Opinion
MEMORANDUM AND ORDER GRANTING PLAINTIFFS' MOTION FOR PARTIAL RECONSIDERATION OF OCTOBER 3, 2011 DISCOVERY ORDER; GRANTING PLAINTIFFS' REQUEST FOR SANCTIONS; AND DENYING DEFENDANTS' OBJECTIONS TO EVIDENCE (Docket No. 205)
SUZANNE H. SEGAL, Magistrate Judge.
On December 16, 2011, plaintiffs MGA Entertainment, Inc. and Little Tikes Company, Inc. (collectively, "Plaintiffs") filed a "Motion for Reconsideration of this Court's October 3, 2011 Discovery Order and Request for Sanctions" (the "Motion") including, among other documents, the declarations of Craig Holden ("Holden Decl."), Robert M. Collins ("Collins Decl."), and Don Onorato ("Onorato Decl."). (Dkt. No. 205). Concurrently with the Motion, Plaintiffs filed an Ex Parte Application for Order Shortening Time to Hear Plaintiffs' Motion (the "Application" or "Appl."). (Dkt. No. 206). On December 19, 2011, defendants National Products Ltd. and Playmind Ltd. (collectively, "Defendants") filed an Opposition to Plaintiffs' Ex Parte Application ("Appl. Opp."). (Dkt. No. 210). The Court granted Plaintiffs' Application and set the Motion for hearing on an expedited basis on December 21, 2011. (Dkt. No. 208). On December 20, 2011, Defendants filed a second Opposition to Plaintiffs' Application addressing the substance of Plaintiffs' Request for Sanctions (the "Sanctions Opp."), including the declarations of Steven H. Haney ("Haney Decl."), Gregg Adelsheimer ("Adelsheimer Decl."), and Lam Siu Jillian ("Lam Decl."). (Dkt. No. 212). On the same date, Defendants filed "Objections to Declaration[s] of Robert Collins, Craig Holden and Don Onorato and Attached Exhibits to Rule 60 Motion and to Application to Proceed Ex Parte" (the "Objections" or "Obj."). (Dkt. No. 211). The Court held a telephonic hearing on the Motion on December 21, 2011. On December 23, 2011, Defendants filed Supplemental Declarations of Steven H. Haney ("Supp. Haney Decl.") and Vincent Thai ("Supp. Thai Decl."). (Dkt. No. 224). For the reasons stated below, the Court GRANTS Plaintiffs' Motion for Reconsideration, GRANTS Plaintiffs' Request for Sanctions, and DENIES Defendants' Objections to Plaintiffs' declarations and exhibits.
Defendants' December 19 and 20, 2011 filings are both captioned "Opposition to Ex Parte Application to Shorten Time on Hearing for Reconsideration of this Court's October 3, 2011 Discovery Order." (See Dkt. Nos. 210 & 212). However, the December 20, 2011 filing, including its attached declarations, is primarily a substantive response to Plaintiffs' Request for Sanctions. (Sanctions Opp. at 3-5). To distinguish between the two identically-captioned filings, the Court will refer to Defendants' December 19, 2011 filing as the "Application Opposition" and the December 20, 2011 filing as the "Sanctions Opposition."
I.
INTRODUCTION
A. This Matter Is Properly Heard On An Expedited Basis
As discussed in more detail below, the Motion seeks an order requiring National Products to supplement its production of documents. On December 19, 2011, after Plaintiffs had filed their Motion and Application, the District Judge extended the discovery cut-off deadline from December 16, 2011 to January 31, 2012. (Dkt. No. 217 at 2). At the hearing, Plaintiffs argued that despite the discovery extension, this matter should be heard on an expedited basis because the earliest regularly-scheduled hearing date for the Motion, January 10, 2012, is too late to allow Plaintiffs to prepare for the deposition of National Products, which Plaintiffs anticipate will occur on January 3 and 4, 2012. The Court agrees. Whether or not the National Products deposition takes place on those exact dates, very little time remains to complete all discovery. The Court also finds that Plaintiffs could not have brought the Motion earlier as they only recently uncovered new, material evidence from third parties of Defendants' written contracts for the sale of Plaintiffs' Little Tikes-branded products, which Defendants had repeatedly asserted did not exist. Consequently, this matter is properly before the Court on expedited notice.
B. The Parties' Contentions
Plaintiffs' Motion seeks reconsideration of a portion of this Court's October 3, 2011 Order denying Plaintiffs' Motion to Compel Production of Documents by Defendant National Products, as applied to Requests for Production Nos. 36, 37 and 38. (Motion at 1). In the October 3 Order, the Court denied the motion to compel on the ground that Plaintiffs had not established that Defendants had possession, custody or control of documents responsive to the disputed production requests. (Order, Dkt. No. 92, at 4-5). The Court also found that Plaintiffs had "not met their burden of showing how documents relating to [National Products'] Talking Train' products past the sell-by date are relevant to the claims and defenses in this case...." (Id. at 6).
