DR Distribs., LLC v. 21 Century Smoking, Inc.

513 F.Supp.3d 839

DR DISTRIBUTORS, LLC, Plaintiff-Counterdefendant,

v.21 CENTURY SMOKING, INC., and Brent Duke, Defendants-Counterclaimants,

v.CB Distributors, Inc., and Carlos Bengoa, Counterdefendants.

No. 12 CV 50324

United States District Court, N.D. Illinois, Western Division.

Signed January 19, 2021

Brian M. Gaynor, Nicoll Davis & Spinella LLP, Paramus, NJ, Robert Charles von Ohlen, Jr., Robert C. von Ohlen & Associates, Lake Forest, IL, Anthony J. Davis, Pro Hac Vice, Santomassimo Davis LLP, Parsippany, NJ, for Plaintiff-Counterdefendant DR Distributors, LLC.

Brian M. Gaynor, Nicoll Davis & Spinella LLP, Paramus, NJ, for Counterdefendants CB Distributors, Inc., Carlos Bengoa.

Kevin Bruce Salam, Law Offices of Kevin Salam, Michael Irving Leonard, Leonard Trial Lawyers LLC, John G. Bisbikis, LeonardMeyer LLP, Chicago, IL, for Defendants-Counterclaimants.

MEMORANDUM OPINION AND ORDER

Iain D. Johnston, United States District Judge

I. INTRODUCTION AND CONCLUSION

A. Ominous Foreshadowing

B. Issue Before the Court

C. Sanctions Imposed

II. EXPLANATION FOR CONCLUSION

A. Background

B. Evidence Produced at Hearing and Contained in the Record

1. Court's Reaction to the Evidentiary Hearing

2. Witnesses

a. Brent Duke

b. Thomas Leavens

c. Heather Liberman

d. Travis Life

e. Peter Stamatis

f. Steven Shonder

g. Chad Gough

3. Findings of Fact: What Happened a. Pre-Litigation: 2009—2012

i. Duke's E-Commerce Businesses and IT Systems

ii. "Personal" v. "Corporate" Email Accounts & Auto-forwarding

iii. Duke's Communication and Relationship with SEO Consultant Saraswat

iv. Duke Learns of Plaintiff's Trademark

b. 2012

i. Initiation of Litigation and Pleadings

ii. Leavens’ Meeting with Duke About Disclosures

c. 2013

i. Online Sales ESI

ii. Preliminary Injunction

iii. Amended Pleadings Because of Preliminary Injunction Hearing

iv. Las Vegas Tradeshow

v. Defendants Move for Partial Summary Judgment

d. 2014

i. The Undersigned's Entry into the Case

ii. Liberman Meets with Duke About ESI

iii. Judge Kapala's Partial Summary Judgement Ruling

iv. First Failed Settlement Conference

v. Defendants Added Defamation Counterclaim

vi. Defendants Contract with ESI Vendor

vii. ESI Vendor Copies Computers Hard Drives But Not Web-based Emails

viii. Unreasonable Reaction to Volume of ESI Recovered

e. 2015

i. Court's Discovery Orders

ii. Plaintiff's Motion to Compel and Court's Order

iii. Stamatis Appears and Duke is Deposed

iv. Court's Concerns About Duke's Deposition Testimony

v. Duke Allegedly First Learns of Spoliation by Autodeletion

vi. Court's Concerns About Autodeletion

vii. Plaintiff Seeks to Add Invited Defamation Defense

f. 2016

i. Expert Discovery

g. 2017

h. 2018

i. Cross-Motions for Summary Judgment

ii. Former Defense Counsel's Scramble to "Figure It Out"

iii. What the Former Defense Counsel Don't "Figure Out"

iv. Responses to Summary Judgment Motions and ESI Issues Emerge

v. Court Attempts to Understand ESI Problems

vi. Defendants Identify 15,000 Pages of Responsive Documents Not Produced

vii. Court's Warning Shots and Attempts to Resolve ESI Problems

viii. More ESI Concerns Emerge: Yahoo! Chat and Self-Collection

ix. Defendants and Former Defense Counsel Finally Investigate Yahoo! Chat

x. GoDaddy Accounts Remain Unsearched

xi. San Diego Meeting xii. Defendants and Former Defense Counsel's Failed Escape from ESI Blunders: The Motion to Dismiss the Defamation Counterclaim

i. 2019

i. Sanctions Motion Schedule

ii. Former Defense Counsel Finally "Figure It Out" About GoDaddy Accounts Because Duke Finally Tells Them

iii. New Defense Counsel Appear and Court Attempts to Resolve the Case

iv. Evidentiary Hearing Held

v. Post-Hearing Briefs Filed

(a) Plaintiff's Brief

(b) Defendants’ Brief

(c) Leavens, Strand & Glover Brief

(d) Stamatis’ Brief

(e) Shonder's Brief

vi. Post-Hearing Activity Included Mediation

C. The E-Discovery Process: Same As It Ever Was

1. Identification of ESI: The Whole Process Starts Here

2. Preservation of ESI: The Litigation Hold

3. Collection of ESI

4. Review of ESI

5. Disclosure/Production of ESI

6. Three Assumptions Underlying the ESI Discovery Process

a. Competence of Counsel

b. Honesty and Candor of Client

D. Legal Authority to Impose Sanctions

1. Bases the Court Will Not Use

a. Inherent Authority and Civil Contempt

b. Rule 11

c. Rule 56(h)

d. 28 U.S.C. § 1927

2. Bases for Sanctions

a. Rule 26(g)

b. Rule 37

i. Rule 37(a)

ii. Rule 37(b)

iii. Rule 37(c)

iv. Rule 37(e)

v. Rule 37 ’s Exceptions for Sanctions

E. Application of Findings to Relevant Law

1. Sanctions are Warranted under Rules 26(g), 37(a), (b), (c)

a. Rule 26(g)

b. Rule 37(a)

c. Rule 37(b)

d. Rule 37(c)

