Opinion
No. 01-01734 EDL.
October 25, 2001
ORDER GRANTING PLAINTIFF'S MOTION FOR SANCTIONS FOR SPOLIATION OF EVIDENCE
The parties appeared before this Court, through their counsel, on October 16, 2001 for hearing on the following motions: (1) Defendant Fortune 500 Systems, Ltd.'s Motion to Dismiss, or in the Alternative, to Transfer [3]; (2) Plaintiff Pennar Software Corp.'s Motion to Enjoin Spoliation and for Sanctions [10]; (3) Plaintiff's Emergency Motion to Compel Compliance with the Court's Order and to Compel Production of the "Most Knowledgeable Witness" [73]; (4) Defendant's Motion to Quash Subpoena [28, 32]. Naren Chaganti appeared on behalf of Plaintiff and Michael Kadish appeared on behalf of Defendant.
At the hearing, Defendant stipulated to the personal jurisdiction of this Court. By virtue of this stipulation, Defendant's Motion to Dismiss, Plaintiff's Emergency Motion to Compel, and Defendant's Motion to Quash Subpoena were rendered moot. The Court will therefore address the remaining issue, Plaintiff's Motion to Enjoin Spoliation and for Sanctions.
I. PROCEDURAL HISTORY
Plaintiff Pennar Software Corporation ("Plaintiff") filed a complaint against Defendant Fortune 500 Systems, Ltd. ("Defendant") alleging breach of contract and related causes of action arising from an alleged agreement between the parties in which Plaintiff was to provide computer consultants to be placed with Defendant's clients. Defendant, a Pennsylvania entity, made a special appearance and filed a motion to dismiss this action, or in the alternative, to transfer it to the Middle District of Pennsylvania on the ground of forum non conveniens. Defendant argued that it lacked the "minimum contacts" with California necessary for the Court to exercise personal jurisdiction over Defendant in this District. Plaintiff opposed the motion, arguing that Defendant had sufficient minimum contacts to be subject to personal jurisdiction in California.
Plaintiff alleges the following causes of action in his complaint: breach of contract, interference in contractual relations, conspiracy to injure a business, fraud and misrepresentation, breach of the duty of good faith and fair dealing, and breach of confidentiality.
While Defendant's motion to transfer was pending, Plaintiff alleged that Defendant had engaged in spoliation of evidence (specifically, deleting web pages purporting to list Defendant's California office in San Bruno from its web site) designed to frustrate Plaintiff's efforts to oppose the motion. Defendant denied that the web pages ever existed and accused Plaintiff's counsel of concocting them. The Court (Alsup, J.) permitted the parties to engage in limited discovery on this issue and enjoined any spoliation of evidence.
II. FACTUAL FINDINGS
Plaintiff is a Virginia corporation with its principal place of business in Palo Alto, California. Plaintiff recruits and hires consultants from foreign countries, secures proper work authorization for these consultants from the U.S. Immigration and Naturalization Service and finds placements for them.
In a somewhat unusual arrangement, Plaintiff's counsel, Naren Chaganti, is also the President of Pennar Software Corporation and appears to have personally negotiated the contract at issue in this case.
Defendant is an Internet-based Pennsylvania placement firm that also places consultants with client companies. Defendant advertises, solicits resumes, and makes human resources and administrative documents available to its employees via its web site, www. fortune500systems.com. Defendant also solicits referrals from third parties through this web site.
In support of its position that Defendant is subject to personal jurisdiction in the Northern District of California, Plaintiff alleged that Defendant maintained an office in San Bruno, California, and that the telephone number for this location was listed on Defendant's web site, in the business white pages of the local telephone book and in an on-line directory. Defendant denied that it maintained an office in California, and stated that the leased apartment was the private residence of an employee, not an office. Plaintiff also alleged that although the San Bruno address was displayed on Defendant's web site on a page labeled "contact.htm" until approximately July 24, 2001, it disappeared after Plaintiff filed his opposition brief to Defendant's motion to dismiss with the "contact.htm" page as an exhibit.
Mr. Mittal, the employee in question, denied under oath that he or any other of Defendant's employees executed any contracts on the company's behalf in California. However, Mr. Mittal plainly entered into at least one contract: the lease in San Bruno, which was signed by Mr. Mittal on behalf of Defendant on March 29, 2001.