In the instant Motion, Plaintiffs argue that they have developed evidence indicating that Defendants entered into written agreements concerning Defendants' sales of products bearing Plaintiffs' Little Tikes brand that should have been produced in response to Request Nos. 36, 37 and 38 of Plaintiffs' underlying Requests for Production. (Motion at 1). Despite representations by Defendants' counsel that Defendants "didn't have any written contracts with our distributors during the relevant time frame, " (Collins Decl., Exh. A at 6), Plaintiffs state that they have obtained written agreements between National Products and third parties executed during the relevant period, proving the falsity of Defendants' prior representations. (Motion at 2). Specifically, Plaintiffs point to National Products' agreements, produced by third party Onorato Associates, Inc., with Heartland America (Onorato Decl., Exh. A) and Hammacher Schlemmer & Co., Inc. (id., Exh. B), both of which were entered into prior to the sell-off date and specifically concern Defendants' sales of Little Tikes-branded products. (Motion at 3-4). Plaintiffs also note that Defendants entered into written agreements with Amazon and Toys R Us, further casting doubt on Defendants' assertions that its contracts with distributors were always verbal. (Collins Decl., Exh. D; Motion at 5). Additionally, Plaintiffs argue that Gregg Adelsheimer, National Products' Sales Manager/Vice President of Sales, testified in his deposition that numerous retailers required National Products to execute written vendor agreements. (Id. at 4-5; see also Holden Decl., Exh. A, at 12-19). Consequently, Plaintiffs argue that the Court should order Defendants "to produce all written agreements with third parties pertaining to Little Tikes branded merchandise, " including documents in the possession, custody or control of Mr. Adelsheimer. (Motion at 9). Furthermore, Plaintiffs contend that because their discovery efforts have been prejudiced by Defendants' alleged misrepresentations regarding the existence of written agreements, monetary sanctions should be imposed against Defendants and their counsel. (Id. at 10).
The Court will cite to the parties' declarations and attached exhibits as though the pages were consecutively paginated. The Court reminds the parties that pursuant to Local Rule 11-3.3, "[a]ll documents shall be numbered consecutively at the bottom of each page." L.R. 11-3.3 (emphasis in original). The rule encompasses declarations and exhibits.
Defendants argue that in light of the extension of the discovery period ordered by the District Judge, this matter should not be heard on an expedited basis. (Appl. Opp. at 3). Defendants further argue that their representations to Plaintiffs and the Court that they had "no contracts during the relevant time period" were accurate. (Sanctions Opp. at 3). According to Defendants, Mr. Adelsheimer, despite his representations that he served as a "Vice-President" of National Products, (Onorato Decl. at 2), is "not an officer, director or employee" of either Defendant, (Sanctions Opp. at 3; see also Adelscheimer Decl. at 19), and therefore, Defendants did not have "the legal right to obtain documents in his possession." (Sanctions Opp. at 4). Defendants state that the contracts identified by Plaintiffs "were never in the possession of National Products, but instead were documents in the possession of Gregg Adelsheimer, who is the Independent Sales Representative for National Products that resides in New Jersey." (Id.). Defendants contend that the Heartland America and Hammacher Schlemmer contracts each involved the sale of "a single Little Tikes Jet, which [Mr. Adelsheimer] was attempting to sell before the sell-off cut-off date of October 31, 2008." (Adelsheimer Decl. at 19). Furthermore, Defendants argue that the Amazon and Toys R Us contracts do not mention or refer to Little Tikes products and pertained only to the sale of National Products' own "Ride On" toys after the sell-off date, and therefore are not responsive to the production requests. (Haney Decl. at 7). Mr. Adelsheimer states that he did not send copies of any of the aforementioned contracts to National Products in Hong Kong. (Id.). Lam Ping Jillian, General Manager for National Products, states that National Products did not have copies of the Heartland America and Hammacher Schlemmer contracts in its files and that because the Amazon and Toys R Us contracts pertain to sales of National Products-branded products after the sell off date, she does not believe they were responsive to any document request. (Lam Decl. at 21-22).
C. The Magistrate Judge Has Authority To Reconsider Portions Of The October 3 Order Not Ruled On By The District Judge, Including The Specific Issue Raised In The Instant Motion
At the hearing, Defendants contended that the Magistrate Judge lacks authority to reconsider the portion of her prior order in dispute because the District Judge previously denied a motion for review of the Magistrate Judge's earlier order. As discussed below, however, the requests for production raised in the current motion were not raised before the District Judge in the Motion For Review. (Compare Motion for Review, Dkt. No. 107, at 5-8, with Motion at 1).
