880 F.3d 620 (2nd Cir. 2018), 16-3637-cv, Klipsch Group, Inc. v. ePRO E-Commerce Ltd.

Docket Nº:Docket 16-3637-cv, 16-3726-cv United States Court of Appeals, Second Circuit
Citation:880 F.3d 620
Opinion Judge:Gerard E. Lynch, Circuit Judge:
Party Name:KLIPSCH GROUP, INC., Plaintiff-Appellee-Cross-Appellant, ABC, Plaintiff, v. EPRO E-COMMERCE LIMITED, DBA DealExtreme, DBA Dealextreme.com, DBA DX, DBA Dx.com, Defendant-Appellant-Cross-Appellee, Def; Big Box Store Limited, DBA Bigboxstore.com, DBA Bigboxsave.com; Zhongren Cao, DBA United Pacific Connections Company, DBA Atechport.com, DBA ...
Attorney:G. ROXANNE ELINGS (L. Danielle Toaltoan, George Wukoson, on the brief), Davis Wright Tremaine LLP, New York, NY, for Plaintiff-Appellee-Cross-Appellant. JOHN A. BASINGER, Saul Ewing LLP, Newark, N.J. (Hugh H. Mo, Pedro M. Medina, Law Firm of Hugh H. Mo, P.C., New York, NY, and Steven C. Bennett, ...
Judge Panel:Before: Jacobs and Lynch, Circuit Judges, and Crotty, District Judge.
Case Date:January 25, 2018
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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880 F.3d 620 (2nd Cir. 2018)

KLIPSCH GROUP, INC., