court for an order compellingproduction or inspection,” there is no provision in Rule45 for an award of expenses for bringing such a motion.Such a provision can be found in Rule 37(a)(5)(A), whichauthorizes an award of “the movant's reasonable expenses

incurred in making the motion [to compel], includingattorney's fees,” but Rule 37(a) does not appear togovern motions to compel production of documents madepursuant to Rule 45. See, e.g., Kona Spring Water Distrib.,Ltd. v. World Triathlon Corp., Case No. 8:05cv119–T–23TBM, 2006 WL 905517, at *2 (M.D.Fla. Apr.7, 2006)(court granted in part and denied in part motion tocompel compliance with subpoena under Rule 45 anddenied motion for sanctions, finding “to the extent thatDefendant seeks sanctions under Rule 37, ... the rule [is]inapposite”) (citing Davis v. Speechworks Int'l, Inc., CaseNo. 03cv533S(F), 2005 WL 1206894, at *5 (W.D.N.Y.

May 20, 2005)); 14 see also Peacock v. Merrill, Case No.08–01–B–M2, 2008 WL 687195, at *4 (M.D.La. Mar.10,2008) (“The Court also finds that Peacock's request forcourt costs and attorney's fees in connection with thismotion should be denied, as Fed.R.Civ.P. 45, dealing withthe issuance and response to subpoenas directed to non-parties, does not provide for court costs and attorney'sfees as a sanction against persons who fail to producethe subpoenaed documents.”); NLRB v. Midwest Heatingand *673 Air Conditioning, Inc., 528 F.Supp.2d 1172,1181 (D.Kan.2007) (“Unlike Rule 37, Rule 45 contains noexpress provision for attorneys' fees or sanctions to a partythat has prevailed on a motion to compel compliancewith a subpoena duces tecum.”); SEC v. Kimmes, CaseNo. M18–304, 1996 WL 734892, at *7 (S.D.N.Y. Dec.24,1996) (“As for the applicability of Rule 37(a)(4) to motionsto compel compliance with a subpoena duces tecum issuedpursuant to Rule 45, this Court's research reveals that bothcase law and commentary regarding this issue are scarce.Nevertheless, the authority that does exist suggests thatRule 37(a)(4) is inapplicable to motions to compel under

Rule 45.”). 15 Thus, based on the foregoing authority,the undersigned declines to award attorney's fees or costsincurred by Bailey in bringing the motion to compel, eventhough Bailey has prevailed on the motion.

14 In Davis, the court wrote “The court has no authorityto sanction Mr. Weiss under Rule 37, as that Ruledoes not apply to a motion to compel compliancewith a subpoena pursuant to Fed.R.Civ.P. 45.” Davis,2005 WL 1206894, at *5 (citing Kimmes, 1996 WL734892).

15 The provisions of former Rule 37(a)(4) are currentlyfound in 37(a)(5).

Costs

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[12] As Bailey has acknowledged (at least with regardto CLJP's response to the invoice request) (see, e.g.,Doc. 14 at 10 (agreeing to pay costs once responsivedocumentation is received)), CLJP is entitled to certaincosts of production. The parties, however, cannot agree onsomething as simple as reasonable copying costs (Baileyasserts a reasonable amount is $.25/per page, and CLJPasserts a reasonable amount is $.75/per page); thus, thecourt will set the amount at $.50/per page. The court finds,however, that Bailey shall not be required to pay to CLJPcopying costs for previously-produced documentation(regarding Bailey's invoice request), as it is non-responsiveto the subpoena. Bailey will, however, be required topay for copying costs associated with CLJP's amendedresponse.

With regard to the email request, Bailey will berequired to advance to CLJP reasonable costs foradditional computer searches to be conducted by CLJP,as ordered below. See United States v. InternationalBusiness Machines, 62 F.R.D. 507, 509 (S.D.N.Y.1974)(“The advancement of costs as a condition for thedenial of a motion to quash is committed to the sounddiscretion of the court.”) (citation omitted). Likewise,although the prior computer search produced only twoemails, it nevertheless was conducted only because Baileycommanded that it be conducted, and while the searchwas not as thorough as it should have been, CLJPis nevertheless entitled to reasonable expenses incurredin conducting the previous search. CLJP is cautioned,however, that:

The costs sought by the non-partymay be unreasonable if they aredisproportionate to the demandsmade; if other persons, similarlysituated, would incur lesser costs tocomply; or proof that a non-movingparty and non-party are in collusionto artificially inflate the costs ofcompliance so as to make the priceof litigating the case prohibitive.These examples are illustrative andnot intended to be all-inclusive.

Cantaline v. Raymark Industries, Inc., 103 F.R.D. 447, 450

n. 4 (S.D.Fla.1984). 16

16 The parties are forewarned that if they fail to agreeon a “reasonable” amount of costs, and the disputeis brought to this court for resolution, the matterwill likely be set for a hearing at a time convenientto the court (which may—due to the undersigned'sfull schedule—be in the evening or on a Saturday).After such hearing, one or both of the parties will paythe costs associated with the hearing, including butnot limited to court reporter costs and, potentially,costs for the opposing party's travel and lodging.Alternatively, at the court's discretion, the mattermay be referred to a mediator; the mediation will becourt-ordered to occur immediately; the court willselect the mediator; and the parties will pay for themediation. Thus, as can be seen, any failure to reachan agreement on the matter of costs will serve only toincrease the amount of costs paid by one or both ofthe parties.

Accordingly, it is ORDERED:

1. Bailey's Motion to Compel (Doc. 1) is GRANTED,with regard to its invoice request, to the following extent.On or before OCTOBER 6, 2010, CLJP shall providean amended response to Bailey's invoice request, and theamended response must:

(a) consist of a reproduction of the spreadsheets, andthe spreadsheets shall—in addition to the informationcontained on the spreadsheets originally produced—include (i) a description of the item sold (the description*674 may be provided by identifying the Legacy

product that corresponds to the inventory number on thespreadsheets, or the description may be provided in thespreadsheet column titled “comment”), and (ii) the invoicetotals. OR

(b) consist of a reproduction of the invoices, and theinvoices shall—in addition to the information containedon the invoices originally produced—include (i) the city towhere the product was shipped, and (ii) the invoice total.

2. Bailey's Motion to Compel (Doc. 1) is GRANTED, withregard to its email request, to the following extent. On orbefore OCTOBER 6, 2010—IF Baily confirms to CLJPthat it is desirous of each of the following directives ANDBailey complies with Part 4.(b) of this order, infra—Mr.Schultz (or another IT expert of CLJP's choosing) shall:

(a) conduct an additional search of “all e-mail folders,”the “mailboxes of all users,” and “all available

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mailboxes” (see Doc. 22 at 1) using the following searchterms: Alliant, Suggs, Mike O'Riley, Jon Reddell, Carlos

Ansoategui, and Mobile; 17

17 Although the folders and mailboxes were alreadysearched (see Doc. 22 at 1 ¶ 5), it is not evidentthat a thorough search was conducted (compare Doc.1, Ex. E (suggested search terms including Bailey,Alliant, Pensacola, Rodney Suggs, Mike O'Riley, JonReddell, Carlos Ansoategui, and Mobile) with Doc.22 at 2 ¶ 6 (search terms actually used: Rodney,Carlos, Pensacola, and Bailey)).

(b) conduct a search of the Tallahassee laptop computerusing the following search terms: Bailey, Alliant,Pensacola, Rodney Suggs, Mike O'Riley, Jon Reddell,

Carlos Ansoategui, and Mobile; 18 and,

18 Mr. Schultz states in the amended affidavit thatall laptops (except one in Tallahassee) have beenreplaced within the last twelve months (or sinceapproximately August or September of 2009),apparently as an explanation for CLJP's failure topreviously search those laptops. Bailey's subpoena(issued and served in June 2010), however, callsfor production of all correspondence (includingemails) from March 1, 2008 “to the present.”Notwithstanding, Bailey indicated to CLJP thatthe relevant time frame is January 2008 throughSeptember 2009 (see Doc. 1, Ex. E). Thus, thereplacement laptops are unlikely to contain relevantemails. However, even though most of CLJP's laptopswere replaced in August or September 2009, the courtnotes that businesses customarily transfer or archiveinformation from laptops that are to be replacedprior to disposing of the laptops (or, as in this case(apparently), prior to donating them to charity (seeDoc. 24, Ex. A)). If CLJP did so, the archivedor transferred information shall also be searchedby CLJP's IT expert, wherever that information isstored, using the following search terms: Bailey,Alliant, Pensacola, Rodney Suggs, Mike O'Riley, Jon

Reddell, Carlos Ansoategui, and Mobile (unless sucha search would duplicate any of the other searchesordered by this court).

(c) conduct a search of any CLJP desktop computer thatwas not previously searched using all of the followingsearch terms: Bailey, Alliant, Pensacola, Rodney Suggs,Mike O'Riley, Jon Reddell, Carlos Ansoategui, andMobile (unless such a search would duplicate the searchdescribed in part 2. (a), supra ).

3. Following the additional computer searches, but nolater than OCTOBER 8, 2010, CLJP shall provideto Bailey an amended response to the email request.The amended response shall include any additionaldocumentation located as a result of the additionalsearches, and if no such documentation is located, astatement confirming that search(es) compliant with thiscourt's order were conducted.

4. CLJP's Motion to Require Payment of Copy Costs(Doc. 11) is GRANTED to the following extent:

(a) On or before OCTOBER 8, 2010, Bailey shall submitpayment to CLJP, in the amount of $.50/per page, foreach page produced by CLJP in its amended response toBailey's invoice request.

(b) On or before OCTOBER 5, 2010, Bailey shall payreasonable costs associated with CLJP's previous andfuture computer searches.

5. Bailey's Motion to Strike (Doc. 15) is DENIED.

DONE AND ORDERED.

All Citations

270 F.R.D. 662

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

Dr. Greens, Inc. v. Spectrum Laboratories, LLC, Not Reported in F.Supp.2d (2012)

2012 WL 3111746

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1

2012 WL 3111746Only the Westlaw citation is currently available.

United States District Court,D. Kansas.

DR. GREENS, INC., Plaintiff,v.

SPECTRUM LABORATORIES, LLC, Defendant.

No. 12–MC–226–KHV–GLR.|

July 31, 2012.

Attorneys and Law Firms

Norman E. Beal, Beal & Reinhardt, LLC, Overland Park,KS, for Defendant.

MEMORANDUM AND ORDER

GERALD L. RUSHFELT, United States MagistrateJudge.

*1 The Court has the following motions underconsideration: Spectrum's Motion to Compel Dyna–Tekto Comply with Subpoena (ECF No. 1) and Non-partyDyna–Tek's Motion to Quash or Modify Subpoena DucesTecum (ECF No. 6). For the reasons that follow, theCourt grants in part and denies in part both motions.

I. NATURE OF THE MATTER BEFORE THECOURTDefendant Spectrum Laboratories LLC (Spectrum)commenced this miscellaneous action by moving tocompel non-party Dyna–Tek Industries, Inc. (Dyna–Tek)to comply with a subpoena issued out of this Court.In accordance with Fed.R.Civ.P. 45, Spectrum serveda subpoena duces tecum to obtain formula informationand communications that are purportedly relevant to apatent infringement case (Case No. 11–CV–638–JAH)commenced in the Southern District of California byDyna–Tek's customer—Dr. Greens, Inc. (Dr. Greens).The court in the underlying action denied a motion forprotective order filed by Dr. Greens to preclude Spectrumfrom obtaining supplier information and the chemical

formula for the alleged infringing product. 1 It orderedthat the information be provided subject to an “Outside

Attorneys Eyes Only” protective order. 2 By agreementof the parties, the court entered a three-tiered order toprotect the confidentiality of documents disclosed during

the litigation. 3

1 See ECF No. 1–3 (Ex. C).

2 Id.

3 See ECF No. 1–5. Under the Protective Order, anyparty to the litigation may designate documents as“Confidential”, “Confidential—For Counsel Only”,or “Confidential—Outside Attorney Eyes Only”. Seeid. at 2.

Spectrum filed its motion to compel on April 27, 2012.This Court extended the response time to May 18, 2012.Dyna–Tek filed its motion to quash on May 18, 2012.Spectrum filed a response to the motion to quash. Dyna–Tek timely filed a reply brief on June 15, 2012. Themotions are ready for ruling.

II. ANALYSISSpectrum seeks to compel Dyna–Tek to producedocuments responsive to six document requests includedin its subpoena duces tecum. Dyna–Tek assertednumerous general objections to the subpoena and specificobjections to the particular requests. In response tothe motion to compel, Dyna–Tek moved to quash thesubpoena. Spectrum responded that the latter motion isuntimely and without merit.

A. TimelinessThe Court does not find the motion to quash untimely.Spectrum relies on the timeliness requirement set outin Fed.R.Civ.P. 45(c)(3)(A). But Dyna–Tek primarilymoves to quash the subpoena under Rule 45(c)(3)(B).Unlike subparagraph (A), which mandates the quashingor modifying of a subpoena in certain circumstances ontimely motion, subparagraph (B) invokes the discretion ofthe Court to modify or quash a subpoena that requirescertain disclosures or lengthy travel by a non-party whois not an officer of a party. While both provisions requirea motion to prompt court action, only the mandatoryprovision expressly requires that the motion be timelyfiled.

To the extent Dyna–Tek relies on Rule 45(c)(3)(A), theCourt may excuse a failure to meet the deadline when

Dr. Greens, Inc. v. Spectrum Laboratories, LLC, Not Reported in F.Supp.2d (2012)

2012 WL 3111746

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the delayed filing results from attempts to informallyresolve the disputes about a subpoena without judicial

intervention. 4 In this case Dyna–Tek engaged in severalexchanges with Spectrum in an effort to resolve theissues. The filing of the motion to compel confirmedan inability to resolve the matters without resort to thecourt. Dyna–Tek filed its motion to quash within thetime for responding to the motion to compel. Under thesecircumstances, the Court finds the motion to quash timelyto the extent the timeliness requirement of Rule 45(c)(3)(A) applies.

4 See Hartz Mountain Corp. v. Chanelle Pharm.Veterinary Prods. Mfg. Ltd., 235 F.R.D. 535, 536(D.Me.2006).

*2 Rule 45(c)(3)(B) has no specific timelinessrequirement. Spectrum, moreover, has provided no basisto graft such a requirement to that subparagraph.Nevertheless, a delay in pursuing a motion under Rule45(c)(3)(B) may be relevant to whether the Court shouldexercise its discretion to modify or quash the subpoena.In this instance, however, the Court finds no reason todeny the motion to quash or modify based on any delayfor the same reasons that it finds the motion timely underRule 45(c)(3)(A). The Court proceeds to the merits of themotions.

B. Requests for DocumentsThe subpoena commands Dyna–Tek to produce thefollowing six categories of documents identified in an

attachment: 5

5 Both parties provide a copy of a subpoenaissued in Oregon seeking the same categories ofdocuments from another non-party. See ECF No. 1–7 (attachment to Compl.); ECF No. 6–2 (attachmentto Mot. Quash). Dyna–Tek also provides theirobjections to the subpoena, which sets out thecategories of documents. See ECF No. 6–3. As usedin the subpoena, “YOU” refers to Dyna–Tek.

1. All past or present formulas for any substance ormixture YOU have directly or indirectly supplied toDR. GREENS.

2. ALL DOCUMENTS that relate to, refer to,reflect, constitute, or evidence the names or amountsof any substance present in (or added to) each

substance or mixture YOU have directly or indirectlysupplied to DR. GREENS, including, but not limitedto, ingredient lists, recipes, procedures, instructions,test results, bills of material, quality control records,invoices, and purchase orders.

3. For each particular substance constituting,contained within, or otherwise used to manufactureany substance or mixture YOU have directlyor indirectly supplied to DR. GREENS,a representative purchase order or invoicedocumenting YOUR purchase of the substance ormixture sufficient to show (i) a description of thesubstance or mixture; (ii) the date of the order; (iii)the quantity ordered; (iv) the price paid; and (v) thename and address of the person or entity from whomYOU received the substance.

4. ALL DOCUMENTS that relate to, refer to,reflect, constitute, or evidence testing or chemicalanalysis of any substance or mixture YOU directly orindirectly supplied to DR. GREENS.

5. All written communications (e.g., e-mails, letters,and notes) between YOU and DR. GREENS.

6. To the extent such documents were not produced inresponse to Request No. 5 above, all DOCUMENTSthat record, describe, contain, refer to, or relateto any communications (e.g., e-mails, letters,voice messages between YOU and DR. GREENSrelating to (a) SPECTRUM or Matt Stephens; (b)patent infringement allegations; (c) the chemicalcomposition of, or any substance within, a substanceor mixture provided by YOU to DR. GREENS; (d)U.S. Patent No. 7,192,776; (e) any actual or potentiallawsuit between DR. GREENS and SPECTRUM.

Dyna–Tek asserted numerous objections to the subpoenaand requested production. In its motion to quash, itcontinues to object on various grounds. “In general,the party resisting discovery has the burden to show

how requested discovery is objectionable.” 6 That Dyna–Tek is a non-party to the underlying litigation does not

alter who must carry the burden of persuasion. 7 Dyna–Tek has not adequately supported any objection to therequested discovery except for showing that produceddocuments will include trade secrets or other confidential

information. 8

Dr. Greens, Inc. v. Spectrum Laboratories, LLC, Not Reported in F.Supp.2d (2012)

2012 WL 3111746

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3

6 Robinson v. City of Ark. City, Kan., No. 10–1431–JAR–GLR, 2012 WL 603576, at *6 (D.Kan. Feb.24,2012), review denied, 2012 WL 1674255 (D.Kan. May14, 2012); accord P.S. ex rel. Nelson v. The Farm,Inc., No. 07–2210–JWL–DJW, 2007 WL 4570872,at *2 (D.Kan. Dec.27, 2007) (recognizing that partymoving to quash a subpoena has burden to supportits objections).

7 With respect to an objection of based on irrelevancy,the burden switches to the party seeking discovery,when the requested discovery does not appearrelevant on its face. See Robinson, 2012 WL 603576, at*7 (discussing the changing burdens). The requesteddiscovery in this case appears facially relevant giventhe nature of the underlying action, the rulings inthat action, and the broad scope of relevancy in thediscovery context under Fed.R.Civ.P. 26(b)(1). Theburden thus remains with Dyna–Tek to show that thediscovery is not relevant under Rule 26(b)(1) or “isof such marginal relevance that the potential harmoccasioned by discovery would outweigh the ordinarypresumption in favor of broad disclosure .” Mackey v.IBP, Inc., 167 F.R.D. 186, 193 (D.Kan.1996) (citationomitted).

8 Spectrum does not dispute that requested productionwill include trade secrets. See Mem. Supp. Mot.Compel at 9.

*3 But that showing does not necessarily preclude

the discovery of such information. 9 “There is noabsolute privilege for trade secrets and similar confidential

information.” 10 If a subpoena requires disclosure of “atrade secret or other confidential research, development,or commercial information”, the federal courts havediscretion to quash or modify the subpoena to protect a

person subject to or affected by it. 11 Alternatively, thecourts may order “production under specified conditionsif the serving party: (i) shows a substantial need forthe ... material that cannot be otherwise met withoutundue hardship; and (ii) ensures that the subpoenaed

person will be reasonably compensated.” 12 Spectrumhas made a sufficient showing under subparagraph (i).There is no reason to believe that Spectrum will not

reasonably compensate Dyna–Tek. 13 As the court in theunderlying action has already found, production of tradesecrets or other similar confidential information can beadequately protected under an “Outside Attorneys Eyes

Only” protective order. 14 Given the existing protectiveorder entered in the underlying action, this Court

can adequately protect the confidentiality of produceddocuments by extending that protective order to coverdocuments produced by Dyna–Tek, a non-party to theunderlying action. The production is also contingenton Spectrum ensuring that Dyna–Tek is reasonably

compensated for the costs of production. 15

9 Cf. Naerebout v. IBP, Inc., No. 91–2254–L, 1992 WL754399, at *13 (D.Kan. Aug.19, 1992) (recognizingthat a showing of confidentiality or trade secrets doesnot preclude discovery under Fed.R.Civ.P. 34).

10 Centurion Indus., Inc. v. Warren Steurer & Assocs.,665 F.2d 323, 325 (10th Cir.1981); Speed Trac Techs.,Inc. v. Estes Exp. Lines, Inc., No. 08–212–KHV, 2008WL 2309011, at *4 (D.Kan. June 3, 2008).

11 Fed.R.Civ.P. 45(c)(3)(B)(i). Similarly, on motion,for good cause shown, and “to protect a party orperson from annoyance, embarrassment, oppression,or undue burden or expense”, the courts may require“that a trade secret or other confidential research,development, or commercial information not berevealed or be revealed only in a specified way.”Fed.R.Civ.P. 37(c)(1)(G).

12 See Fed.R.Civ.P. 45(c)(3)(C).

13 What constitutes “reasonable compensation” is leftto the discretion of the courts. 9A Charles AlanWright & Arthur R. Miller, Federal Practice andProcedure § 2463.1 (3d ed.2008). The compensationmay be limited to the costs of production, if such costsreasonably compensate the producing party. Klay v.All Defendants, 425 F.3d 977, 984–86 (11th Cir.2005).

14 See also Transcor, Inc. v. Furney Charters, Inc., 212F.R.D. 588, 593 (D.Kan.2003) (entering protectiveorder to protect confidential documents sought bysubpoena).

15 Given the protective order and the facts of thiscase, the Court finds that reasonable compensation islimited to the costs of production.

In addition, even though Dyna–Tek has not adequatelysupported any other asserted objection, the Court mayfind a particular request for discovery overly broad orunduly burdensome on its face when ‘it is couched insuch broad language as to make arduous the task ofdeciding which of numerous documents may conceivably

fall within its scope.’ “ 16 There is no need to substantiatean asserted objection in such circumstances. To the extent

Dr. Greens, Inc. v. Spectrum Laboratories, LLC, Not Reported in F.Supp.2d (2012)

2012 WL 3111746

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4

Requests 2, 4, and 6 use the phrase “relate to”, they are

overly broad on their face. 17 In each of these requests,that phrase modifies all documents instead of a particulartype of document. By doing so, they require Dyna–Tek toguess whether a particular document falls within the scope

of the request. They are objectionable to that extent. 18

Because Requests 2, 4, and 6 are objectionable only inpart, the Court can eliminate the objectionable portionby modifying the requests to omit the phrase “relate to.”Omitting that phrase adequately limits Requests 2, 4, and6 to an acceptable form.

16 Audiotext Commc'ns Network, Inc. v. U.S. Telecom,Inc., No. 94–2395–GTV, 1995 WL 625962, at *6(D.Kan. Oct.5, 1995); accord Cotracom CommodityTrading Co. v. Seaboard Corp., 189 F.R.D. 655, 665–66 (D.Kan.1999); Mackey v. IBP, Inc., 167 F.R.D.186, 197 (D.Kan.1996).

17 To limit the subject matter of responsive documents,Request 6 also uses the similar phrase “relating to”just prior to listing five limitations on the contentof responsive documents. The limiting languagemakes this second use of the omnibus phrasenon-objectionable. In such context, the phrase isequivalent to using the word “about”.

18 See Cotracom, 189 F.R.D. at 665–66; Robinson. 2012WL 603576, at *8–9.

Request 5 is also overly broad on its face. Althoughit does not use a specific objectionable phrase like“relating to”, it is overly broad in that it seeks all writtencommunications. Without some limitation as to subjectmatter, such a request is overly broad. Because Request5 lacks appropriate limiting language, the Court modifiesthe subpoena to omit that request.

The Court overrules all objections asserted by Dyna–Tek,except as specifically mentioned in this order. BecauseRequests 2, 4, and 6 are overly broad in part and Request5 is overly broad in its entirety, the Court has modifiedthe subpoena as contemplated by Fed.R.Civ.P. 45(c)(3).Because the subpoena requires Dyna–Tek to disclosetrade secrets or other confidential information set out inRule 45(c)(3)(B)(i) and Spectrum has shown a substantial

need for the material under Rule 45(c)(3)(C), the Courtorders production under the protective order enteredin the underlying action and herein extended to cover

non-party Dyna–Tek. 19 Spectrum shall also reasonablycompensate Dyna–Tek for its production costs.

19 If Dyna–Tek desires additional protection, it mayseek modification of that protective order in theunderlying action. It expresses concerns aboutdisseminating its materials to litigation counsel forSpectrum, David Cupar. From the informationbefore this Court, however, it is not clear that hewill have access to the disclosed materials underthe Outside Attorneys Eyes Only protective order.The California court will have additional informationabout the underlying action.

III. CONCLUSION*4 For the reasons stated, the Court grants in part and

denies in part Spectrum's Motion to Compel Dyna–Tekto Comply with Subpoena (ECF No. 1) and grants inpart and denies in part Nonparty Dyna–Tek's Motionto Quash or Modify Subpoena Duces Tecum (ECFNo. 6). It grants the latter motion only to modifythe subpoena by omitting Request 5 in its entirety; byeliminating the phrase “relates to” from Requests 2, 4,and 6; and order production under specified conditionsas contemplated by Fed.R.Civ.P. 45(c)(3)(C). It grantsthe motion to compel only to the extent Spectrum seeksto compel production of documents to the subpoenaas modified herein. The motions are otherwise denied.When producing documents responsive to the requestsin the subpoena, Dyna–Tek may avail itself of theconfidentiality protections afforded by the “OutsideAttorneys Eyes Only” protective order entered in theunderlying action. That protective order is hereby adoptedand extended to cover Dyna–Tek.

IT IS SO ORDERED.

All Citations

Not Reported in F.Supp.2d, 2012 WL 3111746

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

In re Napster, Inc. Copyright Litigation, 462 F.Supp.2d 1060 (2006)

2006 WL 3050864

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1

KeyCite Yellow Flag - Negative Treatment

 Distinguished by Surowiec v. Capital Title Agency, Inc., D.Ariz., May

4, 2011

462 F.Supp.2d 1060United States District Court,

N.D. California.

In re NAPSTER, INC. COPYRIGHT LITIGATION.This Document Relates To:

UMG Recordings, Inc. et al., Plaintiffs,v.

Hummer Winblad VenturePartners et al., Defendants.

UMG Recordings, Inc. et al., Plaintiffs,v.

Bertelsmann AG et. al., Defendants.Jerry Leiber et al., Plaintiffs,

v.Bertelsmann AG et al., Defendants.

Capitol Records, Inc. et al., Plaintiffs,v.

Bertelsmann AG et. al., Defendants.

Nos. C MDL-00-1369 MHP, C 04-1166 MHP, C04-1351 MHP, C 04-1671 MHP, C 04-2121 MHP.

|Oct. 25, 2006.

SynopsisBackground: In actions transferred by Judicial Panel onMultidistrict Litigation, in which owners of copyrightsin musical compositions and performances assertedcontributory and vicarious infringement claims againstinvestors in Internet service that had facilitatedtransmission and retention of MP3-formatted music filesby its users, owners moved for sanctions based on allegedspoliation of evidence.

Holdings: The District Court, Patel, District Judge, heldthat:

[1] investor's duty to preserve relevant e-mails attachedas of time when it received a clear indication thatrecording industry would be targeting downloadingservice's investors;

[2] investor had a continuing obligation to preserve e-mailsrelated to the downloading service even though lawsuitagainst investor had been dismissed;

[3] default sanction was not warranted; but

[4] fact issues existed as to the proper extent of evidentiarysanctions to be imposed;

[5] adverse inference instruction was appropriate sanction;and

[6] monetary sanctions were warranted.

Motion denied in part and granted in part.

West Headnotes (26)

[1] Federal Civil ProcedureInherent Authority

170A Federal Civil Procedure170AXX Sanctions170AXX(A) In General170Ak2756 Authority to Impose170Ak2757 Inherent Authority

District courts may impose sanctions as partof their inherent power to manage their ownaffairs so as to achieve the orderly andexpeditious disposition of cases.

11 Cases that cite this headnote

[2] Federal Civil ProcedureReception of Evidence

170A Federal Civil Procedure170AXV Trial170AXV(C) Reception of Evidence170Ak2011 In General

District courts' inherent power to managetheir own affairs so as to achieve the orderlyand expeditious disposition of cases includesthe broad discretion to make evidentiaryrulings conducive to the conduct of a fair andorderly trial.

7 Cases that cite this headnote

In re Napster, Inc. Copyright Litigation, 462 F.Supp.2d 1060 (2006)

2006 WL 3050864

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2

[3] Federal Civil ProcedureInherent Authority

170A Federal Civil Procedure170AXX Sanctions170AXX(A) In General170Ak2756 Authority to Impose170Ak2757 Inherent Authority

District courts' inherent power to sanctionmay be invoked in response to destruction ofevidence.

1 Cases that cite this headnote

[4] Federal Civil ProcedureFailure to Comply; Sanctions

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1636.1 In General

If a party breaches its duty to preserveevidence, the opposing party may movethe court to sanction the party destroyingevidence.

48 Cases that cite this headnote

[5] Federal Civil ProcedureFacts Taken as Established or Denial

Precluded

Federal Civil ProcedureStriking Out Defaulting Party's Pleading

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1638 Facts Taken as Established orDenial Precluded170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions

170Ak1639 Striking Out Defaulting Party'sPleading

Courts may sanction parties responsible forspoliation of evidence by (1) instructing thejury that it may draw an inference adverseto the party or witness responsible fordestroying the evidence, (2) excluding witnesstestimony proffered by the party responsiblefor destroying the evidence and based on thedestroyed evidence, or (3) dismissing the claimof the party responsible for destroying theevidence.

33 Cases that cite this headnote

[6] Federal Civil ProcedureFailure to Comply; Sanctions

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1636.1 In General

A party's destruction of evidence need notbe in bad faith to warrant impositionof sanctions; courts may impose sanctionsagainst a party that merely had notice that thedestroyed evidence was potentially relevant tolitigation.

50 Cases that cite this headnote

[7] Federal Civil ProcedureFailure to Comply; Sanctions

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1636.1 In General

A party's motive or degree of fault indestroying evidence is relevant to whatsanction, if any, is imposed.

27 Cases that cite this headnote

[8] Federal Civil Procedure

In re Napster, Inc. Copyright Litigation, 462 F.Supp.2d 1060 (2006)

2006 WL 3050864

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3

Discovery and Production of Documentsand Other Tangible Things

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)1 In General170Ak1551 In General

As soon as a potential claim is identified, alitigant is under a duty to preserve evidencewhich it knows or reasonably should know isrelevant to the action.

69 Cases that cite this headnote

[9] Copyrights and Intellectual PropertyDiscovery

99 Copyrights and Intellectual Property99I Copyrights99I(J) Infringement99I(J)2 Remedies99k72 Actions for Infringement99k84 Discovery

In light of already pending copyrightinfringement litigation against Internet music-downloading service, company which hadinvested in the downloading service shouldreasonably have believed that litigationagainst it was probable if it continued itsinvolvement with the service, and thereforeits duty to preserve related e-mails attachedas of time when an officer of investor officerreceived a clear indication, in the form of awarning from the CEO of a copyright holder,that recording industry would be targetingservice's investors.

Cases that cite this headnote

[10] Copyrights and Intellectual PropertyDiscovery

99 Copyrights and Intellectual Property99I Copyrights99I(J) Infringement99I(J)2 Remedies99k72 Actions for Infringement99k84 Discovery

Company which had invested in Internetmusic-downloading service should haveremained on notice that litigation against it

was probable even after lawsuit against itarising out of alleged copyright infringementby downloading service was dismissed, andtherefore investor had a continuing obligationto preserve e-mails related to the downloadingservice; company had already been sued once,and there were several indicators that it wouldbe sued again, since it was a multimilliondollar investor in the service, which had ceasedoperations.

Cases that cite this headnote

[11] Federal Civil ProcedureStriking Out Defaulting Party's Pleading

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1639 Striking Out Defaulting Party'sPleading

When considering whether to impose a defaultsanction in response to spoliation of evidence,court must determine (1) the existence ofcertain extraordinary circumstances, (2) thepresence of willfulness, bad faith, or fault bythe offending party, (3) the efficacy of lessersanctions, and (4) the relationship or nexusbetween the misconduct drawing the defaultsanction and the matters in controversy in thecase; court may also consider the prejudice tothe moving party.

7 Cases that cite this headnote

[12] Federal Civil ProcedureStriking Out Defaulting Party's Pleading

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1639 Striking Out Defaulting Party'sPleading

Entry of default or dismissal under acourt's inherent powers is justified in extremecircumstances, and such extraordinary

In re Napster, Inc. Copyright Litigation, 462 F.Supp.2d 1060 (2006)

2006 WL 3050864

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4

circumstances exist where there is a patternof disregard for Court orders and deceptivelitigation tactics that threaten to interfere withthe rightful decision of a case.

5 Cases that cite this headnote

[13] Copyrights and Intellectual PropertyDiscovery

99 Copyrights and Intellectual Property99I Copyrights99I(J) Infringement99I(J)2 Remedies99k72 Actions for Infringement99k84 Discovery

Factual disputes existed, in copyrightinfringement action against company whichinvested in Internet music-downloadingservice, as to whether investor's failure topreserve e-mails relating to downloadingservice resulted from willful deception orincompetence, militating against entry ofdefault judgment for plaintiffs as discoverymisconduct sanction.

Cases that cite this headnote

[14] Copyrights and Intellectual PropertyDiscovery

99 Copyrights and Intellectual Property99I Copyrights99I(J) Infringement99I(J)2 Remedies99k72 Actions for Infringement99k84 Discovery

District Court would not apply clear andconvincing evidence standard, in copyrightinfringement action against company whichinvested in Internet music-downloadingservice, when determining whether to imposedefault judgment on basis that investor'sfailure to preserve e-mails related to thedownloading service was due to willfulness,fault, or bad faith; court was acting under itsinherent power.

Cases that cite this headnote

[15] Copyrights and Intellectual Property

Discovery

99 Copyrights and Intellectual Property99I Copyrights99I(J) Infringement99I(J)2 Remedies99k72 Actions for Infringement99k84 Discovery

Company which invested in Internet music-downloading service was at fault, in copyrightinfringement action, for its failure topreserve e-mails relating to downloadingservice, militating in favor of default asdiscovery misconduct sanction; company sentits employees an e-mail clearly designed toinstruct them to delete all related e-mailsin order to avoid surrendering them, andcontinued a policy of deleting all e-mails whilefailing to preserve the relevant ones.

2 Cases that cite this headnote

[16] Federal Civil ProcedureFailure to Respond; Sanctions

170A Federal Civil Procedure170AX Depositions and Discovery170AX(A) In General170Ak1278 Failure to Respond; Sanctions

Given the standard of applying the leastonerous effective sanction for discoveryviolations, plaintiffs must justify a defaultsanction by either showing that (1) no lessersanction would adequately punish defendantand deter other parties from engaging in thesame conduct, or (2) defendant has engaged indeceptive conduct and will continue to do so.

4 Cases that cite this headnote

[17] Copyrights and Intellectual PropertyDiscovery

99 Copyrights and Intellectual Property99I Copyrights99I(J) Infringement99I(J)2 Remedies99k72 Actions for Infringement99k84 Discovery

A nexus existed between the matters incontroversy, in copyright infringement actionagainst company which invested in Internet

In re Napster, Inc. Copyright Litigation, 462 F.Supp.2d 1060 (2006)

2006 WL 3050864

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5

music-downloading service, and investor'smisconduct of failing to preserve e-mailsrelating to downloading service, militatingin favor of entry of default judgment forplaintiffs as discovery misconduct sanction;investor systematically failed to preservee-mails on its company servers, therebydestroying relevant communications.

Cases that cite this headnote

[18] Federal Civil ProcedureStriking Out Defaulting Party's Pleading

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1639 Striking Out Defaulting Party'sPleading

In the context of spoliation of evidence, anexus between the defendant's conduct andthe merits, as might support imposition ofdefault judgment as a sanction, exists if theparty destroyed documents that were relevantto discovery requests.

1 Cases that cite this headnote

[19] Copyrights and Intellectual PropertyDiscovery

99 Copyrights and Intellectual Property99I Copyrights99I(J) Infringement99I(J)2 Remedies99k72 Actions for Infringement99k84 Discovery

Fact issues existed, in copyright infringementaction against company which invested inInternet music-downloading service, as to theextent of prejudice created by investor's failureto preserve e-mails relating to downloadingservice, militating against default sanctions;no presumption of prejudice was warrantedwhere it could not be concluded that investoracted willfully.

Cases that cite this headnote

[20] Copyrights and Intellectual PropertyDiscovery

99 Copyrights and Intellectual Property99I Copyrights99I(J) Infringement99I(J)2 Remedies99k72 Actions for Infringement99k84 Discovery

Default sanction was not warrantedin copyright infringement action againstcompany which invested in Internet music-downloading service, arising out of investor'sfailure to preserve e-mails relating todownloading service; although e-mails wererelated to the merits of the action andplaintiffs were prejudiced by their destruction,investor took steps, however inadequate, topreserve relevant communications, investor'sbehavior did not constitute a pattern ofdeliberately deceptive litigation practices thatwere likely to continue, and lesser sanctionswould provide an adequate remedy.

Cases that cite this headnote

[21] Federal Civil ProcedureFacts Taken as Established or Denial

Precluded

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1638 Facts Taken as Established orDenial Precluded

Court's inherent authority to imposesanctions for wrongful destruction of evidenceincludes the power to exclude evidence that,given the spoliation, would unfairly prejudicean opposing party.

10 Cases that cite this headnote

[22] Copyrights and Intellectual PropertyDiscovery

99 Copyrights and Intellectual Property99I Copyrights99I(J) Infringement

In re Napster, Inc. Copyright Litigation, 462 F.Supp.2d 1060 (2006)

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99I(J)2 Remedies99k72 Actions for Infringement99k84 Discovery

Fact issues existed, in copyright infringementaction against company which invested inInternet music-downloading service, as to theproper extent of evidentiary sanctions to beimposed, pursuant to the court's inherentauthority, based on investor's failure toproperly preserve relevant e-mails, where thefull extent of the prejudice to plaintiffs wasunclear pending trial; court was required toimpose the least onerous sanction in light ofinvestor's fault and the resulting prejudice.

2 Cases that cite this headnote

[23] Copyrights and Intellectual PropertyDiscovery

99 Copyrights and Intellectual Property99I Copyrights99I(J) Infringement99I(J)2 Remedies99k72 Actions for Infringement99k84 Discovery

An adverse inference instruction wasappropriate sanction for discovery violationsin copyright infringement action againstcompany which invested in Internet music-downloading service; investor's conduct ofdeleting relevant e-mails, which it had a dutyto preserve, amounted to gross negligence,if not willfulness, and those e-mails wererelevant to the action.

Cases that cite this headnote

[24] Federal Civil ProcedureFacts Taken as Established or Denial

Precluded

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1638 Facts Taken as Established orDenial Precluded

A party seeking an adverse inferenceinstruction based on the destruction of

evidence must establish (1) that the partyhaving control over the evidence had anobligation to preserve it at the time it wasdestroyed, (2) that the records were destroyedwith a culpable state of mind, and (3) that thedestroyed evidence was relevant to the party'sclaim or defense such that a reasonable trierof fact could find that it would support thatclaim or defense.

68 Cases that cite this headnote

[25] Copyrights and Intellectual PropertyDiscovery

99 Copyrights and Intellectual Property99I Copyrights99I(J) Infringement99I(J)2 Remedies99k72 Actions for Infringement99k84 Discovery

Monetary sanctions, consisting of areasonable award of attorney fees, werewarranted in copyright infringement actionagainst company which invested in Internetmusic-downloading service, where investorwrongfully failed to preserve its internallygenerated communications relevant to thedownloading service, requiring filing ofmotion for discovery sanctions and a meet andconfer process.

1 Cases that cite this headnote

[26] Federal Civil ProcedureFailure to Comply; Sanctions

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1636.1 In General

Monetary sanctions may be imposed whereone party has wrongfully destroyed evidence.

6 Cases that cite this headnote

In re Napster, Inc. Copyright Litigation, 462 F.Supp.2d 1060 (2006)

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*1063 MEMORANDUM & ORDER

Re: Motion for Sanctions

MARILYN HALL PATEL, District Judge.

**1 The above-captioned actions arise from the litigationinvolving alleged copyright infringement by Napster,Inc. and its customers. Now before the court isplaintiffs UMG and EMI's (“plaintiffs”) motion forterminating sanctions or, alternatively, for evidentiarysanctions, seeking sanctions against defendant HummerWinblad (“Hummer”) for alleged intentional spoliation ofevidence. Having considered the parties' arguments andsubmissions, and for the reasons set forth below, the courtenters the following memorandum and order.

BACKGROUND 1

1 Unless otherwise noted, background facts are takenfrom the declarations submitted with the parties'briefs and from this court's previous orders.

The instant motion relates to four actions now pendingbefore this court as part *1064 of the In re NapsterCopyright Litigation multidistrict litigation (“MDL”)proceedings, Case No. C MDL-00-1369 MHP. Thehistory of this litigation is well documented in this court'sprevious orders. The instant motion arises out of plaintiffs'allegation that Hummer knowingly and intentionallydeleted an undetermined number of emails which they hada duty to preserve and to produce in response to plaintiffs'document requests. Hummer denies that they knowinglyand intentionally deleted any emails which they had a dutyto preserve. The facts relevant to the instant motion aresummarized below.

The basic timeline of events does not appear to be indispute. Hummer invested in Napster in May 2000. Atthat time, several lawsuits were pending against Napster(collectively “the Napster I litigation”). The litigationprompted Hummer to enter into a Common Interest andDefense Agreement with Napster as part of its investment.On June 1, 2000, deposition and document subpoenaswere issued for Hummer officers John Hummer andHenry Barry in the Napster I litigation, calling forall communications regarding Napster. Two days later,Hummer officer Ann Winblad sent an email to nine

Hummer employees, copying Hummer's counsel, with thesubject line “a/c: E-mails regarding Napster and review ofour long standing doc retention policies.” The email read,in its entirety:

Hank has asked me to send this out to everyone.

All emails re napster at this point are related tothe litigation and should contain the “a/c” (attorneycommunications) symbol in the subject line anddjohnson@fenwick.com should be ccd. We should notbe sending e-mails on this subject anyway. Items fromoutsiders such as resumes do not require this.

Hank Barry, [signature information]

Please also be aware of our e-mail policy. As we have allbeen required to surrender Napster e-mails, this shouldreinforce compliance with our long standing policies.

1. we do not retain e-mails, it is your responsibility todelete your handled e-mails immediately

2. we do not us e-mail to chat about matters related topublic companies or matters such as the above

3. we do not retain written copies of e-mails in our files

4. our document retention policy is that we do not retaindocuments on any public or acquired company andretain limited information on private companies. allretained information is stored in central files, pls donot retain other docs in your own files unnecessarily

**2 5. we do not retain files separate from our centralfiles which are periodically checked for compliance topolicies

Please also review the above policies with any summerassociates.

Boyd Dec., Exh. 1 (“the June 3, 2000 email”).

That same month, John Hummer met with EdgarBronfman, Jr., CEO of Universal Music Corp., whoadvised Hummer that the recording companies intendedto sue Napster's investment firms if the alleged copyrightinfringement continued. John Hummer claims thatBronfman's statement was part of a larger discussion,and that Hummer did not leave the meeting feeling thatHummer Winblad was in danger of being named as adefendant in the Napster litigation.

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On July 26, 2000, an additional lawsuit was filed againstNapster (“the Katz lawsuit”), *1065 naming HummerWinblad and Henry Barry (among several others) asdefendants. Hummer was not served with this complaintuntil January 2, 2001. Hummer claims to have first learnedabout the Katz lawsuit in Fall 2000. In December 2000,while the Napster I litigation and the Katz lawsuit wereboth pending, a hearing took place before this court atwhich plaintiffs' counsel were asked whether they intendedto name any additional defendants. Plaintiffs' counselresponded that they did not intend to bring suit againstany additional parties at that time.

On August 10, 2000, this court entered an orderpreliminarily enjoining Napster from “engaging in, orfacilitating others in copying, downloading, uploading,transmitting, or distributing plaintiffs' copyrightedmusical compositions and sound recordings ... withoutexpress permission of the rights owner.” A & MRecords, Inc. v. Napster, Inc., 114 F.Supp.2d 896, 927(N.D.Cal.2000) (Patel, C.J.). The injunction was affirmedon appeal, A & M Records, Inc. v. Napster, Inc., 239 F.3d1004 (9th Cir.2001), but the Ninth Circuit remanded withinstructions to modify the injunction's scope. On March5, 2001, this court entered an order consistent with theNinth Circuit's instructions. See A & M Records, Inc.v. Napster, Inc., No. C MDL-00-1369 MHP, 2001 WL227083 (N.D.Cal. Mar.5, 2001) (Patel, C.J.), aff'd, 284F.3d 1091 (9th Cir.2002). After concluding that it wasnot technologically feasible to comply with the court'sMarch 2001 order and continue operating its file-sharingnetwork, Napster ceased operations on July 1, 2001. TheKatz lawsuit was dismissed that same month.

The Napster I litigation continued, however, andduring settlement negotiations with other defendants thefollowing August, counsel for plaintiffs sent a letter toHummer threatening litigation. Meanwhile, Hummer wasattempting to sell its stake in Napster to defendantBertelsmann. In April 2002, during negotiations withBertelsmann in which Hummer was requesting anindemnification clause from Bertelsmann, John Hummerstated in an email that “We [Hummer Winblad] know weare going to be sued.” Boyd Dec., Exh. 35. The instantaction was filed a year later in April 2003. Hummer wasserved with the complaint in August 2003.

**3 In February 2004, plaintiffs served Hummer withdiscovery requests in the instant action requesting allNapster-related communications up through the filing ofplaintiffs' complaint in 2003. Plaintiffs were dissatisfiedwith the number of emails produced in response

to this request, 2 particularly in light of documentproductions from other parties which included Napster-related communications involving Hummer that had notbeen produced by Hummer. In July 2005, plaintiffsinitiated a meet and confer process regarding Hummer'sdiscovery responses which included a 30(b)(6) depositionof Hummer partner Todd Forrest regarding Hummer'sdocument preservation and collection efforts. Hummermaintained throughout that its document production wasproper and complete.

2 The exact number of Hummer Winblad emailsproduced by Hummer is in dispute. Plaintiffsclaim that Hummer produced less than 300 emails;Hummer claims to have produced 1,450.

In April 2006, near the close of discovery, Hummerproduced the June 3, 2000 email to plaintiffs claiming tohave mistakenly neglected to produce it earlier. Based onthe June 3, 2000 email and plaintiffs' perceived problemswith Hummer's document production, plaintiffs nowallege that Hummer personnel continued to communicatewith each other via email regarding Napster, includingdiscussions about *1066 issues relevant to the claimsand defenses in this action. Plaintiffs further allege thatHummer personnel willfully deleted all of their Napster-related emails in order to avoid turning them over in thislitigation.

Hummer does not seem to dispute that they deletedany Napster-related emails on the Hummer Winbladsystem that were generated after June 3, 2000. Hummeracknowledges that its personnel routinely deletedemails on their system without regard to whether thedeleted emails were relevant to the instant litigation.However, Hummer alleges that Napster-related emailcommunication within Hummer Winblad decreaseddramatically beginning in June 2000, and any Napster-related emails involving Hummer Winblad personnel werepreserved on Napster servers. Hummer further claims thatno Napster-related communications were deleted willfullyor intentionally, and that any relevant communicationsthat were deleted were deleted by inadvertence or mistake.

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LEGAL STANDARD[1] [2] District courts may impose sanctions as part of

their inherent power “to manage their own affairs so as toachieve the orderly and expeditious disposition of cases.”Chambers v. NASCO, Inc., 501 U.S. 32, 43, 111 S.Ct. 2123,115 L.Ed.2d 27, reh'g denied, 501 U.S. 1269, 112 S.Ct. 12,115 L.Ed.2d 1097 (1991); see also Unigard Sec. Ins. Co.v. Lakewood Eng'g & Mfg. Corp., 982 F.2d 363, 368 (9thCir.1992) (excluding evidence as a sanction for spoliation).This power includes the “ ‘broad discretion to make ...evidentiary rulings conducive to the conduct of a fair andorderly trial.’ ” Id. at 368 (quoting Campbell Indus. v. M/V Gemini, 619 F.2d 24, 27 (9th Cir.1980)).

[3] [4] The district courts' inherent power to sanctionmay be invoked in response to destruction of evidence. If aparty breaches its duty to preserve evidence, the opposingparty may move the court to sanction the party destroyingevidence. See Unigard, 982 F.2d at 365.

**4 [5] Courts may sanction parties responsible forspoliation of evidence in three ways. First, a court caninstruct the jury that it may draw an inference adverseto the party or witness responsible for destroying theevidence. See Glover v. BIC Corp., 6 F.3d 1318, 1329(9th Cir.1993); Akiona v. United States, 938 F.2d 158,161 (9th Cir.1991), cert. denied, 503 U.S. 962, 112 S.Ct.1567, 118 L.Ed.2d 212 (1992). Second, a court can excludewitness testimony proffered by the party responsiblefor destroying the evidence and based on the destroyedevidence. See Glover, 6 F.3d at 1329; Unigard, 982 F.2dat 368-69. Finally, a court may dismiss the claim ofthe party responsible for destroying the evidence. SeeAllstate Ins. Co. v. Sunbeam Corp., 53 F.3d 804, 806-07(7th Cir.1995); see also Chambers, 501 U.S. at 45, 111S.Ct. 2123 (“outright dismissal ... is a particularly severesanction, yet is within the court's discretion”); Alexanderv. National Farmers Org., 687 F.2d 1173 (8th Cir.1982),cert. denied, 461 U.S. 937, 103 S.Ct. 2108, 77 L.Ed.2d 313(1983) (dictum) (dismissal of claims is a severe sanctionand may be warranted for “outrageous” destruction ofevidence).

[6] [7] A party's destruction of evidence need not be in“bad faith” to warrant a court's imposition of sanctions.Glover, 6 F.3d at 1329; Unigard, 982 F.2d at 368 n.2. District courts may impose sanctions against a partythat merely had notice that the destroyed evidence waspotentially relevant to litigation. See Glover, 6 F.3d at

1329; Akiona, 938 F.2d at 161; cf. Unigard, 982 F.2d at 368n. 2 (sanctions may be imposed for “willfulness or fault bythe offending party”). However, a party's motive or degreeof fault in destroying evidence is relevant to what sanction,if any, *1067 is imposed. Baliotis v. McNeil, 870 F.Supp.1285, 1291 (M.D.Pa.1994); see also Schmid v. MilwaukeeElectric Tool Corp., 13 F.3d 76, 79 (3rd Cir.1994) (courtsshould choose “the least onerous sanction correspondingto the willfulness of the destructive act and the prejudicesuffered by the victim”).

DISCUSSIONPlaintiffs argue that Hummer had a duty to preserveNapster-related emails beginning in May 2000, and thatthis duty remained in place continuously throughout therequest period. Plaintiffs further allege that the June 3,2000 email demonstrates that Hummer willfully deleted allNapster-related emails in violation of this duty. Plaintiffsalso argue that Hummer deceived plaintiffs and the courtin failing to candidly explain the lack of emails producedafter June 3, 2000. Finally, plaintiffs claim that they havebeen prejudiced by Hummer's deletion and deception,pointing to emails from Hummer personnel gathered fromother sources showing that Hummer continued generatingprobative emails after June 2000. Plaintiffs therefore arguethat they are entitled to a default judgment on their claimsagainst Hummer. In the alternative, plaintiffs requestthat the court preclude Hummer from contesting certainissues related to the case, and that the jury be givenan adverse inference instruction regarding Hummer'sdocument deletion. In any case, plaintiffs additionallyrequest monetary sanctions.

**5 In response, Hummer argues that it had no dutyto preserve Napster-related emails before learning of theKatz lawsuit, and between the dismissal of the Katzlawsuit and the commencement of the instant action.Hummer further claims that the June 3, 2000 email wasan instruction to produce, rather than delete, Napster-related communications, and that the portion of theemail concerning document retention was unrelated toNapster. In addition, Hummer claims that Napster-related emails within Hummer decreased dramaticallyfollowing Hummer's May 2000 investment in Napsterand that no emails were deleted willfully or intentionally.Finally, Hummer denies any deceptive conduct and assertsthat plaintiffs have offered no evidence of prejudice.

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I. Hummer's Obligation to Preserve Documents[8] As soon as a potential claim is identified, a litigant

is under a duty to preserve evidence which it knows orreasonably should know is relevant to the action. NationalAss'n of Radiation Survivors v. Turnage, 115 F.R.D. 543,556-57 (N.D.Cal.1987) (Patel, J.); Baliotis, 870 F.Supp. at1290; see also Unigard, 982 F.2d at 365, 369 (upholdingthe district court's exclusion of plaintiff's expert testimonybased on evidence plaintiff destroyed two years beforefiling suit).

Plaintiffs argue that Hummer had a duty to preserverelevant evidence beginning in May 2000, when it firstinvested in Napster and became aware of the NapsterI litigation. Hummer argues that it did not anticipatebecoming a party to the litigation when it invested inNapster in May 2000, and that the obligation to preservedocuments did not attach until Hummer learned aboutthe Katz lawsuit in Fall 2000. Hummer also suggests thatits obligation ended in July 2001 when the Katz lawsuitwas dismissed, and did not attach again until August 2003when it was served with the instant lawsuit. Hummerclearly had a duty to preserve documents from Fall 2000to July 2001, and from August 2003 onward. The courtmust determine, therefore, whether the obligation existedduring the other times at issue.

*1068 A. Hummer's Obligation Before Fall 2000In support of their position that Hummer's obligationto preserve attached in May 2000, plaintiffs pointto deposition testimony by Hummer officer ToddForrest in which Forrest states that, as early as May2000, individuals were instructed to keep documentssurrounding Napster, instructions which continuedthroughout the relevant period. In addition, plaintiffspoint to the fact that Hummer was well aware of Napster'slegal troubles based on its pre-investment diligence, andentered into a Common Interest Defense Agreement withNapster at the time of investment. Finally, plaintiffs pointto the June 3, 2000 email as evidence that Hummer wastaking specific actions with an eye toward litigation duringthis time period.

Hummer claims that no obligation existed prior to thefiling of the Katz lawsuit, because prior to that pointlitigation was not “imminent.” Hummer's claim thatlitigation must be “imminent” is incorrect. The case citedby Hummer does not stand for this proposition. Rather,

that case states that “[t]here is no doubt that a litiganthas a duty to preserve evidence it knows or should knowis relevant to imminent litigation.” A. Farber & Partners,Inc. v. Garber, 234 F.R.D. 186, 193 (C.D.Cal.2006). Thecourt in A. Farber thus held imminence to be sufficient,rather than necessary, to trigger the duty to preservedocuments. Furthermore, the court in A. Farber didnot reach the issue of when, exactly, the duty attached.The duty to preserve documents attaches “when a partyshould have known that the evidence may be relevant tofuture litigation.” Zubulake v. UBS Warburg LLC, 220F.R.D. 212, 216 (S.D.N.Y.2003). See also National Ass'nof Radiation Survivors, 115 F.R.D. at 556-57. The futurelitigation must be “probable,” which has been held tomean “more than a possibility.” Hynix Semiconductor Inc.v. Rambus, Inc., 2006 WL 565893 at *21 (N.D.Cal.2006)(Whyte, J.).

**6 Although Hummer took actions with respect to itsNapster-related documents as early as May 2000 thatindicated knowledge of the relevance of the documents tolitigation, this does not necessarily suggest that Hummershould have anticipated litigation against Hummer.Rather, Hummer's actions were taken in its roles as aninvestor in a company that was embroiled in litigation,and as a third party to that litigation that had beenserved with a subpoena. It is not surprising that Hummeracknowledged a duty to preserve documents beginningin May 2000-Hummer was under a legal obligation todo so based on plaintiffs' subpoena in the Napster Ilitigation. This also explains the fact that Hummer soughtthe assistance of counsel in dealing with Napster-relatedissues. None of this points to a reasonable expectationthat Hummer itself would be named as a defendant in anypending or future litigation.

The deposition excerpts cited by plaintiffs do not supportthe contention that Hummer anticipated being sued asearly as May 2000. Indeed, Forrest testified that the firsttime he anticipated being sued by plaintiffs was in August2001, when Hummer received a letter from plaintiffs'counsel threatening litigation. Boyd Dec., Exh. 12, ForrestDepo. at 98:8-13. The fact that Hummer was preservingdocuments in response to obligations arising out of athird-party subpoena does not necessarily suggest thatthey anticipated being named as defendants.

As for the Common Interest & Defense Agreementbetween Napster and Hummer, Hummer claims that it

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entered the agreement because “[Hummer] and Napstershared a common interest in Napster's achieving successin the lawsuit” *1069 based on Hummer's multimilliondollar investment in Napster. According to Hummer, thepurpose of the agreement was “to cloak the HummerWinblad entities' communications with Napster's lawyerswith the attorney-client privilege.” Whether or not thiswas a legitimate aim of the Common Interest & DefenseAgreement, the fact remains that Hummer entered intothis agreement because it shared an interest in Napsterprevailing in the lawsuit, not because it expected to benamed as a party.

[9] However, there is evidence that John Hummer, atleast, knew or should have known that litigation wasprobable as early as June 3, 2000. Hummer testified tobeing told by Edgar Bronfman, Jr., CEO of UniversalMusic Corp., at that time that if Hummer did not“instantaneously comply with the injunction, we willsue the venture firm and you people personally.” BoydDec., Exh. 13, Hummer Depo. at 478:13-17. Hummeracknowledges this, but claims that he “did not leave thatmeeting anticipating that Hummer Winblad would besued.” Hummer Dec. ¶ 5. Given the already pendinglitigation against Napster and the clear indication fromMr. Bronfman that the recording industry would betargeting Napster's investors, Hummer Winblad shouldreasonably have believed that litigation against it wasprobable if it continued its involvement with Napster.Therefore, Hummer's duty to preserve evidence attachedin June 2000.

B. Hummer's Obligation Between July 2001 and August2003

**7 Plaintiffs argue that Hummer's duty to preserveremained in place during the period of time between thedismissal of the Katz lawsuit and the commencement ofthe instant litigation. Counsel for plaintiffs sent Hummera letter threatening litigation in August 2001, the monthfollowing the dismissal of the Katz suit. In addition,John Hummer himself stated, in an email to Joel Kleindated April 21, 2002, “We know we are going to besued.” Hummer Dec. ¶ 11. Plaintiffs therefore argue thatHummer should have known and did know that litigationwas likely during this time period.

Hummer denies that any duty existed during this period,claiming that “plaintiffs' on/again, off/again litigationcertainly made litigation against the Hummer Winblad

Defendants a possibility, but the probability of litigationrose and fell as threats passed with no action beingtaken.” Hummer further argues that plaintiffs representedto Hummer and to the court in December 2001 thatthey would not add any more defendants to the lawsuit.An examination of the transcript from the hearing towhich Hummer refers, however, reveals that counsel forplaintiffs did not unequivocally represent that there wereno future defendants to be named. When asked by thecourt whether there were “any defendants that have notbeen served that you intend to proceed against,” plaintiffs'counsel responded “Not at this time, Your Honor.”Hummer Dec., Exh. C at 14:12-14. This left open thedanger of Hummer being named as a defendant.

Hummer also downplays the significance of JohnHummer's statement in his email to Klein, claimingthat this was a “negotiation tactic” employed to securean indemnification provision from Bertelsmann in theirpurchase of Hummer's shares of Napster. Even if Mr.Hummer's purported certainty at being sued in the futurecannot be taken at face value, litigation against Hummerwas at least probable enough for Hummer to insist onthis indemnification provision before selling its sharesto Bertelsmann, and likely enough to be used as anegotiation tactic. This amply demonstrates that therewas a reasonable *1070 probability of litigation againstHummer during the time period following the dismissalof the Katz lawsuit, and that John Hummer was aware ofthis probability.

[10] Hummer should have remained on notice thatlitigation against them was probable even after the Katzsuit was dismissed. Hummer had already been suedonce, and there were several indicators that they wouldbe sued again. Even after Napster sought bankruptcyprotection and ceased being a party to any lawsuit, thelitigation continued, with plaintiffs seeking recovery fromthe still-solvent entities that invested in Napster beforeit ceased operations. As a multimillion dollar investorin Napster, Hummer should have anticipated that itwould be targeted. This is particularly evident given theactions on the part of plaintiffs' counsel to keep thethreat of litigation alive during this time period, and JohnHummer's own statement regarding his fear of litigation.

**8 Accordingly, Hummer had a continuing duty topreserve documents after the Katz lawsuit was dismissedin July 2001.

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II. SanctionsOnce Hummer's duty to preserve took effect in June 2000,Hummer was required to suspend any existing policiesrelated to deleting or destroying files and preserve allrelevant documents related to the litigation. Zubulake,220 F.R.D. at 218 (“Once a party reasonably anticipateslitigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’to ensure the preservation of relevant documents.”);see also National Ass'n. of Radiation Survivors, 115F.R.D. at 557-58 (“The obligation to retain discoverablematerials is an affirmative one; it requires that theagency or corporate officers having notice of discoveryobligations communicate those obligations to employeesin possession of discoverable materials.”). Therefore, evenif Hummer's “long standing policies” included deletingemails, Hummer was required to cease deleting emailsonce the duty to preserve attached in May 2000. SinceHummer acknowledges that it did not cease its documentpolicy, the court may impose sanctions for Hummer'sdeletion of documents. Zubulake, 220 F.R.D. at 220(“Once the duty to preserve attaches, any destruction ofdocuments is, at a minimum, negligent.”).

Plaintiffs have requested a default judgment againstHummer or, in the alternative, an issue preclusion orderand an adverse inference instruction. Plaintiffs havealso requested monetary sanctions independent of anyother sanctions the court may impose. The appropriatesanction, if any, depends largely on the culpability ofHummer and the resulting prejudice to plaintiffs. Baliotis,870 F.Supp. at 1291; Schmid, 13 F.3d at 79.

A. Default Sanction[11] When considering a default sanction in response to

spoliation of evidence, the court must determine “(1) theexistence of certain extraordinary circumstances, (2) thepresence of willfulness, bad faith, or fault by the offendingparty, (3) the efficacy of lesser sanctions, [and] (4) therelationship or nexus between the misconduct drawingthe [default] sanction and the matters in controversy inthe case.” Halaco Eng'g Co. v. Costle, 843 F.2d 376,380 (9th Cir.1988). In addition, the court may considerthe prejudice to the moving party as an “optional”consideration where appropriate. Id. This multi-factor testis not “a mechanical means of determining what discoverysanction is just,” but rather “a way for a district judge to

think about what to do.” Valley Engineers, Inc. v. ElectricEng'g Co., 158 F.3d 1051, 1057 (9th Cir.1998).

*1071 1. Extraordinary Circumstances[12] “Dismissal under a court's inherent powers is

justified in extreme circumstances.” Id. In the NinthCircuit, “extraordinary circumstances exist where thereis a pattern of disregard for Court orders and deceptivelitigation tactics that threaten to interfere with therightful decision of a case.” See Advantacare HealthPartners, LP v. Access IV, No. C 03-04496 JF, 2004WL 1837997 at *5 (N.D.Cal. Aug.17, 2004) (Fogel, J.)(citing Halaco, 843 F.2d at 381). See also Anheuser-Busch, Inc. v. Natural Beverage Distributors, 69 F.3d 337,348 (9th Cir.1995) (holding that it is “well settled thatdismissal is warranted where ... a party has engageddeliberately in deceptive practices that undermine theintegrity of judicial proceedings”); Wyle v. R.J. ReynoldsTobacco Co., 709 F.2d 585, 591 (9th Cir.1983) (upholdingdismissal where the district court determined that “thedeliberate deception and irreparable loss of materialevidence justified the sanction of dismissal”); WilliamT. Thompson Co. v. Gen'l Nutrition Corp., 593 F.Supp.1443, 1456 (C.D.Cal.1984) (holding that default anddismissal were proper sanctions in view of party's “willfuldestruction of documents and records that deprived [theopposing party] of the opportunity to present criticalevidence on its key claims to the jury”). Given thisrequirement of extraordinary circumstances, courts haveheld that a party's “failure to preserve evidence that theyknew or reasonably should have known would be relevantto a potential action and might be sought in discovery”does not necessarily warrant default or dismissal if theseactions “do not eclipse entirely the possibility of a justresult.” Advantacare, 2004 WL 1837997 at *5.

**9 Plaintiffs argue that Hummer engaged in deceptivepractices by willfully destroying relevant documents andsubsequently claiming that all responsive documents hadbeen retained and produced. Specifically, plaintiffs assertthat they spent three years attempting to glean anexplanation from Hummer regarding the small numberof Hummer Winblad emails produced during discovery,and that Hummer deceived them during this period byfailing to admit to their document destruction policyand by withholding the June 3, 2000 email until theclose of discovery. In addition, plaintiffs point to thetestimony of Todd Forrest, Hummer's 30(b)(6) witnessregarding Hummer's document preservation policies.

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Forrest failed to acknowledge that Hummer was routinelydeleting emails and instead represented that Hummerpersonnel had been instructed to preserve Napster-relatedcommunications.

Hummer claims that it failed to produce the June 3, 2000email due to a mistake as to its relevance and privilegedstatus, claiming that such errors are to be expected inlarge-scale document production. Hummer claims to havebelatedly located the June 3, 2000 email in a box ofmiscellaneous files during one of a number of repeatedsearches for responsive documents. Furthermore, becauseHummer denies any wrongdoing with respect to itsdocument preservation duties, it denies that it madeany bad-faith representations to plaintiffs regarding itsproduction.

[13] It is difficult to say whether Hummer's conductin this regard resulted from willful deception or simpleincompetence. Hummer presents a muddled account of itsknowledge of its duties and the means chosen to executethose duties. The June 3, 2000 email may have beenwithheld based on a good-faith belief that it was attorney-client privileged (though it is clearly relevant given that itexplicitly discusses the Napster litigation). But this doesnot explain why Hummer failed to include it in its privilegelog, as plaintiffs point out, and why Hummer suddenlydecided *1072 to produce it at the close of discovery.As for Hummer's representations to plaintiffs regardingits email production, Hummer claims that it believed allrelevant emails were preserved by forwarding them to theNapster server or using Napster.com email addresses.

2. Willfulness, Bad Faith, or Fault[14] “For a dismissal to be proper, the conduct to

be sanctioned must be due to willfulness, fault, orbad faith.” Anheuser-Busch, 69 F.3d at 348 (internalquotations omitted). As a preliminary matter, Hummerargues that plaintiffs must prove willfulness, bad faith,or fault by clear and convincing evidence. In supportof this assertion Hummer cites cases from other circuitswhich have applied a heightened standard of proof todefault sanctions in various circumstances. Maynard v.Nygren, 332 F.3d 462, 468 (7th Cir.2003) (applying clearand convincing evidence standard to Rule 37 dismissalbased on willfulness, bad faith, or fault); Aptix Corp.v. Quickturn Design Systems, Inc., 269 F.3d 1369, 1374(Fed.Cir.2001) (upholding dismissal based on “extremelitigation misconduct” supported by clear and convincing

evidence); Shepherd v. American Broadcasting Cos., 62F.3d 1469, 1474 (D.C.Cir.1995) (applying clear andconvincing evidence standard to default sanctions basedon litigation misconduct); Aoude v. Mobil Oil Corp., 892F.2d 1115, 1118 (1st Cir.1989) (holding that fraud onthe court was demonstrated “clearly and convincingly”where party had submitted false evidence and concealedauthentic evidence); Pfizer, Inc. v. Int'l Rectifier Corp.,538 F.2d 180, 195 (8th Cir.1976) (holding that fraudon the court “must be supported by clear, unequivocaland convincing evidence”). Hummer points to no NinthCircuit authority applying the clear and convincingstandard to the exercise of the court's inherent authorityto impose dismissal or default sanctions, and the NinthCircuit has not squarely addressed the issue of whichstandard of proof is appropriate. Moreover, none ofthe cases cited by Hummer dealt with the specific,yet common, situation here-inherent power sanctionsresulting from the destruction of evidence. Accordingly,the court declines to adopt the clear and convincingevidence standard.

**10 Plaintiffs argue that Hummer willfully destroyedrelevant documents in order to prevent them from beingproduced in this litigation. Specifically, plaintiffs allegethat the June 3, 2000 email clearly amounts to aninstruction to delete all Napster-related emails ratherthan comply with the outstanding subpoena, and withHummer's ongoing document preservation duties in itsrole as a potential and actual defendant. Plaintiffs furtherallege that, because there was no system in place toautomatically dispose of email, each Napster-relatedemail that was deleted was the result of a consciousdecision on the part of a Hummer employee.

Hummer denies that the June 3, 2000 email indicates anyintentional deletion of Napster-related emails. Rather,Hummer asserts that the portion of the email concerningHummer's document retention policy has “nothing todo with Napster,” despite the portion of the email thatexplicitly addresses the Napster I subpoena. Hummer'sclaims in this regard do not withstand scrutiny. Hummerattempts to divide the email into two wholly separate anddistinct parts: (1) a Napster-related message precedingBarry's signature, and (2) a non-Napster-related messageregarding the company's “long standing” email policy.Essentially, Hummer would have the court believethat Winblad forwarded a message regarding Napsterfrom John Hummer, and added a completely unrelated

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additional message regarding document *1073 retentionas a non-sequitur. In seeking to make this distinction,Hummer glaringly ignores the sentence between the twoportions of the email that explicitly ties the retentionpolicy to the Napster production: “As we have all beenrequired to surrender Napster e-mails, this should reinforcecompliance with our long standing policies.” Boyd Dec.,Exh. 1 (emphasis added). The very first tenet of thepolicy, “reinforce[d]” by the requirement to surrenderNapster emails, is “we do not retain e-mails, it is yourresponsibility to delete your handled e-mails immediately[.]” Id. (emphasis added). This was clearly designed toinstruct the recipients to delete all of their Napster-relatedemails going forward in order to avoid surrendering them.Hummer offers no plausible explanation to the contrary.

Indeed, Hummer's representations regarding its documentretention policy are muddled and inconsistent, and donot suggest an organized effort to maintain Napster-related communications as required. The confusion iscompounded by the fact that Hummer distributed a moreformal document retention policy in 2003. Boyd Decl.,Exh. 19. Hummer states that the 2003 policy “did notexist in June of 2000.” However, Todd Forrest testifiedthat he believed that the 2003 policy was consistentlyfollowed beginning in January 2000. Slaughter Dec., Exh.B, Forrest Depo. at 19:6-20:1. Hummer further claims,however, that neither Hank Barry nor John Hummerwere aware of the policy before reading it in 2003.The June 3, 2000 email itself, meanwhile, refers to thedocument retention policy as “long standing.” Absenta clear explanation for why Hummer employees wereinstructed to “delete all emails” in conjunction with beingapprised of a pending subpoena, the court concludes thatthe June 3, 2000 email served as an command to deleteNapster-related emails going forward.

**11 Separate from the June 3, 2000 email, Hummerapparently acknowledges that it routinely deletedNapster-related emails that resided on Hummer's servers.Hummer's email software was configured such that exitingthe program prompted a message asking whether theuser wished to permanently delete all the emails inthe “Deleted Items” folder. Hummer asserts that itsemployees “frequently responded affirmatively to thatquestion without ever checking” what was in their deletedfolders. In addition, the tapes on which Hummer'semails were backed up were recycled every three months,and Hummer employees occasionally received emails

reminding them to delete emails. Thus, while Hummeremployees may not have individually decided to deleteeach Napster-related email, the policy of deleting allemails and failing to preserve Napster-related emailscontinued apace beginning in June 2000 at the very latest.

Despite failing to maintain files on its own servers,Hummer argues that it attempted to retain Napster-related emails by other means. In particular, defendantsclaim that Barry “made a conscious effort” to use hisNapster email address for all Napster-related business,and that Barry and Morga forwarded Napster-relatedemails to themselves at their Napster accounts, believingthat these messages would be automatically saved byNapster. According to Hummer, procedures were in placeat Napster to retain all of Napster's emails while Barrywas Napster's interim CEO (from May 2000 to July2001). Hummer is unclear on what these procedureswere, however. For example, Hummer does not claimthat Napster employees were specifically directed toretain all Napster-related communications as required byHummer's duty to preserve, and does not claim that suchprocedures were in place when Barry was not serving asNapster's CEO. Furthermore, given Hummer's *1074affirmative duty to preserve evidence (National Ass'n. ofRadiation Survivors, 115 F.R.D. at 557-58), Hummer'spurported reliance on undisclosed backup procedures at acompany over which Hummer strenuously denies havingany control was grossly deficient.

[15] Hummer's deletion of Napster-related emails maynot have been willful, but willfulness is not strictlyrequired for the imposition of default sanctions. Instead, adefault sanction requires “willfulness, fault, or bad faith.”At worst, Hummer mounted a knowing and concertedeffort to destroy Napster-related emails that it had aduty to preserve and produce. At best, however, Hummerwas grossly negligent in executing its duties to preserveevidence, by failing to implement a litigation hold andinstead relying on Napster to preserve Hummer's emails.Hummer was therefore at fault in failing to preserveNapster-related emails.

Hummer's additional arguments do not change thisconclusion. Hummer argues that its failure to producedocuments was due to inadvertence or mistake. Again,mistakes resulting from gross negligence constitutesufficient fault to impose sanctions. Hummer also arguesthat the deficiencies in plaintiffs' own production render

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plaintiffs' allegations inappropriate and unfounded.Hummer does not accuse plaintiffs of discoverymalfeasance, but rather cites gaps in plaintiffs' documentproduction to illustrate that documents are inevitablylost or overlooked in large-scale document production.Any problems with plaintiffs' discovery responses areirrelevant to the factual findings regarding Hummer'sproduction. Documents may be lost and overlooked inlarge-scale document production, but the abject failureto preserve an entire source of relevant evidence issanctionable conduct.

3. Efficacy of Lesser Sanctions**12 [16] Plaintiffs have requested the alternative relief

of preclusion and an adverse inference instruction in theevent that the court does not grant a default sanction.If such sanctions would be effective, a default sanctionis inappropriate. Given the standard of applying theleast onerous effective sanction, plaintiffs must justifythe default sanction by either showing that (1) no lessersanction would adequately punish Hummer and deterother parties from engaging in the same conduct or(2) Hummer has engaged in deceptive conduct and willcontinue to do so. Advantacare, 2004 WL 1837997 at*6 (citing Computer Assoc. Int'l v. Am. Fundware, Inc.,133 F.R.D. 166 (D.Colo.1990); TeleVideo Sys., Inc. v.Heidenthal, 826 F.2d 915, 917 (9th Cir.1987); Chism v.Nat'l Heritage Life Ins. Co., 637 F.2d 1328, 1332 (9thCir.1981)).

Plaintiffs point to a number of cases in which courtshave imposed default or dismissal sanctions where noother remedy would be adequate, but plaintiffs makeno specific showing regarding the inadequacy of lesser

sanctions in this case. 3 For the reasons set forthbelow, the court concludes that lesser sanctions wouldbe adequate given the level of demonstrable culpabilityon the part of Hummer, and there is nothing in thecurrent representation or conduct to suggest a recurrence.Therefore, this factor weighs against default sanctions.

3 Hummer interprets plaintiffs' brief as lackingany argument regarding the inadequacy of lessersanctions whatsoever, and explicitly declines toaddress the issue.

4. Nexus Between Misconduct and Matters inControversy

[17] [18] In order for default sanctions to be imposedfor Hummer's destruction of documents, there must bea nexus between Hummer's conduct and the merits such*1075 that the conduct interferes with the rightful

decision of the action. Halaco, 843 F.2d at 381. Inthe context of spoliation of evidence, a nexus exists ifthe party destroyed documents that were relevant todiscovery requests. See Anheuser-Busch, 69 F.3d at 351;Advantacare, 2004 WL 1837997 at *6-*7. As discussedabove, Hummer systematically failed to preserve emailson its company servers, thereby destroying Napster-related communications that resided on the serversduring the relevant time period. Accordingly, there is anexus between Hummer's misconduct and the matters incontroversy.

5. PrejudicePrejudice is an “optional” consideration when

determining whether default sanctions are appropriate. 4

Halaco, 843 F.2d at 382. Prejudice is a significantconsideration here, however, given the dispute overthe effect of Hummer's failure to preserve evidence.In particular, the parties differ over the number ofNapster-related emails that Hummer actually deleted. Thefact that a number of Hummer's Napster-related emailshave been obtained by plaintiffs from other sources,furthermore, bears on the degree to which plaintiffs havebeen prejudiced. If all or substantially all of Hummer'sNapster-related emails have been obtained by plaintiffs, adefault sanction is not warranted.

4 Hummer claims that the Ninth Circuit has “foundthe element of prejudice to be essential” whendetermining whether dismissal is an appropriatesanction, citing Wanderer v. Johnston, 910 F.2d 652,656. However, the case on which Hummer reliesfor this point concerned sanctions under FederalRule of Civil Procedure 37. Id. Plaintiffs haverequested sanctions pursuant to the court's inherentauthority “to manage [its] own affairs so as toachieve the orderly and expeditious disposition ofcases.” Chambers, 501 U.S. at 43, 111 S.Ct. 2123.Sanctions imposed pursuant to a court's inherentpowers is governed by a different set of principles thansanctions under Rule 37. See Unigard, 982 F.2d at 368(finding that a district court lacked power to imposea sanction under Rule 37, but properly imposed thesanction as an exercise of its inherent powers).

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Plaintiffs contend that Hummer's document destructionpolicy resulted in the loss of “volumes” of documentsover the relevant time period. In support of their claimthey point principally to Hummer's lack of production.According to plaintiffs, Hummer has produced onlyapproximately 4,000 documents to date in response todiscovery requests, fewer than 300 of which are emails.Plaintiffs also point out that, in response to the NapsterI subpoena, Hummer produced 271 emails, 89 of whichare purely internal, from the seven-day period fromMay 20, 2000 to May 26, 2000. This, according toplaintiffs, suggests that there should be many more emailsgenerated after that time period, and that these emailswere destroyed by Hummer. In addition, plaintiffs pointto several emails collected from other sources which,they claim, demonstrate that Hummer was engaged incommunications regarding every aspect of the action.Again, plaintiffs claim that the limited number of emailsthat have been obtained indicates a large number ofsimilar emails that were deleted from the HummerWinblad servers.

**13 Hummer offers several explanations for the smallnumber of emails. To begin with, Hummer disputesplaintiffs' numbers. Hummer claims to have produced7,147 documents, 1,450 of which were emails. In addition,Hummer points to the fact that plaintiffs received 2,965emails from the Napster bankruptcy trustee, including2,133 on which Barry was a sender or recipient. Plaintiffscounter that Hummer's calculations include emails fromsources other than Hummer Winblad's servers whichwere nonetheless produced by Hummer, and that thetotal number of *1076 “humwin.com” emails remains atapproximately 300.

To further account for the lack of emails, Hummerclaims that its employees had limited involvement withNapster after the investment was made in May 2000and therefore would not have engaged in Napster-related email communication. Connee Young received a“minuscule amount” of emails related to Napster afterthe investment, and Dan Beldy and Ann Winblad had“no involvement” with Napster after the investment.Furthermore, the June 3, 2000 email advised Hummeremployees to stop sending emails about Napster. Thesefacts, coupled with the fact that Hank Barry andAlicia Morga used their Napster.com email accounts forNapster-related emails, indicate that any Napster-relatedemails that were generated during the relevant time period

resided with Napster, and were thus produced by theNapster bankruptcy trustee.

Plaintiffs have produced a number of emails collectedfrom sources other than Hummer indicating that Hummerdid not strictly adhere to their asserted practices. Inparticular, Hank Barry, Alicia Morga and John Hummerused their Hummer Winblad email accounts to discussNapster-related business after the investment was made.See Compendium of Documents Missing from theHummer Winblad Production, Exhs. 165, 181, 183, 185,186, 188, 216, 231, 238, 241, 245, 248, 267 and 275.Furthermore, as Hummer admits, plaintiffs obtained over2,100 emails from the Napster trustee in which JohnHummer was the sender or recipient, demonstratingthat Hummer Winblad email communications regardingNapster did not cease after the distribution of the June3, 2000 email. There was clearly some amount of emailtraffic on the Hummer servers related to Napster afterthe number of produced emails dropped off in June2000. The precise number, of course, is impossible todetermine given the fact that emails on Hummer Winbladservers were routinely deleted. As the party at fault forfailing to preserve the emails, Hummer would typicallybear the consequences of this uncertainty. See NationalAss'n of Radiation Survivors, 115 F.R.D. at 557 (holdingthat where “the relevance and resulting prejudice fromdestruction of documents cannot be clearly ascertainedbecause the documents no longer exist ... the culpableparty can hardly assert any presumption of irrelevanceas to the destroyed documents”) (internal quotationsomitted); see also Computer Assoc. Int'l, Inc. v. AmericanFundware, Inc., 133 F.R.D. 166, 170 (D.Colo.1990).However, because the court cannot conclude thatHummer acted willfully, the presumption of prejudice isnot appropriate.

**14 Plaintiffs further claim that they have beenprejudiced because the Hummer Winblad witnesses haveexhibited “litigation amnesia” in claiming an inability torecall facts that would be memorialized in the deletedemails. While Hummer denies that its witnesses haveexhibited any significant lack of recollection, plaintiffswould certainly be better off with documentary evidencethan with witnesses' personal recollections of eventsand communications that occurred years ago. Indeed,Hummer's own representations to this court illustratethe unreliability of the Hummer witnesses' personalrecollections, as neither John Hummer, Ann Winblad or

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Hank Barry recall the June 3, 2000 email. Hummer Dec. ¶3; Winblad Dec. ¶ 3; Barry Dec. ¶ 3.

Finally, plaintiffs point to specific emails collected fromother sources which show that Hummer personnel weresending communications regarding the relevant issues inthis action during the relevant time period. Plaintiffsclaim that the deleted emails would shed further lighton the *1077 facts revealed in these documents, andthat they are prejudiced by the unavailability of theadditional emails. Hummer disputes the significance ofthe examples cited by plaintiffs. The dispute over thespecific contents of a particular email that was produced,however, does little to shed light upon the contentsof emails that were destroyed other than pointing tothe general issues that may have been discussed in the

deleted communications. 5 As discussed above, the lossof an entire source of documents significantly hampersplaintiffs' ability to prepare and prosecute their case.

5 Likewise, Hummer argues that several of thedocuments fail to show prejudice because they werepreserved. This argument completely misses the pointof plaintiffs' citation of the documents. Obviously, thedocuments that are now in the hands of plaintiffs werepreserved-otherwise plaintiffs would not have them.Plaintiffs do not argue that they have been prejudicedby the deletion of these specific documents. Rather,plaintiffs claim that these documents illustrate thetypes of communications that were not preserved byHummer. Such a showing is pertinent to the existenceof relevant documents which were destroyed. SeeZubulake v. UBS Warburg LLC, 229 F.R.D. 422, 437(S.D.N.Y.2004) (holding that the content of emailsrecovered from other sources was probative of thecontents of lost emails).

[19] At this stage of the proceedings, when the fullevidentiary record has not yet been considered by thecourt or by a jury, the court cannot determine the extentof prejudice created by Hummer's failure to preserve itsemails. Although Hummer is at fault for deleting emails,plaintiffs have not shown that Hummer acted willfully indestroying its emails, and there is evidence that the actualnumber of emails lost is small. The court will thereforeengage in a full analysis of the evidence regarding thequality and quantity of emails improperly deleted byHummer at the Summary Judgment or trial stage. At thispoint the court can only conclude that plaintiffs have notproduced sufficient evidence of prejudice to justify defaultsanctions.

6. Summary[20] Hummer deleted emails which it had a duty

to preserve and produce to plaintiffs. These emailsrelated to the merits of the action, and plaintiffshave been prejudiced by their destruction. However,Hummer has shown that they took steps to preserveNapster-related communications, albeit inadequate ones.Although these steps failed to satisfy Hummer's discoveryduties, Hummer's behavior does not constitute a patternof deliberately deceptive litigation practices that are likelyto continue as the action proceeds, thereby preventingthe resolution of this action. In addition, as discussedbelow, lesser sanctions will adequately remedy Hummer'sfailure to preserve and produce. Therefore, plaintiffs arenot entitled to a default sanction.

B. Evidentiary Sanctions**15 Plaintiffs have requested two forms of evidentiary

sanctions. First, plaintiffs request that Hummer beprecluded from contesting all or some of a numberof issues related to the parties' claims and defenses.Second, plaintiffs request that the jury be given an adverseinference instruction.

1. Preclusion[21] The court's inherent authority to impose sanctions

for the wrongful destruction of evidence includes thepower to exclude evidence that, given the spoliation,would “unfairly prejudice an opposing party.” Unigard,982 F.2d at 368; see also Glover, 6 F.3d at 1329.The propriety of *1078 preclusion sanctions, therefore,depends on the extent to which plaintiffs were prejudicedby Hummer's deletion of its Napster-related emails. Thisanalysis must be made in light of the requirement toimpose the “least onerous sanction” given the extent of theoffending party's fault and the prejudice to the opposingparty. Schmid, 13 F.3d at 79.

[22] As discussed above, the full extent of prejudiceis unclear based on the record before the court for thepurposes of this motion. However, plaintiffs have shownsufficient prejudice to warrant some degree of preclusionsanctions. The nature and extent of these sanctions will bedetermined at the Summary Judgment or trial stage.

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2. Adverse Inference Instruction[23] [24] “[A] party seeking an adverse inference

instruction based on the destruction of evidence mustestablish (1) that the party having control over theevidence had an obligation to preserve it at the time itwas destroyed; (2) that the records were destroyed witha culpable state of mind; and (3) that the destroyedevidence was relevant to the party's claim or defense suchthat a reasonable trier of fact could find that it wouldsupport that claim or defense.” Hamilton v. SignatureFlight Support Corp., No. C 05-0490, 2005 WL 3481423,at *3, 2005 U.S. Dist. LEXIS 40088 at *9 (N.D.Cal. Dec.20, 2005) (James, Magis.J.) (citing Residential FundingCorp. v. DeGeorge Financial Corp., 306 F.3d 99, 107 (2dCir.2002)). As discussed above, Hummer deleted Napster-related communications which it had a duty to preserve,knowing that such a duty existed. Hummer's conductamounts to gross negligence, if not willfulness, which issufficient culpability to justify an adverse inference. Id. at*5. In addition, the deleted emails were relevant to theaction as discussed above. Therefore, plaintiffs are entitledto an adverse inference instruction. The precise wordingof the instruction will be determined at trial.

C. Monetary Sanctions[25] [26] Monetary sanctions may be imposed where

one party has wrongfully destroyed evidence. See, e.g.,National Ass'n of Radiation Survivors, 115 F.R.D. at558-59. Plaintiffs claim that they are entitled to theirattorneys' fees associated with bringing this motion, andwith the meet and confer process involved in determining

the availability of Hummer's Napster-related emails. Thecourt finds that monetary sanctions are warranted here.Hummer could have forestalled a great deal of timeand effort by simply acknowledging early on that it wasnot preserving its internally generated Napster-relatedcommunications.

**16 Plaintiffs are entitled to an award of attorney feesthat is reasonable in light of the degree of Hummer'sculpability. Plaintiffs are ordered to submit a request for aspecific amount of fees, with evidentiary support, for thecourt's consideration.

CONCLUSIONFor the above reasons the court hereby DENIESplaintiffs' motion for sanctions to the extent plaintiffs seekdefault sanctions, and GRANTS plaintiffs' motion forsanctions to the extent plaintiffs seek a preclusion order,an adverse inference instruction and attorneys' fees.

Plaintiffs shall submit their declaration andcontemporaneous records in support of attorneys' feesand costs with thirty (30) days of this order. DefendantHummer shall file its response, if any, as to reasonablenessonly within thirty (30) days of the filing of plaintiffs'submission.

IT IS SO ORDERED.

All Citations

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Fletcher v. Dorchester Mut. Ins. Co., 437 Mass. 544 (2002)

773 N.E.2d 420

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1

KeyCite Yellow Flag - Negative Treatment

 Declined to Extend by Com. v. Kee, Mass., July 20, 2007

437 Mass. 544Supreme Judicial Court of Massachusetts,

Plymouth.

1 Of the estates of Maria Vazquez, Paul Fletcher, andStephen Fletcher, and as mother and next friend ofDominique Vazquez and Kristin Lynch.

2 Michael Vazquez, individually and ascoadministrator of the estate of Maria Vazquez, andas father and next friend of Dominique Vazquez;and George Fletcher, coadministrator of the estatesof Stephen Fletcher and Paul Fletcher.

Francine M. FLETCHER, individually

and as administratrix, 1 & others 2

v.DORCHESTER MUTUAL INSURANCE

COMPANY 3 & another. 4

3 Doing business as The Norfolk & Dedham Group.

4 Richard Splaine.

Argued Jan. 8, 2002.|

Decided Aug. 16, 2002.

Tenants, whose children either died or were severelyinjured in house fire, brought action against landlord'sinsurer and against expert, who was retained by insurerand removed certain wiring components and fixtures fromremains of house after fire, alleging negligence, negligentspoliation of evidence, and intentional spoliation ofevidence. The Superior Court Department, Richard F.Connon, J., dismissed action, and tenants appealed. TheSupreme Judicial Court transferred the case on its ownmotion. The Supreme Judicial Court, Sosman, J., heldthat there is no cause of action for spoliation of evidence.

Affirmed.

West Headnotes (12)

[1] Torts

Spoliation, Destruction, or Loss ofEvidence

379 Torts379III Tortious Interference379III(D) Obstruction of or Interference withLegal Remedies; Spoliation379k303 Spoliation, Destruction, or Loss ofEvidence379k304 In General

(Formerly 379k13)

There is no cause of action for spoliationof evidence; appropriately tailored sanctionsimposed in the underlying action are amore efficacious remedy for spoliation thanallowing a separate, inherently speculativecause of action for such litigation misconduct.

12 Cases that cite this headnote

[2] Pretrial ProcedureAvailability in General; Nature and

Scope of Remedy

307A Pretrial Procedure307AII Depositions and Discovery307AII(E) Production of Documents andThings and Entry on Land307AII(E)1 In General307Ak331 Availability in General; Nature andScope of Remedy

Whether to recognize a duty to preserveevidence is a matter of policy, and the courtswill find a duty where, in general, reasonablepersons would recognize it and agree that itexists.

1 Cases that cite this headnote

[3] Pretrial ProcedurePersons Subject

307A Pretrial Procedure307AII Depositions and Discovery307AII(E) Production of Documents andThings and Entry on Land307AII(E)1 In General307Ak334 Persons Subject

Persons who are not themselves parties tolitigation do not have a duty to preserveevidence for use by others.

Fletcher v. Dorchester Mut. Ins. Co., 437 Mass. 544 (2002)

773 N.E.2d 420

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5 Cases that cite this headnote

[4] Pretrial ProcedurePersons Subject

307A Pretrial Procedure307AII Depositions and Discovery307AII(E) Production of Documents andThings and Entry on Land307AII(E)1 In General307Ak334 Persons Subject

Nonparty witnesses may have evidencerelevant to a case, such as documents,photographs, tape recordings, equipmentparts, or any other tangible objects, and mayknow of its relevance, but that knowledge, byitself, does not give rise to a duty to cooperatewith litigants.

2 Cases that cite this headnote

[5] Pretrial ProcedurePersons Subject

307A Pretrial Procedure307AII Depositions and Discovery307AII(E) Production of Documents andThings and Entry on Land307AII(E)1 In General307Ak334 Persons Subject

A nonparty witness is not required to preserveand store an item merely because that itemmay be of use to others in pending oranticipated litigation.

Cases that cite this headnote

[6] WitnessesSubpoena Duces Tecum

410 Witnesses410I In General410k16 Subpoena Duces Tecum

Witnesses may be required to produceparticular items by way of a subpoena ducestecum, as long as the item is still in the witness'possession, custody, or control at the timethe subpoena is served, and witness may notdestroy the item after having been servedwith the subpoena; however, by definition,anything already destroyed prior to service

is no longer within the witness' possession,custody, or control. Rules Civ.Proc., Rule45(b), 43A M.G.L.A.

Cases that cite this headnote

[7] WitnessesSubpoena Duces Tecum

WitnessesPunishment of Disobedience to

Subpoena as Contempt

410 Witnesses410I In General410k16 Subpoena Duces Tecum410 Witnesses410I In General410k21 Punishment of Disobedience toSubpoena as Contempt

Duty imposed on witness to produceparticular item by way of subpoena ducestecum attaches at the time the subpoena isserved, not before, and that duty is thenenforced as needed by appropriate courtorders, up to and including holding thewitness in contempt.

2 Cases that cite this headnote

[8] TortsSpoliation, Destruction, or Loss of

Evidence

379 Torts379III Tortious Interference379III(D) Obstruction of or Interference withLegal Remedies; Spoliation379k303 Spoliation, Destruction, or Loss ofEvidence379k304 In General

(Formerly 379k13)

A third-party witness may agree to preservean item of evidence and thereby enter into anenforceable contract, and remedies for breachof such an agreement are found in contractlaw, not in tort law.

3 Cases that cite this headnote

[9] Torts

Fletcher v. Dorchester Mut. Ins. Co., 437 Mass. 544 (2002)

773 N.E.2d 420

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3

Spoliation, Destruction, or Loss ofEvidence

379 Torts379III Tortious Interference379III(D) Obstruction of or Interference withLegal Remedies; Spoliation379k303 Spoliation, Destruction, or Loss ofEvidence379k304 In General

(Formerly 379k13)

Where the source of a nonparty's duty topreserve evidence is one that already states acause of action and provides its own remedies,court will not invent a separate, duplicatecause of action in tort.

5 Cases that cite this headnote

[10] Pretrial ProcedureFailure to Comply; Sanctions

307A Pretrial Procedure307AII Depositions and Discovery307AII(E) Production of Documents andThings and Entry on Land307AII(E)6 Failure to Comply; Sanctions307Ak434 In General

Expert's testimony, or portions thereof, maybe excluded in civil action as remedy forspoliation of evidence so that the expert willnot have the unfair advantage of posing as theonly expert with first-hand knowledge of theitem, and such a sanction should go no furtherthan to preclude tainted testimony; impositionof such a remedy must also take into accountthe party responsible for the spoliation.

10 Cases that cite this headnote

[11] Pretrial ProcedureFailure to Comply; Sanctions

Pretrial ProcedureDismissal or Default Judgment

307A Pretrial Procedure307AII Depositions and Discovery307AII(E) Production of Documents andThings and Entry on Land307AII(E)6 Failure to Comply; Sanctions307Ak434 In General307A Pretrial Procedure307AII Depositions and Discovery

307AII(E) Production of Documents andThings and Entry on Land307AII(E)6 Failure to Comply; Sanctions307Ak435 Dismissal or Default Judgment

If spoliation occurs in violation of a discoveryorder, various sanctions, including dismissalor judgment by default, may be imposed forthat violation. Rules Civ.Proc., Rule 37(b)(2),43A M.G.L.A.

1 Cases that cite this headnote

[12] Pretrial ProcedureFailure to Comply; Sanctions

307A Pretrial Procedure307AII Depositions and Discovery307AII(E) Production of Documents andThings and Entry on Land307AII(E)6 Failure to Comply; Sanctions307Ak434 In General

Sanctions for spoliation of evidence arecarefully tailored to remedy the preciseunfairness occasioned by that spoliation, andparty's claim of prejudice stemming fromspoliation is addressed within the contextof the action that was allegedly affected bythat spoliation, and if the party claimingprejudice is of the view that judge erredin refusing to impose sanctions, or in notordering sufficiently extensive sanctions, thatissue may be raised on appeal, and as such,the remedies to which a victim of spoliation isentitled will be conclusively determined in theunderlying action.

28 Cases that cite this headnote

Attorneys and Law Firms

**422 *544 Michael R. Rezendes, Quincy (Sara J.Trezise with him) for the plaintiffs.

Ralph C. Sullivan for Dorchester Mutual InsuranceCompany.

Francis M. Lynch, Quincy, for Richard Splaine.

Present: MARSHALL, C.J., GREANEY, IRELAND,SPINA, COWIN, SOSMAN, & CORDY, JJ.

Fletcher v. Dorchester Mut. Ins. Co., 437 Mass. 544 (2002)

773 N.E.2d 420

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4

Opinion

SOSMAN, J.

The present appeal requires us to determine *545whether we should recognize a cause of action in tortfor intentional or negligent spoliation of evidence. ASuperior Court judge granted the defendants' motionsto dismiss such claims, and the plaintiffs appealed. Wetransferred the case to this court on our own motion. Forthe following reasons, we conclude that there is no causeof action for spoliation of evidence and therefore affirmthe judgment.

1. Facts and procedural background. 5 On April 4, 1995,five young children were trapped and severely burnedin a tragic house fire in Scituate. Three of the childrendied; the two surviving children sustained permanentinjuries. The house was owned by Stephen Littleton,who had leased the premises to the victims' family. Inthe immediate aftermath of the fire, the owner's insurer,the defendant Dorchester Mutual Insurance Company(Dorchester Mutual), retained an expert to investigate thefire scene. That expert, the defendant Richard Splaine,removed certain wiring components and fixtures from theremains of the building approximately two weeks after thefire.

5 The facts are taken from the plaintiffs' complaint,augmented by materials submitted in conjunctionwith the plaintiffs' opposition to the motions todismiss.

The parents of the children injured and killed in theblaze brought suit against Littleton, alleging that hehad failed to maintain the dwelling in a safe and

habitable condition. 6 Among the defects alleged was

a faulty electrical system, 7 along with inadequate firedetection devices, inadequate fire exits, and inadequatefire **423 fighting equipment. In a separate action(later consolidated with the action against the owner),the parents brought suit against the electrical contractorresponsible for the wiring installation.

6 Along with the tort claims against the owner, theparents alleged unfair claim settlement practices, inviolation of G.L. c. 93A and G.L. c. 176D, § 3(9),against Dorchester Mutual Insurance Company.

7 The fire marshal's report identified antiquated wiring,surrounded by blown-in insulation that prevented thedissipation of heat, as the likely cause of the fire.

In that underlying tort action, the parents filed a motionfor sanctions, alleging that Splaine's removal of theelectrical components from the scene had so altered themas to compromise the parents' ability to prove their claims.They requested *546 that judgment be entered in theirfavor or, in the alternative, that the owner “be precludedfrom utilizing, commenting upon or offering any evidencespoiled by Defendants, including the insulation, circuit,switches and components removed, altered or modifiedby Defendant's experts or agents.” Littleton argued inresponse that Splaine had retained the removed items, andthat they were still available for trial with no prejudiceto the parents' case. After an evidentiary hearing on themotion, the judge concluded that the plaintiff parents had“failed to prove that defendant has materially altered,damaged or destroyed any evidence in this case” andtherefore denied the motion for sanctions.

Meanwhile, the parents had filed the present actionagainst Dorchester Mutual and Splaine, alleging countsof negligence, “negligent spoilation of evidence,” and“intentional spoilation of evidence” against each of them.As against Dorchester Mutual, the parents also allegeda violation of G.L. c. 93A and G.L. c. 176D stemmingfrom the same “spoilation of evidence.” In support oftheir negligence claim, the parents alleged that DorchesterMutual and Splaine were negligent in their “failure toproperly preserve and maintain the condition of thesubject premises and its components, including the subjectelectrical circuit and its appurtenant parts when [they]knew or should have known that the condition of saidcircuit and its appurtenant parts constituted an elementvital to the establishment and proof of the cause andorigin of the subject fire,” and that they had suffered“irreparable harm” as a result. In separate counts for“negligent spoilation of evidence,” the plaintiffs allegedthat the defendants “knew, or should have known, thatsaid [electrical] circuit was a relevant piece of causativeevidence to potential liability claims” and therefore “owedto the Plaintiffs a duty of care to preserve the firescene and the subject electrical circuit for prospectivecivil litigation.” The removal of the electrical circuit wasallegedly a breach of that duty. Finally, in their counts for“intentional spoilation of evidence,” the plaintiffs allegedthat the defendants breached that same “duty of care topreserve the property” by removing the electrical circuit

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“with the purpose of harming the Plaintiffs' prospectiveactions against [the owner] and others” when they “knewor *547 should have known that harm to the Plaintiffs'prospective claims and lawsuits was substantially certainto follow.”

Dorchester Mutual filed a motion to dismiss for failureto state a claim, arguing that Massachusetts does notrecognize an action in tort for “spoliation of evidence.”The judge agreed, noting that the remedy for spoliationof evidence, if any occurred, would be the imposition ofappropriate sanctions in the underlying tort action. SeeKippenhan v. Chaulk Servs., Inc., 428 Mass. 124, 126-128,697 N.E.2d 527 (1998); Nally v. Volkswagen of Am.,Inc., 405 Mass. 191, 197-198, 539 N.E.2d 1017 (1989).Thereafter, Splaine filed his own motion to dismiss, which

was allowed on the same ground. 8

8 Splaine's motion to dismiss raised other grounds aswell, which we need not consider in light of ourdetermination that the complaint against him failedto state a claim.

**424 [1] 2. Discussion. To date, we have not recognizeda cause of action for spoliation of evidence. Mostjurisdictions that have considered the issue have declined

to recognize such a cause of action. 9 We adhere to thatmajority view.

9 See Moore v. United States, 864 F.Supp. 163,164-165 (D.Colo.1994); Christian v. Kenneth ChandlerConstr. Co., 658 So.2d 408, 413-414 (Ala.1995);Goff v. Harold Ives Trucking Co., 342 Ark. 143,150, 27 S.W.3d 387 (2000); Temple CommunityHosp. v. Superior Court, 20 Cal.4th 464, 477-478,84 Cal.Rptr.2d 852, 976 P.2d 223 (1999); Cedars-Sinai Med. Ctr. v. Superior Court, 18 Cal.4th 1,17-18, 74 Cal.Rptr.2d 248, 954 P.2d 511 (1998);Lucas v. Christiana Skating Ctr., Ltd., 722 A.2d 1247,1250-1251 (Del.Super.Ct.1998); Owens v. AmericanRefuse Sys., Inc., 244 Ga.App. 780, 781, 536 S.E.2d782 (2000); Gardner v. Blackston, 185 Ga.App. 754,755, 365 S.E.2d 545 (1988); Meyn v. State, 594N.W.2d 31, 34 (Iowa 1999); Monsanto Co. v. Reed,950 S.W.2d 811, 815 (Ky.1997); Miller v. MontgomeryCounty, 64 Md.App. 202, 214-215, 494 A.2d 761(1985); Trevino v. Ortega, 969 S.W.2d 950, 952-953(Tex.1998); Austin v. Consolidation Coal Co., 256 Va.78, 82-84, 501 S.E.2d 161 (1998). See also Koplinv. Rosel Well Perforators, Inc., 241 Kan. 206, 215,734 P.2d 1177 (1987) (declining to recognize tort of

spoliation “absent some independent tort, contract,agreement, voluntary assumption of duty, or specialrelationship” of parties); Guillory v. Dillard's Dep'tStore, Inc., 777 So.2d 1, 4-5 (La.Ct.App.2000); Panichv. Iron Wood Prods. Corp., 179 Mich.App. 136,142-143, 445 N.W.2d 795 (1989); Elias v. LancasterGen. Hosp., 710 A.2d 65, 69 (Pa.Super.1998).

Other jurisdictions have declined to reach thequestion because the facts of the cases beforethem would fail to make out a spoliation claim,even if such a cause of action were to berecognized. See Murray v. Farmers Ins. Co., 118Idaho 224, 230, 796 P.2d 101 (1990); FederatedMut. Ins. Co. v. Litchfield Precision Components,Inc., 456 N.W.2d 434, 439 (Minn.1990); Baugherv. Gates Rubber Co., 863 S.W.2d 905, 910(Mo.Ct.App.1993). Some courts have refused toimpose a general duty to preserve evidence, buthave found that the facts as pleaded fit within anarrower cause of action already acknowledgedwithin the jurisdiction. See Smith v. Atkinson, 771So.2d 429, 433 (Ala.2000) (assumption of duty);La Raia v. Superior Court, 150 Ariz. 118, 121,722 P.2d 286 (1986) (duty to mitigate harm ofunderlying tort); Boyd v. Travelers Ins. Co., 166Ill.2d 188, 194-195, 209 Ill.Dec. 727, 652 N.E.2d267 (1995) (assumption of duty); Rosenblit v.Zimmerman, 166 N.J. 391, 405-406, 766 A.2d 749(2001) (fraudulent concealment); Weigl v. QuincySpecialties Co., 158 Misc.2d 753, 757, 601 N.Y.S.2d774 (N.Y.Sup.Ct.1993) (unlawful interference withemployee's right to pursue workers' compensationclaim). See also Thompson v. Owensby, 704 N.E.2d134, 138 (Ind.Ct.App.1998) (negligent spoliationclaim recognized where facts gave rise to specialduty).Only a handful of jurisdictions has expresslyrecognized a cause of action for spoliation ofevidence. See Hazen v. Anchorage, 718 P.2d456, 463 (Alaska 1986); Bondu v. Gurvich, 473So.2d 1307, 1312 (Fla.Dist.Ct.App.1984); Oliverv. Stimson Lumber Co., 297 Mont. 336, 348-352,993 P.2d 11 (1999); Torres v. El Paso Elec. Co.,127 N.M. 729, 745, 987 P.2d 386 (1999); Smith v.Howard Johnson Co., 67 Ohio St.3d 28, 29, 615N.E.2d 1037 (1993). But see Nichols v. State FarmFire & Cas. Co., 6 P.3d 300, 304 (Alaska 2000)(narrowing scope of permissible spoliation claims);White v. Ford Motor Co., 142 Ohio App.3d 384,388, 755 N.E.2d 954 (2001) (same).

[2] *548 Our inquiry must begin by determiningwhether, and in what circumstances, a duty to preserveevidence arises. See Pirrone v. Boston, 364 Mass. 403, 413

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n. 13, 305 N.E.2d 96 (1973) (“there need be a remedy onlywhere there is an enforceable duty”). Whether to recognizea duty is a matter of policy, and “the courts will find a dutywhere, in general, reasonable persons would recognize itand agree that it exists.” Luoni v. Berube, 431 Mass. 729,735, 729 N.E.2d 1108 (2000), quoting W.L. Prosser &W.P. Keeton, Torts § 53, at 358-359 (5th ed.1984).

[3] [4] [5] Persons who are not themselves parties tolitigation do not have a duty to preserve evidence foruse by others. Nonparty witnesses may have evidencerelevant **425 to a case-documents, photographs,tape recordings, equipment parts, or any other tangibleobjects-and may know of its relevance, but thatknowledge, by itself, does not give rise to a duty tocooperate with litigants. Automatic imposition of sucha duty on all witnesses would interfere with a witness'sown property rights. A nonparty witness is not required topreserve and store an item merely because that item maybe of use to others in pending or anticipated litigation.

[6] [7] While a duty to preserve evidence does not ariseautomatically from a nonparty's mere knowledge, thereare ways that that duty may be imposed on a nonparty.Witnesses may be required to produce particular items byway of a subpoena *549 duces tecum, as long as the itemis still in the witness's possession, custody, or control at

the time the subpoena is served. 10 See Mass. R. Civ. P.45(b), 365 Mass. 809 (1974); Commonwealth v. Kreplick,379 Mass. 494, 497, 399 N.E.2d 9 (1980) (“a personcannot be compelled to produce, under a subpoena, adocument which is neither in his possession nor underhis control”); Finance Comm'n of Boston v. McGrath, 343Mass. 754, 766, 180 N.E.2d 808 (1962) (“subpoena cannotrequire [witness] to produce documents not now withinhis possession or reasonable control”). The witness maynot destroy the item after having been served with thesubpoena, but, by definition, anything already destroyedprior to service is no longer within the witness's possession,custody, or control. Thus, the duty imposed by a subpoenaattaches at the time the subpoena is served, not before.That duty is then enforced as needed by appropriatecourt orders, up to and including holding the witnessin contempt. See Mass. R. Civ. P. 45(f), 365 Mass. 809(1974). The duty placed on nonparties is one imposed bythe rules governing subpoenas, and a violation of that dutyhas its own remedy under those same rules. There is noneed to invent a cause of action to enforce a duty when the

rules that created the duty in the first place already providetheir own remedies.

10 The rule allows a witness for whom such productionwould be unreasonably burdensome to move to quashthe subpoena, thereby avoiding any such duty incases where it would be unreasonable or oppressiveto impose it. See Mass. R. Civ. P. 45(b)(1), 365 Mass.809 (1974).

[8] [9] A third-party witness may also agree to preservean item of evidence and thereby enter into an enforceablecontract. See Koplin v. Rosel Well Perforators, Inc., 241Kan. 206, 208, 215, 734 P.2d 1177 (1987) (declining torecognize cause of action for spoliation, but recognizingthat duty to preserve evidence may be imposed “byreason of an agreement, contract, statute, or otherspecial circumstance”). Remedies for breach of such anagreement are found in contract law, not in tort law.Again, where the source of a nonparty's duty to preserveevidence is one that already states a cause of action andprovides its own remedies, we will not invent a separate,duplicate cause of action in tort.

We have implicitly recognized that persons who areactually involved in litigation (or know that they will likelybe involved) *550 have a duty to preserve evidence foruse by others who will also be involved in that litigation.Where evidence has been destroyed or altered by personswho are parties to the litigation, or by persons affiliatedwith a party (in particular, their expert witnesses), andanother party's ability to prosecute or defend the claim hasbeen prejudiced as a result, we have held that a judge mayexclude evidence to remedy that unfairness. See **426Kippenhan v. Chaulk Servs., Inc., 428 Mass. 124, 126-128,697 N.E.2d 527 (1998); Nally v. Volkswagen of Am.,Inc., 405 Mass. 191, 197-198, 539 N.E.2d 1017 (1989).See also Bolton v. Massachusetts Bay Transp. Auth., 32Mass.App.Ct. 654, 656-657, 593 N.E.2d 248 (1992). Indoing so, we have gone farther than other jurisdictions,many of which address spoliation merely by permittingan adverse inference against the party responsible for thespoliation. See Kippenhan v. Chaulk Servs., Inc., supraat 128, 697 N.E.2d 527, citing Beers v. Bayliner MarineCorp., 236 Conn. 769, 775, 675 A.2d 829 (1996). Thus,once “a litigant or its expert knows or reasonably shouldknow that the evidence might be relevant to a possibleaction,” we have imposed a duty to preserve such evidencein the interests of fairness. Kippenhan v. Chaulk Servs.,Inc., supra at 127, 697 N.E.2d 527.

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[10] [11] Again, however, in recognizing such a duty, wesimultaneously crafted the remedy for spoliation withinthe context of the underlying civil action. Sanctions inthat action are addressed to the precise unfairness thatwould otherwise result. Thus, for example, an expert'stestimony (or portions thereof) may be excluded so thatthe expert would not have the unfair advantage of posingas “the only expert with first-hand knowledge” of theitem. Nally v. Volkswagen of Am., Inc., supra at 198,539 N.E.2d 1017. Such a sanction “should go no furtherthan to preclude tainted testimony.” Id. at 199, 539N.E.2d 1017. The imposition of such a remedy mustalso take into account the party responsible for thespoliation. See Kippenhan v. Chaulk Servs., Inc., supra at128, 697 N.E.2d 527 (defendant's spoliation of evidencedid not preclude plaintiff's expert from testifying againstcodefendant). Not only do we impose the sanction ofexcluding testimony, but we do so recognizing that suchexclusion of testimony may be dispositive of the ultimatemerits of the case, thereby imposing the ultimate sanctionon the party responsible for the spoliation. See Nally v.Volkswagen of Am., Inc., supra at 195, 199, 539 N.E.2d1017 (summary judgment *551 for defendant may beappropriate if exclusion of expert testimony preventsplaintiff from making out prima facie case). Of course, ifspoliation occurs in violation of a discovery order, varioussanctions, including dismissal or judgment by default, maybe imposed for that violation. See Mass. R. Civ. P. 37(b)(2), 365 Mass. 797 (1974).

[12] Thus, consistent with the specific facts andcircumstances of the underlying case, sanctions forspoliation are carefully tailored to remedy the preciseunfairness occasioned by that spoliation. A party's claimof prejudice stemming from spoliation is addressed withinthe context of the action that was allegedly affected by thatspoliation. And, if the party claiming prejudice is of theview that the judge erred in refusing to impose sanctions,or in not ordering sufficiently extensive sanctions, thatissue may be raised on appeal. As such, the remedies towhich a victim of spoliation is entitled will be conclusivelydetermined in the underlying action.

Finally, along with other jurisdictions, we are persuadedthat allowing a separate cause of action for spoliationwould recognize a claim that, by definition, could not beproved without resort to multiple levels of speculation.See, e.g., Goff v. Harold Ives Trucking Co., 342 Ark. 143,

149, 27 S.W.3d 387 (2000); Cedars-Sinai Med. Ctr. v.Superior Court, 18 Cal.4th 1, 17-18, 74 Cal.Rptr.2d 248,954 P.2d 511 (1998). A plaintiff pursuing a spoliationaction would have to prove that the breach of the duty topreserve evidence caused damage to the plaintiff's positionin the underlying case, and would have to prove theamount of those damages. To establish causation anddamages, the plaintiff would have to **427 show that thejury in the underlying action would have found differentlyif the original, unaltered item of evidence had been beforethem. Such a showing requires proof of the very thingthat can no longer be proved: the precise nature of theoriginal item. If the contents or salient characteristics ofthe original item can still be shown, then they can beshown in the underlying action and there is no damagefrom any “spoliation.” If they cannot be shown, then thejury in the spoliation action could only surmise whetherthe item in its original state would in fact have beenfavorable to the party now claiming to have suffered a

loss on account of *552 that spoliation. 11 And, it wouldbe the utmost of surmise and speculation for the jury todecide what persuasive effect that item, if still availablein its original state, would have had on the jury in theunderlying action. Ultimately, such claims are inherentlycircular, calling on one jury to revisit what another juryhave already decided and to determine whether somethingthat still cannot be shown would, had it been available,have changed that original jury's opinion.

11 Here, for example, if some relevant feature of theelectrical components was destroyed by Splaine, thecodefendant electrical contractor could claim thathe, not the plaintiffs, is the party prejudiced by thespoliation, on the theory that the original componentswould have demonstrated that there was no defect inthe way they were installed.

The experience of the California courts is instructive in thisregard. It was a California intermediate appeals court thatfirst recognized a cause of action for spoliation of evidencein 1984. See Smith v. Superior Court, 151 Cal.App.3d 491,502, 198 Cal.Rptr. 829 (1984). Overruling that decisionfourteen years later, California's highest court determinedthat the speculative nature of a cause of action forspoliation would make such a claim virtually impossibleto prove:

“[I]n a substantial proportion ofspoliation cases the fact of harmwill be irreducibly uncertain. In such

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cases, even if the jury infers from theact of spoliation that the spoliatedevidence was somehow unfavorableto the spoliator, there will typicallybe no way of telling what preciselythe evidence would have shown andhow much it would have weighedin the spoliation victim's favor.Without knowing the content andweight of the spoliated evidence, itwould be impossible for the juryto meaningfully assess what rolethe missing evidence would haveplayed in the determination of theunderlying action. The jury couldonly speculate as to what the natureof the spoliated evidenced was andwhat effect it might have hadon the outcome of the underlyinglitigation.”

Cedars-Sinai Med. Ctr. v. Superior Court, supra at13-14, 74 Cal.Rptr.2d 248, 954 P.2d 511. We agreethat it is inappropriate to “open [ ] up the decisionon the merits of the underlying causes of action tospeculative reconsideration regarding how the presence of

the spoliated evidence might have changed the outcome.”Id. at 17, 74 Cal.Rptr.2d 248, 954 P.2d 511.

*553 The destruction of relevant evidence “is anunqualified wrong,” id., that has a pernicious effect onthe truth-finding function of our courts. See Nesson,Incentives to Spoliate Evidence in Civil Litigation: TheNeed for Vigorous Judicial Action, 13 Cardozo L.Rev.793, 794-805 (1991). It is for that very reason that we havegone farther than other jurisdictions in imposing sanctionsfor spoliation. See Kippenhan v. Chaulk Serve., Inc., supraat 128, 697 N.E.2d 527. In our view, appropriately tailoredsanctions imposed in the underlying action are a moreefficacious remedy **428 for spoliation than allowing aseparate, inherently speculative cause of action for suchlitigation misconduct.

Accordingly, we affirm the dismissal of plaintiffs' claimsfor spoliation, and leave the plaintiffs to pursue theirremedies for the alleged spoliation in the underlying tortactions.

Judgment affirmed.

All Citations

437 Mass. 544, 773 N.E.2d 420

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

In re NTL, Inc. Securities Litigation, 244 F.R.D. 179 (2007)

2007 WL 241344, 68 Fed.R.Serv.3d 1145

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1

KeyCite Yellow Flag - Negative Treatment

 Distinguished by Royal Park Investments SA/NV v. Deutsche Bank

National Trust Company, S.D.N.Y., February 5, 2016

244 F.R.D. 179United States District Court,

S.D. New York.

In re NTL, INC. SECURITIES LITIGATION.Gordon Partners, et al., Plaintiffs,

v.George S. Blumenthal, et al., Defendants.

Nos. 02 Civ. 3013(LAK)(AJP), 7377(LAK)(AJP).|

Jan. 30, 2007.

SynopsisBackground: Securities fraud suits were brought allegingthat telecommunications company and its directorsdefrauded investors by failing to disclose materialproblems that undermined company's financial stability.Plaintiffs moved for discovery sanctions against defendantand non-party.

Holdings: The District Court, Peck, United StatesMagistrate Judge, held that:

[1] adverse inference spoliation sanction against defendantwas warranted, and

[2] plaintiffs were entitled to award of costs and attorneyfees they incurred in connection with motion for discoverysanctions as monetary sanction for defendant's spoliation.

Motion granted.

West Headnotes (11)

[1] Federal Civil ProcedureFailure to Comply; Sanctions

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things

170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1636.1 In general

“Spoliation” is the destruction or significantalteration of evidence, or the failure topreserve property for another's use asevidence in pending or reasonably foreseeablelitigation.

5 Cases that cite this headnote

[2] Federal Civil ProcedureFailure to Comply; Sanctions

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1636.1 In general

A court has the authority to impose sanctionson a party for spoliation and other discoverymisconduct under its inherent power tomanage its own affairs or under civilprocedure rule governing discovery sanctions.Fed.Rules Civ.Proc.Rule 37, 28 U.S.C.A.

8 Cases that cite this headnote

[3] EvidenceSuppression or spoliation of evidence

157 Evidence157II Presumptions157k74 Evidence Withheld or Falsified157k78 Suppression or spoliation of evidence

The spoliation of evidence germane toproof of an issue at trial can support aninference that the evidence would have beenunfavorable to the party responsible for itsdestruction.

1 Cases that cite this headnote

[4] Federal Civil ProcedureFailure to Comply; Sanctions

Federal Civil ProcedureNecessity and subject matter

170A Federal Civil Procedure170AX Depositions and Discovery

In re NTL, Inc. Securities Litigation, 244 F.R.D. 179 (2007)

2007 WL 241344, 68 Fed.R.Serv.3d 1145

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2

170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1636.1 In general170A Federal Civil Procedure170AXV Trial170AXV(G) Instructions170Ak2173 Necessity and subject matter

An adverse inference instruction is a severesanction for spoliation of evidence that oftenhas the effect of ending litigation because itis too difficult a hurdle for the spoliator toovercome; the sanction should not be imposedlightly.

4 Cases that cite this headnote

[5] Federal Civil ProcedureFailure to Comply; Sanctions

Federal Civil ProcedureNecessity and subject matter

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1636.1 In general170A Federal Civil Procedure170AXV Trial170AXV(G) Instructions170Ak2173 Necessity and subject matter

A party that seeks an adverse inferenceinstruction as a sanction for destruction or lateproduction of evidence must show that: (1)the party having control over the evidence hadan obligation to preserve or timely produce it;(2) the party that destroyed or failed to timelyproduce evidence had a culpable state ofmind; and (3) the missing or tardily producedevidence is relevant to the party's claim ordefense such that a reasonable trier of factcould find that it would support that claim ordefense.

11 Cases that cite this headnote

[6] EvidenceSuppression or spoliation of evidence

Federal Civil ProcedureDiscovery and Production of Documents

and Other Tangible Things

157 Evidence157II Presumptions157k74 Evidence Withheld or Falsified157k78 Suppression or spoliation of evidence170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)1 In General170Ak1551 In general

In order for an adverse inference to arisefrom the destruction of evidence, the partyhaving control over the evidence must havehad an obligation to preserve it at the timeit was destroyed; the obligation to preserveevidence arises when the party has noticethat the evidence is relevant to litigation,most commonly when suit has already beenfiled, providing the party responsible forthe destruction with express notice, but alsoon occasion in other circumstances, as forexample when a party should have knownthat the evidence may be relevant to futurelitigation.

7 Cases that cite this headnote

[7] Federal Civil ProcedureDiscovery and Production of Documents

and Other Tangible Things

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)1 In General170Ak1551 In general

Once a party reasonably anticipates litigation,it must suspend its routine documentretention/destruction policy and put in place a“litigation hold” to ensure the preservation ofrelevant documents.

5 Cases that cite this headnote

[8] Federal Civil Procedure

In re NTL, Inc. Securities Litigation, 244 F.R.D. 179 (2007)

2007 WL 241344, 68 Fed.R.Serv.3d 1145

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3

Existence, possession, custody, controland location

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)2 Subject Matter in General170Ak1574 Existence, possession, custody,control and location

Under discovery rule requiring productionof documents “in the possession, custody orcontrol” of a party, “control” does not requirethat the party have legal ownership or actualphysical possession of the documents at issue;rather, documents are considered to be undera party's control when that party has the right,authority, or practical ability to obtain thedocuments from a non-party to the action.Fed.Rules Civ.Proc.Rule 34(a), 28 U.S.C.A.

47 Cases that cite this headnote

[9] Federal Civil ProcedureFailure to Comply; Sanctions

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1636.1 In general

The “culpable state of mind” requirementfor imposition of sanctions for destruction orlate production of evidence is satisfied by ashowing of ordinary negligence.

5 Cases that cite this headnote

[10] Federal Civil ProcedureFailure to Comply; Sanctions

Federal Civil ProcedureNecessity and subject matter

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1636.1 In general170A Federal Civil Procedure

170AXV Trial170AXV(G) Instructions170Ak2173 Necessity and subject matter

Adverse inference instruction as spoliationsanction against defendant was warranted insecurities fraud action, where defendant hadcontrol over and duty to preserve documentsand electronically stored information (ESI) inphysical possession of non-party, defendantwas at a minimum grossly negligent inallowing documents and ESI including e-mailsof approximately forty-four key players to bedestroyed, and those e-mails were relevant toplaintiffs' claims.

23 Cases that cite this headnote

[11] Federal Civil ProcedurePayment of expenses

170A Federal Civil Procedure170AX Depositions and Discovery170AX(E) Discovery and Production ofDocuments and Other Tangible Things170AX(E)5 Compliance; Failure to Comply170Ak1636 Failure to Comply; Sanctions170Ak1637 Payment of expenses

As monetary sanction against defendant forhindering and delaying document productionin case and for allowing numerous documentsand electronically stored information (ESI)to be destroyed, plaintiffs were entitled toaward of costs and attorney fees they incurredin connection with motion for discoverysanctions. Fed.Rules Civ.Proc.Rule 37, 28U.S.C.A.

3 Cases that cite this headnote

Attorneys and Law Firms

*180 Joel B. Harris, Thacher, Profitt and Wood LLP,New York, NY, Robert Hermann, Thacher, Profitt andWood LLP, Whie Plains, NY, for Plaintiffs.

Brooks Roy Burdette, David Keith, Momborquette,Schulte, Roth & Zabel LLP, Seth M. Schwartz, Skadden,Arps, Slate, Meagher & Flom LLP, New York, NY, forDefendants.

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OPINION AND ORDER

PECK, United States Magistrate Judge.

**1 Plaintiffs Gordon Partners, Frederick L. Gordonand Sam D. Gordon (“Gordon” or the “Gordonplaintiffs”) have moved for discovery sanctions againstdefendant NTL Europe, Inc. and “nominal non-partyNTL, Inc.,” claiming that they hindered and delayeddocument discovery in this case and allowed numerousdocuments and electronically stored information (“ESI”),including the e-mails of approximately forty-four ofNTL's “key players,” to be destroyed. (02 Civ. 7377, Dkt.No. 30: Gordon Pls. Br.; 02 Civ. 7377, Dkt. No. 29:Notice of Motion & 4/11/06 Hermann Aff.) The Gordonplaintiffs *181 request that the Court impose a rangeof sanctions, including an adverse inference order forfact finding purposes during summary judgment or trial,and payment of attorneys' fees and costs relating to thismotion and the document discovery process. (E.g., 4/11/06Hermann Aff. ¶ 47.) The Court heard oral argument onthe motion on January 29, 2007.

For the reasons set forth below, the Gordon plaintiffs'sanctions motion is GRANTED in substantial part. Thatis, the Court imposes an adverse inference instructionand awards the Gordon plaintiffs attorneys' fees for themotion and the additional discovery costs caused bydefendant NTL Europe's conduct.

FACTS

The Securities Lawsuits and NTL's BankruptcyThe class-plaintiffs filed suit on April 18, 2002 against acompany then known as NTL, Inc. (“Old NTL”), allegingfederal securities laws violations. (See 02 Civ. 3013, Dkt.No. 1: Class Compl.; see also 02 Civ. 3013, Dkt. Nos.21, 25 & 28: Consolidated & Am. Compls.) The Gordonplaintiffs filed their complaint on September 13, 2002. (02Civ. 7377, Dkt. No. 1: Compl.)

Old NTL and several of its subsidiaries entered intoChapter 11 bankruptcy, emerging on September 5, 2002with a “Second Amended Joint Reorganization Planof NTL Incorporated and Certain Subsidiaries” (the“Bankruptcy Plan”). (02 Civ. 7377, Dkt. No. 29: 4/11/06

Hermann Aff. Ex. A: Bankruptcy Plan.) Two maincompanies emerged out of the bankruptcy: NTL Europe,

Inc. (“NTL Europe”), 1 the successor company to OldNTL, and NTL, Inc. (“New NTL”), formerly knownas NTL Communications Corp. (E.g., Bankruptcy Planat 31–32.) NTL Europe was primarily responsible forselling off Old NTL's unprofitable assets, and New NTLbecame the surviving operational company with control ofthe company's European telecommunications assets. (See4/11/06 Hermann Aff. ¶ 3; see generally Schwartz Aff. Ex.

3: Bankruptcy Disclosure Statement.) 2 The BankruptcyPlan specifically allowed the Gordon plaintiffs' and classplaintiffs' securities lawsuits to go forward after thebankruptcy, against the individual defendants and NTLEurope (as successor to Old NTL), but only to the extentof NTL Europe's insurance coverage. (Bankruptcy Plan at15–16, 50–52; 02 Civ. 7577, Dkt. No. 33: Schwartz Aff. Ex.11: 6/13/03 Bankruptcy Order at 2; see 4/11/06 HermannAff. ¶ 2.)

1 NTL Europe is now known as PTV, Inc. (See Dkt.No. 52: Def. NTL 8/21/06 Supp. Br. at 1.) The Courtwill continue to refer to it as “NTL Europe.”

2 Skadden Arps Slate Meagher & Flom LLP representsdefendant NTL Europe in the Gordon and classactions and represented Old NTL in the bankruptcyproceedings. (4/11/06 Hermann Aff. ¶ 3.) FriedFrank Harris Shriver & Jacobson LLP representsnominal non-party New NTL in discovery inthese proceedings, and represented the creditorscommittee during the bankruptcy proceedings.(4/11/06 Hermann Aff. ¶ 3.)

Document Sharing Clauses in The Demerger Agreementand Transitional Services Agreement**2 Pursuant to the Bankruptcy Plan, defendant

NTL Europe and non-party New NTL entered into a“Demerger Agreement” dated January 10, 2003, whichspecifies that:

4. ACCESS TO INFORMATION

For a period of ten years from the date of thisAgreement, each party shall ... allow the other partyand its personnel to have access to (during normalbusiness hours and following not less than 48 hours'notice) and (at the expense of the party requesting theinformation) take copies of all documents, records orother materials containing any information which that

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party or any of its Group Companies or affiliated jointventures might reasonably require to be able to complywith their respective legal, regulatory, accounting orfiling obligations, or to resist, appeal, dispute, avoid orcompromise any tax assessment, provided that nothingin this clause shall permit either party to copy anydocument, record or other material which is subjectto legal privilege. Furthermore, each party shall ...allow reasonable access to such of its duly authorisedpersonnel, at all reasonable times during business *182hours upon prior written notice, as are required topermit the availability, access or, subject to the aboverestriction, copying of such information.

(02 Civ. 7377, Dkt. No. 33: Schwartz Aff. Ex. 12:

Demerger Agmt. ¶ 4 at p. 5, emphasis added.) 3

3 The Demerger Agreement further provided that:6. FURTHER ASSURANCEEach party shall ... do, execute and perform allsuch further deeds, documents, assurances, actsand things as may reasonably be required to giveeffect to this Agreement.(Demerger Agmt. ¶ 6 at p. 5.)

Also pursuant to the Bankruptcy Plan, defendant NTLEurope and non-party New NTL entered into a January10, 2003 “Transitional Services Agreement,” in which theparties stipulated that they would provide certain servicesto each other in order to smooth the transition after thecompanies emerged from bankruptcy. The TransitionalServices Agreement specifically provided that:

The Services Provider [New NTL]shall provide the Services RecipientGroup Companies [NTL Europeand its subsidiaries], or procurethat the Services Recipient GroupCompanies are provided, with suchinformation and records in relationto the Services as the ServicesRecipient [NTL Europe] may fromtime to time reasonably requestand, without prejudice to thegenerality of the foregoing, theServices Provider shall use itsreasonable commercial efforts torespond during Business Hours,orally or by telephone, facsimiletransmission or in writing (as

appropriate) to any request forfurther information made by theServices Recipient [NTL Europe].

(02 Civ. 7377, Dkt. No. 33: Schwartz Aff. Ex. 4:Transitional Services Agmt. ¶ 2.5 at p. 8.)

In a list of “Services” to be provided under theTransitional Services Agreement, under a heading for“Legal,” the agreement states that “Euroco's [NTLEurope's] legal counsel shall have access to New NTL'slegal department for the purpose of inquiring abouthistoric transactions.” (Transitional Services Agmt. at p.

33.) 4

4 The Demerger Agreement and Transitional ServicesAgreement were publicly disclosed in 2003 whenentered into. (02 Civ. 7377, Dkt. No. 35: RodburgAff. ¶ 5 & Ex. D; 1/30/07 Schwartz Ltr. to Court.)Plaintiffs' counsel, however, were not aware of theagreements until they received them after the Brodskydeposition. (See page 184 n. 5 below.) In any event,as discussed below, the agreements' existence was notrevealed to the Court until very late in the discoveryprocess. (See page 189 below.)

Old NTL's 2002 Document Hold MemorandaOn March 13, 2002, a document “hold” memo wascirculated to approximately seventeen employees of OldNTL:

**3 Although, under usual circumstances, destructionof documents/files, in the ordinary course is permitted,under certain circumstances, a company is under a dutyto preserve documents that could be relevant to disputeswith third parties. Basically, what this means is thatyou can have a policy that dictates which and whendocuments can be destroyed in the ordinary course, butonce you are on notice that there may be litigation youare required to retain documents that would reasonablyconstitute evidence even if under your retention policyyou would destroy such documents in the ordinarycourse.

Accordingly, given the obvious possibility that we mayencounter a heightened risk of litigious activity in theongoing restructuring process, it is imperative that alldocuments that even possibly could be evidence in anysuch a matter be retained.

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Thank you.

(02 Civ. 7377, Dkt. No. 29: 4/11/06 Hermann Aff. Ex.T.) On March 14, 2002, the same memorandum wasforwarded to approximately twenty-eight more employeesat Old NTL with the following instruction: “Please readand note carefully Lauren Blair's (Assistant GeneralCounsel in New York) memorandum on the retention ofdocuments. Please forward to your reports as you considerappropriate. Many thanks.” (4/11/06 Hermann Aff. Ex.T.)

On or about June 6, 2002, while Old NTL was inbankruptcy, another document hold *183 memorandumabout the Gordon and class action lawsuits was circulatedto employees. (See 02 Civ. 7377, Dkt. No. 33: SchwartzAff. Ex. 5: 6/6/02 Document Hold Memo.) The memostated in part:

NTL Incorporated and certain of its officers havebeen named as defendants in a number of purportedsecurities class action lawsuits. The complaints in thosecases generally allege that NTL failed to accuratelydisclose its financial condition, finances and futureprospects in press releases and other communicationswith investors prior to filing for reorganization infederal bankruptcy court.

We presently do not know of any facts that wouldsupport these allegations, and we intend to defend thelawsuits vigorously.

In connection with such lawsuits, NTL and its affiliatesmay be required to produce documents relevant toplaintiffs' claims. Therefore, as we have previouslyinformed you, we are required to take reasonable stepsto preserve all potentially relevant material that mayexist (whether in paper or electronic format). Relevantmaterials may include sales data, minutes or notes ofmeetings or conversations, financial statements, creditfacilities and other loan documents, press releases,PowerPoint presentations and any other documents(including drafts) relating to the business, assets,properties, condition (financial or otherwise), andresults of operations of NTL or its affiliates at any timeafter April 1, 1999.

Please ensure that these types of documents arepreserved until further notice. When in doubt about

possible relevance, you should err on the side ofretaining the material.

**4 (Schwartz Aff. Ex. 5: 6/6/02 Document Hold Memo,emphasis added.)

A Brief History of Discovery in this Case Relevant to thisMotionOn May 2, 2005, the Gordon plaintiffs and class plaintiffs(collectively, “plaintiffs”) served their initial documentrequests upon defendant NTL Europe and the individualdefendants. (02 Civ. 7377, Dkt. No. 29: 4/11/06 HermannAff. ¶ 5 & Ex. B.) On June 1, 2005, defendant NTL Europeand the individual defendants filed their objections andresponses. (4/11/06 Hermann Aff. ¶ 5 & Exs. C & D.)Defendant NTL Europe's response to the documentrequests stated that “NTL will produce documents, if any,responsive to [the] request.” (4/11/06 Hermann Aff. Ex.C.) Defendant NTL Europe, however, did not produceany responsive documents or e-mails. (4/11/06 HermannAff. ¶ 7.) Defendant NTL Europe's counsel informedplaintiffs' counsel that all corporate records relating to the1999–2002 pre-bankruptcy period were in non-party NewNTL's possession and that defendant NTL Europe did notpossess any of these records. (4/11/06 Hermann Aff. ¶ 7.)

George Blumenthal was the only individual defendantwho produced any documents. (4/11/06 Hermann Aff. ¶6.) Blumenthal had material because he had requestedand obtained copies of his e-mails upon leaving hisemployment with Old NTL, some of which were probativeof plaintiffs' allegations in this case. (See 4/11/06 HermannAff. ¶ 6.) Many of the probative e-mails are dated during2001, the primary year involved in plaintiffs' allegations,and relate to NTL's accounting procedures. (See 4/11/06Hermann Aff. ¶ 6.)

On August 16, 2005, plaintiffs served a subpoena uponnon-party New NTL requesting production of essentiallythe same documents as plaintiffs had requested fromdefendant NTL Europe. (4/11/06 Hermann Aff. ¶ 8 & Ex.F.) Approximately two months later, non-party New NTLmade seventy boxes of documents available to plaintiffs'counsel for inspection and copying. (4/11/06 HermannAff. ¶ 8; see 02 Civ. 7377, Dkt. No. 35: Rodburg Aff. ¶ 12.)

On November 21, 2005, plaintiffs' counsel sent a letterto New NTL's counsel noting that New NTL had notproduced several requested categories of documents,

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including financial analyses, subscriber integration andbilling issues, and e-mail. (4/11/06 Hermann Aff. ¶ 9 &Ex. G.) On November 30, 2005, New NTL's counselresponded that New NTL does “not believe responsivedocuments that fall into the categories of documents*184 which you reference in your letter as missing exist

and/or can be produced,” and concluded that in light ofits “limited role” in the litigation, New NTL's productionwas “full and complete.” (4/11/06 Hermann Aff. ¶ 10 &Ex. H.) New NTL's counsel also orally told plaintiffs'counsel that “responsive e-mails did not exist because thecompany's [computer] servers had been ‘upgraded’ afterthe reorganization.” (4/11/06 Hermann Aff. ¶ 11.)

On December 6, 2005, plaintiffs' counsel served asubpoena upon non-party New NTL for a Rule 30(b)(6)deposition regarding New NTL's document production,and, after several scheduling difficulties, a deposition wasscheduled for January 25, 2006. (4/11/06 Hermann Aff. ¶13 & Ex. K.)

**5 On December 20, 2005, plaintiffs' counsel took aRule 30(b)(6) deposition of Jeffrey Brodsky, defendantNTL Europe's CEO. (4/11/06 Hermann Aff. ¶ 12 & Ex. I:Brodsky Dep.) Brodsky testified that NTL Europe doesnot have physical possession of Old NTL's books andrecords. (4/11/06 Hermann Aff. ¶ 12 & Brodsky Dep. 46–50.) Because non-party New NTL retained the operatingtelecommunications assets after the bankruptcy, NewNTL had physical possession of the books and records.(4/11/06 Hermann Aff. ¶ 12 & Brodsky Dep. 52–53.)This was the reason that defendant NTL Europe did notproduce any documents in response to plaintiffs' May 2,2005 subpoena. (4/11/06 Hermann Aff. ¶ 12 & BrodskyDep. at 61.) Brodsky testified that he did not knowwhether defendant NTL Europe ever requested responsivedocuments from non-party New NTL or its counseldespite the information sharing clauses in the DemergerAgreement and Transitional Services Agreement anddespite Brodsky's statement that “[w]henever there was adocument that we needed [from New NTL], we would call[New NTL] and ask if they had it, and if they had it, they'dsend it.” (4/11/06 Hermann Aff. ¶ 12 & Ex. I: Brodsky

Dep. 51–55, 60–62.) 5

5 According to the Gordon plaintiffs' counsel, allplaintiffs' attorneys were unaware of the DemergerAgreement and Transitional Services Agreementuntil vague mention of them during the Brodsky

deposition, and the agreements themselves were notprovided until even later. (See 1/29/07 Oral Arg. Conf.Tr. at 24–27.)

In a letter dated January 24, 2006, New NTL's counseldisclosed to plaintiffs' counsel that New NTL hadperformed selected, targeted searches of 23,000 boxes offiles in storage in four locations in the United Kingdomand had located no additional responsive documents,and further asserted that reviewing every box in storageto locate documents responsive to plaintiffs' documentrequests would be “overly burdensome, unreasonable,unrealistic and extraordinarily costly for [non-party]NTL.” (4/11/06 Hermann Aff. ¶ 15 & Ex. O at 2.) NewNTL offered to provide plaintiffs' counsel with an indexof the 23,000 storage boxes and allow plaintiffs' counsel toperform an on-site review of any boxes on a per-box andper-day cost to plaintiffs. (4/11/06 Hermann Aff. Ex. O at3.) New NTL also offered to perform targeted searches forthe e-mail accounts of current and former NTL employeesas requested by plaintiffs, at a specific cost to plaintiffs foreach account downloaded. (Id.) New NTL also notifiedplaintiffs that electronic documents and e-mail of currentand former NTL employees who worked in New Yorkhad been on a server in New York that was shut downin 2003 after the companies' emergence from bankruptcy,and the electronically stored information was transferredto a new server in the UK. (Id. at 4.) New NTL located theinformation on the new server in the UK and downloadedit onto three DVD's, which it sent to plaintiffs. (Id.; seealso Rodburg Aff. ¶ 18.) Additionally, New NTL founda collection of computer back-up tapes for the New Yorkserver. (4/11/06 Hermann Aff. Ex. O at 4.) New NTLstated that its IT department was working with a vendorto determine the cost that plaintiffs would have to payto access the information on the tapes to produce theinformation stored on them. (Id. at 4–5.) On January 25,2006, New NTL's counsel sent a letter to plaintiffs' counselwith more information regarding the forty-six back-uptapes, and estimating how much plaintiffs would need topay to restore the back-up tapes. (4/11/06 Hermann Aff.¶ 17 & Ex. R at 1–2.)

*185 **6 At the January 25, 2006 New NTL Rule 30(b)(6) deposition, David Bond, a New NTL in-house lawyertestified that New NTL's IT system was outsourced toIBM in late 2002 or early 2003. (4/11/06 Hermann Aff. ¶18 & Ex. S: Bond Dep. 66; see also Rodburg Aff. ¶ 8.)Bond did not know what the e-mail retention policy wasat the time of the outsourcing to IBM; IBM's current e-

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mail retention policy with respect to a former employee'se-mail account is that New NTL's IT department hasaccess to the account for three months after an employeeleaves the company, then it goes to a back-up tape fornine months, after which it may be overwritten. (BondDep. 67.) Bond testified that the policy with regard tothe e-mail accounts of current New NTL employees isthat employees are free to retain e-mails or discard them“to suit their needs.” (Bond Dep. 68.) In order to retainan e-mail, an employee must move the e-mail from theirinbox to a separate folder, otherwise the e-mails in theinbox will start to be deleted after approximately threemonths. (Bond Dep. 68–69.) Bond stated that employeesreceived new computers at the time of the outsourcing toIBM, and he did not know whether e-mails written on theold computers were placed on back-up tapes as part ofthe outsourcing. (Bond Dep. 69–71.) Bond was not awareof any communications within New NTL at the time ofthe outsourcing to IBM regarding retention of e-mail ordocuments pertinent to ongoing litigation. (Bond Dep.71–72.)

Bond testified that he first became involved withresponding to plaintiffs' August 15, 2005 subpoena toNew NTL in December 2005. (Bond Dep. 77–79.) Bondasked an assistant to work with New NTL's IT head tolocate electronic files for the individual defendants, andalso requested that she locate physical documents in theUK offices where the individual defendants may haveworked. (Bond Dep. 79–81.) The assistant later notifiedBond that the IT department was only able to find certainincoming e-mails for George Blumenthal, but that therewere no other electronic files for Blumenthal or the otherindividual defendants because they were not on any NTLservers. (Bond Dep. 82–83.) Bond testified that the NewYork employees, with the exception of Stephen Carter,did not have outgoing e-mail accounts on the NTL serversbecause they had used outside service providers for theire-mail. (Bond Dep. 84–85.)

Bond testified that at the request of New NTL's in-house legal director, the assistant and the IT departmentalso searched for e-mails and electronic documentsrelating to other individuals that had been requested byplaintiffs' counsel. (Bond Dep. 98–101.) Those searcheswere completed the week before Bond's deposition. (BondDep. 101.) Bond did not know of any electronic searchesthat were performed at New NTL in relation to thislitigation prior to the searches overseen by the assistant.

(Bond Dep. 103.) Bond testified that back-up tapes forNew NTL's UK servers are done annually, but theyare overwritten the following year, so “there is onlyever one backup tape in existence at one time.” (BondDep. 103.) Bond stated that New NTL also creates dailyback-up tapes, but that those back-up tapes usually areoverwritten. (Bond Dep. 104.) Bond said that the first timehe learned that some of the information from the NewYork servers had been moved to the UK server was inDecember 2005. (Bond Dep. 104.)

**7 On January 31, 2006, the Gordon plaintiffs' counselrequested an extension of the discovery deadline becauseof New NTL's failure to produce documents and e-mails,which this Court granted on February 2, 2006. (4/11/06Hermann Aff. ¶ 26 & Ex. W, Ex. X at 17.)

On February 3, 2006, plaintiffs' counsel sent New NTLa list of fifty-eight present and former NTL employeeswhose e-mails plaintiffs wished to have searched. (4/11/06Hermann Aff. ¶ 24 & Ex. V.)

On February 8, 2006, plaintiffs took the deposition ofGeorge Bernet, the information technology manager atOld NTL's executive offices in New York starting in2001. (4/11/06 Hermann Aff. ¶ 29 & Ex. CC: BernetDep.; see also Rodburg Aff. ¶ 8.) Bernet testified thatno one ever asked him to save or preserve informationbecause of threatened or pending litigation. (BernetDep. 150.) Bernet stated that NTL's New York serverwas decommissioned in 2004, with all electronic filestransferred to the company's *186 UK servers. (Bernet

Dep. 54–56.) 6 After that, the old computers from theNew York office were donated to charity. (Bernet Dep.187.) Bernet testified that full back-up tapes for the NewYork office were moved to the company's new Manhattanoffices and also to a bank vault. (Bernet Dep. 78, 88–89,126–27, 136–37, 177, 180.)

6 On the other hand, another New NTL employeeinvolved with the transfer of files from New York tothe UK stated that only the e-mails of the employeeswho were continuing to work at New NTL after themove in 2003 were transferred to the UK server.(4/11/06 Hermann Aff. ¶ 31 & Ex. DD.)

On March 1, 2006, New NTL produced CD's containingthe e-mail files of ten present or former NTL employees,three of which had already been provided to plaintiffs twoweeks before. (4/11/06 Hermann Aff. ¶ 36.) Therefore, as

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of March 1, 2006, plaintiffs had received e-mail files foronly twelve of the fifty-eight employees requested. (4/11/06Hermann Aff. ¶ 36.)

On March 13, 2006, New NTL produced the NewYork office back-up tapes to plaintiffs' counsel. (4/11/06Hermann Aff. ¶ 32; see also Rodburg Aff. ¶¶ 14–16.) Atplaintiffs' expense, the back-up tapes were restored andconverted to readable, searchable files. (4/11/06 HermannAff. ¶ 32.) Plaintiffs' counsel's review of the back-uptapes revealed that they contained e-mails from seniorexecutives who worked in NTL's executive offices inNew York, but that the tapes did not contain any e-mail from 2001, the main year in which plaintiffs allegethat defendant NTL Europe and its executives committedsecurities violations. (4/11/06 Hermann Aff. ¶ 32; see also02 Civ. 7377, Dkt. No. 40: 5/2/06 Hermann Aff. ¶ 6: “Theback-up tapes were made in 2000, 2002 and 2003—but not2001.”; id. ¶ 9.)

On March 17, 2006, IBM's attorney advised plaintiffs'counsel that IBM completed the searches of the NewNTL electronic files in its possession, and out of alist of fifty-seven current and former NTL employees,IBM found files for thirteen employees, most of whosefiles New NTL's counsel previously had produced toplaintiffs. (4/11/06 Hermann Aff. ¶ 28 & Ex. BB.) In e-mail correspondence between New NTL's counsel andplaintiffs' counsel, New NTL confirmed that it hadsearched several times for e-mails relating to the remainingcurrent and former employees on the list and did not findanything at all, even though some produced documentsindicate that at least three of those employees had e-mailaccounts during the time period pertinent to the documentrequest. (4/11/06 Hermann Aff. ¶¶ 37, 40 & Exs. HH, II,JJ & KK; see also Rodburg Aff. ¶¶ 19–21.)

**8 During depositions of former NTL employees onMarch 24, 2006 and April 5, 2006, the employees hada very difficult time remembering events during 1999–2001 relating to plaintiffs' allegations without reviewingdocuments from that time period, but upon reviewingdocuments, their memories were substantially refreshedand they were able to discuss the events in detail. (4/11/06Hermann Aff. ¶¶ 42–43 & Exs. MM & NN.) Plaintiffs'counsel notes that because “NTL's senior executives usede-mail extensively to communicate with each other andwith other NTL executives and employees, about financialand operational issues,” production of e-mails from those

senior executives is crucial to the prosecution of plaintiffs'case. (4/11/06 Hermann Aff. ¶ 44.) Indeed, the e-mailsthat plaintiffs have obtained have provided them withimportant information relating to their claims. (4/11/06Hermann Aff. ¶¶ 6, 44.)

On June 27, 2006, plaintiffs' counsel updated the Courton the progress of discovery. (See 02 Civ. 7377, Dkt.No. 42: 6/27/06 Hermann Ltr. to Court.) As of thatdate, the majority of the e-mails from the files offorty-four of the current and former employees onplaintiffs' list of “key players” were still missing fromNew NTL's document production, including those fromindividual defendants Barclay Knapp, John Gregg, andSteven Carter, as well as those of other top managerssuch as Leigh Wood, Scott Falconer and Dinesh Jain.(6/27/06 Hermann Ltr. at 1.) Additionally, very fewpieces of external correspondence and personal meetingnotes were provided, and no NTL communicationswith securities analysts or investment *187 firms wereproduced. (6/27/06 Hermann Ltr. at 1–2.) On July 7, 2006,defendants' counsel wrote to the Court disputing plaintiffs'characterizations of New NTL's document production,and claiming that New NTL produced more relevante-mails, written correspondence, and communicationswith securities analysts than plaintiffs indicated, listingexamples of documents produced in each category. (See02 Civ. 7377, Dkt. No. 43: 7/7/06 Defs.' Ltr. to Court.)Plaintiffs responded in a July 14, 2006 letter to the Court,explaining that the examples listed in defendants' letter didnot come within plaintiffs' document request because mostof them were not authored by anyone on plaintiffs' list of“key players” in this case, and suggesting that the few e-mails from non-“key players” that were produced furtherdemonstrate how extensively NTL personnel used e-mailto communicate with one another. (See 02 Civ. 3013, Dkt.

No. 114: 7/14/06 Hermann Ltr. to Court.) 7

7 On July 7, 2006, plaintiffs sent a letter to the Courtcontaining an update on non-party McKinsey & Co.'sdocument production to date in this case. (See 02 Civ.7377, Dkt. No. 44: 7/7/06 Hermann Ltr. to Court.)Plaintiffs claimed that they had found several highlyrelevant documents in McKinsey & Co.'s productionthat were never produced by defendant NTL Europeor non-party New NTL. (Id.)

On August 14, 2006, the Gordon plaintiffs providedtheir final update to the Court regarding discovery.(8/14/06 Supp. Hermann Aff.) The Gordon plaintiffs

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confirmed that they had completed the depositions of theindividual defendants, that they questioned the individualdefendants about specific categories of missing documentsand e-mails, and were told that many of the documentsand e-mails from those categories previously existed butnever were produced, presumably because they werediscarded. (Id. at ¶¶ 3–8, 15, 17 & Ex. A.) On August21, 2006, defendants responded to the Gordon plaintiffs'final update, essentially arguing that the Gordon plaintiffsdid not provide evidence of the destruction of relevantdocuments in this case, and therefore that spoliationsanctions are not appropriate. (See 02 Civ. 7377, Dkt. No52: 8/21/06 Def. NTL Europe Supp. Br.; 02 Civ. 7377,Dkt. No. 51: 8/21/06 Individual Defs.' Br.) Defendantsspecifically argued that while “the duty [to] preservedocuments first arose in May 2002 upon commencementof the first shareholder litigation ..., [t]he GordonSupplement presents no evidence that Old NTL destroyedany relevant ‘favorable’ documents [“created between2000 and the first quarter of 2002”] in or after May 2002,when a duty to preserve existed.” (Def. NTL Europe Supp.Br. at 3.)

Discovery Conferences With The Court**9 The prior section discussed discovery from the

parties' perspectives. The Court had frequent conferenceswith counsel for the parties, and eventually also withcounsel for non-party New NTL, but it was not until verylate in the discovery process that the Court was informedof the Demerger Agreement.

At the November 21, 2005 conference, plaintiffs' counselnoted that it had just received seventy boxes containinga million pages of documents from non-party New NTL.(02 Civ. 3013, Dkt. No. 79: 11/21/05 Conf. Tr. at 2, 7.)After clarification by defense counsel as to which “NTL”produced the documents, plaintiffs' counsel stated:

Your Honor, if I could just direct some commentto that. I think from a technical legal standpoint,they probably are separate entities, based upon howthey emerged from bankruptcy. And we tried multipletimes to reach a resolution with [defendant NTLEurope's counsel] in particular about trying to gethis cooperation and assistance in getting documentsfrom [New] NTL. Unfortunately, we couldn't resolveanything.

We thought, rather than seek intervention from yourHonor, we served a subpoena on [New] NTL. We stillbelieve that [defendant NTL Europe's counsel] has somepersuasive say in assisting, but it's been difficult for usin that regard. We've had to go the subpoena route.

(11/21/05 Conf. Tr. at 3; see also id. at 6–7.) Plaintiffs'counsel said it already had found deficiencies in the non-party production, but since it had not yet had a meet andconfer, the Court set a date for the next conference. (Id.at 7–8.)

*188 At the next conference, on December 1, 2005,plaintiffs' counsel again complained that neither of the twoNTLs had produced e-mails, and that it would take 30(b)(6) depositions to learn more about both NTLs' electronicinformation systems:

MR. SCOTTI: Good afternoon, your Honor. DanScotti for Milberg Weiss on behalf of the class plaintiffs.The last time we were here, which was just a week or soago, we had raised an issue of document production thatwe had received from nonparty [New] NTL Inc. Whenthis case was first started, there was one NTL entity,[Old] NTL Inc. After the reorganization, there were twoentities, [New] NTL Inc. and NTL Europe. The NTLInc. that exists today is a nonparty. [Defendant] NTLEurope, which was formerly known as NTL Inc., is theentity which is represented by Skadden.

We wrote a letter to Fried Frank, who representsthe new NTL Inc., the nonparty, highlighting theproduction deficiencies. Our main problem was thatthere were really very few, if any, emails or electronicdocuments produced whatsoever. We were given accessto several dozen boxes of paper, but there are zeroelectronic documents that were produced to us.

All along we have been looking to [defendant] NTLEurope for documents. Mr. Schwartz from Skadden hasbeen telling us, we don't have anything, we are just ashell corporation, you are going to have to look at thenew entity, NTL Inc. That is what we have now done.

**10 Their response is, we have given you everythingwe have and there are absolutely no electronicdocuments whatsoever to produce. That troubles us fora number of reasons. First, Mr. Blumenthal, one ofthe named individual defendants, was able to producethousands of pages of emails electronically. That was

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produced on CD with metadata which tells us that therewere some electronic documents at some point thatexisted.

....

We think the next step here is to take a 30(b)(6)deposition of NTL Europe, the defendant, and perhapsa 30(b)(6) deposition of NTL Inc., to determine exactlywhat the relationship is between these two entities....

....

There might be a slightly bigger issue here, though.I have been told by counsel for [New] NTL Inc.,the nonparty, that the servers were upgraded in late2003, after the reorganization, and documents were notpreserved. That troubles us, which is why we believe a30(b)(6) might be appropriate.

THE COURT: Make your record. If it is a nonparty, Iam not sure what good a spoliation instruction, if therewas spoliation after a lawsuit began, what that gets youultimately. In any event, I am sure you have all read oryou are about to be reading Judge Scheindlin's five orsix relevant Zubulake opinions and the growing case lawon electronic discovery and spoliation sanctions and allof that.

Make your record through depositions or otherdiscovery so that we are not dealing with this in theabstract or based on bits and pieces of information, butthat there is sufficient information for the Court to thenact on, whenever that becomes appropriate.

MR. HERMANN: Your Honor, Robert Hermann forGordon Partners. We have a nonparty here only in themost mythical sense. We have a lawsuit that emergedout of the bankruptcy proceedings which explicitlyrecognized that we had a right to pursue this lawsuitat a time when the now two companies were onlyone company and the lawsuit was already pending.Certainly everybody was on notice of this lawsuit.

THE COURT: It sounds like you are starting to arguea motion which is not yet ripe.

(02 Civ. 3013, Dkt. No. 80: 12/1/05 Conf. Tr. at 3–7.)

At the next conference, on January 11, 2006, the Gordonplaintiffs' counsel began the conference by noting thatdefendant NTL Europe had “no e-mails from this

[litigation] period” and that plaintiffs would be deposinga witness from non-party New NTL. (1/11/06 Conf. Tr. at2–3.) The Court noted that it *189 did not know whatlegal authority it had over the non-party New NTL (thenon-party subpoenas were not issued out of the SouthernDistrict). (Id. at 5.) Referring to Zubulake and possiblespoliation inferences, the Court told plaintiffs to “makeyour record.” (Id. at 5–6.) The Court also suggested that“to the extent that the defendant NTL [Europe] has abusiness relationship or former business relationship with[non-party New NTL] that might be useful to say, youknow, Get off the stick, guys....” (Id. at 6.) The Gordonplaintiffs' counsel again noted the problem, or as he calledit, the “ruse,” of the two NTLs:

**11 MR. HERMANN: Your Honor, ... I would justadd that the distinction between party and nonpartyhere is, in our view, bogus. Because this company wassplit in bankruptcy, and the party with the lawsuit endedup without the documents. That was a decision theymade. They didn't tell that to the bankruptcy court. Andthere may be an issue here with regard to going back tothe bankruptcy court on some of this.

But the ruse, as I see it, of leaving the documents withthe company that didn't have the lawsuit was preciselythe party/nonparty distinction. So, we'll probably beback to you.

(Id. at 7.) The Court ended the issue by saying it hopednon-party New NTL would be convinced to cooperate butthat if not, the parties would have to brief the spoliationissue. (Id. at 7–8.)

At the next conference, on February 2, 2006, counsel fornon-party New NTL attended for the first time. (02 Civ.3013, Dkt. No. 85: 2/2/06 Conf. Tr. at 1–2.) The Courtwelcomed New NTL's counsel (the Fried Frank law firm)by noting that “on the one hand, you're a non-party.On the other, you're not quite a non-party ... I'd like toknow what we can do to speed up your client's review of

electronic records and production thereof.” (Id. at 2.) 8

8 Later in the conference, the Fried, Frank lawyernoted that “I am a non-party subject to a Delawaresubpoena, but I knew if you'd asked me to speak, Iwould speak.” (Id. at 13.)

The Court learned about the Demerger Agreement fromthe Gordon plaintiffs' sanctions motion (02 Civ. 7377,

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Dkt. No. 30) immediately before the April 12, 2006conference. (See 02 Civ. 3013, Dkt. No. 92: 4/12/06Conf. Tr. at 3–4.) The Court was most “distressed” thatdefendant NTL Europe had never informed the Court ofthis agreement:

THE COURT: .... I skimmed the plaintiff's [sanctions]brief. As I understand it from that, there is an accessagreement that lets defendant NTL [Europe] haveunfettered access to all the documents of the [New] NTLas represented by Fried, Frank. That's news to me, andit is quite distressing to the Court since I have tiptoeddelicately around Fried, Frank and their client, andthanked Fried, Frank for voluntarily appearing hereand all of that, when, quite frankly, it should have beenyour client, Ms. Hardister [counsel for defendant NTLEurope], who was producing all these documents out ofEurope pursuant to that access agreement.

So that's not a definitive ruling by any means on thismotion, but, I think you and Fried, Frank's client betterseriously consider what, if anything, you can do tomake plaintiffs happy, at least monetarily, with respectto all of the costs that went on treating the discoveryas nonparty discovery of an entity sitting in Europe,when, in fact, it would appear—and I have not readthe agreement; I've just read the brief that quotes ordescribes it—it would appear that NTL defendant hadthe obligation to produce all of this material in theUnited States as party discovery.

If you want to address that at all now, you can,if you want to say anything. Otherwise, I will beturning to Fried, Frank, but, frankly, the courtesy toa nonparty is about to disappear unless somebody tellsme, since I haven't read the access agreement, that it wasmisdescribed in plaintiff's brief.

**12 MS. HARDISTER: I understand. Your Honor,we are prepared to respond to that [motion] at a laterdate.

(4/12/06 Conf. Tr. at 3–4, emphasis added.) The Court suasponte ruled that defendant NTL Europe now would beheld responsible for reviewing the boxes that New NTLhad *190 in storage in Europe and producing responsivedocuments to plaintiffs' counsel in the United States:

THE COURT: The documents will be produced in theUnited States on a rolling basis starting Monday and

ending no later than Friday of next week, all costs to beborne by defendant NTL.

Any applications, discussions, or any comments, Ms.Hardister, since your client just got hit with some coststhat they perhaps were not expecting?

MS. HARDISTER [Counsel for Defendant NTLEurope]: I understand, your Honor. That's fine.

THE COURT: That's fine, meaning you're consenting,or, that's fine, meaning you hear it?

MS. HARDISTER: I'm consenting.

(Id. at 6; see also id. at 18–20.) The Court also suggestedthat defendant NTL Europe at a minimum should workout an agreement with plaintiffs' counsel to reimburseplaintiffs' counsel for the additional expenses of theallegedly “non-party” discovery:

THE COURT: .... Quite frankly, while the spoliationsanction of an inference is not one that I expect you'llbe able to work out, if I have to rule on the additionalrequest here, which is for attorney's fees for certain ofthe discovery disputes with respect to nonparty NTLand there are depositions of document custodians, etc.,my guess is that you're going to lose. So, depending onhow you would like [the] written opinions to read, whileI don't expect that the spoliation issue is something youall can work out ... but I do strongly recommend thatyou work out whatever issues there are with respectto Mr. Hermann and the other plaintiffs' counsels theissues of legal fees as raised in the motion.