On October 17, 2011, Plaintiffs filed a "Motion for Review of Magistrate's October 3, 2011 Order" with the District Judge. (See Motion for Review, Dkt. No. 107, at 1). That motion presented "essentially a single issue for [the District Judge's] consideration, " i.e., whether the Magistrate Judge correctly ruled that Plaintiffs "should be precluded from discovery of documents reflecting or relating to the sales information for Defendants' 6V and 12V ride-on vehicles which have been marketed and sold through advertising" in violation of Plaintiffs' trademark rights. (Id. at 1). Specifically, Plaintiffs asked the District Judge "to review Magistrate Judge Segal's Order denying Plaintiffs' Motion to Compel documents referring or relating to Defendants' sales since the termination of the October 31, 2008 sell-off' period." (Id. at 4). On November 28, 2011, the District Judge denied Plaintiffs' Motion for Review. (Civil Minutes, Dkt. No. 174 at 1). The District Judge found that the Magistrate Judge "did not commit error by denying Plaintiffs' motion to compel based on the scope of the operative complaint at that time...." (Id.). While the District Judge stated that he would consider compelling production of the sought discovery if the Court granted Plaintiffs' motion to amend the First Amended Complaint, (id.), on December 19, 2011, the District Judge denied Plaintiffs' motion for leave to file a Second Amended Complaint. (Civil Minutes, Dkt. No. 217 at 2).
The Magistrate Judge may not reconsider issues presented to the District Judge and ruled on by him in the denial of Plaintiffs' Motion for Review. However, the specific issue in the present Motion, compelling the production of agreements between National Products and third parties relating to Little Tikes-branded products, was not reached by the District Judge because it was not squarely before him on the earlier Motion for Review. Plaintiffs' Motion for Review before the District Judge sought review of the Magistrate Judge's decision to deny the production of documents pertaining to sales of National Products-branded products after the sell-off date. Before the Court currently is a motion for reconsideration of the Court's order concerning a different issue, i.e., the production of agreements, contracts and related documents pertaining to sales of Little Tikes-branded products before and after the sell-off date. Thus, this Court has jurisdiction to reconsider its prior order on the Requests for Production at issue in the instant Motion, which were not specifically raised in the Motion for Review submitted to the District Judge.
II.
DISCUSSION
A. Plaintiffs Meet The Standard For Filing A Motion For Reconsideration
A motion for reconsideration "may be made only on the grounds of (a) a material difference in fact or law from that presented to the Court before such decision that in the exercise of reasonable diligence could not have been known to the party moving for reconsideration at the time of such decision, or (b) the emergence of new material facts or a change of law occurring after the time of such decision, or (c) a manifest showing of a failure to consider material facts presented to the Court before such decision." Local Rule 7-18. On December 15, 2011, after the Court ruled on Plaintiffs' motion to compel, Plaintiffs took the deposition of Gregg Adelsheimer. (Holden Decl., Exh. A at 4). At that deposition, Mr. Adelsheimer disclosed that National Products had indeed entered into written agreements with several distributors. (See id. at 12-19). This disclosure appears to directly contradict Defendants' repeated representations that National Products did not enter into any agreement post-December 2007 pertaining to Little Tikes-branded products (Collins Decl., Exh. B at 30), or any written agreements at all from 2006, 2007, 2008 or beyond "that are relevant to this lawsuit." (Id. at 40). The production of contracts by third parties (see Onorato Decl., Exhs. A & B; Collins Decl., Exh. D), similarly contradicts representations by Defendants to this Court that all of National Products' relevant contracts with distributors were "verbal, " a representation that the Court found questionable at the time it was made, but for which no actual evidence to the contrary was presented at the time. (Collins Decl., Exh. A at 7). The Court denied Plaintiffs' prior motion to compel with respect to these requests in part on the ground that Plaintiffs had failed to present persuasive evidence that Defendants had failed to comply with their discovery obligations, i.e., that Defendants were withholding responsive documents. (Order, Dkt. No. 92, at 3). By presenting new material facts or evidence proving the existence of contracts which Defendants did not produce and denied existed, Plaintiffs have satisfied the standard for a motion for reconsideration.
B. New Evidence Demonstrates That National Products Entered Into Written Contracts During The Relevant Period
National Products' contracts with Heartland America, Hammacher Schlemmer, Amazon and Toys R Us establish that, contrary to representations by Defendants, National Products entered into written agreements with distributors during the relevant period. (See Onorato Decl., Exhs. A & B; Collins Decl., Exh. D). Each of these contracts was dated prior to the close of the sell-off period and the Heartland America and Hammacher Schlemmer contracts, at least, specifically pertain to the sale of Little Tikes-branded products. (Onorato Decl., Exhs. A & B). Therefore, Defendants' representation to the Court that National Products "didn't have any written contracts with our distributors during the relevant time frame" and that all such contracts were "verbal" is simply false. (Collins Decl., Exh. A at 6-7).
