Deceptive Discovery: Second Circuit Affirms Sanctions For Mishandling Of Discoverable Data

Late last month, in Klipsch Grp., Inc. v. ePRO E-Commerce Ltd., the Second Circuit affirmed a $2.7 million sanctions award against defendant ePRO after repeated instances of discovery misconduct. Finding that the district court's award properly reflected the additional costs plaintiff Klipsch Group Inc. was forced to bear due to ePRO's actions, the Second Circuit disagreed with ePRO that the sanctions were impermissibly punitive and disproportionate. In an era of increasingly complex digital discovery, this case serves as both a sword and a shield: it protects litigants who pursue corrective discovery efforts to remedy an opponent's willful mishandling of discoverable information, and it punishes litigants who flout their duties to maintain and disclose relevant information.

Background

In August 2012, Klipsch, a manufacturer of sound equipment, brought suit alleging an ePRO subsidiary was selling counterfeit Klipsch headphones. Klipsch sought to learn more about the infringing sales through the discovery of actual sales data and documents ("Structured ESI"), as well as information stored on employee computers and email accounts ("Unstructured ESI").

As discovery progressed, it became clear that ePRO was not fully complying with its discovery obligations. ePRO failed to timely disclose many responsive documents, ePRO restricted a discovery vendor's access to its electronic data, and ePRO neglected to put in place an appropriate litigation hold even after the court directed it to do so, resulting in the loss of a substantial amount of electronic data.

Because of ePRO's repeated discovery missteps, Klipsch moved for discovery sanctions. Although the magistrate judge initially declined to impose sanctions, Klipsch was authorized to forensically examine ePRO's computer systems. The forensic examination revealed that ePRO's sales databases had been edited and that multiple custodians had engaged in various forms of spoliation, including manually deleting thousands of files and emails, utilizing a data wiping software shortly before the examination, and updating computer operating systems to clear program usage data.

Klipsch then filed an ex parte motion seeking additional relief, which the district court granted in substantial part. Ultimately, the court concluded ePRO had willfully spoliated certain electronic information, resulting in some permanently unrecoverable files and data. The sanctions imposed on ePRO included (1) a jury instruction...