If you don't—obviously, I'm reacting based solely ona very fast reading of one side's papers and not theother, but if your client—I'll be very blunt. If your client[defendant NTL Europe] has been silent throughoutthese proceedings about its access agreement implicitly, ifnot explicitly, misleading the Court as to the relationshipbetween the defendant NTL that is in front of meand the “nonparty NTL” represented by Fried, Frank,[defendant] NTL is going to come out on the short endof this, as it should.

(Id. at 6–7, emphasis added.)

Defendant NTL Europe moved for reconsideration of myApril 12, 2006 ruling requiring it to review and produceresponsive boxes of documents from non-party New

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NTL's warehouse. (02 Civ. 7377, Dkt. No. 31.) The Courtdenied reconsideration on the ground that defendant NTLEurope's counsel consented at the conference. (02 Civ.3013, Dkt. No. 100: 5/2/06 Order.) The Court rejecteddefendants' argument that the attorney at the conferencewas too junior to knowingly consent, stating: “Second-guessing a more junior attorney's representation to theCourt is not a basis for a firm to seek reconsideration. Itcertainly is not a basis for the Court to grant it.” (5/2/06Order at 2–3; see also 02 Civ. 3013, Dkt. No. 94: 4/25/06Conf. Tr. at 11–14.)

**13 Defendant NTL Europe filed objections to myApril 12 & 25, 2006 rulings and sought a stay fromJudge Kaplan. (02 Civ. 7377, Dkt. Nos. 37–38.) JudgeKaplan denied the stay. (02 Civ. 3013, Dkt. No. 98:5/3/06 Kaplan Order.) Judge Kaplan quoted from theDemerger Agreement and stated that “On the face ofit, then, there is a compelling case that New NTL isobliged to furnish [defendant NTL] Europe with whateverdocuments [NTL] Europe may request for purposes ofthis litigation.” (5/3/06 Kaplan Order at 4.) Judge Kaplancontinued:

To be sure, [defendant NTL] Europe makes a logic-chopping, circular argument: (1) it can be compelledto produce only documents in its possession, custodyor control, (2) it therefore has no legal obligation toproduce documents that are in the hands of New NTL,and (3) absent such a legal obligation, it has no powerto require [New NTL] to give it the documents. But theargument seems unlikely to prevail for a host of reasons.

To begin with, it is quite doubtful that the parties to the[Demerger] agreement intended such a crabbed reading.In view of the fact that New NTL has been producingdocuments in this action voluntarily, *191 the practiceof the parties clearly suggests a broader view.

More basically, Ms. Hardister [defendant NTLEurope's counsel] consented to the order in question.Thus, whatever might have been the case at the outset,[defendant NTL] Europe now is under a legal obligationto produce documents in the hands of New NTL. It isan obligation that it voluntarily assumed.

In any case, the argument is especially unappealing inview of the facts that [defendant NTL] Europe appearsto have adopted its present position at least in partout of pique and that it rather cavalierly allowed the

deadline fixed by Judge Peck to slide by, uncompliedwith, without making a serious effort to obtain a stay.

(5/3/06 Kaplan Order at 4–5.) Judge Kaplan thus denieda stay but deferred a definitive ruling on defendant NTLEurope's objections to allow for further briefing by theparties. (Id. at 5.)

Perhaps concerned about what that definitive rulingwould be based on Judge Kaplan's preliminary viewsexpressed in his May 3 Order, defendant NTL Europewithdrew its objections, reviewed the warehoused materialand produced responsive documents. (See 5/5/06 SchwartzLtr. to Court & Att. “Withdrawal of Objections.”)

ANALYSIS

I. AUTHORITY FOR IMPOSING SANCTIONS FORSPOLIATION[1] [2] “Spoliation is the destruction or significant

alteration of evidence, or the failure to preserve propertyfor another's use as evidence in pending or reasonablyforeseeable litigation.” West v. Goodyear Tire & Rubber

Co., 167 F.3d 776, 779 (2d Cir.1999). 9 “[T]he impositionof sanctions for spoliation has deep historic roots.”Pastorello v. City of New York, 2003 WL 1740606 at*7 (citing case from 1882). “A court has the authorityto impose sanctions on a party for spoliation and otherdiscovery misconduct under its inherent power to manageits own affairs or under Rule 37 of the Federal Rulesof Civil Procedure.” Phoenix Four, Inc. v. Strategic

Res. Corp., 2006 WL 1409413 at *3. 10 “Where a partyviolates a court order—either by destroying evidencewhen specifically directed to preserve it or by failing toproduce information when directed to do so because therelevant data have been destroyed—Rule 37(b) of theFederal Rules of Civil Procedure provides that the courtmay impose a range of sanctions, including dismissal orjudgment by default, preclusion of evidence, imposition ofan adverse inference, or assessment of attorneys' fees andcosts.” Chan v. Triple 8 Palace, Inc., 2005 WL 1925579 at

*4; Fed.R.Civ.P. 37(b). 11 “Indeed, ‘[e]ven though a *192party may have destroyed evidence prior to issuance ofthe discovery order and thus may be unable to obey,sanctions are still appropriate under Rule 37(b) becausethis inability was self-inflicted.’ ” Chan v. Triple 8 Palace,Inc., 2005 WL 1925579 at *4 (quoting Turner v. HudsonTransit Lines, Inc., 142 F.R.D. at 72). “Where the alleged

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discovery misconduct consists of the non-production ofevidence, a district court has broad discretion to fashionappropriate sanctions on a case-by-case basis.” PhoenixFour, Inc. v. Strategic Res. Corp., 2006 WL 1409413 at

*3. 12

9 Accord, e.g. Allstate Ins. Co. v. Hamilton Beach/Proctor Silex, Inc., 473 F.3d 450, 456–58 (2dCir.2007); Byrnie v. Town of Cromwell, 243 F.3d93, 107 (2d Cir.2001); Ispat Inland, Inc. v. KemperEnvtl., Ltd., 05 Civ. 5401, 2006 WL 3478339 at *3(S.D.N.Y. Nov.30, 2006); Lumbermens Mut. Cas. Co.v. Banco Espanol de Credito, S.A., 03 Civ. 5819,2006 WL 2987694 at *12 (S.D.N.Y. Oct.13, 2006);Buskey v. Boston Mkt. Corp., No. 04 CV 2193, 2006WL 2527826 at *7 (E.D.N.Y. Aug. 14, 2006); DoniniInt'l, S.P.A. v. Satec (U.S.A.) LLC, 03 Civ. 9471,2006 WL 695546 at *8 (S.D.N.Y. Mar.16, 2006);Phoenix Four, Inc. v. Strategic Res. Corp., 05 Civ.4837, 2006 WL 1409413 at *3 n. 6 (S.D.N.Y. May23, 2006); Chan v. Triple 8 Palace, Inc., 03 Civ. 6048,2005 WL 1925579 at *4 (S.D.N.Y. Aug.11, 2005);Zubulake v. UBS Warburg LLC, 229 F.R.D. 422, 430(S.D.N.Y.2004); Zubulake v. UBS Warburg LLC, 220F.R.D. 212, 216 (S.D.N.Y.2003); Pastorello v. Cityof New York, 95 Civ. 470, 2003 WL 1740606 at *7(S.D.N.Y. Apr.1, 2003), reconsideration denied, 2003WL 22118972 (S.D.N.Y. Sept.11, 2003).

10 Accord, e.g., Residential Funding Corp. v. DeGeorgeFin. Corp., 306 F.3d 99, 106–07 (2d Cir.2002); Reillyv. Natwest Mkts. Group Inc., 181 F.3d 253, 267 (2dCir.1999), cert. denied, 528 U.S. 1119, 120 S.Ct. 940,145 L.Ed.2d 818 (2000); West v. Goodyear Tire &Rubber Co., 167 F.3d at 779; L–3 Commc'ns Corp. v.OSI Sys., Inc., 02 Civ. 9144, 2006 WL 988143 at *13(S.D.N.Y. Apr.13, 2006); Donini Int'l, S.P.A. v. Satec(U.S.A.) LLC, 2006 WL 695546 at *8; Chan v. Triple8 Palace, Inc., 2005 WL 1925579 at *4; Zubulake v.UBS Warburg LLC, 229 F.R.D. at 430; Zubulakev. UBS Warburg LLC, 220 F.R.D. at 216; Metro.Opera Ass'n, Inc. v. Local 100, Hotel Employees &Rest. Employees Int'l Union, 212 F.R.D. 178, 219–20(S.D.N.Y.2003); Barsoum v. NYC Hous. Auth., 202F.R.D. 396, 399 (S.D.N.Y.2001); Turner v. HudsonTransit Lines, Inc., 142 F.R.D. 68, 72 (S.D.N.Y.1991).

11 See also, e.g., Residential Funding Corp. v. DeGeorgeFin. Corp., 306 F.3d at 106–07; Metro. Opera Ass'n,Inc. v. Local 100, Hotel Employees & Rest. EmployeesInt'l Union, 212 F.R.D. at 219–20.

12 See also, e.g., Residential Funding Corp. v. DeGeorgeFin. Corp., 306 F.3d at 107; Fujitsu Ltd. v. Fed.Express Corp., 247 F.3d 423, 436 (2d Cir.), cert.denied, 534 U.S. 891, 122 S.Ct. 206, 151 L.Ed.2d146 (2001); Experience Hendrix, LLC v. Chalpin, 461F.Supp.2d 165, 172 & n. 33 (S.D.N.Y.2006) (Kaplan,D.J.); Zubulake v. UBS Warburg LLC, 220 F.R.D.at 216; Metro. Opera Ass'n, Inc. v. Local 100, HotelEmployees & Rest. Employees Int'l Union, 212 F.R.D.at 219.

**14 “The sanctions imposed should serve the threefoldpurposes of deterring parties from engaging in spoliation,placing the risk of an erroneous judgment on the partywho wrongfully created the risk, and restoring theprejudiced party to the position it would have been inhad the misconduct not occurred.” Phoenix Four, Inc. v.

Strategic Res. Corp., 2006 WL 1409413 at *3. 13

13 Accord, e.g., Byrnie v. Town of Cromwell, 243 F.3dat 107; West v. Goodyear Tire & Rubber Co., 167F.3d at 779; see also, e.g., Kronisch v. United States,150 F.3d 112, 126 (2d Cir.1998); Lumbermens Mut.Cas. Co. v. Banco Espanol de Credito, S.A., 2006WL 2987694 at *12; Buskey v. Boston Mkt. Corp.,2006 WL 2527826 at *7; Pastorello v. City of NewYork, 2003 WL 1740606 at *8; Barsoum v. NYC Hous.Auth., 202 F.R.D. at 399; Turner v. Hudson TransitLines, Inc., 142 F.R.D. at 74.

II. PLAINTIFF'S MOTION FOR AN ADVERSEINFERENCE IS GRANTED

A. Legal Standard Governing Adverse InferenceInstructions

[3] “The spoliation of evidence germane ‘to proof of anissue at trial can support an inference that the evidencewould have been unfavorable to the party responsiblefor its destruction.’ ” Zubulake v. UBS Warburg LLC,220 F.R.D. 212, 216 (S.D.N.Y.2003) (quoting Kronisch v.United States, 150 F.3d 112, 126 (2d Cir.1998)).

[4] “An adverse inference instruction is a severe sanctionthat often has the effect of ending litigation because ‘itis too difficult a hurdle for the spoliator to overcome’ ...Accordingly, this sanction ‘should not be given lightly.’” Phoenix Four, Inc. v. Strategic Res. Corp., 2006 WL1409413 at *4 (citation omitted) (quoting Zubulake v. UBSWarburg LLC, 220 F.R.D. at 219–20); see also, e.g., Westv. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2dCir.1999).

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[5] “A party that seeks an adverse inference instructionfor destruction or late production of evidence must showthat: (i) the party having control over the evidence hadan obligation to preserve or timely produce it; (ii) theparty that destroyed or failed to timely produce evidencehad a ‘culpable state of mind’; and (iii) the missing ortardily produced evidence is ‘relevant’ to the party's claimor defense ‘such that a reasonable trier of fact could findthat it would support that claim or defense.’ ” PhoenixFour, Inc. v. Strategic Res. Corp., 05 Civ. 4837, 2006WL 1409413 at *4 (S.D.N.Y. May 23, 2006) (quotingResidential Funding Corp. v. DeGeorge Fin. Corp., 306

F.3d 99, 107 (2d Cir.2002)). 14

14 Accord, e.g., Byrnie v. Town of Cromwell, 243 F.3d 93,107–12 (2d Cir.2001); Kronisch v. United States, 150F.3d at 126–27; Experience Hendrix, LLC v. Chalpin,461 F.Supp.2d 165, 172 n. 33 (S.D.N.Y.2006)(Kaplan, D.J.); Rivera v. Nat'l Passenger R.R. Serv.,442 F.Supp.2d 164, 170 (S.D.N.Y.2006); Buskey v.Boston Mkt. Corp., No. 04 CV 2193, 2006 WL2527826 at *8 (E.D.N.Y. Aug. 14, 2006); L–3Commc'ns Corp. v. OSI Sys., Inc., 02 Civ. 9144,2006 WL 988143 at *13 (S.D.N.Y. Apr.13, 2006);Anderson v. Sotheby's Inc. Severance Plan, 04 Civ.8180, 2005 WL 2583715 at *3 (S.D.N.Y. Oct.11,2005); Chan v. Triple 8 Palace, Inc., 03 Civ. 6048,2005 WL 1925579 at *4 (S.D.N.Y. Aug.11, 2005);Zubulake v. UBS Warburg LLC, 229 F.R.D. 422,430 (S.D.N.Y.2004); Zubulake v. UBS Warburg LLC,220 F.R.D. at 220; Golia v. Leslie Fay Co., 01 Civ.1111, 2003 WL 21878788 at *9 (S.D.N.Y. Aug.7,2003); Pastorello v. City of New York, 95 Civ. 470,2003 WL 1740606 at *8–9 (S.D.N.Y. Apr.1, 2003),reconsideration denied, 2003 WL 22118972 (S.D.N.Y.Sept.11, 2003); Barsoum v. NYC Hous. Auth., 202F.R.D. 396, 399 (S.D.N.Y.2001).

*193 1. Duty to Preserve Evidence[6] [7] “In order for an adverse inference to arise from

the destruction of evidence, the party having control overthe evidence must have had an obligation to preserve itat the time it was destroyed. This obligation to preserveevidence arises when the party has notice that the evidenceis relevant to litigation—most commonly when suit hasalready been filed, providing the party responsible forthe destruction with express notice, but also on occasionin other circumstances, as for example when a partyshould have known that the evidence may be relevant to

future litigation.” Kronisch v. United States, 150 F.3d 112,

126 (2d Cir.1998). 15 “Identifying the boundaries of theduty to preserve involves two related inquiries: when doesthe duty to preserve attach, and what evidence must bepreserved?” Zubulake v. UBS Warburg LLC, 220 F.R.D.at 216; accord, e.g., Chan v. Triple 8 Palace, Inc., 2005WL 1925579 at *4. As Judge Scheindlin summarized inZubulake: “The scope of a party's preservation obligationcan be described as follows: Once a party reasonablyanticipates litigation, it must suspend its routine documentretention/destruction policy and put in place a ‘litigationhold’ to ensure the preservation of relevant documents.”Zubulake v. UBS Warburg LLC, 220 F.R.D. at 218.

15 Accord, e.g., Fujitsu Ltd. v. Fed. Express Corp., 247F.3d 423, 436 (2d Cir.), cert. denied, 534 U.S. 891,122 S.Ct. 206, 151 L.Ed.2d 146 (2001); Byrnie v. Townof Cromwell, 243 F.3d 93, 107 (2d Cir.2001); Quinbyv. WestLB AG, 04 Civ. 7406, 2006 WL 2597900at *8 (S.D.N.Y. Sept.5, 2006), amended on othergrounds, 2007 WL 38230 (S.D.N.Y. Jan.4, 2007);Phoenix Four, Inc. v. Strategic Res. Corp., 05 Civ.4837, 2006 WL 1409413 at *4 (S.D.N.Y. May 23,2006); Donini Int'l, S.P.A. v. Satec (U.S.A.) LLC,03 Civ. 9471, 2006 WL 695546 at *8 (S.D.N.Y.Mar.16, 2006); Treppel v. Biovail Corp., 233 F.R.D.363, 371 (S.D.N.Y.2006); Anderson v. Sotheby's Inc.Severance Plan, 04 Civ. 8180, 2005 WL 2583715at *3 (S.D.N.Y. Oct.11, 2005); Chan v. Triple8 Palace, Inc., 03 Civ. 6048, 2005 WL 1925579at *4 (S.D.N.Y. Aug.11, 2005); Zubulake v. UBSWarburg LLC, 220 F.R.D. 212, 216 (S.D.N.Y.2003);Pastorello v. City of New York, 95 Civ. 470, 2003 WL1740606 at *9 (S.D.N.Y. Apr.1, 2003), reconsiderationdenied, 2003 WL 22118972 (S.D.N.Y. Sept.11, 2003);Barsoum v. NYC Hous. Auth., 202 F.R.D. 396, 400(S.D.N.Y.2001); Turner v. Hudson Transit Lines, Inc.,142 F.R.D. 68, 72–73 (S.D.N.Y.1991).

a. When The Duty To Preserve Attached**15 The original class action securities fraud complaint

in this case was filed on April 18, 2002. (See 02 Civ.3013, Dkt. No. 1: Class Action Compl.) Therefore atleast by that date (if not before), defendants “reasonablyanticipated litigation” and were on notice at least bythat date that they had a duty to preserve evidencerelevant to the litigation. Indeed, defendants anticipatedlitigation even earlier than that, because Old NTL sent outdocument hold memoranda on March 13 and 14, 2002,alerting the employees who received it of “the obvious

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possibility that [NTL] may encounter a heightened risk oflitigious activity in the ongoing restructuring process.” (02Civ. 7377, Dkt. No. 29: 4/11/06 Hermann Aff. Ex. T,quoted on page 182 above.) Both of these dates are wellbefore Old NTL and its subsidiaries entered bankruptcyon May 8, 2002. (See 02 Civ. 7377, Dkt. No. 32: Def. NTLEurope Opp. Br. at 4.)

Consequently, the duty to preserve attached in March2002, or at the latest, on April 18, 2002. See, e.g.,Zubulake v. UBS Warburg LLC, 220 F.R.D. 212,217 (S.D.N.Y.2003) (“[T]he relevant people at UBSanticipated litigation in April 2001. The duty to preserveattached at the time that litigation was reasonably

anticipated.”). 16 Indeed, defendant NTL Europe hasconceded that the duty to preserve attached in March2002. (See 1/29/07 Oral Arg. Conf. Tr. at 3; see also 02 Civ.7377, Dkt. No. 52: 8/21/06 Def. NTL Europe Supp. Br.at 3.)

16 See also, e.g., Henkel Corp. v. Polyglass USA, Inc.,194 F.R.D. 454, 456 (E.D.N.Y.2000) (“At the latest,Henkel's duty to preserve the evidence attached onMarch 28, 1996, when Nolan asked Henkel to providehim with the purchase invoice of the Polybondmaterial to help identify the manufacturer. By thatdate, plaintiff had concluded that the Polybondmaterial was involved in causing the fire and clearlyknew that it was likely to commence litigation againstPolybond's manufacturer.”).

b. What Documents Should Have Been Preserved“A party or anticipated party must retain all relevantdocuments (but not multiple *194 identical copies) inexistence at the time the duty to preserve attaches, and anyrelevant documents created thereafter.” Zubulake v. UBSWarburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y.2003); seealso, e.g., Quinby v. WestLB AG, 245 F.R.D. 94, 103–04,2006 WL 2597900 at *9 (S.D.N.Y.2006), amended on othergrounds, 2007 WL 38230 (S.D.N.Y. Jan.4, 2007). Theduty to preserve extends “to any documents or tangiblethings (as defined by Rule 34(a) [including email] ) madeby individuals ‘likely to have discoverable informationthat the disclosing party may use to support its claims ordefenses.’ ” Zubulake v. UBS Warburg LLC, 220 F.R.D.at 217–18 (fn.omitted); see also, e.g., Quinby v. WestLBAG, 245 F.R.D. at 103–04, 2006 WL 2597900 at *9.Additionally,

The duty also includes documents prepared for thoseindividuals, to the extent those documents can bereadily identified (e.g., from the ‘to’ field in e-mails).The duty also extends to information that is relevant tothe claims or defenses of any party, or which is ‘relevantto the subject matter involved in the action.’ Thus, theduty to preserve extends to those employees likely tohave relevant information—the ‘key players' in the case.

Zubulake v. UBS Warburg LLC, 220 F.R.D. at218 (fns.omitted). As Judge Scheindlin summarizedin Zubulake, “[o]nce a party reasonably anticipateslitigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ toensure the preservation of relevant documents.” Zubulake

v. UBS Warburg LLC, 220 F.R.D. at 218. 17

17 See also, e.g., Quinby v. WestLB AG, 245 F.R.D.at 102–03, 2006 WL 2597900 at *8; Chan v. Triple8 Palace, Inc., 03 Civ. 6048, 2005 WL 1925579at *6 (S.D.N.Y. Aug.11, 2005); Convolve, Inc. v.Compaq Computer Corp., 223 F.R.D. 162, 176(S.D.N.Y.2004), modified on other grounds, 2005 WL1514284 (S.D.N.Y. June 24, 2005).

**16 Plaintiffs' complaints allege that Old NTL'sdirectors, officers and managers embarked on a seriesof poor management decisions that ultimately resultedin the company's entering into bankruptcy, but falselyreported to the public throughout the period before thebankruptcy that the company was in healthy financialcondition. (See 02 Civ. 3013, Dkt. Nos. 21, 25 & 28:Consolidated & Am. Compls.; 02 Civ. 7377, Dkt. No.1: Compl.) Therefore, the employees of Old NTL thatwere most likely to have relevant information were thedirectors, officers, managers and employees in charge offinancial decision making within the company, includingsubscriber integration and billing issues. (See page 186above.) Relevant documents would include any e-mailsbetween the directors, officers, managers and employeesregarding the company's financial condition. Indeed, NTLcannot argue that it did not know what documents andESI to preserve, since its document hold memo instructedemployees to “preserve all potentially relevant materialthat may exist (whether in paper or electronic format).Relevant materials may include sales data, ... financialstatements ... and any other documents (including drafts)relating to the business, assets, properties, condition(financial or otherwise), and results of operations of NTL

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or its affiliates at any time after April 1, 1999.” (02 Civ.7377, Dkt. No. 33: Schwarttz Aff. Ex. 5: 6/6/02 DocumentHold Memo, quoted more fully on page 183 above.)Therefore, NTL Europe had a duty to preserve all relevantdocuments including electronically stored information

from its “key players” that existed as of March 2002. 18

Although NTL sent out hold memos in March and June2002 (see pages 182–83 above), those hold memos werenot sufficient, since they subsequently were ignored byboth NTLs. See, e.g., Zubulake v. UBS Warburg LLC,229 F.R.D. 422, 432 (S.D.N.Y.2004) (“[I]t is not sufficientto notify *195 all employees of a litigation hold andexpect that the party will then retain and produce allrelevant information. Counsel must take affirmative stepsto monitor compliance so that all sources of discoverableinformation are identified and searched.”).

18 The preservation requirement includes allrelevant documents (including electronically storedinformation) that were “in existence” as of the timethat the duty to preserve attached (here, March 2002).Zubulake v. UBS Warburg LLC, 220 F.R.D. at 218.As of March 2002, NTL had in its possession relevantdocuments and electronically stored information thatdated at least back to 1999, because when individualdefendant Blumenthal requested copies of his e-mailsupon his departure in 2002, he received e-mails datedbetween March 16, 1999 and January 13, 2003,including the crucial year of 2001, which he laterproduced to plaintiffs in discovery. (See 02 Civ. 7377,Dkt. No. 53: 8/23/06 Pls. Supp. Br. at 3; 02 Civ. 7377,Dkt. No. 29: 11/11/06 Hermann Aff. ¶ 6.)

c. Defendant NTL Europe Had “Control” Over TheRelevant Documents

Defendant NTL Europe contends that, although it wasthe party designated after bankruptcy to continue asthe defendant in this case, it nevertheless did not have“control” over any documents or ESI relevant to plaintiffs'document requests because they were in non-party NewNTL's possession; therefore defendant NTL Europecontends that it was not responsible for any spoliationwhich may have happened since this case was filed. (See02 Civ. 7377, Dkt. No. 32: Def. NTL Europe Opp. Br. at12–13.)

Under Rule 34(a), parties may request from theiradversaries documents (including ESI) “which are in thepossession, custody or control of the party upon whomthe request is served.” Fed.R.Civ.P. 34(a). “The concept

of ‘control’ has been construed broadly.” In re FlagTelecom Holdings, Ltd. Sec. Litig., 236 F.R.D. 177, 180

(S.D.N.Y.2006). 19

19 Accord, e.g., Dietrich v. Bauer, 95 Civ. 7051, 2000WL 1171132 at *3 (S.D.N.Y. Aug.16, 2000), aff'don reconsideration, 198 F.R.D. 397 (S.D.N.Y.2001);M.L.C., Inc. v. N. Am. Philips Corp., 109 F.R.D. 134,136 (S.D.N.Y.1986).

**17 “ ‘The test for the production of documents iscontrol, not location.’ ” In re Flag Telecom Holdings, Ltd.Sec. Litig., 236 F.R.D. at 180 (quoting Marc Rich & Co.v. United States, 707 F.2d 663, 667 (2d Cir.), cert denied,463 U.S. 1215, 103 S.Ct. 3555, 77 L.Ed.2d 1400 (1983)).“Documents may be within the control of a party evenif they are located abroad.” In re Flag Telecom Holdings,

Ltd. Sec. Litig., 236 F.R.D. at 180. 20

20 Accord, e.g., Marc Rich & Co. v. United States, 707F.2d at 667; Dietrich v. Bauer, 2000 WL 1171132 at*2; Cooper Indus., Inc. v. British Aerospace, Inc., 102F.R.D. 918, 920 (S.D.N.Y.1984).

[8] Under Rule 34, “ ‘control’ does not requirethat the party have legal ownership or actual physicalpossession of the documents at issue; rather, documentsare considered to be under a party's control when thatparty has the right, authority, or practical ability toobtain the documents from a non-party to the action.”Bank of New York v. Meridien BIAO Bank TanzaniaLtd., 171 F.R.D. 135, 146–47 (S.D.N.Y.1997); see also,e.g., In re Flag Telecom Holdings, Ltd. Sec. Litig., 236F.R.D. at 180; Exp.-Imp. Bank of the United States v. AsiaPulp & Paper Co., 233 F.R.D. 338, 341 (S.D.N.Y.2005);Dietrich v. Bauer, 2000 WL 1171132 at *3 (“ ‘Control’has been construed broadly by the courts as the legalright, authority or practical ability to obtain the materialssought upon demand.”) (emphasis added); In re NASDAQMarket–Makers Antitrust Litig., 169 F.R.D. 493, 530(S.D.N.Y.1996); Golden Trade, S.r.L. v. Lee Apparel Co.,143 F.R.D. 514, 525 (S.D.N.Y.1992) (The courts have“interpreted Rule 34 to require production if the party hasthe practical ability to obtain the documents from another,irrespective of his legal entitlement to the documents.”)(emphasis added).

Here, defendant NTL Europe had both the legal “right”and certainly the “practical ability” to obtain the relevantdocuments from New NTL, and therefore had the

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necessary “control” of those documents to be able topreserve and produce them in this litigation, for threeseparate reasons:

First, the document sharing clause in the DemergerAgreement makes it clear that New NTL was to makeavailable to defendant NTL Europe any documents that itneeded to be able to comply with its legal obligations, suchas this lawsuit. (See 02 Civ. 7377, Dkt. No. 33: SchwartzAff. Ex. 12: Demerger Agmt. at 5, quoted at pages 181–

82 above.) 21 Moreover, defendant NTL Europe's CEOdemonstrated that NTL Europe had the simple “practicalability” to obtain *196 the relevant documents fromNew NTL; he testified that “[w]henever there was adocument that we needed [from New NTL] ..., we wouldcall [New NTL] and ask if they had it, and if they hadit, they'd send it.” (02 Civ. 7377, Dkt. No. 29: 4/11/06Hermann Aff. ¶ 12 & Ex. I: Brodsky Dep. 51–53, 54–55,61–62.) Based on these agreements and testimony, boththis Court and Judge Kaplan ruled on a “preliminary”basis that defendant NTL Europe had the legal and/orpractical ability to obtain documents (including e-mail)from New NTL. (See pages 189–91 above.) Nothing in thefurther briefing of the issue has changed the Court's view.Accordingly, the Court holds that defendant NTL Europehad “control” over documents and ESI at New NTL forthe purpose of this litigation.

21 The Transitional Services Agreement also providedthat New NTL was to give defendant NTL Europeany information and records that it needed for legalpurposes regarding “historic transactions,” whichwould also cover many, if not most, of the documentsresponsive to plaintiffs' document requests in thiscase. (Schwartz Aff. Ex. 4: Transitional ServicesAgmt. at 8, 33, quoted at pages 182–83 above.)

**18 Second, even if defendant NTL Europe and non-party New NTL had not been parties to the DemergerAgreement and Transitional Services Agreement, thisCourt finds that defendant NTL Europe still shouldbe held to have “control” over the relevant documentsand ESI possessed by New NTL for the purposes ofdocument production in this case, under the reasoningof the decision in Bank of New York v. Meridien BIAOBank Tanzania Ltd., 171 F.R.D. at 146–49. There, oneof the original defendants went through a bankruptcyreorganization and assigned its interests to a new party.When plaintiff requested documents from the defendantassignee, the assignee party declined to produce those

documents, stating that they were not in its possession,control or custody, and that plaintiff would have toget discovery from the now non-party assignor throughthe use of a third party subpoena. Id. The Court inBank of New York found that although the assigneeknew that the documents that it would need for the casewere in the assignor's possession, but for some reasondid not specifically obtain the explicit assurance that itcould obtain the documents, this should not affect theplaintiff's right to discovery in the case. Id. at 147–48. TheCourt noted that the “[t]reatment of both assignor andassignee as parties for discovery ... is proper when to dootherwise would frustrate discovery, regardless of whetherthis frustration is intentional or not ... Otherwise a litigantby contracting with a third party could nullify and evadethe rules of procedure.” Id. at 148 (internal quotations& citations omitted). The Court ultimately held that “[i]twould be patently unfair if [the assignee party] were able tocontinue to discover relevant information from [plaintiff]while relegating [plaintiff] to seek information from [theassignor] as a non-party,” and thus the Court orderedthe assignee party to “produce all documents relevantto the issues in this action” that were in the assignor'spossession. Id. at 149. In so holding, the Court alsonoted that the assignee party had demonstrated an abilityto retrieve critical documents from the assignor whenneeded, suggesting that the assignee party defendant hadthe requisite “practical ability” to obtain documents thatsatisfies the requirements of Rule 34. Id. at 146–47.

This Court finds the situation in this case analogous tothat in Bank of New York. Plaintiffs here filed their caseagainst Old NTL prior to its entry into bankruptcy. Uponemergence from bankruptcy, defendant NTL Europe wasassigned to be the entity to replace Old NTL in thelawsuit. Defendant NTL Europe's CEO testified thatNTL Europe had the practical ability to obtain anydocuments it needed from New NTL. Therefore, underBank of New York, even without the clear documentsharing provisions of the Demerger Agreement andTransitional Services Agreement, defendant NTL Europehad “control” over “Old NTL's” documents possessedby New NTL that were relevant to this lawsuit, andin any case, it would be patently unfair for defendantNTL Europe to benefit from the artificial separation ofentities that was created after the bankruptcy. See alsoIn re Flag Telecom Holdings, Ltd. Sec. Litig., 236 F.R.D.at 181–82 (holding that former executive of non-partycorporation had the requisite “control” over relevant

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documents possessed by the corporation because he hadthe “practical ability” to obtain the documents); Exp.-Imp. Bank of the United States v. Asia Pulp & PaperCo., 233 F.R.D. at 341–42 (holding that plaintiff bankhad the apparent practical ability to obtain relevantdocuments from its non-party former employee, or at thevery least, had to *197 ask its former employee for thedocuments “before asserting that they have no controlover documents in the former employees' possession.”);Dietrich v. Bauer, 2000 WL 1171132 at *3–4 (holding thatdefendant parent company had sufficient “control” overdocuments at non-party subsidiary company and orderingthat parent company was responsible for producingsubsidiary company's documents within ten days).

**19 There is, however, a third reason why NTLEurope can be sanctioned for failing to produce relevantdocuments and electronically stored information, even if(as it claims), it had no legal or practical ability to obtainthe documents and ESI from New NTL. Once the dutyto preserve material for litigation arises—as it did herein March 2002, before NTL emerged from bankruptcy—the party has a duty to initiate a “litigation hold”and preserve potentially responsive documents and ESI.See, e.g., Zubulake v. UBS Warburg LLC, 229 F.R.D.422, 433–34 (S.D.N.Y.2004). NTL initiated such a hold(or at least sent some hold memos to that effect). (Seepages 182–83 above). If defendant NTL Europe thereafterturned relevant “held” documents and ESI over to NewNTL without itself preserving (or insuring that New NTLwould preserve) such information for possible productionin this litigation, it failed in its obligation to preserverelevant material, and thus spoliated evidence (assuming

the other requirements for spoliation are met). 22 Thus,either the Demerger Agreement gave defendant NTLEurope the ability to obtain relevant documents andESI from New NTL, in which case it had sufficient“control” to be responsible to produce the material indiscovery, or if the Demerger Agreement did not givedefendant NTL Europe that right, then defendant NTLEurope failed to have a sufficient litigation hold in placeand therefore engaged in spoliation when it transferreddocuments to New NTL. See, e.g., Zubulake v. UBSWarburg LLC, 229 F.R.D. at 433–34 (“First, counselmust issue a ‘litigation hold’ at the outset of litigationor whenever litigation is reasonably anticipated. Thelitigation hold should be periodically re-issued ... Second,counsel should communicate directly with the ‘key players'in the litigation ... [T]he key players should be periodically

reminded that the preservation duty is still in place.”).Counsel for defendant NTL Europe conceded that NTLEurope did not take any action to ensure that New NTLwould preserve the documents and ESI that it receivedfrom NTL Europe after the bankruptcy. (1/29/07 Oral

Arg. Conf. Tr. at 13–14.) 23

22 The Court believes this further supports its, and JudgeKaplan's, interpretation of the Demerger Agreementas providing defendant NTL Europe with the abilityto obtain documents and ESI from New NTL.

23 At oral argument, counsel for defendant NTLEurope suggested that plaintiffs' counsel should havesought a preservation order at the very start of thelitigation to ensure that neither of the two NTLsthat emerged from bankruptcy spoliated evidence.(See 1/29/07 Oral Arg. Conf. Tr. at 9–12, citing Inre Nat'l Century Fin. Enters., Inc. Fin. Inv. Litig.,347 F.Supp.2d 538, 540–42 (S.D.Ohio 2004), & Inre Royal Ahold N.V. Sec. & Erisa Litig., 220 F.R.D.246, 249–52 (D.Md.2004).) The Court need notdecide whether, had plaintiffs (or defendant NTLEurope, for that matter) requested a preservationorder aimed at New NTL (or NTL Europe), sucha preservation order would have been granted. See,e.g., Treppel v. Biovail Corp., 233 F.R.D. 363, 370–73 (S.D.N.Y.2006) (discussing appropriate standardto determine whether to issue preservation order);Asset Value Fund Ltd. P'ship v. Find/Svp, Inc., 97Civ. 3977, 1997 WL 588885 at *1 (S.D.N.Y. Sept.19,1997) (Kaplan, D.J.). Defendant NTL Europe doesnot seriously contend that plaintiffs' failure to seeka preservation order should let defendant NTLEurope off the hook of its preservation obligations.Cf. Asset Value Fund Ltd. P'ship v. Find/Svp, Inc.,1997 WL 588885 at *1 (While declining to issuepreservation order to defendant's non-party affiliatethat had not been served with even a subpoena,Judge Kaplan noted that “knowing destruction ordisposal of evidence in the face [of] prospectivelitigation” carries serious consequences includingcriminal prosecution.).

For the reasons set forth above, defendant NTL Europehad “control” and thus a duty beginning in March 2002to preserve documents and ESI relevant to this litigation,even though most of those documents and ESI ended upin the physical possession of non-party New NTL.

2. Culpable State of Mind

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“The preservation obligation runs first to counsel,who has ‘a duty to advise his client of the type ofinformation potentially relevant *198 to the lawsuitand of the necessity of preventing its destruction.’ ”Chan v. Triple 8 Palace, Inc., 03 Civ. 6048, 2005 WL

1925579 at *6 (S.D.N.Y. Aug.11, 2005). 24 “Where theclient is a business, its managers, in turn, are responsiblefor conveying to the employees the requirements forpreserving evidence.” Chan v. Triple 8 Palace, Inc., 2005WL 1925579 at *6; Turner v. Hudson Transit Lines, Inc.,142 F.R.D. at 73.

24 See also, e.g., Fayemi v. Hambrecht & Quist, Inc.,174 F.R.D. 319, 326 (S.D.N.Y.1997); Pastorello v.City of New York, 95 Civ. 470, 2003 WL 1740606at *9 (S.D.N.Y. Apr.1, 2003), reconsideration denied,2003 WL 22118972 (S.D.N.Y. Sept.11, 2003); Turnerv. Hudson Transit Lines, Inc., 142 F.R.D. 68, 73(S.D.N.Y.1991).

**20 [9] “The ‘culpable state of mind’ requirementis satisfied in this circuit by a showing of ordinarynegligence.” Phoenix Four, Inc. v. Strategic Res. Corp., 05Civ. 4837, 2006 WL 1409413 at *4 (S.D.N.Y. May 23,

2006). 25

25 See also, e.g., Residential Funding Corp. v. DeGeorgeFin. Corp., 306 F.3d 99, 101, 108–09 (2d Cir.2002); L–3 Commc'ns Corp. v. OSI Sys., Inc., 02 Civ. 9144, 2006WL 988143 at *14 (S.D.N.Y. Apr.13, 2006); Andersonv. Sotheby's Inc. Severance Plan, 04 Civ. 5180, 2005WL 2583715 at *3 (S.D.N.Y. Oct.11, 2005); Chanv. Triple 8 Palace, Inc., 2005 WL 1925579 at *6;Zubulake v. UBS Warburg LLC, 229 F.R.D. 422, 431(S.D.N.Y.2004); Zubulake v. UBS Warburg LLC, 220F.R.D. 212, 220 (S.D.N.Y.2003).

Defendant NTL Europe's conduct demonstrates asufficiently culpable state of mind to warrant spoliationsanctions. While Old NTL circulated two documenthold memoranda to certain employees (see pages 182–83 above), many NTL employees never received thememoranda. Moreover, there is no evidence that eitherof the two NTLs ever reminded employees (especially atNew NTL) of the need to continue to preserve relevantdocuments and ESI. The evidence, in fact, is that noadequate litigation hold existed at the NTLs. In late 2002or early 2003, NTL's IT system was outsourced to IBM,which apparently did not have any document hold in placeat all. (See pages 184–85 above.) New NTL employeesalso received new computers at the time of the outsourcing

to IBM, and New NTL does not know whether any e-mails written on the old computers were saved or not.(See page 185 above.) Additionally, New NTL did notconvey any litigation hold instructions to IBM at the timeof the outsourcing. (See page 185 above.) More generally,defendant NTL Europe's counsel conceded that NTLEurope took no steps after bankruptcy to ensure that NewNTL personnel continued the litigation hold. (See 1/29/07Oral Arg. Conf. Tr. at 13–14.)

As a result, NTL Europe (through New NTL) was onlyable to produce e-mail files for thirteen out of fifty-sevenrequested current and former NTL employees who are the“key players” involved in plaintiffs' allegations. Counselfor non-party New NTL points out that “New NTLhas made significant and meaningful efforts to cooperatewith the Plaintiffs' discovery requests in a timely mannerconsistent with this Court's discovery deadlines.” (See 02Civ. 7377, Dkt. No. 34: New NTL Opp. Br. at 1, fn.

omitted.) 26 This suggests that if defendant NTL Europehad requested the relevant documents from New NTLin the beginning of the discovery process, New NTLwould have responded, as it was their duty to do, ina “timely manner” so as to help NTL Europe producethe documents and ESI to meet the discovery deadlinesand obligations in this case. However, NTL Europenever asked New NTL for documents and ESI responsiveto plaintiffs' document requests. Instead, NTL Europe'scounsel merely stated that it did not have any documentsor ESI to produce, insisted that plaintiffs subpoena non-party New NTL, and failed to advise the Court of theDemerger Agreement. (See pages 187, 189–90 above.)