Defendant denied creating or deleting the page. Its CEO, Ken Kendre, submitted a sworn declaration denying that the web page "ever existed on its web site or on any location authorized by Defendant" and suggested that Plaintiff might have manufactured the page to defeat Defendant's motion to dismiss. Plaintiff then subpoenaed records from Defendant's web hosting company to track changes made to Defendant's web site and the Court ordered Defendant to produce its "person most knowledgeable" as to the contents of the web site for deposition.
Mr. Kendre's declaration was made after a cursory investigation in which Mr. Kendre clicked on the "Contact Us" link on the web site to test it, but failed to search Defendant's computer files or ask the company's web developer, Mr. Raj Wale, if he had created such a page. Mr. Kendre's failure to consult Mr. Wale before providing sworn testimony to the Court is particularly egregious, since Mr. Wale and Mr. Kendre are the only employees with access to the password-protected web hosting site where Defendant's web site resides, and are the only persons authorized to make changes to Defendant's site.
Defendant designated Mr. Wale, its web developer, as the "person most knowledgeable" and Plaintiff deposed him on August 31, 2001. Mr. Wale admitted creating the pages but he testified that he was not authorized to link them to the active pages on the web site and did not do so. Mr. Wale testified that he created the pages around the end of March or beginning of April 2001 and claimed he did not know what happened to them after that. However, he hypothesized that the web-designing program he used may have deleted the page while cleaning up "dead" links manually or automatically. In a sudden resurgence of memory on October 1, 2001, Mr. Wale testified that he deleted the disputed page as part of "routine maintenance," but provided no details whatsoever about this alleged practice.
Defendant never retracted or corrected Mr. Kendre's sworn declaration after it became apparent that the web page in question did exist on Defendant's site and was thereafter deleted. Indeed, Defendant never produced any evidence of a policy of routine system maintenance for its web server or explained the manner and frequency with which obsolete documents are deleted. Under the circumstances, the Court is left to conclude that Defendant's deletion of the two web pages in question on July 24, 2001 and July 26, 2001 was not part of routine maintenance, but rather was related to Defendant's motion to dismiss for lack of personal jurisdiction.
Defendant also failed to cooperate with discovery into the possible spoliation of evidence. Once Mr.
Wale testified that he did not know how the disputed web page was deleted, denied that he was the most knowledgeable person as to the deletion of pages from Defendant's web site generally, and deferred to Mr.
Kendre on a number of topics, the Court ordered Defendant to produce Mr. Kendre for deposition. The Court also ordered Defendant to produce copies of all versions of its web site for a specified sixty-day period to Plaintiff for inspection. Defendant failed to comply with the Court's orders.
Defendant produced Mr. Kendre for deposition, but failed to produce either the required documents or a complete and thorough declaration explaining the circumstances surrounding the deletion of the web page in question. In his deposition, Mr. Kendre denied that he was the "person most knowledgeable" as to Defendant's web site, but testified that Defendant does not maintain backup copies of modified or deleted web pages, and denied deleting any data from Defendant's log files. Mr. Kendre denied that he was even able to read the log files, despite having a degree in computer science.
The log files and backup tapes of Defendant's web site subpoenaed from the web hosting company,
Interland, showed that not only did Defendant delete the "contact.htm" web page on July 24, 2001, but Defendant also deleted another page relevant to the jurisdictional issue, "press.htm," on July 26, 2001.
The "press.htm" page purports to announce the opening of Defendant's California branch office as of April 2000, at the San Bruno address referenced in the "contact.htm" page.
Evidence from Interland also showed that the log files for the period July 20, 2001 to July 24, 2001 were altered on July 31, 2001. When asked to explain this discrepancy on behalf of Defendant, Mr. Kendre denied that the pages existed on the Interland CD-ROM disks and denied that the log files had been altered. Indeed,
Defendant never explained why the log files were altered.
The evidence brought to light by Plaintiff demonstrates an appalling course of obstructionist conduct by Defendant and its employees. Defendant held itself out to the public as a company doing business in California via its web site and through local advertising, and when called to account for itself in the Northern District of California not only denied that it had advertised its presence here, but attempted to cover that fact up. At a minimum, Defendant falsely accused Plaintiff's counsel of manufacturing evidence, demonstrated an extreme lack of diligence at best in investigating the charges leveled by Plaintiff's counsel concerning the existence and deletion of the web pages at issue, submitted at least one erroneous sworn declaration to this Court, and failed to advise the Court of the erroneous nature of that declaration upon discovering its falsity. In addition, Mr. Kendre's and Mr. Wale's evasive answers and astonishing failures of memory at their depositions suggest a concerted, if inept, effort to thwart discovery into the true nature and extent of Defendant's contacts with the Northern District of California and thereby defeat personal jurisdiction.