National Products' license to sell Little Tikes-branded products expired on December 31, 2007. (Motion at 2). Pursuant to the settlement agreement, National Products was authorized to sell its existing inventory of Little Tikes-branded products to certain approved retailers through October 31, 2008. (Id. at 4; Haney Decl. at 7). The Heartland America contract was dated March 14, 2008. (Onorato Decl. Exh. A at 5). The Toys R Us contract was dated May 2, 2008. (Collins Decl., Exh. D at 20). The Amazon contract was dated August 25, 2008. (Id. at 3). The Hammacher Schlemmer contract was dated October 24, 2008. (Onorato Decl., Exh. B at 4). Although the Heartland America and Hammacher Schlemmer contracts were entered into during the sell-off period and specifically concerned the sale of Little Tikes-branded products, those two distributors were not on the list of authorized distributors. (Collins Decl., Exh. E at 1-2).
It is unclear why National Products failed to produce such documents. Mr. Adelsheimer states that he did not send copies of the Heartland America, Hammacher Schlemmer, Amazon or Toys R Us contracts to National Products in Hong Kong. (Adelscheimer Decl. at 19). According to Mr. Adelscheimer, "it was my practice if I did enter into a contract to simply keep a copy of it in my file." (Id.). Ms. Lam also states that National Products does not have copies of the Heartland America and Hammacher Schlemmer contracts in its files. (Lam Decl. at 22). According to Ms. Lam, National Products does not "ask for those documents as they relate to the business" of Mr. Adelscheimer's company, National Sporting Goods. (Id.). While it strains credulity to assert that a contract binding National Products is relevant only to National Sporting Goods, Defendants nonetheless maintain that they do not have copies of their own written agreements with third parties in their files in Hong Kong. (Haney Decl. at 6-7; see also Supp. Thai Decl. at 1, ¶ 3). However, this Court concludes that Defendants failed to satisfy their discovery obligations by not requesting copies of contracts or agreements from their "Vice-President of Sales, " Mr. Adelscheimer, in response to the discovery requests.
Plaintiffs' evidence shows that Mr. Adelscheimer believed that National Products had entered into contracts with several other distributors. At his deposition, Mr. Adelsheimer testified that at least the following retailers required a written vendor agreement for National Products to sell them goods: Academy Sports, Canadian Tire, Chelsea and Scott, CostCo (US, Canada, CostCo Wholesale, and costco.com), CSN Stores, Exchange Catalogue, FAO Schwartz, JC Penny, KB Toys, LTD Commodities, Meijer, QVC, Target Direct, Sportsmen's Guide, Toys R Us (US and Canada), and Walmart (US, Canada, and walmart.com). (Holden Decl., Exh. A at 12-19; see also Motion at 5). Even though Mr. Adelsheimer's testimony indicates that at some point National Products had numerous written contracts with third parties, it is unclear who has or had them or where they are stored.
The record in fact contains contradictory evidence about the probable location of the contracts. As previously discussed, Mr. Adelheimer stated in his declaration that it was his practice when entering into a contract "to simply keep a copy of it in [his] file." (Adelsheimer Decl. at 19). Mr. Adelsheimer specifically declared that he did not forward copies of the Heartland America, Hammacher Schlemmer, Amazon, or Toys R Us contracts to National Products in Hong Kong. (Id.). Vincent Thai, National Products' president, further stated that "[w]e do no[t] get or keep the sort of agreements that may exist between our distributors and sales representatives in the United States, nor was I aware that such agreements were even in existence...." (Supp. Thai Decl. at 1, ¶ 3). However, during his deposition, Mr. Adelsheimer testified that he did not have copies of contracts between National Products and third parties and stated that such contracts are likely held by National Products in Hong Kong or Fun Creation in Los Angeles:
Q Have you searched your records for vendor agreements between National Products and its customers?
A I don't have them.
Q Who would have those?
A Either the Hong Kong office or Fun Creation in LA.
(Adelsheimer Depo., Dec. 15, 2011, rough transcript, at 145). The record therefore indicates that Mr. Adelsheimer either had or has copies of National Products' distributor agreements in his files, or that he sent them to National Products or its alter ego, Fun Creation. The Court finds that National Products had an obligation to obtain responsive documents from Mr. Adelsheimer and Fun Creation, if such documents were stored in either location.