26 While the Gordon plaintiffs seek spoliation and othersanctions against non-party New NTL, they havecited no authority for a spoliation instruction asto a non-party. In any event, the Court finds thatimposing a spoliation inference sanction and costsagainst defendant NTL Europe to be the appropriatesanction in this case; no separate sanction is or needbe imposed on non-party New NTL.

Consequently, the Court finds that NTL Europe's utterfailure to preserve documents and ESI relevant toplaintiffs' allegations in this case (and its failure to advisethe Court about the Demerger Agreement) to be at*199 least grossly negligent. See, e.g., Phoenix Four,

Inc. v. Strategic Res. Corp., 2006 WL 1409413 at *5–6 (defense counsel's failure to conduct a reasonable andtimely inspection of defendant's computers and servers,

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which resulted in late discovery and production of 200–300 boxes of documents, constituted gross negligence);Chan v. Triple 8 Palace, Inc., 2005 WL 1925579 at *7(“[T]he utter failure to establish any form of litigation holdat the outset of litigation is grossly negligent. That is whatoccurred here: the defendants systematically destroyedevidence because they had never been informed oftheir obligation to suspend normal document destructionpolicies.”); Zubulake v. UBS Warburg LLC, 220 F.R.D.212, 221 (S.D.N.Y.2003) (failure to preserve specific keyemployee's backup tapes that were particularly relevant toplaintiff's allegation was gross negligent if not reckless);Golia v. Leslie Fay Co., 01 Civ. 1111, 2003 WL 21878788at *8–9 (S.D.N.Y. Aug.7, 2003) (defendant's failure toprevent key employee from destroying documents at timeshe was terminated was “grossly negligent”); Pastorello v.City of New York, 2003 WL 1740606 at *11 (loss of dataresulting from unfamiliarity with record-keeping policyby the defendant employee responsible for preservingand producing document was grossly negligent). Thesecond requirement for imposition of an adverse inferenceinstruction therefore is met.

3. Relevance**21 “Finally, a party seeking sanctions for spoliation

must demonstrate that the evidence destroyed was‘relevant’ to its claims or defenses. At least where moresevere sanctions are at issue, this means that the movingparty must show that the lost information would havebeen favorable to it.” Chan v. Triple 8 Palace, Inc., 03Civ. 6048, 2005 WL 1925579 at *7 (S.D.N.Y. Aug.11,2005). “ ‘[R]elevant’ in this context means somethingmore than sufficiently probative to satisfy Rule 401 of theFederal Rules of Evidence. Rather, the party seeking anadverse inference must adduce sufficient evidence fromwhich a reasonable trier of fact could infer that ‘thedestroyed [or unavailable] evidence would have been ofthe nature alleged by the party affected by its destruction.’” Residential Funding Corp. v. DeGeorge Fin. Corp., 306F.3d 99, 108–09 (2d Cir.2002) (fn. omitted, brackets in

original). 27

27 See also, e.g., Byrnie v. Town of Cromwell, 243 F.3d93, 110 (2d Cir.2001); Kronisch v. United States, 150F.3d 112, 127 (2d Cir.1998); Rivera v. Nat'l PassengerR.R. Serv., 442 F.Supp.2d 164, 170 (S.D.N.Y.2006);L–3 Commc'ns Corp. v. OSI Sys., Inc., 02 Civ. 9144,

2006 WL 988143 at *14 (S.D.N.Y. Apr.13, 2006);Chan v. Triple 8 Palace, Inc., 2005 WL 1925579 at *6.

“Courts must take care not to ‘hold[ ] the prejudicedparty to too strict a standard of proof regarding thelikely contents of the destroyed [or unavailable] evidence,’because doing so ‘would subvert the ... purposes of theadverse inference, and would allow parties who have ...destroyed evidence to profit from that destruction.’ ”Residential Funding Corp. v. DeGeorge Fin. Corp., 306

F.3d at 109 (brackets in original). 28

28 Accord, e.g., Kronisch v. United States, 150 F.3d at128; Phoenix Four, Inc. v. Strategic Res. Corp., 05Civ. 4837, 2006 WL 1409413 at *4 (S.D.N.Y. May 23,2006); Golia v. Leslie Fay Co., 01 Civ. 1111, 2003 WL21878788 at *11 (S.D.N.Y. Aug.7, 2003).

“Where a party destroys evidence in bad faith, thatbad faith alone is sufficient circumstantial evidence fromwhich a reasonable fact finder could conclude thatthe missing evidence was unfavorable to that party.”Residential Funding Corp. v. DeGeorge Fin. Corp., 306

F.3d at 109. 29 “Similarly, a showing of gross negligencein the destruction or untimely production of evidencewill in some circumstances suffice, standing alone, tosupport a finding that the evidence was unfavorable tothe grossly negligent party.” Residential Funding Corp. v.

DeGeorge Fin. Corp., 306 F.3d at 109. 30 “Accordingly,*200 where a party seeking an adverse inference adduces

evidence that its opponent destroyed potential evidence(or otherwise rendered it unavailable) in bad faith orthrough gross negligence (satisfying the ‘culpable stateof mind’ factor), that same evidence of the opponent'sstate of mind will frequently also be sufficient to permita jury to conclude that the missing evidence is favorableto the party (satisfying the ‘relevance’ factor).” ResidentialFunding Corp. v. DeGeorge Fin. Corp., 306 F.3d at 109.

29 Accord, e.g., L–3 Commc'ns Corp. v. OSI Sys.,Inc., 2006 WL 988143 at *14; Phoenix Four, Inc.v. Strategic Res. Corp., 2006 WL 1409413 at *4;Anderson v. Sotheby's Inc. Severance Plan, 04 Civ.5180, 2005 WL 2583715 at *3 (S.D.N.Y. Oct. 11,2005); Chan v. Triple 8 Palace, Inc., 2005 WL 1925579at *8; Zubulake v. UBS Warburg LLC, 229 F.R.D.422, 431 (S.D.N.Y.2004).

30 Accord, e.g., Reilly v. Natwest Mkts. Group Inc., 181F.3d 253, 267–68 (2d Cir.1999), cert. denied, 528 U.S.1119, 120 S.Ct. 940, 145 L.Ed.2d 818 (2000); L–3

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Commc'ns Corp. v. OSI Sys., Inc., 2006 WL 988143at *14; Phoenix Four, Inc. v. Strategic Res. Corp.,2006 WL 1409413 at *4; Anderson v. Sotheby's Inc.Severance Plan, 2005 WL 2583715 at *3.

In the absence of bad faith or gross negligence by thealleged spoliator, the relevance element can be establishedif the moving party “submit[s] extrinsic evidence tendingto demonstrate that the missing evidence would havebeen favorable to it.” Chan v. Triple 8 Palace, Inc.,

2005 WL 1925579 at *8. 31 “For example, in Byrnie, theparty seeking the adverse inference established relevancethrough deposition testimony regarding the nature ofthe missing documents, which [the Second Circuit] heldwere likely ‘relevant’ for purposes of an adverse inferencein light of the opponent's shifting theory of the case.”Residential Funding Corp. v. DeGeorge Fin. Corp., 306F.3d at 109 (citing Byrnie v. Town of Cromwell, 243 F.3dat 109–10); accord, e.g., Chan v. Triple 8 Palace, Inc., 2005WL 1925579 at *8.

31 See also, e.g., Residential Funding Corp. v. DeGeorgeFin. Corp., 306 F.3d at 109; Byrnie v. Town ofCromwell, 243 F.3d at 110–11; Phoenix Four, Inc.v. Strategic Res. Corp., 2006 WL 1409413 at *4;Anderson v. Sotheby's Inc. Severance Plan, 2005 WL2583715 at *3; Zubulake v. UBS Warburg LLC, 229F.R.D. at 431.

**22 As discussed above, the Gordon plaintiffs havedemonstrated that defendant NTL Europe's failureto preserve documents and ESI relevant to plaintiffs'allegations was at a minimum grossly negligent. In lightof NTL Europe's failure to call the Demerger Agreementto the Court's attention, the Court could find bad faith,but it need not reach that issue. Thus, no extrinsic proofof relevance is necessary, and the Gordon plaintiffs areentitled to an adverse inference spoliation instruction.

Even if extrinsic proof of relevance were necessary, theGordon plaintiffs have supplied proof that the missingevidence was likely to have been favorable to them:The Gordon plaintiffs have submitted e-mails producedby individual defendant George Blumenthal, in whichthe company's financial strategies are discussed by itsdirectors, officers and managers, that tend to supportplaintiffs' allegations in this case. (See 02 Civ. 7377, Dkt.No. 29: 4/11/06 Hermann Aff. Ex. E: Blumenthal E-mails.)Moreover, defendant Blumenthal produced numerousadditional e-mails from the crucial year of 2001 thatdefendant NTL Europe failed to produce. (See page 183

above.) Thus, if NTL Europe were able to produce theforty-four key players' missing e-mails, those e-mails likelywould reveal similar information that would be helpful forthe prosecution of plaintiffs' case. See Phoenix Four, Inc.v. Strategic Res. Corp., 05 Civ. 4837, 2006 WL 1409413at *6 (S.D.N.Y. May 23, 2006) (plaintiff demonstratedthat documents deleted from server would be relevant toplaintiff's case by showing that similar evidence receivedfrom the server was supportive of plaintiff's centralclaims); Chan v. Triple 8 Palace, Inc., 2005 WL 1925579 at*9 (some evidence of records tending to prove plaintiffs'allegations enough to show relevance of other similarrecords that were destroyed, leading the court to imposean adverse inference sanction against defendants); Golia v.Leslie Fay Co., 01 Civ. 1111, 2003 WL 21878788 at *10–11 (S.D.N.Y. Aug.7, 2003) (plaintiffs demonstrated thatthe type of documents that were destroyed would haveprovided evidence pertinent to two central issues of thecase, and court found that a “jury could conclude that allof this evidence would have been favorable to plaintiffs,”leading the court to impose an adverse inference sanctionagainst defendants).

Therefore, the Gordon plaintiffs have shown that thedestroyed evidence was “relevant” to their allegations.

* * * * * *

[10] Because the Gordon plaintiffs have shown that NTLEurope had the duty to preserve documents and ESIrelevant to this *201 litigation as early as March 2002,that NTL Europe was at a minimum grossly negligentin allowing documents and ESI including the e-mails ofapproximately forty-four key players to be destroyed, andthat those e-mails were relevant to the Gordon plaintiffs'claims, the Gordon plaintiffs have demonstrated that anadverse inference instruction spoliation sanction against

defendant NTL Europe is warranted in this case. 32

32 Judge Kaplan will determine the precise wordingof the adverse inference applicable at trial whencrafting the jury charge. This Court will considerthe adverse inference when issuing its Reportand Recommendation on defendant NTL Europe'spending summary judgment motion.

III. THE GORDON PLAINTIFFS' MOTION FORMONETARY SANCTIONS IS GRANTED

In re NTL, Inc. Securities Litigation, 244 F.R.D. 179 (2007)

2007 WL 241344, 68 Fed.R.Serv.3d 1145

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**23 [11] The Gordon plaintiffs are also entitled toan award of the costs, including attorneys' fees, thatthey incurred in connection with this motion. “Sucha monetary award ‘may be appropriate to punish theoffending party for its actions or to deter [the] litigant'sconduct, sending the message that egregious conduct willnot be tolerated.’ ” Chan v. Triple 8 Palace, Inc., 03 Civ.6048, 2005 WL 1925579 at *10 (S.D.N.Y. Aug.11, 2005).“Furthermore, such an award serves the remedial purposeof making the opposing party whole for costs incurredas a result of the spoliator's wrongful conduct.” Chan

v. Triple 8 Palace, Inc., 2005 WL 1925579 at *10. 33 “‘[C]ompensable costs may arise either from the discoverynecessary to identify alternative sources of informationor from the investigation and litigation of the documentdestruction itself.’ ” Chan v. Triple 8 Palace, Inc., 2005WL 1925579 at *10; accord, e.g., Phoenix Four, Inc. v.Strategic Res. Corp., 05 Civ. 4837, 2006 WL 1409413 at *9(S.D.N.Y. May 23, 2006); Turner v. Hudson Transit Lines,

Inc., 142 F.R.D. at 78–79. 34

33 Accord, e.g., Pastorello v. City of New York, 95 Civ.470, 2003 WL 1740606 at *13 (S.D.N.Y. Apr.1, 2003),reconsideration denied, 2003 WL 22118972 (S.D.N.Y.Sept.11, 2003); Turner v. Hudson Transit Lines, Inc.,142 F.R.D. 68, 78–79 (S.D.N.Y.1991).

34 “When the misconduct is late production of evidence,compensable costs may also arise from the need tore-depose witnesses.” Phoenix Four, Inc. v. StrategicRes. Corp., 2006 WL 1409413 at *9; accord, e.g.,Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 222(S.D.N.Y.2003).

There is no question that e-mails and documents thatdefendant NTL Europe should have produced to plaintiffswere destroyed. Therefore, NTL Europe is ordered toreimburse the Gordon plaintiffs for costs and attorneys'fees (but not class counsel's attorneys' fees) associatedwith bringing this motion. See also, e.g., Zubulake v.

UBS Warburg LLC, 229 F.R.D. 422, 437 (S.D.N.Y.2004)(ordering adverse inference instruction and imposing costsof the motion); Pastorello v. City of New York, 2003 WL1740606 at *13 (awarding costs and attorneys' fees as wellas an adverse inference instruction); Turner v. HudsonTransit Lines, Inc., 142 F.R.D. at 78 (awarding attorneys'fees because defendant's destruction of documents caused“plaintiff to expend time and effort in attempting totrack down the relevant information. It then caused theexpenditure of additional resources by misleading theplaintiff and the Court ...”). In addition, defendant NTLEurope's evasion of its discovery obligations requiredplaintiffs to pursue New NTL, and further requiredplaintiffs to take depositions, including the depositionsof Jeffrey Brodsky, David Bond, and George Bernet, inorder to understand the two NTLs' document and ESIretention and destruction policies. The Gordon plaintiffsare entitled to their attorneys' fees for all of this.

The Gordon plaintiffs shall provide defendant NTLEurope with its proposed fee request, and the parties shalltry to agree on the appropriate reimbursement amount.Failing agreement, the Gordon plaintiffs are to submit afee application to the Court promptly.

CONCLUSION

For the reasons set forth above, the Court grantsthe Gordon plaintiffs' motion and awards an adverseinference spoliation sanction, *202 plus attorneys' fees inan amount to be determined.

SO ORDERED.

All Citations

244 F.R.D. 179, 2007 WL 241344, 68 Fed.R.Serv.3d 1145

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Klay v. All Defendants, 425 F.3d 977 (2005)

18 Fla. L. Weekly Fed. C 965

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1

425 F.3d 977United States Court of Appeals,

Eleventh Circuit.

Leonard J. KLAY, M.D., et al., Plaintiffs,v.

ALL DEFENDANTS, et al., Defendants,Humana, Inc., Humana Insurance Company,Coventry Health Care of Georgia, Inc., f.k.a.

Principal Health Care of Georgia, Inc., UnitedHealthcare of Florida, Inc., Health Net, Inc., f.k.a.Foundation Health, et al., Defendants–Appellees,

American Medical Association, Appellant.

No. 04–13062.|

Sept. 16, 2005.

SynopsisBackground: Subscribers to health maintenanceorganizations (HMOs) brought suits alleging that HMOssystematically underpaid for health care services renderedby plaintiffs. Nonparty American Medical Association(AMA), which had been compelled by defendants,by subpoena, to produce confidential data concerningphysicians' income and medical practices, sought paymentof the license fee that it ordinarily charged for itsreports. The United States District Court for the SouthernDistrict of Florida, No. 00-01334-MD-FAM, Federico A.Moreno, J., ordered defendants to pay the AMA only itsproduction costs, and the AMA appealed.

Holdings: The Court of Appeals, Pryor, Circuit Judge,held that:

[1] subsection of federal rule governing the protectionof persons subject to subpoenas requires reasonablecompensation for the production of confidential material;

[2] under the subject rule, the measure of compensationreasonably owed to the owner of confidential informationis the loss to the owner caused by the production of thematerial, not the gain to the party seeking the information;and

[3] addressing an issue of apparent first impression,because the AMA suffered no loss in the value of itsproperty from its compliance with the subpoena, onthe conditions provided by the order of production andprotective order, the district court did not abuse itsdiscretion when it required defendants to pay the AMA itsproduction costs, but not the license fee for the data.

Affirmed.

West Headnotes (16)

[1] Federal Civil ProcedureDiscretion of Court

170A Federal Civil Procedure170AX Depositions and Discovery170AX(A) In General170Ak1267 Discretion of Court170Ak1267.1 In general

District court is entitled to broad discretionin managing pretrial discovery matters,including the allocation of costs in discovery.

30 Cases that cite this headnote

[2] Federal CourtsProcedural Matters

170B Federal Courts170BXVII Courts of Appeals170BXVII(K) Scope and Extent of Review170BXVII(K)2 Standard of Review170Bk3576 Procedural Matters170Bk3577 In general

(Formerly 170Bk776)

Interpretation of term as used in the FederalRules of Civil Procedures was a question oflaw that the Court of Appeals reviewed denovo.

1 Cases that cite this headnote

[3] Federal CourtsJudgment

170B Federal Courts170BXVII Courts of Appeals170BXVII(K) Scope and Extent of Review170BXVII(K)2 Standard of Review

Klay v. All Defendants, 425 F.3d 977 (2005)

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170Bk3576 Procedural Matters170Bk3604 Judgment170Bk3604(1) In general

(Formerly 170Bk813)

So long as the district court's interpretationof the Federal Rules of Civil Procedure wascorrect and the record contained evidenceupon which the court rationally could havebased its decision, the ruling of the court hadto be affirmed.

2 Cases that cite this headnote

[4] WitnessesSubpoena

WitnessesSubpoena duces tecum

410 Witnesses410I In General410k7 Subpoena410k8 In general410 Witnesses410I In General410k16 Subpoena duces tecum

Subsection of federal rule governing theprotection of persons subject to subpoenas isintended to prevent abuse of the subpoenapower and requires that a district court protectthe property rights of the person subject to thesubpoena. Fed.Rules Civ.Proc.Rule 45(c), 28U.S.C.A.

1 Cases that cite this headnote

[5] Privileged Communications andConfidentiality

Trade secrets; commercial information

WitnessesApplication and proceedings thereon

WitnessesSubpoena duces tecum

311H Privileged Communications andConfidentiality311HVII Other Privileges311Hk402 Trade secrets; commercialinformation410 Witnesses410I In General410k7 Subpoena

410k9 Application and proceedings thereon410 Witnesses410I In General410k16 Subpoena duces tecum

District court has options to address theeffects of a subpoena that requires thedisclosure of a trade secret or otherconfidential information: the court may eitherquash or modify the subpoena, or the courtmay order appearance or production uponspecified conditions. Fed.Rules Civ.Proc.Rule45(c)(3)(B)(i), 28 U.S.C.A.

2 Cases that cite this headnote

[6] Privileged Communications andConfidentiality

Trade secrets; commercial information

311H Privileged Communications andConfidentiality311HVII Other Privileges311Hk402 Trade secrets; commercialinformation

(Formerly 410k16)

When a district court orders the productionof a trade secret or other confidentialinformation pursuant to a subpoena, thecourt must make two determinations: (1)whether the party who seeks that materialhas a substantial need for the testimony ormaterial that cannot be otherwise met withoutundue hardship, and (2) the reasonablecompensation owed to the person subject tothe subpoena. Fed.Rules Civ.Proc.Rule 45(c)(3)(B)(i), 28 U.S.C.A.

5 Cases that cite this headnote

[7] WitnessesCompensation

410 Witnesses410I In General410k23 Compensation410k24 In general

Subsection of federal rule governingthe protection of persons subject tosubpoenas requires reasonable compensationfor the production of confidential material.

Klay v. All Defendants, 425 F.3d 977 (2005)

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Fed.Rules Civ.Proc.Rule 45(c)(3)(B)(i), 28U.S.C.A.

Cases that cite this headnote

[8] WitnessesAmount in general

410 Witnesses410I In General410k23 Compensation410k27 Amount in general

Although, as used in subsection of federal rulegoverning the protection of persons subject tosubpoenas, term “reasonable compensation”may require more than reimbursement for thecosts of production, it need not always be so;the term is both broad and flexible. Fed.RulesCiv.Proc.Rule 45(c)(3)(B)(i), 28 U.S.C.A.

1 Cases that cite this headnote

[9] WitnessesSubpoena

WitnessesSubpoena duces tecum

410 Witnesses410I In General410k7 Subpoena410k8 In general410 Witnesses410I In General410k16 Subpoena duces tecum

Drafters of subsection of federal rulegoverning the protection of persons subjectto subpoenas intended to protect personssubject to a subpoena from both unnecessaryexpense and unwarranted or unduly harmfuldisclosures of confidential information, andalso sought to prevent the uncompensatedtaking of intellectual property. Fed.RulesCiv.Proc.Rule 45(c)(3)(B), 28 U.S.C.A.

1 Cases that cite this headnote

[10] WitnessesCompensation

410 Witnesses410I In General410k23 Compensation

410k24 In general

Compensation is required when compliancewith a subpoena causes an actual propertyloss, such as when an expert witness isforced to testify and consequently loses hisor her bargaining power relative to the partyseeking the witness's testimony. Fed.RulesCiv.Proc.Rule 45(c)(3)(B), 28 U.S.C.A.

1 Cases that cite this headnote

[11] Eminent DomainNecessity of just or full compensation or

indemnity

148 Eminent Domain148II Compensation148II(C) Measure and Amount148k122 Necessity of just or full compensationor indemnity

In a taking of real property, just compensationis determined by the loss to the person whoseproperty is taken. U.S.C.A. Const.Amend. 5.

Cases that cite this headnote

[12] Eminent DomainNecessity of just or full compensation or

indemnity

148 Eminent Domain148II Compensation148II(C) Measure and Amount148k122 Necessity of just or full compensationor indemnity

In a taking of real property, as in the lawof remedies, an aggrieved party should beput in as good a position as he was inbefore the wrong, but not better. U.S.C.A.Const.Amend. 5.

Cases that cite this headnote

[13] Eminent DomainValue of land

148 Eminent Domain148II Compensation148II(C) Measure and Amount148k129 Taking Entire Tract or Piece ofProperty148k131 Value of land

Klay v. All Defendants, 425 F.3d 977 (2005)

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Measure of the compensation owed in atakings case depends on the nature of theproperty; in an ordinary takings case, oneparty's gain directly corresponds to anotherparty's loss, but if property is “nonrivalrous,”that is, one party's use of the property does notnecessarily diminish the use and enjoyment ofothers, compensation for the nonrivalrous useof the property will ordinarily be limited to themarginal cost incurred by that use. U.S.C.A.Const.Amend. 5.

2 Cases that cite this headnote

[14] WitnessesAmount in general

410 Witnesses410I In General410k23 Compensation410k27 Amount in general

Under subsection of federal rule governing theprotection of persons subject to subpoenas,the measure of compensation reasonablyowed to the owner of confidential informationis the loss to the owner caused by theproduction of the material, not the gain tothe party seeking the information; thus, ifthe enforcement of a subpoena under thatrule causes no loss, then the amount ofcompensation reasonably owed will be zero,but if the loss to the owner of the informationis substantial, then so will be the amountof compensation even if the gain to thetaker of the information is slight. Fed.RulesCiv.Proc.Rule 45(c)(3)(B), 28 U.S.C.A.

3 Cases that cite this headnote

[15] WitnessesAmount in general

410 Witnesses410I In General410k23 Compensation410k27 Amount in general

Where, in lawsuit brought by subscribers tohealth maintenance organizations (HMOs)against HMOs, nonparty American MedicalAssociation (AMA) had been compelledby defendants, by subpoena, to produce

confidential data concerning physicians'income and medical practices, the districtcourt did not abuse its discretion in requiringdefendants to pay the AMA its productioncosts, but not the license fee that it ordinarilycharged for the data; order of productionand protective order issued by districtcourt designated the material as “highlyconfidential” and strictly limited the HMOs'use of the data, restricting its disclosure toHMOs' outside counsel, independent retainedexperts, and other litigation personnel, andbecause of these strict limitations, the AMAsuffered no loss in the commercial value ofits intellectual property from its compliancewith the subpoena, as it remained free tosell the property at its market price toany willing buyers, including the HMOs.Fed.Rules Civ.Proc.Rule 45(c)(3)(B)(i), 28U.S.C.A.

8 Cases that cite this headnote

[16] WitnessesPersons Who May Be Required to

Appear and Testify

410 Witnesses410I In General410k3 Persons Who May Be Required toAppear and Testify410k4 In general

There is a fundamental responsibility of everyperson to give testimony, and this duty toprovide evidence has long been considered tobe almost absolute.

1 Cases that cite this headnote

Attorneys and Law Firms

*980 Jack R. Bierig, Sidley, Austin, Brown & Wood,LLP, Chicago, IL, for Appellant.

K. Lee Blalack, II, Brian P. Brooks, Roger A. Fairfax, Jr.,O'Melveny & Myers, LLP, Washington, DC, Nicholas J.Pappas, Weil, Gotshal & Manges, LLP, New York City,Edward Soto, Weil, Gotshal & Manges, LLP, Miami, FL,

Klay v. All Defendants, 425 F.3d 977 (2005)

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Gregory S. Coleman, Weil, Gotshal & Manges, Austin,TX, for Appellees.

Appeal from the United States District Court for theSouthern District of Florida.

Before TJOFLAT, PRYOR and ALARCÓN * , CircuitJudges.

* Honorable Arthur L. Alarcón, United States CircuitJudge for the Ninth Circuit, sitting by designation.

Opinion

PRYOR, Circuit Judge:

This appeal presents an issue of first impression: whetherthe requirement of reasonable compensation in FederalRule of Civil Procedure 45(c)(3)(B) obliges a party that hascompelled, by subpoena, the production of confidentialdata to pay a license fee for the data, even though thedistrict court, by protective order, limited the use of thedata to litigation purposes, avoided any diminution ofthe value of the data, and required the payment of theproduction costs of the data. The American MedicalAssociation, a nonparty, was commanded to produce itsannual reports regarding physicians' income and medicalpractices and the underlying data for those reports. Thedefendants, including many of the largest managed healthcare providers in the nation, sought that material todefend against the plaintiffs' complaint, which relied inpart upon the AMA data. The AMA contends that itwas entitled to the license fee it ordinarily charges for itsreports. We conclude that the district court did not abuseits discretion when it required the managed care providersto pay the AMA only its production costs, because theAMA did not suffer a loss in the value of its property.

I. BACKGROUND

In the class action that led to this appeal, numerousphysicians and independent physicians' associations suedmany of the nation's largest managed care providers andalleged that the managed care providers systematicallyunderpaid for health care services rendered by theplaintiffs. See Klay v. Humana, Inc., 382 F.3d 1241,1246 (11th Cir.2004). During discovery, the managed careproviders served the physicians with an interrogatory thatrequired the physicians to identify all evidence supporting

their allegations of a racketeering conspiracy by themanaged *981 care providers. In their answer to thatinterrogatory, the physicians identified reports of statisticscompiled by the AMA that purported to show thatphysicians' income declined during the class period as aresult of actions of the managed care providers.

The reports, for which the physicians paid a license fee,were outlines of survey data compiled during “large scalesocio-economic surveys of physicians” conducted by theAMA over fifteen years. From 1986 to 2000, the AMAreferred to the surveys as the “Socioeconomic MonitoringSystem Core Surveys,” and from 2002 to the present, theAMA entitled the surveys the “Patient Care PhysicianSurvey.” The reports of those surveys, referred to as the“Product Release Data,” include information regardingphysicians' net income from medical practice, expenses,working hours, and the type and number of managed carecontracts.

The AMA uses the data for internal purposes and licensesthe data to any person or corporation willing to pay thelicense fee. The AMA charges for-profit entities $13,000per year and non-profit entities $6500 per year for theProduct Release Data, and the AMA requires licensees tosign an agreement “that the data cannot be disseminatedto or used by persons other than the licensee without theconsent of the AMA.” If the AMA did not protect itsconfidentiality, the data would lose its commercial value.

After the physicians identified the Product Release Data,the managed care providers served a subpoena on theAMA for both the Product Release Data and the “Non–Aggregated Raw Data” that underlay the reports. TheAMA objected to the subpoena, under Rule 45(c)(3)(B), on the ground that the managed care providers didnot show a “substantial need” for the data. The AMAalso stated that the confidential nature of the data wasthreatened by the subpoena, particularly because themanaged care providers sought not only the ProductRelease Data, but the Non–Aggregated Raw Data, whichthe AMA stated had never been released outside ofthe AMA. The AMA argued alternatively that, if thesubpoena was enforced, the managed care companiesshould pay the ordinary license fee paid by for-profitentities for all years of the Product Release Data listed inthe subpoena, for a total of $195,000.

Klay v. All Defendants, 425 F.3d 977 (2005)

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The district court referred the dispute to a Special Master,who recommended that the subpoena be enforced,because the managed care providers had established, asrequired by Rule 45(c)(3)(B), a substantial need for thedata that could not be otherwise met without unduehardship. The Special Master also recommended that theAMA “be reimbursed for expenses incurred in its effortsto comply with the subpoena,” but that the demand of theAMA for the license fee be denied. The Special Masterexplained that it was unreasonable to expect “a litigantwho has no profit motive whatsoever in possessing theinformation” to pay the license fee. Over the objectionof the AMA, the district court adopted the report andrecommendation of the Special Master.

Under the “Amended Protective Order GoverningProtected Material Other Than Confidential HealthInformation,” which had been entered by the districtcourt in the underlying managed care litigation, the AMAdesignated the data as “highly confidential,” which couldbe disclosed only to the managed care providers' outsidecounsel, independent retained experts, and other litigationpersonnel. Officials of the managed care providers werenot allowed to view the material in any manner. Inaddition, the attorneys and experts for the managed careproviders were not permitted *982 to use the material“for any purpose other than the prosecution or defense ofthis litigation.” With these significant restrictions in place,the AMA produced the data.

II. STANDARD OF REVIEW

[1] [2] [3] A district court is “entitled to broaddiscretion in managing pretrial discovery matters.” Perezv. Miami–Dade County, 297 F.3d 1255, 1263 (11thCir.2002). Although the court has substantial discretion inthe allocation of costs in discovery, see Tilton v. CapitalCities/ABC, Inc., 115 F.3d 1471, 1475 (10th Cir.1997), theinterpretation of the term “reasonable compensation” inRule 45(c)(3)(B) is a question of law that we review denovo. Silvious v. Pharaon, 54 F.3d 697, 700 (11th Cir.1995)(per curiam). So long as the interpretation of Rule 45(c)(3)(B) was correct and the record contains evidence uponwhich the district court “rationally could have basedits decision,” Ariel v. Jones, 693 F.2d 1058, 1060 (11thCir.1982) (per curiam), the ruling of the district court mustbe affirmed.

III. DISCUSSION

The AMA and the managed care companies presentarguments in stark opposition regarding the meaning ofRule 45(c)(3)(B). The AMA contends that the “languageand syntax” of Rule 45(c)(3)(B) requires that the AMAbe “fairly compensated” for the value of the intellectualproperty subject to the subpoena, in addition to thecosts of production. The AMA argues that Rule 45(c)(3)(B) is broader than Rule 45(c)(2)(B), which requiresa party seeking to enforce a subpoena to pay the costsof producing the material. The AMA also argues thatthe Advisory Committee Notes to the 1991 Amendments,which added subdivision (c) to the current Rule 45, showthat Rule 45(c)(3)(B) prohibits the “taking of intellectualproperty” in litigation through the use of the subpoenapower.

The managed care providers contend that Rule 45 isintended to protect the confidentiality of intellectualproperty and avoid undue costs and burdens fromcompliance with a subpoena. The managed care providerscontend that the district court protected both of thoseinterests through its stringent protective order andrequirement that the managed care providers bear thecosts of producing the data subject to the subpoena. Themanaged care providers also contend that nothing in thelanguage, structure, or purpose of Rule 45 supports theposition of the AMA.

This discussion is divided into three parts. We begin withan examination of the text of Rule 45(c)(3)(B) to determinewhether the enforcement of a subpoena for confidentialdata requires the payment of reasonable compensation.We then examine the meaning of the term “reasonablecompensation” in Rule 45(c)(3)(B). Finally, we examinewhether the district court abused its discretion when itlimited the compensation owed the AMA to the costs ofproducing the data.

A. Rule 45(c)(3)(B)(i) RequiresReasonable Compensation for the

Production of Confidential Material.

[4] We begin, as we must, with the text of the Rule.Federal Rule of Civil Procedure 45 governs the manner inwhich parties may obtain evidence by subpoena. Entitled

Klay v. All Defendants, 425 F.3d 977 (2005)

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“Protection of Persons Subject to Subpoenas,” Rule 45(c)is intended to prevent abuse of the subpoena power andrequires that a district court protect the property rights ofthe person subject to the subpoena:

If a subpoena

*983 (i) requires disclosure of a trade secret or otherconfidential research, development, or commercialinformation, or

(ii) requires disclosure of an unretained expert'sopinion or information not describing specific eventsor occurrences in dispute and resulting from theexpert's study made not at the request of any party, or

(iii) requires a person who is not a party or an officerof a party to incur substantial expense to travel morethan 100 miles to attend trial,

the court may, to protect a person subject to or affectedby the subpoena, quash or modify the subpoena or,if the party in whose behalf the subpoena is issuedshows a substantial need for the testimony or materialthat cannot be otherwise met without undue hardshipand assures that the person to whom the subpoenais addressed will be reasonably compensated, thecourt may order appearance or production only uponspecified conditions.

Fed.R.Civ.P. 45(c)(3)(B).

[5] A district court has a few options to address theeffects of a subpoena that requires the disclosure ofa trade secret or other confidential information underSubdivision (i). The district court may either quash ormodify the subpoena, and the district court “may orderappearance or production ... upon specified conditions.”Id. In this appeal, the district court chose the latter of thesealternatives.

[6] When a district court orders the production ofmaterial under Subdivision (i), the plain language ofthe Rule requires the district court to make twodeterminations: (1) whether the party who seeks thatmaterial has “a substantial need for the testimony ormaterial that cannot be otherwise met without unduehardship”; and (2) the reasonable compensation owed tothe person subject to the subpoena. Fed.R.Civ.P. 45(c)(3)(B). The parties do not dispute that the managed careproviders established a substantial need for the data that

could not otherwise be met without undue hardship. Theirdispute is about the ruling on reasonable compensation.

[7] Before we turn from the text of the Rule, we mustaddress an argument for a narrower construction of theobligation for reasonable compensation. The managedcare providers erroneously argue that the AdvisoryCommittee Notes to Rule 45(c)(3)(B) establish that therequirement of reasonable compensation does not applyto Subdivision (i), because the Notes refer only to thecompensation of expert witnesses and nonparty witnessesburdened by lengthy travel. The problem with thisargument is that the text of the Rule, not the Notes,governs.

If the drafters did not intend for the reasonablecompensation requirement to apply to Subdivision (i),then they would have placed the reasonable compensationlanguage within Subdivisions (ii) and (iii), instead ofwithin the final paragraph following all three subdivisions.The drafters did not do so. According to the plainlanguage of the Rule, reasonable compensation mustaccompany the disclosure of confidential research,because all three subdivisions of Rule 45(c)(3)(B) aresubject to that requirement.

B. Rule 45(c)(3)(B)(i) Requires ReasonableCompensation for a Loss Caused by the

Production of Confidential Material.

We turn next to the meaning of reasonable compensationin Rule 45(c)(3)(B)(i), which includes more thaninspection and copying costs. As the AMA correctlyargues, the drafters of Rule 45(c) knew the differencebetween costs of production and *984 other formsof compensation. Subdivision (c)(2)(B) of Rule 45, forexample, states that an order to compel production “shallprotect any person who is not a party or an officerof a party from significant expense resulting from theinspection and copying commanded.” Fed.R.Civ.P. 45(c)(2)(B). The drafters of Rule 45 could have used thatnarrower language in Subdivision (c)(3)(B) had theyintended to limit compensation to the costs of production.

[8] [9] Although reasonable compensation mayrequire more than reimbursement for the costs ofproduction, it need not always be so. The term“reasonable compensation” is both broad and flexible.

Klay v. All Defendants, 425 F.3d 977 (2005)

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As the Advisory Committee Notes explain, the draftersof Rule 45(c)(3)(B) intended to protect personssubject to a subpoena from both unnecessary expenseand unwarranted or unduly harmful disclosures ofconfidential information. If the only compensationreasonably owed is the cost of production, then Rule 45(c)(3)(B) requires no more.

The Advisory Committee Notes also establish thatthe drafters of Rule 45(c)(3)(B) sought to preventthe uncompensated taking of intellectual property. Thecomments to Subdivision (c)(3)(B)(ii), for example, reflectthe concern of the drafters that the subpoena power couldbe used to deprive expert witnesses of the opportunity tobargain for the value of their services:

Clause (c)(3)(B)(ii) providesappropriate protection for theintellectual property of the non-party witness .... A growing problemhas been the use of subpoenasto compel the giving of evidenceand information by unretainedexperts. Experts are not exemptfrom the duty to give evidence,even if they cannot be compelled toprepare themselves to give effectivetestimony ..., but compulsion togive evidence may threaten theintellectual property of expertsdenied the opportunity to bargainfor the value of their services ....Arguably the compulsion to testifycan be regarded as a “taking”of intellectual property. The ruleestablishes the right of such personsto withhold their expertise, atleast unless the party seeking itmakes the kind of showing requiredfor a conditional denial of amotion to quash as provided inthe final sentence of subparagraph(c)(3)(B); that requirement is thesame as that necessary to securework product under Rule 26(b)(3)and gives assurance of reasonablecompensation ....

Fed.R.Civ.P. 45(c)(3)(B)(ii) advisory committee's note.Although Subdivision (c)(3)(B)(i) does not concern expert

testimony, the comments to Subdivision (c)(3)(B)(ii) areillustrative.

Describing the effects of a subpoena under Subdivision (c)(3)(B)(ii) as a taking of intellectual property is consistentwith the language of Rule 45(c)(3)(B) as a whole. Rule45(c)(3)(B) requires reasonable compensation for certainforced uses of property owned by the person served withthe subpoena. The question before us is the measureof compensation for a forced disclosure of confidentialintellectual property.

[10] Ordinarily compensation in law means the“[p]ayment of damages, or any other act that a courtorders to be done by a person who has caused injuryto another and must therefore make the other whole.”Black's Law Dictionary 277 (7th ed.1999). Put anotherway, compensation is required when compliance witha subpoena causes an actual property loss. An expertwitness, for example, suffers a property loss when he isforced to testify; the witness no longer has bargainingpower relative to the party seeking the witness's testimony.

*985 [11] [12] Our understanding of the term“reasonable compensation” is informed by our takingsjurisprudence. We have explained that, in a taking ofreal property, “just compensation is determined by theloss to the person whose property is taken.” Ala. PowerCo. v. FCC, 311 F.3d 1357, 1369 (11th Cir.2002). “Putdifferently, ‘[t]he question is, What has the owner lost? not,What has the taker gained?’ ” Id. (quoting United Statesv. Va. Elec. & Power Co., 365 U.S. 624, 635, 81 S.Ct. 784,792, 5 L.Ed.2d 838 (1961)). In this context, as in the lawof remedies, “an aggrieved party should be put in as gooda position as he was in before the wrong, but not better.”Ala. Power Co., 311 F.3d at 1369.

[13] The measure of the compensation owed in a takingscase depends on the nature of the property. In an ordinarytakings case, one party's gain directly corresponds toanother party's loss. Id. That measure is common because“most property is rivalrous—its possession by one partyresults in a gain that precisely corresponds to the lossendured by the other party.” Id.