The Court notes, however, that no proof has been presented that Defendant's attorney, Michael Kadish, or his firm knew that Mr. Kendre's declaration was false when it was filed, or that defense counsel engaged in any deliberate wrongdoing in connection with this case. Further, Mr. Kendre testified that, promptly after Plaintiff notified Mr. Kadish of the disputed web pages, Mr. Kadish informed Mr. Kendre of Defendant's duty to preserve evidence.
Defendant's course of conduct in this case is entirely unacceptable and merits sanctions.
III. MOTION TO ENJOIN SPOLIATION AND FOR SANCTIONS
Based on the preceding events, Plaintiff quite rightly asked the Court to enjoin Defendant's spoliation of evidence and to impose sanctions on Defendant. Plaintiff provided a detailed chronology of events supporting his allegations of misconduct by Defendant. The Court finds the large body of circumstantial evidence submitted by Plaintiff on the spoliation issue persuasive, and finds Defendant's explanations and purported loss of memory lacking in credibility. Thus, Plaintiff's Motion to Enjoin Spoliation of Evidence and for Sanctions is granted. The Court has the authority to impose sanctions on a party for resisting discovery and obstructing justice under Rule 37(b)(2) of the Federal Rules of Civil Procedure and as part of the Court's inherent powers. As explained below, sanctions are appropriate under either standard.
A. Rule 37 Sanctions
The Court has the authority under Rule 37(b)(2) to impose discovery sanctions when a party "fails to obey an order to provide or permit discovery." Fed.R.Civ.P. 37(b)(2). The court can issue an order: (1) establishing facts; (2) precluding claims or defenses or the introduction of designated matters into evidence; (3) striking pleadings, staying proceedings, or dismissing the action; or (4) finding contempt of court.See id. In addition, the court may require the sanctioned party or attorney or both "to pay the reasonable expenses, including attorney's fees, caused by the failure" for which the sanctions were ordered. Id. Violation of a court order regarding discovery is generally necessary to trigger the discovery sanctions of Rule 37(b). Unigard Sec. Ins. Co. v. Lakewood Eng'g Mfg. Corp., 982 F.2d 363, 367-68 (9th Cir. 1992); accord Shepherd v. American Broad. Cos., Inc., 62 F.3d 1469, 1474 (D.C. Cir. 1995). Here, Defendant violated at least three discovery orders of the Court by failing to produce the person(s) most knowledgeable for deposition or to produce the current and prior versions of Defendant's web site, both of which were relevant to the discovery of Defendant's contacts with California for purposes of personal jurisdiction, and by tampering with the log files and deleting evidence in contravention of the August 24, 2001 order.
The Court's August 24, 2001 order (Alsup, J.), and September 12, 2001 and September 18, 2001 orders (Laporte, J.).
Courts have imposed severe sanctions under Rule 37(b)(2) for similar misconduct by other defendants, including orders establishing personal jurisdiction over a recalcitrant defendant for refusing to comply with discovery requests. See, e.g., Insurance Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinie, 456 U.S. 694 (1982) (affirming order establishing personal jurisdiction under Rule 37(b)(2) as sanction for resisting discovery on jurisdictional issue); Gibson v. Chrysler Corp., 261 F.3d 927, 948 (9th Cir. Aug. 21, 2001) (Fletcher, J.) (district court in diversity action could properly issue an order establishing amount in controversy as discovery sanction, thus establishing subject matter jurisdiction); see also Chilcutt v. U.S., 4 F.3d 1313, 1319, 1324 (5th Cir. 1993) (affirming discovery sanction deeming the prima facie elements of plaintiff's liability claim established following flagrant refusal to produce an accident log in a slip-and-fall case). The Court's discretion to impose sanctions under Rule 37(b)(2) is limited by two standards: (1) any sanction must be "just"; and (2) the sanction must be specifically related to the particular "claim" at issue in the order to provide discovery. Insurance Corp. of Ireland, 456 U.S. at 707.
In this case, had Defendant not stipulated to personal jurisdiction at the hearing before the Court on October 16, 2001, the Court could have issued an order pursuant to Rule 37(b)(2) establishing personal jurisdiction in the Northern District of California as a sanction for obstructing legitimate discovery into the nature and extent of Defendant's contacts with this forum. In light of Defendant's eventual stipulation to the personal jurisdiction of this Court, an establishment order of this nature is no longer necessary. However, the Court finds the imposition of monetary sanctions on Defendant appropriate under Rule 37(b)(2). Defendant's recalcitrance in resisting discovery on the jurisdictional issue and disavowing the disputed web pages necessitated four depositions to resolve the issue and additional motion practice, imposing unnecessary costs on Plaintiff and requiring considerable time and effort by the Court.