Plaintiffs produced to Defendants and the Court a copy of the complete rough transcript of Mr. Adelsheimer's December 15, 2011 deposition following the hearing on the Motion (the "Adelsheimer Depo.").
C. National Products' Contracts Held By Mr. Adelscheimer Are In Defendants' Possession, Custody, Or Control And Must Be Produced
Rule 34 provides that a party may serve a request for production of any documents relevant to the litigation "in the responding party's possession, custody or control." Fed.R.Civ.P. 34(a). "The phrase possession, custody or control' is in the disjunctive and only one of the numerated requirements need be met." Soto v. City of Concord , 162 F.R.D. 603, 619 (N.D. Cal. 1995). "Control is defined as the legal right to obtain documents on demand." United States v. Int'l Union of Petroleum & Indus. Workers , 870 F.2d 1450, 1452 (9th Cir. 1989); see also Duran v. Cisco Systems, Inc., 258 F.R.D. 375, 379 (C.D. Cal. 2009).
It is well settled that "[a] party need not have actual possession of documents to be deemed in control of them." Clark v. Vega Wholesale Inc. , 181 F.R.D. 470, 472 (D. Nev. 1998) (internal quotation marks omitted); Noble v. Gonzalez, 2011 WL 2118746 at *9 (E.D. Cal. May 27, 2011). The fact that documents are in the physical possession of a third party custodian does not eliminate the responsibility of a responding party to search for and produce those documents when the party has the legal right to obtain the documents on demand. See, e.g., Brown v. Fambrough, 2011 WL 1466601 at *3 (E.D. Cal. April 18, 2011) ("A party may be ordered to produce a document in the possession of a non-party entity if that party has a legal right to obtain the document or has control over the entity who is in possession of the document.") (internal quotation marks omitted). As the court in Allen v. Woodford explained,
Property is deemed within a party's possession, custody, or control if the party has actual possession, custody, or control thereof or the legal right to obtain the property on demand. A party having actual possession of documents must allow discovery even if the documents belong to someone else; legal ownership of the documents is not determinative. Control need not be actual control; courts construe it broadly as the legal right to obtain documents upon demand. Legal right is evaluated in the context of the facts of each case. The determination of control is often fact specific. Central to each case is the relationship between the party and the person or entity having actual possession of the document. The requisite relationship is one where a party can order the person or entity in actual possession of the documents to release them. This position of control is usually the result of statute, affiliation or employment. Control may be established by the existence of a principal-agent relationship.
Allen v. Woodford , 2007 WL 309945 at *2 (E.D. Cal. Jan. 30, 2007) (internal citations and quotations omitted).
Here, Defendants assert that Mr. Adelsheimer is not and has never been an "employee, officer, director or owner" of National Products. (Adelsheimer Decl. at 19; see also Sanctions Opp. at 3-4). However, Mr. Adelsheimer concedes that he "operate[s] part of the time as Sales Representative for National Products, Inc. in Hong Kong...." (Adelsheimer Decl. at 19). Mr. Adelsheimer further stated in his deposition that he is a "1099 independent consultant to National Products" and that in that capacity he has assisted National Products with the sales and marketing of its products "since the beginning" of the company. (Adelsheimer Depo., Dec. 15, 2011, rough transcript, at 20). Mr. Adelsheimer is paid a flat monthly fee of $7, 000.00 by National Products for his services. (Id.). Mr. Adelsheimer held himself out to Don Onorato, owner of Onorato Associates, Ltd., as the "Vice President of Sales" for National Products in connection with a request that Mr. Onorato serve as a sales representative to market National Products' products. (Onorato Decl. at 2). Furthermore, Mr. Adelsheimer signed contracts with Heartland America, Hammacher Schlemmer, Amazon and Toys R Us on behalf of National Products. ( Id., Exhs. A & B; Collins Decl., Exh. D).
Under these circumstances, Mr. Adelsheimer was acting as National Products' agent with authority to bind the company. See, e.g., Edwards v. Toys "R" Us , 527 F.Supp.2d 1197, 1213 (C.D. Cal. 2007) ("[A]n independent contractor, no less than a servant may be an agent in that he is employed as a fiduciary, acting for the principal with the principal's consent and subject to the principal's overall control and direction in accomplishing some matter undertaken on the principal's behalf....") (internal quotation marks omitted). As such, National Products clearly had the legal right to obtain documents on demand from Mr. Adelsheimer, as Defendants' counsel admitted at the hearing. Because documents relating to National Products in Mr. Adelsheimer's possession are under National Products' control, National Products had an obligation to collect and produce documents held by Mr. Adelsheimer that are responsive to Plaintiffs' requests for production.
