Osi Rest. Partners, LLC v. Oscoda Plastics, Inc.

266 N.C.App. 310

831 S.E.2d 386

OSI RESTAURANT PARTNERS, LLC f/k/a OSI Restaurant Partners, Inc. and Outback Steakhouse, Inc.; Bonefish Grill, LLC f/k/a Bonefish Grill, Inc.; Carrabba's Italian Grill, LLC f/k/a Carrabba's Italian Grill, Inc.; Cheeseburger in Paradise, LLC; OS Southern, LLC f/k/a OS Southern, Inc.; OSI/Fleming's, LLC f/k/a Outback/Fleming's, LLC; and Outback Steakhouse of Florida, LLC f/k/a Outback Steakhouse of Florida, Inc., Plaintiffs,

v.OSCODA PLASTICS, INC. and Allied Companies, LLC f/k/a The Allied Companies International, LLC and its successors in interest and/or related entities Allied Industries International, Inc.; Allied Flooring Products, Inc. ; Eco-Grip Central, LLC ; Eco-Grip East, LLC; Eco-Grip Flooring, LLC ; Eco-Grip Flooring Gulf Coast, LLC; and Eco-Grip Great Lakes, LLC, Defendants.

No. COA18-841

Court of Appeals of North Carolina.

Filed: July 16, 2019

Young Moore and Henderson, P.A., Raleigh, by Christopher A. Page and Jonathan L. Crook, for plaintiffs-appellees.

Parker Poe Adams & Bernstein LLP, Raleigh, by Kevin L. Chignell and Collier R. Marsh, for defendant-appellant Oscoda Plastics, Inc.

ZACHARY, Judge.

Defendant Oscoda Plastics, Inc.¹ appeals from the portion of the trial court's order imposing discovery sanctions in the form of striking its answer to Plaintiffs’ claims for negligence, breach of implied warranty, and breach of express warranty. Because Defendant was not given notice that sanctions might be imposed, we reverse that portion of the trial court's order.

Background

Plaintiffs are several restaurants operated under the parent company OSI Restaurant Partners, LLC (collectively, "Plaintiffs"). Defendant is a manufacturer of commercial flooring products, which Plaintiffs purchased and installed in 130 of their restaurants across the United States. Plaintiffs initiated the instant action against Defendant on 5 July 2013, alleging that the flooring they purchased from Defendant had "completely failed at numerous restaurants, requiring complete replacement of the flooring products at numerous of the Plaintiffs’ locations," as well as "costly repairs." Specifically, Plaintiffs alleged that the problems included "seam separation, seam distortion, bubbling under the flooring, flooring detachment from the substrate, and water ponding beneath the flooring." In their complaint, Plaintiffs asserted claims for negligence, breach of implied warranty, breach of express warranty, strict liability, negligent misrepresentation, and breach of consumer protection acts.

Through discovery, Plaintiffs sought to learn the extent of Defendant's knowledge of the alleged defects in its flooring. Plaintiffs requested that Defendant produce, inter alia , all documents that referred or related to (1) "the design, testing, or manufacture of" its flooring, (2) "any issues with or complaints about" the flooring, and (3) "any attempt to repair or otherwise correct the issues with or complaints about" the flooring.

Following Plaintiffs’ first motion to compel, Defendant indicated that it had certain "backup tapes" that might potentially contain responsive emails and documents.

On 4 September 2015, the trial court ordered Defendant to produce "all responsive, non-privileged documents contained on the backup tapes for the time period from 2006 through 2009." On 9 October 2015, Defendant filed a motion for reconsideration, contending that it had "obtained new information ... that indicates that recovery of the backup tapes will be far more expensive and time consuming ... than [Defendant] initially expected." However, after two orders extending Defendant's deadline to produce the backup tapes, Defendant returned to court, this time representing that it was unable to access the documents due to the fact that the backup tapes were encrypted.

On 16 March 2016, the trial court entered an order (the "Spoliation Order"), concluding that Defendant had "intentionally encrypted emails and ... intentionally failed to retain the electronic ability to retrieve the subject emails, with knowledge of their relevance and materiality for this case," and that Defendant had "suppressed its knowledge of this encryption for several months prior to it being revealed for the first time by forensic experts." The trial court ordered that Defendant be sanctioned with a "spoliation instruction to the jury unless, not less than 120 days prior to the trial, [Defendant] provide[d] Plaintiffs the subject emails in an unencrypted form."