Accordingly, Plaintiff is awarded sanctions against Defendant for its reasonable attorney's fees and costs expended in connection with the motions and depositions relating to the Court's personal jurisdiction over Defendant. The parties shall meet and confer over the amount claimed by Plaintiff as directed by the Court's October 17, 2001 order. Plaintiff is cautioned, however, that only fees reasonably incurred will be awarded.
For example, the Court will not award fees for time spent on items, such as preparing timesheets, that are not normally billed because they are overhead tasks subsumed within a reasonable hourly rate.
B. Inherent Powers
The imposition of sanctions for Defendant's misconduct is also appropriate under the Court's inherent power to sanction litigants for abusive litigation practices taken in bad faith. See, e.g., Wm. T. Thompson Co. v. General Nutrition Corp., Inc., 593 F. Supp. 1443, 1455 (C.D.Cal. 1984). This power "is governed not by rule or statute but by the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases." Link v. Wabash R.R. Co., 370 U.S. 626, 630-31 (1962).
Sanctions may be imposed on a party who is on notice that certain information in his or her possession is relevant to litigation or potential litigation:
While a litigant is under no duty to keep or retain every document in its possession once a complaint is filed, it is under a duty to preserve what it knows, or reasonably should know, is relevant to the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery, and/or is the subject of a pending discovery request. General Nutrition, 593 F. Supp. at 1455.
There must be clear and convincing evidence of misconduct before a punitive sanction such as a dismissal or default judgment is entered.Shepherd, 62 F.3d at 1478. A court's decision under its inherent powers is reviewed under a heightened abuse of discretion standard. Id. at 1475. The inherent power to sanction includes the power to enter a default judgment or dismissal as well as to order fines, awards of attorney's fees, contempt citations, disqualifications, adverse evidentiary inferences or exclusion of evidence. Id. at 1475 (citingGregory P. Joseph, Sanctions: The Federal Law of Litigation Abuse, § 28(a) (2d ed. 1994)).
A sanction for failure to preserve evidence is appropriate only when a party has "consciously disregarded" its obligations to preserve it.Shepherd, 62 F.3d at 1481. An adverse inference may then be drawn against the party that destroyed the evidence. Unigard, 982 F.2d at 368. Parties who intentionally destroy evidence while under a duty to preserve it may be subjected to more serious sanctions, including exclusion of evidence, default or dismissal. Schwarzer et al., Federal Civil Procedure Before Trial, § 11:19-10 (Rutter Group 2001).
Not only did Defendant here disregard its obligation to preserve relevant evidence in connection with the jurisdictional issue, but once Plaintiff brought the "contact.htm" page to light by filing it with the Court, Defendant engaged in spoliation of evidence. Defendant accused Plaintiff's counsel of manufacturing the "contact.htm" page, deleted the page from its web server, deleted another relevant page two days later, and finally altered the server's log files in an attempt to cover its tracks. The Court concludes that awarding the reasonable fees and costs incurred by Plaintiff due to Defendant's bad-faith litigation abuse is also appropriate under the Court's inherent powers.
C. Civil Contempt
Under the Federal Courts Improvement Act of 2000, magistrate judges are authorized to exercise civil contempt authority in consent cases identical to that of a district judge. See 28 U.S.C. § 636(e). Civil contempt is a coercive measure designed to force a party to comply with the Court's order. Richmark Corp. v. Timber Falling Consultants, 959 F.2d 1468, 1479-80 (9th Cir. 1992). Contempt is inappropriate where a party has taken "all the reasonable steps" it can take to comply. Id. at 1479 (citing Balla v. Idaho State Bd. of Corp., 869 F.2d 461, 466 (9th Cir. 1989)). In light of Defendant's stipulation to the personal jurisdiction of the Court and the imposition of the monetary sanctions set forth above, the Court declines to hold Defendant in contempt.
IV. CONCLUSION
Plaintiff's Motion to Enjoin Spoliation of Evidence and for Sanctions [10] is GRANTED. The parties are directed to meet and confer as to the amount of sanctions to be awarded pursuant to the Court's direction of October 17, 2001. Defendant is strongly cautioned that any further misconduct before this Court will result in swift and severe sanctions.
IT IS SO ORDERED.