D. The Motion For Reconsideration Is Granted And National Products And Mr. Adelscheimer Must Produce Contracts Or Agreements And Describe Under Oath Their Search For Relevant Contracts
National Products must produce all contracts or agreements it entered into with third parties during the relevant period regarding the sale of Little Tikes-branded products that are in the possession, custody or control of any of its offices, foreign or domestic. While National Products' obligation to produce relevant documents held by Mr. Adelsheimer is certain, it is less clear, based on the current record, that Mr. Adelsheimer continues to posses any contracts responsive to Plaintiffs' requests. Plaintiffs' counsel, who brought the instant Motion in part on the basis of Mr. Adelsheimer's deposition testimony, could not respond to the Court's inquiry regarding whether Mr. Adelsheimer was asked relevant questions about his possession of written agreements during his deposition. Furthermore, the apparent contradictions between Mr. Adelsheimer's statements in his declaration and deposition testimony require additional clarification.
To resolve this uncertainty and ensure that Plaintiffs receive all of the discovery to which they are entitled, the Court ORDERS National Products to demand that Mr. Adelsheimer provide copies of all contracts and agreements in his possession, custody or control between National Products and third parties concerning the sales of Little Tikes-branded products. Defendants must produce any such documents in time for use at Plaintiffs' deposition of National Products, i.e., by January 4, 2012 if the deposition proceeds as planned on January 3 and 4, 2012. If the deposition of National Products is continued to a later date, Defendants must produce any such documents within ten calendar days of the date of this Order or two calendar days before the rescheduled National Products deposition, whichever is earlier. With the production, or in lieu of the production if Mr. Adelsheimer represents that he does not have any such documents, Defendants must submit a declaration from Mr. Adelsheimer to Plaintiffs and the Court describing (1) the search Mr. Adelsheimer conducted for copies of agreements and contracts between National Products and third parties regarding the sales of Little Tikes-branded products; (2) whether Mr. Adelsheimer previously provided copies of such contracts to National Products or Fun Creation, and if so, to whom those contracts were sent; (3) whether Mr. Adelsheimer ever possessed but destroyed any such contracts, and if so, the reasons for destroying them. Defendants must also conduct another search of their offices, foreign and domestic, for contracts and agreements responsive to Plaintiffs' requests, including those contracts in the possession, custody or control of Fun Creation, and produce any such contracts concurrently with the production and service of Mr. Adelsheimer's documents and declaration. With the production, or in lieu of the production if no such contracts are found, National Products must provide to Plaintiffs and the Court a declaration describing (1) the search it conducted for contracts and agreements responsive to Plaintiffs' requests, both in response to the instant Order and previously; and (2) whether any such contracts have been destroyed, and if so, when they were destroyed and why.
Defendants are cautioned not to attempt to avoid their discovery obligations when filing their declarations by abusing their corporate form. Any such abuse will subject Defendants to sanctions. See, e.g., Guex v. Allmerica Financial Life Ins. and Annuity Co. , 146 F.3d 40, 43 (1st Cir. 1998) (plaintiff's abuse of corporate form by asserting that he could not ensure compliance with discovery requests by company of which he was the president and 100% owner warranted imposition of terminating sanctions); Zerr v. Johnson , 905 F.Supp. 872, 876 (D. Colo. 1995) (defendant's "obdurate and hypertechnical efforts to evade service" of complaint merited imposition of costs incurred in serving complaint on defendant). Because Fun Creation does business as National Products, (Holden Decl., Exh. B, at 23), and because Vincent Thai, president of Defendants National Products and Playmind Group (Supp. Thai Decl. at 1), is registered with the California Secretary of State as Fun Creation's president and sole officer (Dkt. No. 182, Declaration of Robert M. Collins in Opposition to Defendants' Motion to Quash Fun Creation Subpoena, Exh. B at 1), and because Mr. Thai's family members appear to play significant roles in the operation of Fun Creation, (see Declaration of Wendy Wong, Ex Parte Application to Quash Subpoena to Fun Creation, Inc., Dkt. No. 178, at 1), the Court considers any documents kept at Fun Creation's Los Angeles facilities to be in Defendants' control for discovery purposes. See Walsh v. Kindred Healthcare, 2011 WL 2415739 at *3-4 (N.D. Cal. 2011) (alter ego doctrine applies to corporations and prevents "other corporations from misusing the corporate laws by the device of a sham corporate entity").
III.
REQUEST FOR SANCTIONS
Federal Rule of Civil Procedure 37(a)(5)(A) provides:
If the [discovery] is granted - or if the disclosure or requested discovery is provided after the motion was filed - the court must... require the party... whose conduct necessitated the motion, the party or attorney advising the conduct, or both to pay the movants reasonable expenses incurred in making the motion, including attorney's fees.