2. Defendants’ Failures were Not Substantially Justified or Harmless, and Sanctions would not be Unjust

3. Curative Measures are Necessary under Rule 37(e)

a. Evidentiary Issues

b. Background of Yahoo! Chats and GoDaddy Emails

i. Yahoo! Chats

ii. GoDaddy Emails

c. Rule 37(e) Decision Tree Analysis

i. Was the Information ESI?

ii. Was There a Duty to Preserve the ESI?

iii. Was the ESI Relevant?

iv. Was the ESI Lost Because a Party Failed to Take Reasonable Steps?

v. Was the Lost ESI Unable to be Restored or Replaced?

vi. Was There Intent to Deprive/Was There Prejudice?

d. Curative Measures Imposed 4. Default and Dismissal Are Not Warranted

I. INTRODUCTION AND CONCLUSION

A. Ominous Foreshadowing

"Snakebit"—That's how a former defense counsel described this case. But "snakebit" connotes the unfortunate circumstances that befall unsuspecting victims. That didn't happen here. Instead, through a series of missteps, misdeeds, and misrepresentations, Defendants and the former defense counsel find themselves looking down the barrel of a sanctions motion Howitzer. If any entity has been snakebit, it's this Court.

This case has taught this Court that—like Boxer the Horse in Animal Farm —it cannot solve all problems by just working harder. No matter how hard this Court tried to move this case to a just, speedy, and inexpensive determination, it was thwarted. This case is evidence that early and constant case management does not necessarily result in a prompt resolution or avoidance of problems.

This case was filed eight years ago in 2012. There are over 400 docket entries now. And no end is in sight. The case was assigned to the undersigned in 2014, while a summary judgment motion was pending before the then District Judge. In keeping with this Court's practice of active (perhaps hyperactive) case management, immediately upon the transfer of the case, this Court held an in-person status conference.¹ At this conference, this Court specifically addressed electronic discovery issues. The Court asked counsel if litigation holds were issued. Dkt. 367, at 6. No one informed the Court that they had not been issued. It turns out, defense counsel issued no written litigation hold to Defendants. The Court warned that it did not want to have a problem because of the lack of litigation holds. Id. The Court then asked each side if the record custodians had been identified. Defense counsel said they were and identified Brent Duke as the custodian. The Court asked defense counsel if Duke was sufficiently knowledgeable with electronically stored information (ESI). Id. at 7. Defense counsel said that Duke was generally knowledgeable. To drill down, the Court specifically asked if Duke were asked about metadata and native applications, would Duke understand those terms. Defense counsel said generally he would. Id. As will be shown below, Duke's purported knowledge of ESI is now hotly debated. The Court then asked the parties how they intended to search for ESI, whether through search terms or predictive coding/technology assisted review. The parties said that they had not yet discussed that issue. The Court then specifically ordered the parties to "reconvene a 26(f) conference to discuss e-discovery issues in detail with custodians for each side." Dkt. 78 (emphasis added). In ordering the parties to engage in this process—one mandated by the Federal Rules of Civil Procedure—the Court said that it did not want to have "an e-discovery snag ... [that] throws the entire schedule out the window." Dkt. 367 at 9. If that initial status hearing and court order did not place all counsel, and specifically the former defense counsel, on notice that ESI was an important issue to this case and to this Court and that e-discovery should be taken seriously, the Court is at a loss as to what else it could do to notify them.

B. Issue Before the Court

As anticipated in a previous order, DR Distribs., LLC v. 21 Century Smoking, Inc. , No. 12 CV 50324, 2015 WL 5123652, 2019 U.S. Dist. LEXIS 22404 (N.D. Ill. Feb. 12, 2019), currently pending before the Court is Plaintiff's motion for sanctions relating to the failure to timely produce ESI and for the spoliation of ESI as well as other alleged misdeeds. Plaintiff has requested a full arsenal of sanctions weapons, including civil contempt, inherent authority, 28 U.S.C. § 1927, and Federal Rules of Civil Procedure 11, 26(g), 37, and 56(h). Dkt. 294. According to Plaintiff, because of Defendants’ and the former defense counsel's actions and inactions, the only reasonable sanction is defaulting Defendants and dismissing their counterclaims. (Occasionally, these sanctions are referred to as the "nuclear option[s]." Gerace v. Andrews , No. 16 C 721, 2017 WL 1822290, at *1, 2017 U.S. Dist. LEXIS 68790, at *1 (N.D. Ill. May 5, 2017). Defendants and the former defense counsel now unreasonably assert that modest sanctions, at most, should be imposed. This assertion is contrary to one of the former defense counsel's confession that he "would be hard pressed to say there shouldn't be sanction on this." Dkt. 315, at 9. Apparently, once the lawyers lawyered up, they changed their tune.

The issue for this Court is to determine in its discretion what, if any, sanctions should be imposed, against whom, and under what authority. In deciding this issue, the Court held five days of evidentiary hearings, admitted voluminous documents into evidence, and carefully listened to the testimony of witnesses and...