Court Upholds $2.7 Million Sanction on Case Valued $25,000 Because of Defendant’s ‘Persistent Discovery Misconduct’

11 May 2018

In Klipsch Grp., Inc. v. ePRO E-Commerce Ltd., Nos. 16-3637-cv, 16-3726-cv (2d Cir. Jan. 25, 2018), the Second Circuit found no error in the lower court’s imposition of a multi-million sanction for discovery misconduct.

While defending against claims it sold counterfeit products, ePRO E-Commerce Limited (“Defendant”) engaged in persistent discovery misconduct. It did not disclose the majority of responsive documents in a timely fashion, it restricted a discovery vendor’s access to its ESI, and failed to impose a litigation hold even though the Court told it to—which resulted in the deletion of thousands of documents and large amounts of data. The Court granted, in part, plaintiff-appellee Klipsch Group, Inc.’s (“Plaintiff”) motion for discovery sanctions, including a $2.7 million monetary sanction to compensate Plaintiff for its corrective discovery efforts and a corresponding asset restraint in that amount, permissive and mandatory jury instructions, and an additional $2.3 million bond to preserve Plaintiff’s ability to recover damages and fees at the end of the case. Defendant appealed.

In August 2012, Plaintiff, a manufacturer of sound equipment including headphones, sued a subsidiary of Defendant, a Chinese corporation, alleging that it was selling counterfeit headphones. Defendant does not dispute that some infringing sales occurred, however, throughout the proceedings, the parties have insisted on vastly different estimates of the extent of such sales. Plaintiff claimed Defendant sold at least $5 million in counterfeit products. Defendant says it sold a total of $8000 in counterfeit products.

As the case proceeded, Defendant failed to comply with its discovery. Instead of producing actual sales receipts, the Defendant turned over spreadsheets created specifically for this litigation, all of which supported Defendant’s contention of a tiny amount of sales of the counterfeit products. Also, during this lawsuit, it was determined that Defendant still had the counterfeit products in question for sale on its websites. The Court concluded that Plaintiff had shown that Defendant had willfully spoliated relevant ESI. The Court awarded Plaintiff a total of $2.68 million as compensation for the additional discovery efforts occasioned by Defendant’s misconduct—an amount it determined would be appropriate to secure Plaintiff’s likely recovery of treble damages and attorney’s fees at the conclusion of the case.

The Defendant appealed, arguing that the lower Court’s sanctions were impermissibly punitive because they were so disproportionate to the likely value of the case. While the Court found the Defendant’s position sympathetic on the surface, its argument conveniently omitted the fact that the Defendant caused the Plaintiff to accrue those costs by failing to comply with its discovery obligations. The Court said the multi-million-dollar award appropriately reflects the additional costs Defendant imposed on the Plaintiff by refusing to comply with its discovery obligations. The Court also said the million-dollar award would serve as a deterrent to other parties of lawsuits who may consider refusing to comply with discovery obligations. The Court also issued its own warning, noting that the Defendant ePRO did not have a software usage policy in place to ensure the preservation of communications sent through personal accounts. That was the company’s own error, and it could not complain because the resulting and wholly foreseeable deletion of material gave rise to sanctions.