Shortly thereafter, Defendant represented that it had discovered a means by which it could gain access to the documents on its backup tapes, and on 14 October 2016, Defendant produced more than 5,000 pages of those documents. When Plaintiffs reviewed the documents, they discovered a potential reference to the existence of flooring testing data. Plaintiffs requested that Defendant further supplement its document production to include those related materials, and after Plaintiffs filed a second motion to compel, Defendant produced additional documents. Defendant also indicated that it did not possess any additional responsive documents requested by Plaintiffs, but that such documents were in the possession of its sister company, Duro-Last. The trial court thus ordered Defendant to "use reasonable efforts to encourage the voluntary production of the Duro-Last Documents by Duro-Last."

Duro-Last produced 1,054 pages of documents on 13 July 2017. At that point, Defendant maintained that the terms of the Spoliation Order had been "fully satisfied," and on 13 November 2017, Defendant filed a motion to set aside the spoliation instruction.

According to Plaintiffs, however, the documents that they received from Duro-Last contained several highly relevant emails that would have been stored on Defendant's backup tapes, but nevertheless were not included within the 5,000 pages of documents that Defendant produced from the tapes. In particular, Plaintiffs emphasized an email sent from Defendant's technical sales manager to a Duro-Last representative, in which the manager stated, "we have been doing some testing on our vinyl flooring .... The biggest problem we have with material in the field is shrinking." According to Plaintiffs, this "smoking gun" email

was on the backup tapes, it is not privileged, it is relevant, it contains search terms [Defendant] apparently applied in [its] review, and it was sent from the only employee who supplied information for [Defendant's] responses to Plaintiffs’ first set of interrogatories, in which [Defendant] flatly denied any defects with its product .

Plaintiffs subsequently filed a motion to amend their complaint in order to allege "newly discovered facts related to [Defendant's] knowledge of defects in the [flooring] and [Defendant's] contemporaneous misrepresentations and fraudulent concealment of the same," and to "assert claims for fraudulent concealment and punitive damages against [Defendant] based on th[is] newly discovered evidence." Defendant consented to Plaintiffs’ motion to amend their complaint.

On 14 December 2017, Defendant's motion to set aside the spoliation instruction came on for hearing before the Honorable Robert H. Hobgood. Plaintiffs argued that the spoliation instruction was justified based upon Defendant's conduct throughout discovery. Furthermore, pointing to the newly discovered "smoking gun" emails, Plaintiffs argued that the Spoliation Order "not only shouldn't be lifted, [but] it should be modified to make it more severe." Plaintiffs suggested that the trial court order Defendant to produce all of its remaining backup tapes within 30 days, and if Defendant did not comply, Plaintiffs asked that the court "consider the sanction of a default judgment against [Defendant], and we will try the case on damages."

Apparently surprised by Plaintiffs’ stance, Defendant noted that Plaintiffs’ argument was "not a response to our argument" regarding the spoliation instruction, but was instead "related to [the allegations in their] motion to amend." Defendant maintained that it had consented to Plaintiffs’ motion to amend "because we understood that today was not the time to argue that." Defendant also pointed out that there was not a pending motion to compel, but nevertheless attempted to defend against Plaintiffs’ suggestion that additional sanctions were warranted.

On 10 April 2018, the trial court denied Defendant's motion to set aside the spoliation instruction due to Defendant's failure to comply with the Spoliation Order. Specifically, the trial court found that Defendant "ha[d] not satisfied the requirement ... that it produce to Plaintiffs the subject emails from 2006 to 2009 on the backup tapes." In addition, the trial court found that Defendant's

repeated sworn representations in its pleadings and interrogatory responses that it never believed [its flooring] product to be defective in any way have been shown to be false or misleading by the documents Duro-Last produced from the backup tapes. The Court finds it significant that perhaps the most critical email Duro-Last produced was sent by [Defendant's technical sales manager], who was also the only witness [Defendant] identified as providing responses to Plaintiffs’ interrogatories, in which [Defendant] flatly denied there being any defect in [its flooring] at any time.

Based upon its findings of misrepresentations and "other acts of misconduct," the trial court concluded that it would "impose additional sanctions against [Defendant] pursuant to North Carolina Rules of Civil Procedure 37(b)(2) and its inherent powers." The trial court sanctioned Defendant by striking its answer and entering default against it as to liability on Plaintiffs’ claims for negligence, breach of implied warranty, and breach of express warranty. Defendant timely filed written notice of appeal.

On appeal, Defendant argues that the trial court's order striking its answer as a discovery sanction violated Defendant's due process...