The purpose of the rule is to "protect courts and opposing parties from delaying or harassing tactics during the discovery process." Cunningham v. Hamilton County , 527 U.S. 198, 208, 119 S.Ct. 1915, 144 L.Ed.2d 184 (1999). The Supreme Court has recognized that Rule 37 was designed to require a court to impose sanctions upon the granting of a discovery motion, unless the court found that the losing party's conduct was substantially justified. Id. at 208 n.5. The change in the statute represented the intent of the drafters to "encourage the awarding of expenses and fees wherever applicable.'" (Id.). (citations omitted).
The rule also provides that if the opposing party can demonstrate "substantial justification" for its opposition, the court has the discretion to deny sanctions. In the absence of substantial justification of a refusal to comply, "the award of expenses is mandatory against a party whose conduct necessitated a motion to compel discovery...." Merritt v. Int'l Brotherhood of Boilermakers , 649 F.2d 1013, 1019 (5th Cir. 1981) (construing former Fed R. Civ. P. 37(a)(4)).
Plaintiffs argue that as a consequence of Defendants' withholding of written agreements, they have "been forced to take depositions without full document production, and have been precluded from a full inquiry into Defendants' relationship with third parties related to the sale of Little Tikes branded merchandise." (Motion at 10). Accordingly, Plaintiffs request "an opportunity to provide a supplemental declaration setting forth the fees and costs they seek in connection with Defendants' withholding of documents and repeated misrepresentations...." (Id.). The Court agrees that Defendants' failure to conduct a reasonable search for contracts and agreements responsive to Plaintiffs' legitimate discovery requests lacks substantial justification and warrants an award of sanctions.
Defendants claim that the contracts identified by Plaintiffs in their November 7, 2011 meet and confer do not establish that Defendants had written agreements with third parties during the relevant period that were responsive to Plaintiffs' production requests. (Supp. Haney Decl. at 3). Defendants note that two Wal-Mart contracts concerned Defendant Playmind Ltd., which Defendants state did not sell "Ride-on" toy vehicles. (Id. at 2). A third Wal-Mart contract was dated June 29, 2010, well after the close of the sell-off period, and concerned only sales of National Products-branded merchandise. (Id.). Defendants further claim that the Toys R Us contract, dated April 10, 2008, and the Amazon contract, dated August 21, 2008, do not mention "Little Tikes" and were signed in anticipation of sales of National Products-branded merchandise after the close of the sell-off period. (Id. at 2-3). Even if the Wal-Mart contracts were not responsive, they (and Mr. Adelsheimer's deposition testimony) should have alerted Defendants (and Defendants' counsel) to the fact that National Products had in fact entered into written distributor agreements and that Defendants' previous assertions that all distributor agreements were verbal were completely false. That knowledge should have triggered a new investigation for potentially responsive documents, rather than a strenuous opposition to the current motion.
Furthermore, it appears that the Toys R U.S. and Amazon contracts were, on their face, responsive to Request No. 37, which called for contracts relating to National Products-branded goods. (Motion at 1). While this Court's October 3, 2011 Order determined that documents relating to sales of National Products-branded goods after the close of the sell-off period were not relevant to the claims and defenses in the First Amended Complaint, it did not reach the same conclusion with regard to such documents dated before the close of the sell-off period. Furthermore, Defendants' claim that the Toys R Us and Amazon contracts were entered into in anticipation of sales following the close of the sell-off period is scarcely credible. The Toys R Us contract was entered into almost six months before the close of the sell-off period and the Amazon contract was entered into more than two months before the close of the sell-off period. (Supp. Haney Decl. at 2-3; id. Exhs. 5 & 6). Each of these contracts appears to have been effective upon signing and includes an integration clause stating that the written contract constitutes the entire agreement between the parties. (See id., Exh. 5 at 84 (TRU 00146); id., Exh. 6 at 87 & 91 (AMAZ000052 & 0056)). Therefore, even if National Products genuinely intended for these contracts to apply only to post-October 31, 2008 sales, which the Court doubts, the contracts do not reflect that effective date and at the very least, Plaintiffs were entitled to explore Defendants' assertion. These contracts should have been collected and produced. The same is true of the Heartland America and Hammacher Schlemmer contracts, which specifically involved the sales of Little Tikes-branded products before the close of the sell-off period and were responsive to Request Nos. 36 and 38.
