Author: Dana Kutzleb
Case Citation: Klipsch Group, Inc. v. ePRO E-Commerce Ltd., 16-3637-cv (2d Cir. Jan 25, 2018).
Employee/Personnel/Employer Implicated: CEO, CFO, various employees in unspecified positions deemed “custodians of responsive information”
eLesson Learned: Willful spoliation of discovery can result in exorbitant sanctions and cost restitution to adversaries, regardless of the ultimate award of damages.
Tweet This: The Price of Willful Spoliation is an Adversary’s Costs of Investigation

The process of discovery tends to be the costliest phase of litigation, save a trial itself. Generally, the costs associated with discovery come from the gathering, organizing, copying, and producing the demanded documents: a process that can take months and drain tremendous resources. While the information learned in the discovery phase is typically invaluable to the case and often bases for case resolution, the bank-breaking prices can have parties wishing they could simply pretend the information doesn’t exist. The Second Circuit recently disincentivized the cost-saving yet rule-breaking practice of spoliation, however, when it awarded a plaintiff more than 100 times the value of the litigation damages as sanctions for discovery violations. (“Continue Reading…”)

In Klipsch Group, Inc. v. ePRO E-Commerce Ltd., the Second Circuit affirmed a district court’s imposition of sanctions for continuous, willful spoliation by the defendant. Plaintiff Klipsch Group, a maker of electronic sound equipment, sued Defendant ePRO alleging ePRO’s sale of counterfeit headphones that unlawfully mimicked Plaintiff’s product. That ePRO’s subsidiaries engaged in infringing sales is undisputed; the controversy arises in the number of sales of the infringing products. The Plaintiff claimed sales of approximately $5M; ePRO asserted the profit was closer to $8,000.

Over the course of the litigation, as the parties entered the discovery phase, the Defendant failed to produce the documents demanded by Plaintiff through lawful means: as of the time when Plaintiff was to depose its employees, ePRO produced less than 500 pages of documents in discovery. ePRO ultimately admitted some failures and agreed to retain an e-discovery vendor, who was able to extricate an additional 40,000 documents relevant to the litigation. The documents contradicted the testimony given by the CEO in depositions, and the vendor revealed that ePRO both limited the vendor’s investigation and failed to enact a “litigation hold,” or policy of preservation, as instructed by the court. Plaintiff moved for sanctions at this time, but the court instead allowed Plaintiff to conduct its own investigation at its own cost, with the option of seeking reimbursement depending on the results. The e-investigator uncovered evidence of document deletion and manipulation, data-wiping software, and a failure to preserve the information on backup drives.

Court rules impose on parties the obligation to honestly and fairly disclose all reasonably sought evidence in the course of litigation. There are lawful remedies for challenges to document demands, which include negotiating with the adversary and relief from the court, but which DO NOT include the willful destruction of information relevant to the legal case. Moreover, the Rules incorporate certain limitations on demands to rein in over-eager discovery-seekers, which includes that discovery is “proportional to the needs of the case.” This means that a case with a court-estimated valuation of $25,000 should not cost one party $2.7 MILLION DOLLARS in discovery costs. But, given ePRO’s conduct, that is exactly what happened in this case: discovery cost ePRO 108 times what paying actual damages would have.

There are a few important lessons to be learned from this case: first and foremost, willful spoliation will cost you, even if the case has relatively little otherwise at stake. At numerous points, ePRO could have made better decisions: it could have been more responsive in the first instance, cooperated with its own e-discovery vendor, imposed a litigation hold at any point, and not actively manipulated and deleted relevant information. If that were the case, maybe ePRO would have had to pay $25,000 in damages, but the Defendant would not have had $2.7M in assets seized by the court before the trial even began. Also of note: the model behavior of the Plaintiff, which would continuously inform the court of the Defendant’s perceived failures and seek permission before taking corrective action. The takeaway: adhere to the rules of discovery and cooperate with the court’s directives, or the party-protecting proportionality requirement relating to discovery will not be able to shield you!

Dana Kutzleb, a third-year law student at Seton Hall University School of Law, focuses her studies in criminal law. Prior to law school, she graduated from Seton Hall University with B.A. degrees in political science and classical studies. In law school, Dana participated in the Seton Hall Center for Social Justice’s Criminal Defense Clinic and will clerk for a presiding criminal judge in the Superior Court of New Jersey upon graduation.

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