A different rule prevails for another form of property.If the property is nonrivalrous—i.e., one party's useof the property “does not necessarily diminish theuse and enjoyment of others”—compensation for the

Klay v. All Defendants, 425 F.3d 977 (2005)

18 Fla. L. Weekly Fed. C 965

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nonrivalrous use of the property will ordinarily be limitedto the marginal cost incurred by that use. See id. Thislimitation is proper even if the taking deprives the ownerof the opportunity to sell the use of its property at a desiredprice, because the “one immutable principle in the law ofjust compensation ... is that the value to the taker is notto be considered, only loss to the owner is to be valued.”Id. at 1370 (quoting Metro. Transp. Auth. v. ICC, 792 F.2d287, 297 (2d Cir.1986)).

[14] Like the law of takings, Rule 45(c)(3)(B) governsforced disclosures of both rivalrous and nonrivalrousproperty. Expert testimony is a form of rivalrous property,because the measure of its loss to the owner is the same asthe gain to its taker. Confidential information is a form ofnonrivalrous property, and that fact affects the measureof compensation for its taking.

The gain to the party seeking confidential informationthrough a subpoena is not the measure of compensationreasonably owed to the owner of that information. Themeasure is the loss to the owner of the property. If theenforcement of a subpoena under Rule 45(c)(3)(B) causesno loss, then the amount of compensation reasonablyowed will be zero. If the loss to the owner of theinformation is substantial, then so will be the amountof compensation even if the gain to the taker of theinformation is slight.

C. The District Court Did Not Abuse Its DiscretionWhen It Denied the License Fee Sought by the AMA.

[15] With that understanding of compensation in mind,we turn to whether compliance with the subpoenacaused a loss to the AMA. As we have explained,the use of the data by the managed care providerswas strictly limited by the district court. According tothe terms of the protective order, that material wasdesignated as “highly confidential.” The data could bedisclosed only to the managed care providers' outsidecounsel, independent retained experts, and other litigationpersonnel. In addition, the representatives of the managedcare providers were not permitted to use the material “forany purpose other than the prosecution or defense of thislitigation.”

*986 With these strict limitations on the use of thedata, the AMA did not suffer a loss in the commercial

value of its property. The protective order ensured thatthe confidential nature of the data was not threatened.The disclosure to outside counsel of that material didnot deprive the AMA of the use of its property in anyway. The disclosure also did not deprive the AMA of theopportunity to sell its intellectual property at its marketprice to any willing buyers, including the managed careproviders, because the managed care providers were notallowed to use this data for nonlitigation purposes. TheAMA did not present any evidence that the value ofits intellectual property would be harmed by compliancewith the order of production. The district court did notabuse its discretion, therefore, when it determined that thecompensation owed to the AMA was limited to the costof producing the data.

This appeal is similar to Alabama Power, in whichthe Federal Communications Commission ordered theAlabama Power Company to allow cable televisionproviders access to its utility poles. Alabama Powerobjected, under the Just Compensation Clause, to the rateimposed by the FCC for such access. Ala. Power Co., 311F.3d at 1360–61. We rejected the argument of AlabamaPower and held that, because the use of the utility poleswas nonrivalrous and did not deprive Alabama Powerof the opportunity to sell access to other providers, thecompensation owed to Alabama Power was limited to themarginal costs of allowing access to the cable providers.Id. at 1369–71.

As in Alabama Power, the AMA has not lost theopportunity to sell its product to other persons, includingthe managed care providers. As a result of the protectiveorder, the confidential nature of the data has not beencompromised. Although the AMA would have preferredto receive the license fee it ordinarily charges for thisconfidential material, the subjective desires of the AMAare immaterial to whether it has suffered a compensableloss. “[A]n aggrieved party should be put in as good aposition as he was in before the wrong, but not better.” Ala.Power Co., 311 F.3d at 1369 (emphasis added).

[16] The decision of the district court to compelproduction of the data, without the payment of a licensefee, was supported by basic principles of due process.There is a “fundamental responsibility of every person togive testimony,” Garner v. Wolfinbarger, 430 F.2d 1093,1100 (5th Cir.1970), and the duty to provide evidence“has long been considered to be almost absolute ....” In re

Klay v. All Defendants, 425 F.3d 977 (2005)

18 Fla. L. Weekly Fed. C 965

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Grand Jury Subpoena Duces Tecum, 555 F.2d 1306, 1308–09 (5th Cir.1977). The managed care providers soughtaccess to the data of the AMA for the limited purpose ofthe defense of a lawsuit in which their adversaries paidthe AMA its license fee and relied upon the data in theprosecution of their claims for relief. If the district courthad agreed with the AMA, then the access of the managedcare providers to information vital to their defense wouldhave been conditioned upon the payment of a windfall tothe AMA. Rule 45(c)(3)(B) did not require that result.

IV. CONCLUSION

Because the AMA suffered no loss in the value of itsproperty from its compliance with the subpoena, onthe conditions provided by the order of production andprotective order, the district court did not abuse itsdiscretion when it required the managed care providers topay the AMA its production costs, but not the license feefor the data.

AFFIRMED.

All Citations

425 F.3d 977, 18 Fla. L. Weekly Fed. C 965

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19 of 36 DOCUMENTS

PositiveAs of: Apr 18, 2017

SOUND SECURITY, INC., a Washington Corporation, Plaintiffs, v. SONITROLCORPORATION, a Delaware Corporation, et al., Defendant.

Civil No.: 3:08-cv-05350-RBL

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OFWASHINGTON

2009 U.S. Dist. LEXIS 59630

June 26, 2009, DecidedJune 26, 2009, Filed

PRIOR HISTORY: Sound Sec., Inc. v. Sonitrol Corp.,2009 U.S. Dist. LEXIS 131574 (W.D. Wash., June 11,2009)

COUNSEL: [*1] For Sound Security Inc, a Washingtoncorporation, Plaintiff: C Todd Norris, LEADATTORNEY, BULLIVANT HOUSER BAILEY (SanFran), SAN FRANCISCO, CA; Gail R Manuguid, LEADATTORNEY, BULLIVANT HOUSER BAILEY (SEA),SEATTLE, WA; Renee E Rothauge, Susan L Ford,LEAD ATTORNEYS, BULLIVANT HOUSERBAILEY PC (PORTLAND), PORTLAND, OR.

For Sonitrol Corporation, a Delaware corporation,Defendant: Christopher J Lowe, Jeffrey D Grossman,LEAD ATTORNEYS, PRO HAC VICE, STRADLEYRONON STEVENS & YOUNG LLP, PHILADELPHIA,PA; Francis X Manning, LEAD ATTORNEY, PRO HACVICE, STRADLEY RONON STEVENS & YOUNG,LLP NJ, CHERRY HILL, NJ; Brian C Free, Louis DavidPeterson, HILLIS CLARK MARTIN & PETERSON,

SEATTLE, WA.

For Sonitrol Holding Corporation, Sonitrol FranchiseCompany, L.L.C., Stanley Convergent SecuritySolutions, Inc., Securityco Solutions, Inc., StanleySecurity Solutions, Inc., The Stanley Works, SonitrolHolding, LLC, Defendants: Francis X Manning, LEADATTORNEY, PRO HAC VICE, STRADLEY RONONSTEVENS & YOUNG, LLP NJ, CHERRY HILL, NJ.

For Sonitrol National Dealer's Association, Intervenor:Bryan W Dillon, LEAD ATTORNEY, PRO HAC VICE,SINGLER, NAPELL & DILLON, LLP, SEBASTOPOL,CA; Howard Ramsey Morrill, GORDON [*2] THOMASHONEYWELL MALANCA PETERSON & DAHEIM(SEA), SEATTLE, WA.

For Sonitrol Corporation, a Delaware corporation,Counter Claimant: Christopher J Lowe, Jeffrey DGrossman, LEAD ATTORNEYS, STRADLEY RONONSTEVENS & YOUNG LLP, PHILADELPHIA, PA;Francis X Manning, LEAD ATTORNEY, PRO HAC

Page 1

VICE, STRADLEY RONON STEVENS & YOUNG,LLP NJ, CHERRY HILL, NJ; Brian C Free, Louis DavidPeterson, HILLIS CLARK MARTIN & PETERSON,SEATTLE, WA.

For Sound Security Inc, a Washington corporation,Counter Defendant: C Todd Norris, LEAD ATTORNEY,BULLIVANT HOUSER BAILEY (San Fran), SANFRANCISCO, CA; Francis X Manning, LEADATTORNEY, PRO HAC VICE, STRADLEY RONONSTEVENS & YOUNG, LLP NJ, CHERRY HILL, NJ;Gail R Manuguid, LEAD ATTORNEY, BULLIVANTHOUSER BAILEY (SEA), SEATTLE, WA; Renee ERothauge, Susan L Ford, LEAD ATTORNEYS,BULLIVANT HOUSER BAILEY PC (PORTLAND),PORTLAND, OR.

For Sonitrol Corporation, a Delaware corporation,Counter Claimant: Christopher J Lowe, Jeffrey DGrossman, LEAD ATTORNEYS, STRADLEY RONONSTEVENS & YOUNG LLP, PHILADELPHIA, PA;Francis X Manning, LEAD ATTORNEY, STRADLEYRONON STEVENS & YOUNG, LLP NJ, CHERRYHILL, NJ; Brian C Free, Louis David Peterson, HILLISCLARK MARTIN & PETERSON, SEATTLE, [*3]WA.

JUDGES: HONORABLE RONALD B. LEIGHTON,UNITED STATES DISTRICT JUDGE.

OPINION BY: RONALD B. LEIGHTON

OPINION

ORDER DENYING MOTION FORMODIFICATION OF PROTECTIVE ORDER

INTRODUCTION

This matter comes before the Court on nonpartySonitrol National Dealers Association's ("SNDA's")Motion to Modify the Protective Order entered by theCourt on December 2, 2008. [Dkt. # 22]. For the reasonsset forth below, SNDA's Motion to Modify the ProtectiveOrder is DENIED. SNDA is responsible for all discoverycosts incurred in compliance with Defendant's subpoenasexcept reasonable copying and mailing costs for whichDefendant has assumed responsibility. SNDA is alsoresponsible for the more than $ 26,000 in attorney's feesalready incurred in document review.

DISCUSSION

A. Background

In the underlying action, Plaintiff/franchisee SoundSecurity Inc. ("SSI") alleges that Defendant/franchisorSonitrol negotiated in bad faith with SSI and itsfranchisee association SNDA concerning the terms of aprospective franchise agreement. [Dkt. # 1]. In response,Sonitrol served deposition subpoenas on SNDA and itsdirectors seeking information related to the franchisenegotiations. The parties then filed a joint CR 37submission asking the Court [*4] to determine the extentof production [Dkt. # 54]. The Court ordered SNDA andits directors to produce non-privileged documents whilelimiting any confidential commercial information to an"attorney's eyes only" Protective Order. [Dkt. # 22].SNDA now moves to modify the Protective Order to shiftall discovery costs for compliance with the depositionsubpoenas to Defendant Sonitrol. [Dkt. # 69]. 1 The issuethus before the Court is whether SNDA's status as anonparty requires that the Defendant bear the costsassociated with Defendant's discovery requests. TheCourt holds that it does not.

1 The Court informed SNDA that recovery ofsuch costs can be sought but it is generally not theCourt's practice to award such costs.

B. The District Court has Discretion to DetermineCosts

District courts have broad discretion to determine theproper allocation of discovery costs. Fed. R. Civ. P. 26(c)authorizes courts to make 'any order which justicerequires to protect a party or person from . . . undueburden or expense.'" U.S. v. Columbia BroadcastingSystem, Inc., 666 F.2d 364, 368-69 (9th Cir. 1982).However, a determination of discovery costs involvingnonparties is subject to Fed. R. Civ. P. 45, [*5] whichstates in pertinent part that "an order to compelproduction shall protect any person who is not a party oran officer of a party from significant expense resultingfrom the inspection and copying commanded." Fed. R.Civ. P. 45(c)(2)(B)(ii); Columbia Broadcasting, 666 F.2dat. 368-69.

What constitutes a "significant" cost is at thediscretion of the district court. SNDA seeksreimbursement of more than $ 26,000 in attorney's feesfor review and production of SSI documents already

Page 22009 U.S. Dist. LEXIS 59630, *2

provided to the Defendant. It also seeks more than $60,000 in fees and costs that it estimates will benecessary to comply with Defendant's remainingsubpoena requests. While this amount is clearly"significant," 2 it does not mean that the requesting partymust necessarily bear the entire cost of compliance.Linder v. Calero-Portocarrero, 251 F.3d 178, 182, 346U.S. App. D.C. 117 (D.C. Cir. 2001)). In fact, a nonpartymay still be required to bear some or all of its discoverycosts under Rule 45:

While the drafters of new Rule 45clearly intended to expand the protectionfor non-parties such as disinterested expertwitnesses, see Advisory Committee Noteto 1991 Amendment, there is no indicationthat they also intended to overrule [*6]prior Rule 45 case law, under which anon-party can be required to bear some orall of its expenses where the equities of aparticular case demand it." In Re ExxonValdez, 142 F.R.D. 380, 383 (D.D.C.1992).

The prior case law indicates several non-exhaustive,equitable factors to be considered in nonpartycost-shifting disputes.

2 The D.C. Circuit in hinder v.Calero-Portocarrero had "no trouble concluding"that discovery expenses amountingto $ 200,000were "significant."Lmrferv. Calero-Portocarrero,251 F.3d 178, 182, 346 U.S. App. D.C. 117 (D.C.Cir. 2001). The Texas District Court in Williamsv. City of Dallas held that $ 9,000 in discoverywas significant to shift costs. Williams v. City ofDallas, 178 F.R.D. 103, 113 (N.D.Tex. 1998)

1. Factors Considered when Determining Costs

In nonparty cost-shifting cases, equitable factorsconsidered are: "(1) whether the nonparty has an interestin the outcome of the case; (2) whether the nonparty canmore readily bear its costs than the requesting party; and(3) whether the litigation is of public importance."Linder, 251 F.3d at 182. See also In Re Exxon, 142F.R.D. at 383. 3 The Ninth Circuit has developed otherfactors that may be considered in apportioning discovery[*7] costs as well: "(1) the scope of the discovery; (2) theinvasiveness of the request; (3) the extent to which the

producing party must separate responsive informationfrom privileged or irrelevant material; and (4) thereasonableness of the costs of production." ColumbiaBroadcasting System, Inc., 666 F.2d 364, 372 (9th Cir.1982). The Court now considers these factors. 4

3 The Exxon Court cites cases from differentjurisdictions that have established these factors:Pollitt v. Mobay Chem. Corp., 95 F.R.D. 101, 105(S.D.Ohio 1982) (It is relevant to inquire whetherthe nonparty had an interest in the case);Westinghouse Elec. Corp. v. City of Burlington,351 F.2d 762, 122 U.S. App. D.C. 65 (D.C.Cir.1965) and United States v. International BusinessMach. Corp., 62 F.R.D. 526, 529 (S.D.N.Y.1974)(whether one party can more easily bear the costsand whether the litigation is of publicimportance). In Re Exxon Valdez, 142 F.R.D. 380,383 (D.D.C. 1992).4 As an initial matter, the Court notes that theoutcome of this case will not have significantpublic importance. Although SSI does bring aclaim under the Washington Consumer ProtectionAct, the current litigation over bad faith issues infranchisor/franchisee negotiations [*8] is oflimited public importance and is not a significantfactor in the Court's determination of costs.

2. Sonitrol's Discovery Requests are not Unreasonable

The Court is not convinced that compliance withDefendant's discovery requests would constitute an undueburden on SNDA under Fed. R. Civ. P. 26(c). AlthoughSNDA contends it would suffer undue financial burden ifforced to shoulder all costs of compliance, it provides noconcrete evidence that it lacks funds sufficient to comply.5

5 SNDA states only that it has no budget forresponding to the discovery requests and thatforcing compliance would divert resources fromSNDA's separate litigation against Sonitrol inCalifornia. [Dkt. # 70, Dkt. # 69 at 5, Dkt. # 76 at4-5]. SNDA offers no actual evidence to supportthe assertion that compliance would be an unduefinancial burden. This also impacts the Courtsdetermination of the second factor developed inLinder (above). While Sonitrol may indeed bemore able to bear the costs of discovery, SNDA,as previously stated, offers no concrete evidencein support thereto.

Page 32009 U.S. Dist. LEXIS 59630, *5

In addition, numerous steps are being taken to keepdiscovery costs reasonable. According to the Defendant,depositions of [*9] four of the six SNDA witnesses willbe conducted over a two day period while the witnessesare attending a conference in Baltimore. [Dkt. # 74 at 6].This will reduce travel expenses and other costs ofdiscovery. In addition, both sides agree that SNDA'ssubpoenaed members are likely to have most of the samedocuments that have already been reviewed by SNDA'slawyer on behalf of SSI. [Dkt. # 74 at 7, Dkt. # 76 at 5-6].6 SNDA thus contends that such a review is unnecessaryand duplicative. The Court disagrees. Just because thedeponents "likely" have the same documents [Dkt. # 76 at6] doesn't make it so, and a reasonable search forpotential documents not previously reviewed justifies anyduplicative work invariably done in the process.

6 Those SNDA members being subpoenaed forrecords were all on the SNDA's ContractNegotiations Committee. SNDA's lawyer hasalready reviewed one member's records from theCommittee (3,000 documents from SSI's JimDopp).

SNDA argues that forcing it to pay the discoverycosts is also against California public policy because itcould have a general chilling effect on future volunteerparticipation in non-profit corporations such as itself.[Dkt. 69 at 11]. [*10] SNDA mischaracterizes itspurpose and function as a non-profit corporation. 7

7 Although SNDA is a "non-profit" corporation,it is not, as it appears to imply, the type oforganization concerned with "public service andcharitable affairs of the people of California"[Dkt. 69 at 11]. SNDA is in fact a tradeassociation and even identifies itself as such.[Dkt. # 70 at 1]. SNDA's primary function is thusto advance the financial interests of itsmember-companies.

3. SNDA has a Substantial Interest in the Outcome ofthe Case

Despite SNDA's repeated attempts to distance itselffrom the SSI litigation, SNDA has a plain interest in theoutcome of the case; and its discovery costs will not beshifted to Defendant.

SNDA is a trade association that works to advancethe financial interests of its member companies. It

promotes and represents the interests of Sonitrolfranchisees and is directly funded by these companiesthrough membership dues. The Association's Board ofDirectors is composed of franchisee members [Dkt. #74-2 at 10-13]. SSI's President is a past President andboard member of SNDA and SSI's General Manager waspreviously a member of SNDA's Contract NegotiatingCommittee that negotiates [*11] with Sonitrol on behalfof SNDA members. [Id. at 10]

The SNDA also voluntarily authorized its attorney toreview more than 3,000 SSI documents in response todiscovery requests by Sonitrol. While SNDA has aninterest in protecting its own privileged documentswhether they are in SSI's possession or not, we agree withDefendant that SNDA's willingness to spend more that $26,000 on attorney's fees for discovery requests directednot to SNDA but to SSI, is indicative of SNDA's closebusiness relationship with SSI and its interest in theoutcome of these proceedings.

It has been recognized by other courts that anonparty cannot shift its discovery costs if it has asubstantial interest in the outcome of the case. In adecision involving the Exxon Oil Company, for example,the D.C. District Court noted that the outcome of the casewould be of great concern to the petroleum industrygenerally and that the nonparty trade association,American Petroleum Institute ("API"), had an inherentinterest in its outcome. In Re Exxon, 142 F.R.D. at 384.As such, the Court held that API was not a "purenon-party witness" necessarily protected from significantdiscovery expense under Rule 45. Id.

The outcome [*12] of this case has similarimplications for nonparty SNDA and the Sonitrolfranchisees it represents. While SNDA is correct that thiscase involves a dispute as to whether a single franchisee(SSI) can continue operating under an original franchiseagreement, the case also involves allegations that Sonitrolnegotiated in bad faith with SNDA on the terms of a newfranchise agreement. Whether or not Sonitrol is found tohave acted in bad faith may affect its bargaining powerand negotiating strategy in future negotiations. Moreover,the contractual terms, if any, that are eventually agreedupon by the parties may serve as precedent for what otherfranchisees can expect to receive in future negotiationswith Sonitrol.

CONCLUSION

Page 42009 U.S. Dist. LEXIS 59630, *8

It is the general inclination of this Court not to shift thecosts of discovery. Having considered, amongst otherthings, the reasonableness of Defendant's discoveryrequests, SNDA's burden of compliance therewith, andSNDA's interest in the outcome of the case, SNDA'sMotion to Modify the Protective Order is DENIED.Defendant has volunteered and will be responsible forreimbursing all copying and mailing costs incurred bySNDA pursuant to Defendant's subpoenas. SNDA [*13]is responsible for all other costs related to Defendant'sdiscovery requests including the attorney's fees that it has

already incurred.

IT IS SO ORDERED.

Dated this 26th of June, 2009

/s/ Ronald B. Leighton

RONALD B. LEIGHTON

UNITED STATES DISTRICT JUDGE

Page 52009 U.S. Dist. LEXIS 59630, *12

Legal Voice v. Stormans Inc., 738 F.3d 1178 (2013)

87 Fed.R.Serv.3d 663, 14 Cal. Daily Op. Serv. 43, 2014 Daily Journal D.A.R. 26

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1

KeyCite Yellow Flag - Negative Treatment

 Distinguished by Spears v. First American Eappraiseit, N.D.Cal.,

December 8, 2014

738 F.3d 1178United States Court of Appeals,

Ninth Circuit.

LEGAL VOICE, FKA Northwest Women'sLaw Center, Non–Party–Appellant,

v.STORMANS INC., DBA Ralph's Thriftway; Rhonda

Mesler; Margo Thelen, Plaintiffs–Appellees.

No. 12–35224.|

Argued and Submitted Oct. 10, 2013.|

Decided Dec. 31, 2013.

SynopsisBackground: Pharmacists and corporate pharmacybrought action against appointed state officials, seeking toenjoin enforcement of regulations making it sanctionablefor a pharmacy to permit practice known as “refuseand refer,” whereby pharmacy would refuse to filllawful prescriptions for “morning after” contraceptivebecause of religious or moral objections and refer thepatient to a nearby pharmacy that would dispense thedrug. The United States District Court for the WesternDistrict of Washington, Ronald B. Leighton, J., 2009 WL564656,denied non-party's requests for costs and sanctionsassociated with plaintiffs' discovery request. Non-partyappealed after final judgment had been entered.

Holdings: The Court of Appeals, Tashima, Circuit Judge,held that:

[1] on issue of first impression, non-party could appealorder denying costs and sanctions associated withplaintiff's discovery request either immediately upon entryof order or await entry of final judgment;

[2] expenses that non-party incurred in amount of $20,000to comply with subpoena duces tecum from plaintiffpharmacists and corporate pharmacy was significant, andthus those costs had to be shifted to plaintiffs;

[3] subpoena duces tecum was not so facially overbroadthat district court's denial of sanctions was abuse ofdiscretion;

[4] district court did not abuse its discretion in finding thatplaintiffs did not act in bad faith; and

[5] imposition of sanctions after losing motion to compelwould have been largely duplicative.

Affirmed in part, reversed in part, and remanded.

West Headnotes (9)

[1] Federal CourtsParticular persons

Federal CourtsSanctions

Federal CourtsCosts and attorney fees

170B Federal Courts170BXVII Courts of Appeals170BXVII(B) Appellate Jurisdiction andProcedure in General170Bk3253 Persons Entitled to Seek Review orAssert Arguments; Parties; Standing170Bk3255 Particular persons

(Formerly 170Bk544)170B Federal Courts170BXVII Courts of Appeals170BXVII(C) Decisions Reviewable170BXVII(C)2 Particular Decisions, Matters,or Questions as Reviewable170Bk3329 Sanctions

(Formerly 170Bk554.1)170B Federal Courts170BXVII Courts of Appeals170BXVII(C) Decisions Reviewable170BXVII(C)2 Particular Decisions, Matters,or Questions as Reviewable170Bk3331 Remedial Matters170Bk3335 Costs and attorney fees

(Formerly 170Bk597)

Non-party could appeal order denying costsand sanctions associated with plaintiff'sdiscovery request either immediately uponentry of order or await entry of final

Legal Voice v. Stormans Inc., 738 F.3d 1178 (2013)

87 Fed.R.Serv.3d 663, 14 Cal. Daily Op. Serv. 43, 2014 Daily Journal D.A.R. 26

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2

judgment. 28 U.S.C.A. § 1291; F.R.A.P.Rule4, 28 U.S.C.A.; Fed.Rules Civ.Proc.Rule45(d)(2)(B)(ii), 28 U.S.C.A.

2 Cases that cite this headnote

[2] Federal CourtsPersons Entitled to Seek Review or

Assert Arguments; Parties; Standing

Federal CourtsInterlocutory and Collateral Orders

170B Federal Courts170BXVII Courts of Appeals170BXVII(B) Appellate Jurisdiction andProcedure in General170Bk3253 Persons Entitled to Seek Review orAssert Arguments; Parties; Standing170Bk3254 In general

(Formerly 170Bk543.1)170B Federal Courts170BXVII Courts of Appeals170BXVII(C) Decisions Reviewable170BXVII(C)1 In General170Bk3277 Interlocutory and CollateralOrders170Bk3278 In general

(Formerly 170Bk572.1)

A non-party may appeal an interlocutoryorder within 30 days after entry of finaljudgment to the same extent that a party mayappeal such an order. 28 U.S.C.A. § 1291;F.R.A.P.Rule 4, 28 U.S.C.A.

1 Cases that cite this headnote

[3] WitnessesCompensation

410 Witnesses410I In General410k23 Compensation410k24 In general

Expenses that non-party incurred in amountof $20,000 to comply with subpoenaduces tecum from plaintiff pharmacists andcorporate pharmacy was significant, and thusthose costs had to be shifted to plaintiffs,in action challenging Washington's rulesthat required pharmacies to maintain arepresentative assortment of drugs for whichthere was patient demand and to dispense

prescription drugs and drugs approved bythe Food and Drug Administration for“restricted distribution,” unless one of severalenumerated exceptions applied. Fed.RulesCiv.Proc.Rule 45(d)(2)(B)(ii), 28 U.S.C.A.

1 Cases that cite this headnote

[4] WitnessesCompensation

410 Witnesses410I In General410k23 Compensation410k24 In general

A district court must shift a non-party'scosts of compliance with a subpoena ducestecum, if those costs are significant. Fed.RulesCiv.Proc.Rule 45(d)(2)(B)(ii), 28 U.S.C.A.

23 Cases that cite this headnote

[5] WitnessesCompensation

410 Witnesses410I In General410k23 Compensation410k24 In general

When discovery is ordered against a non-party, the only question before the court inconsidering whether to shift costs is whetherthe subpoena duces tecum imposes significantexpense on the non-party; if so, the districtcourt must order the party seeking discoveryto bear at least enough of the cost ofcompliance to render the remainder “non-significant.” Fed.Rules Civ.Proc.Rule 45(d)(2)(B)(ii), 28 U.S.C.A.

27 Cases that cite this headnote

[6] WitnessesSubpoena duces tecum

410 Witnesses410I In General410k16 Subpoena duces tecum

Subpoena duces tecum was not so faciallyoverbroad that district court's denialof sanctions was abuse of discretion,although court denied motion to compel

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as to eight of 14 categories requested insubpoena. Fed.Rules Civ.Proc.Rule 45(d)(1),28 U.S.C.A.

3 Cases that cite this headnote

[7] WitnessesSubpoena duces tecum

410 Witnesses410I In General410k16 Subpoena duces tecum

Merely losing a motion to compel does notexpose a party to sanctions, and a districtcourt need not impose sanctions every timeit finds a subpoena duces tecum overbroad,although failure to narrowly tailor a subpoenamay be a ground for sanctions; however, acourt may impose sanctions when a partyissues a subpoena in bad faith, for an improperpurpose, or in a manner inconsistent withexisting law. Fed.Rules Civ.Proc.Rule 45(d)(1), 28 U.S.C.A.

15 Cases that cite this headnote

[8] WitnessesSubpoena duces tecum

410 Witnesses410I In General410k16 Subpoena duces tecum

In denying non-party's motion for sanctions,district court did not abuse its discretion infinding that plaintiff pharmacists did not actin bad faith in their subpoena duces tecumby interpreting document production order toallow for discovery from non-party advocacygroup of internal communications “relatedto” communications with governmentdecision-makers after court issued ordercompelling production of only externalcommunications, in action challengingWashington's rules that required pharmaciesto maintain representative assortment ofdrugs, where there appeared to have remainedsome uncertainty regarding whether orderhad encompassed internal documents thatrecounted communications with governmentdecision-makers. Fed.Rules Civ.Proc.Rule45(d)(1), 28 U.S.C.A.

2 Cases that cite this headnote

[9] WitnessesSubpoena duces tecum

410 Witnesses410I In General410k16 Subpoena duces tecum

Imposition of sanctions after losing motionto compel production of documents requestedin subpoena duces tecum would have beenlargely duplicative, and thus denial ofmotion for sanctions was not abuse ofdiscretion, where mandatory cost-shiftingapplied. Fed.Rules Civ.Proc.Rule 45(d)(1),(d)(2)(B)(ii), 28 U.S.C.A.

3 Cases that cite this headnote

Attorneys and Law Firms

*1180 Scott A. Smith (argued) and Daniel J. Gunter,Riddell Williams P. S., Seattle, WA, for Non–Party–Appellant.

Steven T. O'Ban (argued) and Kristen K. Waggoner,Ellis, Li & McKinstry, PLLC, Seattle, WA, for Plaintiffs–Appellees.

Appeal from the United States District Court for theWestern District of Washington, Ronald B. Leighton,District Judge, Presiding. D.C. No. 3:07–cv–05374–RBL.

Before: A. WALLACE TASHIMA, SUSAN P.GRABER, and MARY H. MURGUIA, Circuit Judges.

OPINION

TASHIMA, Circuit Judge:

Legal Voice, f/k/a Northwest Women's Law Center (“LawCenter”), appeals the district court's denial of sanctionsand costs under Federal Rule of Civil Procedure 45(d)

(“Rule 45(d)”). 1 We must determine first whether we havejurisdiction over this appeal and, if so, whether the districtcourt abused its discretion in denying the Law Center'srequests for costs *1181 and sanctions. As to the first

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question, we conclude that we have jurisdiction. As to themerits, we affirm the district court's denial of sanctions,but reverse the district court's denial of costs.

1 The 2013 amendment to the Federal Rules of CivilProcedure renumbered Rule 45. Rule 45(c), whichwas in effect when the district court entered its ordersand the parties argued this appeal, was renumberedand now appears, without substantive change, asRule 45(d).

I.

This appeal relates to a discovery dispute that arose inthis action challenging Washington's rules that requirepharmacies to maintain a representative assortment ofdrugs for which there is patient demand and to dispenseprescription drugs and drugs approved by the Foodand Drug Administration for “restricted distribution,”unless one of several enumerated exceptions applies.The Washington State Board of Pharmacy (“Board”)promulgated the rules in April 2007 in response to itsconcern that there was a lack of clear authority regardingthe destruction or confiscation of lawful prescriptions.The Board became concerned with this problem in early2006 when it received reports of incidents across thecountry in which pharmacists had refused to dispenseemergency contraception, including one instance in whicha pharmacist ripped up a patient's prescription. TheLaw Center was among the organizations bringing thesereports to the Board's attention. The Law Center wasalso a member of a task force that participated in therule-making process. The task force held a series ofmeetings and developed the draft text of the rules that wereultimately approved by the Board and that are the subjectof the underlying action.

Stormans, Inc., doing business as Ralph's Thriftway,Rhonda Mesler, and Margo Thelen (“Plaintiffs”) filedsuit challenging the rules. In this action, Plaintiffs serveda subpoena duces tecum on the Law Center seekingproduction of fourteen categories of documents. Amongthe requested documents were any communicationsconcerning the challenged regulations between the LawCenter and the Board, the Washington State HumanRights Commission, the Governor's Office, and otheradvocacy groups. The subpoena also sought internal LawCenter communications pertaining to the regulations, aswell as general information concerning the Law Center's

membership and employees. The Law Center objectedto the subpoena on various grounds, including that therequested documents were irrelevant, protected by theFirst Amendment, and protected by the attorney-clientprivilege. When Plaintiffs filed a motion to compel, theLaw Center raised these objections and requested in thealternative that, if it were compelled to produce anydocuments, Plaintiffs be required to reimburse the costs ofcompliance pursuant to Rule 45(d)(2)(B)(ii). On October28, 2008, the district court granted the motion to compel asto six of the fourteen categories of documents and deniedthe motion as to the remaining requests. The district courtfurther ordered that “[e]ach party will bear its own costsincurred in connection with these motions.”

Plaintiffs and the Law Center thereafter disputed thescope of the district court's order. The Law Center assertedthat the compelled production was limited to actualcommunications with government decision-makers, whilePlaintiffs asserted that the Law Center was required toproduce any documents, including internal documents,“related to” such communications. The Law Center(and other advocacy groups) then filed a motion forclarification. In that motion, the Law Center soughtadditional clarification on the issue of costs. The districtcourt issued a second order, explaining that it hadpreviously sought “to draw a distinction between (A)actual communications between Non–Parties and thosepersons or entities responsible for promulgating theregulations that are the subject of this dispute and(B) internal communications among Non–Parties, their*1182 members, allies and affiliates related to why

or how they communicated to government decision-makers.” The district court stated that it had intendedto compel production of the former, but not the latter.As to the issue of costs, in its order of November 24,2008, the district court held that “[t]he scope of productionhas been sufficiently limited by the Court such that thecost of producing said documents should not be overlyburdensome.”

The district court's efforts at providing clarificationproved futile; Plaintiffs and the Law Center continued todispute the scope of the required production. Plaintiffsfiled another motion to compel, seeking, inter alia,“information related to mental impressions or internalcommunications concerning actual communications ...with governmental agencies involved with rulemaking,”and “information related to internal communications ...

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related to ‘why or how to communicate to governmentalagencies.’ ” In opposing this motion, the Law Centerrenewed its request for costs and fees. In support ofits opposition to the motion, the Law Center filed thedeclaration of Lisa Stone, its Executive Director, claimingthat the Law Center had by then incurred roughly $20,000in expenses in complying with the subpoena. That thisamount was expended in the Law Center's complianceefforts is unchallenged.

On March 3, 2009, the district court denied Plaintiffs'second motion to compel. It referred to the previousdistinction it had drawn between external and internalcommunications. The district court rejected the LawCenter's renewed request for costs and fees withoutexplanation, stating only that it was denying “all motionsor requests for fees or sanctions.”

The Law Center did not immediately appeal any of thethree orders related to the discovery dispute. On March22, 2012, thirty days after final judgment was entered inthis action, the Law Center filed a notice of appeal. TheLaw Center appeals only the district court's denial of costsand sanctions under Rule 45(d).

II.

[1] Plaintiffs contend that this court lacks jurisdictionover the Law Center's appeal because the Law Center,as a nonparty, was required to appeal within thirty daysof the entry of the respective orders denying costs andsanctions, making the appeal filed after entry of finaljudgment untimely. We disagree.

We have not addressed whether a non-party may appeala collateral order after final judgment, rather than onlywithin thirty days of the entry of the order. Althoughwe have previously considered our jurisdiction over non-party appeals of interlocutory orders, none of these casesaddressed whether a non-party may await final judgmentto appeal such an order. In United States v. ColumbiaBroadcasting System, Inc., 666 F.2d 364 (9th Cir.1982),for example, we addressed whether the collateral orderdoctrine permitted non-party witnesses to appeal anorder denying their motion for reimbursement beforeentry of final judgment. Id. at 365. We concluded thatsuch an immediate appeal was permissible. Id. ColumbiaBroadcasting, however, did not address whether a non-

party may also appeal an interlocutory discovery orderafter entry of final judgment.

SEC v. Capital Consultants LLC, 453 F.3d 1166 (9thCir.2006) (per curiam), similarly did not address theprecise question presented here. In Capital Consultants,we considered whether we had jurisdiction over anappeal of an interlocutory order, filed before entryof final judgment, that was neither rendered finalpursuant to Federal Rule of Civil Procedure 54(b) norappealable under the collateral order doctrine. *1183Id. at 1170–75. We concluded that we did not. LikeColumbia Broadcasting, Capital Consultants said nothingabout whether a non-party may appeal a collateralor interlocutory order after entry of final judgment.See also David v. Hooker, 560 F.2d 412, 416–17 (9thCir.1977) (holding that an order directing a non-partyto pay attorney's fees as a sanction was immediatelyappealable, but not addressing whether a non-party canappeal a collateral discovery order after the entry of finaljudgment).

[2] Whether a non-party may appeal an interlocutoryorder after entry of final judgment is therefore an openquestion in this circuit. We now hold that a non-partymay appeal an interlocutory order within thirty days afterentry of final judgment to the same extent that a party mayappeal such an order.

Several circumstances persuade us that a non-partymay appeal an interlocutory order after entry of finaljudgment. First, appeal after final judgment is the defaultrule under 28 U.S.C. § 1291 and Federal Rule of AppellateProcedure 4. Thus, our decision today merely appliesthe general rule to non-parties. Moreover, our priorcases have generally held that even when parties mayimmediately appeal an interlocutory order, they are notrequired to do so. Hook v. Ariz. Dep't of Corr., 107 F.3d1397, 1401 (9th Cir.1997) (“A party does not lose theright to appeal an interlocutory order by not immediatelyappealing and waiting for the final judgment.”). In otherwords, had Plaintiffs wanted to appeal the orders at issuein this case, they could have awaited final judgment. Id.Plaintiffs' proposed rule would therefore allow partieseither to appeal immediately upon entry of the order orto await the entry of a final judgment, but would requirenon-parties to appeal within thirty days of the entry ofthe order or lose the right to appeal. We reject a rule withthis effect; all potential appellants should be in the same

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position with regard to the timing of an appeal from the

same order. 2

2 It would also remain an open question underPlaintiffs' proposed rule whether, if one party appealsafter the entry of a final judgment, a nonparty maythen file a cross-appeal from the same order.

Plaintiffs' proposed rule also would promote piecemealappeals. In this case, such a rule would have required theLaw Center to appeal each of the three separate ordersdenying sanctions. Further, similar orders could havefollowed as discovery continued. Indeed, it was unclear atthe time of the entry of each of these orders whether therewould be future discovery requests for which the districtcourt might order sanctions and/or costs. Accordingly,Plaintiffs' proposed rule would have required at leastthree separate appeals, and possibly more. Obviously,a rule requiring only non-parties immediately to appealan interlocutory discovery order of this nature promotesinefficiency. See Dickinson v. Petroleum Conversion Corp.,338 U.S. 507, 511, 70 S.Ct. 322, 94 L.Ed. 299 (1950)(recognizing “the inconvenience and costs of piecemealreview” as one of the most important considerations whendetermining whether an order can be appealed).

Finally, Plaintiffs will suffer no prejudice if the LawCenter is permitted to appeal now. The record containsno indication that Plaintiffs have in any way relied ontheir belief that the Law Center's time for appeal hadexpired, nor do Plaintiffs identify any substantive rightthat would be prejudiced by permitting this appeal toproceed. Moreover, the appeal of the discovery orderscoincided with the State's appeal of the decision on themerits, so the Law Center's appeal after entry of judgmentdid not disturb the finality of the case or draw out itsconclusion.

*1184 For these reasons, we hold that a non-party mayappeal an interlocutory order after the entry of finaljudgment to the same extent a party can appeal such anorder. We now turn to the merits of the Law Center'sclaims.

III.

Rule 45(d) provides two related avenues by which a personsubject to a subpoena may be protected from the costs

of compliance: sanctions under Rule 45(d)(1) and cost-shifting under Rule 45(d)(2)(B)(ii). The latter provisionapplies to non-parties only, while the former applies toparties and non-parties alike. With little explanation, thedistrict court decided neither to impose sanctions norto shift costs. Reviewing the district court's denial ofdiscovery sanctions and costs for abuse of discretion andits interpretation of the Federal Rules of Civil Procedurede novo, we reverse the district court's denial of costs underRule 45(d)(2)(B)(ii), but affirm the denial of sanctionsunder Rule 45(d)(1).

A.

[3] Rule 45(d)(2)(B)(ii) states that, when a court orderscompliance with a subpoena over an objection, “theorder must protect a person who is neither a party nora party's officer from significant expense resulting fromcompliance.” The rule was amended in 1991, and we havenot interpreted the rule since its amendment. The leadingCourt of Appeals decision to have analyzed the rule sincethe 1991 amendment is Linder v. Calero–Portocarrero, 251F.3d 178 (D.C.Cir.2001), which held that the amendmentmade cost shifting mandatory in all instances in whicha non-party incurs significant expense from compliancewith a subpoena. Id. at 182. It further noted that “the1991 changes were intended ‘to enlarge the protectionsafforded persons who are required to assist the court.’ ” Id.(quoting Fed.R.Civ.P. 45 advisory committee's note to the1991 amendment). Based on this analysis, the Linder courtheld that only two considerations are relevant under therule: “[1] whether the subpoena imposes expenses on thenon-party, and [2] whether those expenses are ‘significant.’” Id. If these two requirements are satisfied, “the courtmust protect the non-party by requiring the party seekingdiscovery to bear at least enough of the expense to renderthe remainder ‘non-significant.’ ” Id.

[4] [5] We agree with the D.C. Circuit's analysis ofthe amended rule and hold that Rule 45(d)(2)(B)(ii)requires the district court to shift a non-party's costs ofcompliance with a subpoena, if those costs are significant.The plain language of the rule dictates our conclusion.The rule states that the district court's order compellingcompliance with a subpoena “must protect a person whois neither a party nor a party's officer from significantexpense resulting from compliance,” Fed.R.Civ.P. 45(d)(2)(B)(ii) (emphasis added), and provides no exceptions.

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This language leaves no room for doubt that the ruleis mandatory. Thus, when discovery is ordered againsta non-party, the only question before the court inconsidering whether to shift costs is whether the subpoenaimposes significant expense on the non-party. If so, thedistrict court must order the party seeking discovery tobear at least enough of the cost of compliance to render theremainder “non-significant.” See Linder, 251 F.3d at 182.

Under this regime, we conclude that the district courterred in its interpretation of Rule 45(d)(2)(B)(ii) byframing the issue in terms of undue burden, ratherthan significant expense. The district court denied costsand sanctions because it found that “[t]he scope ofproduction has been sufficiently limited by the Courtsuch that the cost of producing said documents should*1185 not be overly burdensome.” (Emphasis added.)

Rather than considering whether compliance was undulyburdensome, the district court should have consideredonly whether that cost was significant. Applying thecorrect standard, we have no trouble concluding that$20,000 is “significant.” See Linder, 251 F.3d at 182(noting that $9,000 may be sufficiently significant tojustify cost-shifting). Therefore, the district court wasrequired to shift enough of the cost of compliance torender the remainder non-significant. Accordingly, wereverse the district court's denial of costs under Rule 45(d)(2)(B)(ii) and remand for its determination of the properallocation of costs.

B.

[6] [7] Unlike Rule 45(d)(2)(B)(ii), Rule 45(d)(1) is

discretionary. 3 Although our precedent on this issue isnot extensive, we have provided some guidance for whenRule 45(d)(1) sanctions are appropriate. See, e.g., MountHope Church v. Bash Back!, 705 F.3d 418, 425 (9thCir.2012); Mattel Inc. v. Walking Mountain Prods., 353F.3d 792, 814 (9th Cir.2003). Merely losing a motion tocompel does not expose a party to Rule 45 sanctions.See Mount Hope Church, 705 F.3d at 425–27. Similarly,while failure narrowly to tailor a subpoena may be aground for sanctions, the district court need not imposesanctions every time it finds a subpoena overbroad; suchoverbreadth may sometimes result from normal advocacy,which we have said should not give rise to sanctions. Seeid. at 426. A court may, however, impose sanctions whena party issues a subpoena in bad faith, for an improper

purpose, or in a manner inconsistent with existing law. Seeid. at 425, 428; Mattel, 353 F.3d at 814.

3 Rule 45(d)(1), then labeled 45(c), provided in full:A party or attorney responsible for issuing andserving a subpoena must take reasonable stepsto avoid imposing undue burden or expense ona person subject to the subpoena. The issuingcourt must enforce this duty and impose anappropriate sanction—which may include lostearnings and reasonable attorney's fees—on aparty or attorney who fails to comply.

Considering these factors, we conclude that the districtcourt did not abuse its discretion in declining to imposesanctions under Rule 45(d)(1). Although the district courtdenied the motion to compel as to eight of the fourteencategories requested, we cannot say that the subpoena wasso facially overbroad that the district court's denial ofsanctions was an abuse of discretion.

[8] We are also not persuaded that Plaintiffs so clearlyacted in bad faith or with an improper motive thatwe may reverse the denial of sanctions on this ground.We recognize that Plaintiffs requested internal LawCenter communications “related to” communicationswith government decision-makers after their first requestwas denied. Although this may be an indication ofvexatious conduct, a second attempt to compel discoveryof internal communications after the first request wasdenied is not so egregious as to compel a findingof bad faith. Furthermore, Plaintiffs' conduct mayhave been reasonable, given that there was someambiguity in the district court's first and second orders.The first order merely listed without discussion thecategories for which the motion was granted, andthese could reasonably have been read to includeinternal documents related to communications withgovernment decision-makers. And although the secondorder was more specific in compelling the productionof only external communications, there appears tohave remained some uncertainty regarding whether theorder encompassed *1186 internal documents thatrecounted communications with government decision-makers. Given that there was at least some ambiguityin the meaning of the district court's first two discoveryorders, we cannot conclude that the district court abusedits discretion in finding that Plaintiffs did not necessarilyact in bad faith in interpreting the orders in the way theydid.

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[9] Finally, when considering Rule 45(d) sanctions, wehave put “more emphasis on the recipient's burden thanon the issuer's motives.” Mount Hope Church, 705 F.3dat 428–29. Given that we have already determined thatsome or all of the costs of compliance must be shiftedto Plaintiffs under Rule 45(d)(2)(B)(ii), the impositionof sanctions would be largely duplicative, because themandatory cost-shifting should alleviate the significantburden suffered by the Law Center. Accordingly, weconclude that the district court did not abuse its discretionin denying sanctions under Rule 45(d)(1).

IV.

For the foregoing reasons, we reverse the district court'sdenial of costs under Rule 45(d)(2)(B)(ii) and remand forconsideration of the proper allocation of costs; further, weaffirm the district court's denial of sanctions under Rule45(d)(1). Appellant shall recover of Plaintiffs–Appelleesits costs on appeal.

AFFIRMED in part, REVERSED and REMANDED inpart.

All Citations

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2006 WL 733498United States District Court, N.D. California,

San Jose Division.

TESSERA, INC., Plaintiff,v.

MICRON TECHNOLOGY, INC., MicronSemiconductor Products, Inc., InfineonTechnologies Ag, Infineon Technologies

Richmond, LP and Infineon TechnologiesNorth America Corp., Defendants.

No. C06-80024MISC-JW(PVT.|

March 22, 2006.

Attorneys and Law Firms

Alexander F. Wiles, Trevor V. Stockinger, Ellisen SheltonTurner, Irell & Manella LLP, Los Angeles, CA, forPlaintiff.

ORDER GRANTING IN PART ANDDENYING IN PART PLAINTIFF'S

MOTION TO COMPEL PRODUCTIONOF DOCUMENTS FROM NON-PARTY

HYNIX SEMICONDUCTOR AMERICA, INC.

PATRICIA V. TRUMBULL, Magistrate J.

[Docket Nos. 1-17]

INTRODUCTION

*1 Plaintiff Tessera, Inc. (“Plaintiff”) moves tocompel production of documents from non-party HynixSemiconductor America, Inc. (“Hynix SemiconductorAmerica”). Non-party Hynix Semiconductor Americaopposes the motion. On March 21, 2006, the partiesappeared for hearing. Having reviewed the papers andconsidered the arguments of counsel and for the reasonsset forth below, the court grants in part and deniesin part plaintiff Tessera's motion to compel productionof documents from non-party Hynix Semiconductor

America. 1

1 The holding of this court is limited to the facts andthe particular circumstances underlying the presentmotion.

BACKGROUND

Plaintiff Tessera develops semiconductor packagingtechnology. Semiconductor packaging serves manypurposes, including acting as the electrical interfacebetween semiconductor chips and circuit boardsand protecting semiconductor chips from damage,contamination and stress. Tessera holds more than300 patents for semiconductor packaging technologywhich it licenses to various semiconductor manufacturingcompanies throughout the world.

In the early 1990s, Tessera developed certainsemiconductor packaging technology to package thesynchronous dynamic random access memory chipdeveloped by Rambus, Inc. in or around the same

time period (“RDRAM”). 2 The synchronous RDRAMchip was apparently a revolutionary innovation inmicroprocessor architectural technology because itallowed for performance of more complex and fasteroperations and outpaced other circuitry technologyavailable at that time. Indeed, Intel adopted thesynchronous RDRAM chip as next generation memorytechnology for its microprocessors in 1996. In 1998,reference design for the synchronous RDRAM includedTessera's semiconductor packaging technology. Areference design sets forth the assembly instructionsfor the synchronous RDRAM to semiconductormanufacturers. Therefore, Tessera's semiconductorpackaging technology became a necessary component inthe manufacture of synchronous RDRAM chips.

2 Unlike other dynamic random access memory chips(“DRAM”), the RDRAM version developed byRambus incorporated new circuitry and packagingtechnology. Initially, DRAM chips were developedto respond to the increased need for semiconductormemory technology used in personal computers,servers and other devices.

Plaintiff Tessera licenses its semiconductor packagingtechnology directly to semiconductor manufacturers (notRambus itself). Typically, licensing agreements require thesemiconductor manufacturers to pay Tessera royalties on

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the volume of synchcronous RDRAM chips sold whichuses its semiconductor packaging technology.

On April 13, 2005, plaintiff Tessera filed an amendedcomplaint against defendants Micron Technology,Inc., Micron Semiconductor Products, Inc., InfineonTechnologies AG, Infineon Technologies Richmond, LPand Infineon Technologies North America Corporationin U.S. District Court in the Eastern District of Texas.By its complaint, plaintiff Tessera alleges, inter alia,patent infringement, antitrust violations and various statelaw claims. Defendants are semiconductor manufacturers.Plaintiff Tessera complains that defendants unlawfullycolluded with others to boycott the synchronousRDRAM chip. The effect of the boycott was to reducesupply and increase the price for whatever synchronousRDRAM chips were produced. Plaintiff Tessera allegesthat defendants conspired to boycott the synchronousRDRAM chips to reduce demand for them and artificiallyinflate the price of pre-existing and inferior DRAM chipsfor their own financial gain. Defendants' actions evencaused Intel to abandon exclusive use of synchronousRDRAM chips in its microprocessors. Plaintiff Tesseraalleges that defendants' actions deprived the company ofsignificant royalties.

*2 Prior to the filing of plaintiff Tessera's complaint,the Federal Trade Commission (“FTC”) had undertakenan investigation and found that semiconductormanufacturers, including Infineon Technologies AG,Infineon Technologies Richmond, LP and InfineonTechnologies North America Corporation (the “Infineoncompanies”), Micron Technologies, Inc., MicronSemiconductor Products, Inc. (the “Micron companies”)and Hynix Semiconductor Industries, Inc. (“Hynix,Inc.”), had colluded to boycott and impact the marketprice of DRAM chips. The U.S. Department of Justicealso had undertaken such an investigation. On May11, 2005, Hynix, Inc. pleaded guilty to an informationcharging a violation of the Sherman Antitrust Act and was

fined $185 million. 3

3 The information filed by the U.S. Department ofJustice alleged that from on or about April 1, 1999to on or about June 15, 2002, Hynix SemiconductorIndustries, Inc. and others participated in aconspiracy in the United States and elsewhereto suppress and eliminate competition by fixingthe prices of DRAM chips to be sold to

certain original equipment manufacturers of personalcomputers and servers. For purposes of the pleaagreement, the conspiracy related to dynamic randomaccess memory semiconductor devices and modules,including synchronous dynamic random accessmemory and double data rate dynamic randomaccess memory semiconductor devices and modules,but not Rambus dynamic random access memorysemiconductor devices and modules.

Notwithstanding the above, various semiconductormanufacturers eventually came to incorporate Tessera'ssemiconductor packaging technology in the manufactureof newer generation DRAM chips. Hynix, Inc. andSamsung, which are two of the largest semiconductormanufacturers, currently license Tessera's technology.As part of its license, Hynix, Inc. currently makesback payments to plaintiff Tessera for DRAM chipswhich previously had used its semiconductor packagingtechnology.

On October 14, 2005, U.S. District Court Judge LeonardDavis, presiding in the underlying litigation, granteddefendants' partial motion to dismiss on the grounds thatplaintiff Tessera had not met the standing requirementsto bring an antitrust suit (“October 14, 2005 Order”).Specifically, plaintiff Tessera must show that as a licensorin the semiconductor chip market, it was a target ofdefendants' conspiracy.

On September 27, 2005, plaintiff Tessera served non-partyHynix Semiconductor America with a subpoena ducestecum seeking production of documents. On January27, 2006, plaintiff Tessera filed a motion to compeldocuments. On February 28, 2006, Hynix Semiconductorfiled an opposition to the motion to compel. On March7, 2006, plaintiff Tessera filed a reply. On March 8,2006, non-party Hynix Semiconductor America filed a

sur-reply. 4 Pursuant to stipulation and order, non-partyHynix Semiconductor America filed a sur-reply on March13, 2006. On March 14, 2006, plaintiff Tessera filed furtherresponse to the sur-reply.

4 Non-party Hynix Semiconductor America did notseek court approval prior to filing its sur-reply.Generally, leave of the court is necessary to filea sur-reply. “[O]nce a reply is filed, no additionalmemoranda, papers or letters may be filed withoutprior Court approval.” Civ. L.R. 7-3(d). On March

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9, 2006, non-party Hynix Semiconductor Americanotified the court it had withdrawn the sur-reply.

STANDARD

A party may serve a subpoena to obtain discovery froma non-party. Fed.R.Civ.P. 45. The Advisory CommitteeNotes further state that a non-party subject to a subpoenais required to produce materials in its control, which mayor may not be located within the district or territory thatthe subpoena has been served. Fed.R.Civ.P. 45 advisorycommittee notes on 1991 amendments. A non-party issubject to the same scope of discovery as a party servedwith Rule 34 requests. Id. See also, Fed.R.Civ.P. 45advisory committee notes on 1970 amendments (“scopeof discovery through a subpoena is the same as thatapplicable to Rule 34 and other discovery rules.”). UnderRule 34, the rule governing the production of documentsbetween parties, the proper scope of discovery is asspecified in Rule 26(b).

*3 Under the Federal Rules of Civil Procedure,

[p]arties may obtain discoveryregarding any matter, notprivileged, that is relevant to theclaim or defense of any party ....relevant information need notbe admissible at the trial ifthe discovery appears reasonablycalculated to lead to the discoveryof admissible evidence.

Fed.R.Civ.P. 26(b)(1). Relevancy, for the purposes ofdiscovery, is defined broadly, although it is not without“ultimate and necessary boundaries.” Pacific Gas andElec. Co. v. Lynch, Case No. C-01-3023 VRW, 2002WL 32812098, at *1 (N.D.Cal. August 19, 2002) (citingHickman v. Taylor, 329 U.S. 495, 507, 67 S.Ct. 385, 91L.Ed. 451 (1947)).

A court, however, has discretion to limit discovery if:

(i) the discovery sought is unreasonably cumulative orduplicative, or is obtainable from some other sourcethat is more convenient, less burdensome, or lessexpensive;

(ii) the party seeking discovery has had ampleopportunity by discovery in the action to obtain theinformation sought; or

(iii) the burden or expense of the proposed discoveryoutweighs its likely benefit, taking into account theneeds of the case, the amount in controversy, theparties' resources, the importance of the issues atstake in the litigation, and the importance of theproposed discovery in resolving the issues.

Fed.R.Civ.P. 26(b)(2). “A party or an attorneyresponsible for the issuance and service of a subpoenashall take reasonable steps to avoid imposing undueburden or expense on a person subject to that subpoena.”Fed.R.Civ.P. 45(c)(1).

DISCUSSION

Plaintiff Tessera moves to compel production ofdocuments from non-party Hynix SemiconductorAmerica on the grounds that the documents requestedare relevant, that the documents sought from Hynix,Inc. are within the control of its U.S. subsidiary HynixSemiconductor America and that the documents soughtare within three narrowly tailored categories.

A. Documents Subpoenaed are RelevantHynix, Inc. is a Korean company and parent toU.S. subsidiary, Hynix Semiconductor America. BecauseHynix, Inc. participated in the price fixing conspiracywith various semiconductor manufacturers, plaintiffTessera alleges that Hynix Semiconductor Americahas documents especially relevant to the underlyinglitigation. Plaintiff Tessera seeks documents from Hynix,Inc. and Hynix Semiconductor America and “eachof their successors, predecessors and related entities,including subsidiaries, parent corporations, divisions,officers, directors, employees, agents, representatives,attorneys and anyone acting on their behalf.” (collectivelythe “Hynix Semiconductor companies”). Specifically,plaintiff Tessera seeks documents responsive to thefollowing document requests: (1) documents alreadyproduced in other cases involving the same issues inTessera's case against Micron Technology, Inc. and theInfineon companies; (2) documents relating to Tessera

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and its technology; and (3) communications relating topackaging technology used in DRAM products.

*4 Non-party Hynix Semiconductor America challengesthe relevance of the requested documents on the groundsthat the Korean parent company pleaded guilty to anantitrust violation that was unrelated to the synchronousdynamic random access memory chip developed byRambus. Indeed, the plea agreement specifically excludedRDRAM chips. The claims set forth in the complaintfiled in the underlying litigation relate to price fixing ofRDRAM chips only. Therefore, Hynix SemiconductorAmerica rejects any attempt by plaintiff Tessera to suggestthe documents requested are relevant because the HynixSemiconductor companies participated in claims of pricefixing for the DRAM chips.

As the Hynix Semiconductor companies weresemiconductor manufacturers of DRAM chips duringthe relevant time period, currently license plaintiffTessera's semiconductor packaging technology and aremaking back payments for prior use of such technologyand have been involved in numerous governmentalinvestigations, patent and antitrust litigation matterswhich involved defendants Micron and Infineon, thedocuments requested are relevant to the claims set forth inplaintiff Tessera's complaint.

1. Hynix Semiconductor America Does Not HaveControl Over All Documents in Possession of itsParent Company, Hynix Semiconductor Industries,Inc.

Plaintiff Tessera argues that non-party HynixSemiconductor America is required to produce responsivedocuments from parent company, Hynix, Inc., which arein its “possession, custody or control.” Plaintiff Tesseraargues that Hynix Semiconductor America controlsdocuments even in the possession of Hynix, Inc. because ithas the legal right to obtain such documents on demand.Though the Ninth Circuit has not specifically definedwhat constitutes a “legal right” to obtain documents “ondemand,” plaintiff Tessera argues that the language isnot to be narrowly interpreted. Rather the inquiry shouldbe factual and case specific. In support of its position,plaintiff Tessera cites to cases where courts have foundthat a subsidiary may have control of documents inpossession of the parent company. For example, courtshave determined that a subsidiary controls documents inpossession of the parent company when counsel for the

subsidiary has admitted access to documents in possessionof the parent company or when the subsidiary can obtaindocuments in possession of the parent company in theordinary course of business. See, e.g., Hunter Douglas, Incv. Comfotex Corp., No. M8-85 (WHP), 1999 U.S. Dist.LEXIS 101 (S.D.N.Y. Jan. 11, 1999) and Camden Iron &Metal, Inc. v. Marubeni America Corp., 138 F.R.D. 438(D.N.J.1991).

In Choice-Intersil Microsystems, Inc. v. Agere Sys.,224 F.R.D. 471 (N.D.Cal.2004) the court compelledthe production of documents from a non-party thatwas the wholly-owned U.S. subsidiary of a Germanparent company. Plaintiff Choice-Intersil alleged claimsof breach of contract and trade secret misappropriationrelated to a wireless medium access controller chip(“WMAC”). Despite arguments that the U.S. subsidiaryand the German parent company were distinct entitiesand that the U.S. subsidiary did not have control ofdocuments in possession of the German parent company,the court found that the U.S. company was a wholly-owned subsidiary of the German parent company, thatnotwithstanding changes in market conditions, the U.S.subsidiary would have marketed the WMAC in NorthAmerica, that the U.S. subsidiary and the Germanparent company shared databases for documents andrecords and that the U.S. subsidiary was able to obtaindocuments from the German parent company related tothe marketing of the WMAC chip upon demand. Basedon the ability of the U.S. subsidiary to obtain high-level marketing documents related to WMAC from theGerman parent company, the court concluded the U.S.subsidiary also had control over technical documentsrelated to WMAC also in possession of the German parentcompany.

*5 Here, plaintiff Tessera argues that HynixSemiconductor America has access to documents from itsKorean parent company. First, during the parties' effortsto meet and confer, counsel for Hynix SemiconductorAmerica admitted that it has the ability to producedocuments which originated from the Korean parentcompany. Second, documents originating from the parentcompany already would have been produced in responseto preceding litigation, including the FTC and U.S.Department of Justice investigations. Moreover, theKorean parent company and the U.S. subsidiary share thesame U.S. counsel in whose offices such documents arelikely stored.

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Hynix Semiconductor America also has the ability toobtain documents from Hynix, Inc. in the ordinarycourse of business. Plaintiff Tessera points to the Hynixwebsite which states that non-party Hynix SemiconductorAmerica forms part of a global sales network for thesales, marketing and distribution of Hynix productsin the United States. Additionally, the website reflectsthat Hynix Semiconductor America is involved inthe research and development of, inter alia, advancedpackaging technology. Finally, Hynix, Inc. exercisessignificant control over its U.S. subsidiary. The Koreanparent company owns 96.7 percent of non-party HynixSemiconductor America and the two companies haveoverlapping directors. Of the three board of directorsfor the U.S. subsidiary, two overlap with the Koreanparent company. The CEO and Chairman of the Boardfor Hynix, Inc. is also a director on the board of the U.S.subsidiary.

In opposition, non-party Hynix Semiconductor Americadisputes that it controls documents in possession of theKorean parent company. Instead, Hynix SemiconductorAmerica explains that during efforts to meet and confer ondiscovery issues, counsel offered to produce a limited setof documents which originated from the Korean parentcompany and was previously produced in Rambus-related

litigation. 5 Hynix Semiconductor America contends suchan offer fails to demonstrate that it has access to anyand all documents in possession of its Korean parentcompany and therefore, plaintiff Tessera has not met itsburden in showing the U.S. subsidiary controls documentsin possession of the parent company. Non-party HynixSemiconductor America distinguishes the Choice-Intersilcase by arguing that the court compelled production ofdocuments, which was very narrow in scope. There, thecourt ordered production of documents for the marketingand technical development of a specific product becausethe U.S. subsidiary was to become the North Americandistributor for that product and therefore, the U.S.subsidiary had access to those specific-type documentsfrom the parent company.

5 In a December 7, 2005 letter, counsel forHynix Semiconductor America stated that “[a]s acompromise ..., we would be willing to produce toTessera documents originating from [Hynix, Inc.]which have already been produced, whether inresponse to discovery or through other agreements,

within the litigations referenced in your letter,provided these documents contain the search termsdiscussed below. I want to stress that we do not believewe are legally required to produce these documentsunder the subpoena, but are offering to produce thesedocuments in the spirit of compromise.” Declarationof Keith L. Slenkovich in Support of Non-partyHynix Semiconductor America, Inc.'s Opposition toPlaintiff Tessera's Motion to Compel Productionof Documents Pursuant to Subpoena to HynixSemiconductor America, Inc. (Slenkovich Decl.”),Exh. D.

“Control is defined as the legal right to obtain documentsupon demand.” United States v. International Union ofPetroleum and Indus. Workers, AFL-CIO, 870 F.2d 1450,1452 (9th Cir., 1989). “The party seeking production of thedocuments bears the burden of proving that the opposingparty has such control.” Id.

*6 Aside from documents from the Korean parentcompany which are already in possession of theU.S. subsidiary as a result of preceding governmentalinvestigations, antitrust and patent litigation, plaintiffTessera has not shown that Hynix SemiconductorAmerica has the legal right to obtain other documentsfrom Hynix, Inc. upon demand. Although the Koreanparent company owns 96.7 percent of the U.S. subsidiary,the Hynix Semiconductor companies form a globalsales, marketing and distribution network, the HynixSemiconductor companies have undertaken joint effortsin research and development of advanced packagingtechnology, the Hynix Semiconductor companies haveoverlapping directors and share counsel, there is nospecific showing that Hynix Semiconductor America hasthe legal right to obtain any of the documents set forth inthe document requests upon demand. In Choice-Intersil v.Agere, supra, 224 F.R.D. at 472, the court found that theU.S. subsidiary had specific access to certain documentsin possession of the German parent company. PlaintiffTessera makes no showing that Hynix SemiconductorAmerica shares any document databases with its Koreanparent company or that Hynix Semiconductor Americacan obtain documents related to DRAM, RDRAM orTessera semiconductor packaging technology from itsKorean parent company upon demand. To the extent, thetwo entities share the same counsel, their counsel alonecould have sought documents independently from eachof the respective entities to respond to FTC and U.S.Department of Justice investigations and other antitrustand patent related matters. Moreover, it appears the pre-

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existing database of relevant documents was collected inresponse to litigation matters and not obtained by theU.S. subsidiary from the parent company in the ordinarycourse of business. That the Hynix Semiconductorcompanies form a global network or jointly undertakeresearch and development efforts in advanced packagingtechnology does not mean that the U.S. subsidiary iswholly-owned or controlled by the parent. See, e.g., U.S.v. Int'l Union of Petroleum and Indus. Workers, AFL-CIO, 870 F.2d 1450, 1453-1454 (“Control must be firmlyplaced in reality, not in an esoteric concept such as‘inherent relationship.” ’) and In re Legato Systems, Inc.,204 F.R.D. 167 (N.D.Ca.2001) (defendant compelled toproduce his testimony before the SEC because defendantwas entitled to request the transcript and such requestwould only be denied for “good cause.”). Therefore,the duty by Hynix Semiconductor America to producedocuments from its Korean parent company is limitedto existing electronic databases containing documentsalready in its possession (or that of their counsel).

B. Burden of Subpoena to Non-Party HynixSemiconductor America

1. Scope of the Document RequestsPlaintiff Tessera contends it has subpoenaed documentsfrom Hynix Semiconductor America in three narrowlytailored categories. Non-party Hynix SemiconductorAmerica asserts that the document requests are overbroadand burdensome.

a. Document Request No. 1*7 Document Request No. 1:

All documents produced inantitrust-related legal proceedings,including the FTC investigationentitled In the Matter of RambusIncorporated, Docket No. 9302,the DOJ investigation of Hynix'santicompetitive conduct in theDRAM industry, In re DynamicRandom Access Memory (DRAM)Antitrust Litigation, Docket No.02-cv-01486 filed in the NorthernDistrict of California, andCoordinated DRAM Cases, JudicialCouncil Coordination proceeding

No. 4265 filed in the CaliforniaSuperior Court, San FranciscoCounty.

Response to Document Request No. 1:

Hynix Semiconductor America objects to this requeston the grounds that it is overbroad, burdensome, andnot relevant to the matters at issue in the litigationin this case. In addition to seeking many millionsof pages of documents originating from numerousparties, almost all of which are subject to variousforms of protective order, HSA is informed and believesthat under the state of current proceedings at issuein the present litigation, the only documents whichrelate to the threshold issue of antitrust standingfor Tessera are documents that specifically relate toTessera. Specifically, the Court in this matter recentlyruled that “Tessera's only remaining avenue for itsantitrust claims is to show that as a licensor to thechip market, it was the target of the Defendants'conspiracy.” For Tessera to impose on a thirdparty the enormous burden suggested by this overlybroad request under these circumstances would bedisproportionately burdensome and oppressive. HSA iswilling to meet and confer with Tessera to appropriatelylimit the scope of this request so that it is limited to theissues in the case and does not impose an undue burdenon HSA. Any document produced must be governed byan appropriate protective order.

Plaintiff Tessera asserts the first document request isnarrowly tailored because it seeks documents related tothe FTC and U.S. Department of Justice investigationsof the DRAM industry and any related civil actions.Documents from preceding litigation may be relevantin showing the nature and breadth of the conspiracyin the underlying litigation by defendants and third-parties, such as the Hynix Semiconductor companies.Specifically, plaintiff Tessera considers the documentsrelevant to issues in the case, including the scope of thesemiconductor manufacturers' conspiracy to manipulatethe DRAM market, semiconductor manufacturers'attempts to boycott RDRAM and the semiconductormanufacturers exchange of technical information to avoidpayments of significant royalties to companies such asRambus and Tessera.

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Non-party Hynix Semiconductor America objects tothe request on the grounds that it is overbroad andburdensome. Hynix Semiconductor America complainsthat the request encompasses “thousands of documents”and to seek documents produced in “any antitrust-related legal proceeding” is overbroad. Moreover, HynixSemiconductor complains that the request has not beennarrowed to specify whether it must produce responsivedocuments in “any antitrust-related legal proceeding”in which it was a party, witness and/or non-party.Hynix Semiconductor America further complains thatit possesses thousands of pages of documents that evenoriginated from other parties and subject to various formsof protective order.

*8 In reply, plaintiff Tessera asserts that HynixSemiconductor America need merely produce existingelectronic databases of documents on DVD-ROMS orhard drives to respond to the subpoena. Plaintiff Tesserafurther asserts that Hynix Semiconductor Americaneedlessly delayed its response by failing to agree toa list of search terms proffered during the parties'meet and confer. For example, Hynix SemiconductorAmerica would not agree to include defendants Microncompanies and Infineon companies on the list of proposedsearch terms. Plaintiff Tessera also asserts that theU.S. Department of Justice investigation included theRDRAM chip and whether or not Hynix, Inc. pleadedguilty to an antitrust violation that excluded RDRAMdoes not make the document request not relevant.Finally, plaintiff Tessera explains it only seeks documentsproduced by Hynix Semiconductor companies in whichit was a party in preceding “antitrust-related” legalproceedings.

As an initial matter, plaintiff Tessera is not limitedto seeking documents related to establishing antitruststanding in the underlying litigation. During efforts tomeet and confer which spanned from early September2005 through late January 2006, the parties discussed aproposed list of search terms to run through electronicdocument databases created by the Hynix Semiconductorcompanies for preceding governmental investigations,related antitrust and patent litigation. Plaintiff Tesseraproposed the following list of search terms: Tessera,packaging, package, packages, ball grid array, chip scalepackage, chip scale packaging, BGA, CSP, compliant,compliant layer, patent, Micron and Infineon. HynixSemiconductor companies later agreed to the proposed

list of search terms except for “patent,” “Micron” and“Infineon.” Plaintiff Tessera later rejected non-partyHynix Semiconductor America's counter-proposal andbrought this motion to compel. Following the filing ofits motion to compel, plaintiff Tessera sought furthercompromise by requesting that the proposed searchterm list include the terms RDRAM and Rambus. Inturn, non-party Hynix Semiconductor America rejectedthe counter-counter-proposal. Hynix SemiconductorAmerica complained that including “RDRAM” and“Rambus” to the proposed list of search terms yielded150,000 document “hits,” which consists of approximately2.2 million pages.

Accordingly, non-party Hynix Semiconductor Americashall produce on DVD-ROMS or hard drives documentsderived using specific search terms from databases createdfor the U.S. Department of Justice investigation of theDRAM industry and any related preceding litigationin which the Hynix Semiconductor companies were aparty. The following search terms shall be run throughelectronic document databases for production to plaintiffTessera: Tessera, packaging, package, packages, ballgrid array, chip scale package, chip scale packaging,BGA, CSP, compliant, compliant layer, RDRAM,Micron and Infineon. Because Hynix SemiconductorAmerica has stated that the electronic document databasefor the FTC investigation of the DRAM industrycannot be electronically searched (beyond the “re” line),Hynix Semiconductor America shall produce the entireelectronic document database from that investigationon hard drive or DVD-ROM subject to the following

conditions. 6 Hynix Semiconductor America shall notifyrelevant third parties that documents subject to protectiveorder have been or will be produced to plaintiffTessera. In an effort however to avoid any undueburden on non-party Hynix Semiconductor America,plaintiff Tessera shall assume responsibility to review thedocuments produced on DVD-ROMS and/or hard drivesfor responsiveness and obtain permission from any thirdparties for permission to use such documents. The DVD-ROMS and/or hard drives and all documents containedtherein (regardless of their responsiveness to documentrequest no. 1) shall be designated “Confidential-OutsideAttorney Eyes Only” pursuant to the stipulated protectiveorder negotiated between the parties in this motion andin the underlying litigation. Plaintiff Tessera shall assumethe burden to challenge the designation of any documentsproduced by Hynix Semiconductor America. As discussed

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above, production of documents from the Korean parentcompany is limited to documents which preexisted onelectronic databases from preceding litigation.

6 The court was surprised that during the hearingplaintiff Tessera admitted that it had not thoroughlyreviewed the 5,200 documents previously producedby non-party Hynix Semiconductor America. HynixSemiconductor America stated that a portion ofthe documents already produced contain someFTC documents. In light of the looming discoverydeadline, the court will allow production ofdocuments from the FTC investigation despiteplaintiff Tessera's admitted failure to thoroughlyreview all documents already produced by non-partyHynix Semiconductor America.

b. Document Request No. 2*9 Document Request No. 2:

All documents, includinginternal communications andcommunications with third-parties,concerning Tessera or Tesseratechnology.

Response to Document Request No. 2:

Hynix Semiconductor America(“HSA”) objects to this request onthe grounds that it is vague andambiguous in its use of the terms‘concerning Tessera,’ causing HSAto speculate as to what documentsare sought. HSA is willing tomeet and confer with Tessera toappropriately limit the scope ofthis request so that it is limitedto the issues in the case and doesnot impose an undue burden onHSA. Any documents producedmust be governed by an appropriateprotective order.

As set forth in Judge Davis's July 13, 2005 Order, plaintiffTessera must allege certain facts as a licensor in thechip market to establish antitrust standing. Therefore,plaintiff Tessera contends it seeks documents identifiedin this document request to determine whether the HynixSemiconductor companies may have had communications

with others to conspire to target licensors in the chipmarket, including Tessera and its technology.

Non-Party Hynix Semiconductor complains that thesecond document request is vague and ambiguous becausethe term “Tessera technology” is undefined in thesubpoena. Hynix Semiconductor America contends that itis willing to produce documents concerning Tessera only.

In reply, Tessera asserts that Hynix SemiconductorAmerica's objections are baseless. Tessera states thatduring efforts to meet and confer, it provided furtherelaboration as to the meaning of “Tessera technology.”Tessera explains that its technology is known bycertain trademarks and that the Hynix Semiconductorcompanies have licensed Tessera's technology and someof its employees have received specific training towardits implementation. Based on Hynix SemiconductorAmerica's agreement to produce responsive documentsrelating to Tessera and the ensuing clarification fromplaintiff regarding the meaning of its technology, themotion to compel production of documents to documentrequest no. 2 is granted. As discussed above, production ofdocuments from the Korean parent company is limited todocuments which preexisted on electronic databases frompreceding litigation.

c. Document Request No. 3Document Request No. 3:

All communications andpresentations, including internalcommunications and presentationsand those with third-parties, relatingto packaging technology used inor considered for use in DRAM,including SDRAM, RDRAM,DDR, DDR2 and DDR3.

Response to Document Request No. 3:

Hynix Semiconductor America(“HSA”) objects to this request onthe grounds that it is overbroad,burdensome, and not relevant tothe matters at issue in the litigationin this case. In consideration ofthe foregoing general and specificobjections, HSA will produce no

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documents pursuant to this request.HSA is willing to meet and conferwith Tessera to appropriately limitthe scope of this request so that it islimited to the issues in the case anddoes not impose an undue burdenon HSA. Any document producedmust be governed by an appropriateprotective order.

*10 Plaintiff Tessera argues that it seeks documentsidentified in the third document request for the samereasons it seeks documents identified in the seconddocument request. The documents sought may be relevantto establishing plaintiff Tessera's antitrust standing inthe underlying litigation. Communications between theHynix Semiconductor companies and others relatingto semiconductor packaging technology may show thatplaintiff Tessera and/or it technology was targeted by thedefendants Micron companies and Infineon companies.

Hynix Semiconductor America objects to the documentrequest on the grounds that it is overbroad, burdensomeand not relevant. Additionally, plaintiff Tessera hasplaced no time limitation on the breadth of the request.Hynix Semiconductor America asserts that the requestinvolves potentially millions of pages of documentsbecause the request is not limited by time, by type ofpackaging, by identifying third parties, by generation orby type of DRAM.

In reply, plaintiff Tessera states that the HynixSemiconductor companies' communications with othersrelating to packaging technology in DRAM chips mayshow preferences for certain packaging technology.The communications between the Hynix Semiconductorcompanies and others may show that defendants in theunderlying litigation chose certain packaging technologyfor anticompetitive reasons.

As production in response to document request no.3 may involve millions of pages of documents, thecourt finds the request constitutes an undue burdenon non-party Hynix Semiconductor America. Moreover,documents produced in document request no. 2 wouldshow if there were efforts by defendants in the underlyinglitigation to choose certain packaging technology ratherthan Tessera's packaging technology for anticompetitivereasons. For the reasons stated by plaintiff Tessera in

seeking documents responsive to document request no.3, it is also duplicative. Therefore, plaintiff's motion tocompel production of documents in response to document

request no. 3 is denied without prejudice. 7

7 During the hearing, plaintiff Tessera stated for thefirst time that it would agree to limit production ofdocuments responsive to document requestno. 3 tocertain third parties, including JEDEC, SLDRAM,Inc., Advanced DRAM Technology, SynclinkConsortium and Counsel for Computing Power.However, this modification was not previouslydiscussed in the moving papers, the reply or plaintiff'sresponse to the sur-reply.

2. Costs Incurred by Non-party Hynix SemiconductorAmerica

Finally, non-party Hynix Semiconductor America arguesthat the document requests are unduly burdensome.Despite non-party Hynix Semiconductor America'sextensive efforts to meet and confer and determine thescope of the subpoena duces tecum, the burden andattendant cost of such a large scale document productionhas been significant. Non-party Hynix SemiconductorAmerica has collected, reviewed and designated more than100,000 pages of documents for production. Moreover,non-party Hynix Semiconductor America has incurredcosts of more than $70,000. Therefore, non-party HynixSemiconductor America seeks reimbursement for its costs.

“[A]n order to compel production shall protect anyperson who is not a party or an officer of a partyfrom significant expense resulting from the inspectionand copying commanded.” Fed.R.Civ.P. 45(c)(2)(B). Indetermining whether to award costs to a non-party, thecourt considers factors, including the scope of the request,the invasiveness of the request, the need to separateprivileged material, the non-party's financial interest inthe litigation, whether the party seeking production ofdocuments ultimately prevails, the relative resources ofthe party and the non-party, the reasonableness of thecosts sought and the public importance of the litigation.William W. Schwarzer, A. Wallace Tashima, JamesM. Wagstaffe, Federal Civil Procedure Before Trial,11:2308-2309. Generally, attorneys' fees and overheadcosts are not permitted. Id.

*11 Because non-party Hynix Semiconductor Americamay incur significant costs in producing documents

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responsive to the subpoena duces tecum, an awardto cover such costs may be appropriate. As HynixSemiconductor America has not completed production,and the extent of the total costs incurred is not available,the court is not prepared to rule on the merits of such amotion at this time. Hynix Semiconductor America maybring a motion at a later date seeking award of such costs.

CONCLUSION

For the foregoing reasons, Plaintiff's motion tocompel production of documents from non-party HynixSemiconductor America is granted in part and deniedin part. Hynix Semiconductor America shall producedocuments within fifteen (15) days of the date of this

order. 8

8 Non-party Hynix Semiconductor America'sproduction of documents is subject to a stipulated

protective order. See, Stipulated Protective OrderRegarding Documents Produced Pursuant toSubpoena to Hynix Semiconductor America, Inc.signed by U.S. Magistrate Judge John D. Love,Eastern District of Texas, on March 6, 2006(“March 6, 2006 Order”). The March 6, 2006 Orderincorporates by reference the term and protectionsof the July 29, 2005 stipulated protective order inthe underlying action. Declaration of Trevor V.Stockinger In Support of Tessera, Inc.'s Response toSurreply to Tessera's Motion to Compel Productionof Documents Pursuant to Subpoena to HynixSemiconductor America, Inc. (“Stockinger Suppl.Decl.”), Exhs. 17 and 18.

IT IS SO ORDERED.

All Citations

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