Mr. Thai asserts that National Products does not "get or keep the sort of agreements that may exist between our distributors and sales representatives in the United States" and claims that he was not "aware that such agreements were even in existence at the time we produced documents in this case." (Supp. Thai Decl. at 1, ¶ 3). In the first instance, Mr. Thai mischaracterizes the agreements as being between distributors and sales representatives: the Heartland America and Hammacher Schlemmer contracts, for example, were binding on National Products, not National Products' sales representatives, who clearly signed the contracts on behalf of National Products, not themselves. Furthermore, Mr. Thai's declaration does not reflect a serious effort to comply with Defendants' discovery obligations. A company president's personal ignorance, real or purported, of his own company's written agreements does not excuse the company from adhering to Federal discovery rules. Defendants had an obligation to conduct a reasonable search, which would have included a demand for production of agreements from all potential custodians, including Mr. Adelsheimer and Fun Creation.
The Court therefore finds that National Products has unnecessarily and extensively delayed the discovery process and has overwhelmingly failed in its discovery obligations. National Products should have conducted a reasonable search for responsive documents from all custodians from whom it had the legal right to obtain documents, including documents in the possession of Mr. Adelsheimer and those stored at Fun Creation's Los Angeles facilities, particularly after Plaintiffs proved to Defendants that their prior insistence that all distributor contracts were verbal was patently false. Thus, the Court GRANTS Plaintiffs' request for sanctions. However, the Court cannot determine the proper amount of sanctions without a declaration from Plaintiffs' counsel setting forth the additional costs incurred by Defendants' obstruction of the discovery process. Plaintiffs shall file a declaration with the Court within ten (10) calendar days of the date of this Order detailing the hours worked in connection with this discovery dispute and evidence supporting counsel's hourly rate. Plaintiffs shall only seek fees and costs connected with this current motion, not any related motions. Defendants will have five (5) calendar days from service of the declaration to file a response. After a declaration and response have been filed, the Court will take the matter under submission and determine the proper amount of Rule 37 sanctions. Sanctions shall be imposed against Defendant National Products only, not counsel.
IV.
Although the caption to the Objections indicates that Defendants are objecting to portions of the Robert Collins Declaration, none of the Objections are addressed to that declaration or its exhibits.
Defendants' objections (Dkt. No. 211) relating to the transcript of Mr. Adelsheimer's deposition (Objections 1-4) are overruled as moot. The complete transcript served by Plaintiffs following the hearing addressed the minor technical claims raised by Defendants. Defendants' objections relating to Mr. Onorato's declaration (Objections 5-12) are overruled as frivolous. Mr. Onorato's statements describe what he personally observed. To the extent that Defendants' objections are based on Mr. Onorato's observation that Mr. Adelsheimer executed the attached contracts on behalf of National Products, the objections are pointless as the contracts speak for themselves. Defendants are strongly cautioned that frivolous evidentiary objections are viewed with disfavor by the Court.
V.
CONCLUSION
Consistent with the foregoing, Plaintiffs' Motion for Reconsideration is GRANTED. Plaintiffs' Request for Sanctions is GRANTED. Defendants' Objections to evidence are DENIED. Additionally, the Court ORDERS as follows:
(1) Defendants must demand that Mr. Adelsheimer provide copies of all contracts and agreements in his possession, custody or control between National Products and third parties concerning the sales of Little Tikes-branded products during the relevant period and produce them in time for use at Plaintiffs' deposition of National Products, i.e., by January 4, 2012 if the deposition proceeds as planned on January 3 and 4, 2012. If the deposition of National Products is continued to a later date, Defendants must produce any such documents within ten calendar days of the date of this Order or two calendar days before the rescheduled National Products deposition, whichever is earlier; and
(2) Concurrently with the production, or in lieu of a production if no responsive contracts are found, Defendants must serve on Defendants and file with the Court a declaration from Mr. Adelsheimer describing (1) the search Mr. Adelsheimer conducted for the relevant contracts; (2) whether Mr. Adelsheimer previously provided copies of such contracts to National Products or Fun Creation, and if so, to whom those contracts were sent; and (3) whether Mr. Adelsheimer ever possessed but destroyed any such contracts, and if so, the reasons for destroying them; and
(3) Defendants must conduct a search in all of National Products' offices, foreign or domestic, for such contracts, including contracts in the possession, custody or control of Fun Creation, and produce them concurrently with the production and service of Mr. Adelsheimer's documents and declaration; and
(4) Concurrently with the production, or in lieu of a production if no responsive contracts are found, National Products must also serve on Plaintiffs and file with the Court a declaration describing (1) the search it conducted for relevant contracts, both in response to the instant Order and previously; and (2) whether any such contracts were destroyed, and if so, when they were destroyed and why; and
(5) Within ten (10) calendar days of the date of this Order, Plaintiffs' counsel shall file a declaration detailing the hours worked in connection with this discovery dispute and evidence supporting counsel's hourly rate. Defendants will have five (5) calendar days from service of the declaration to file a response.
IT IS SO ORDERED.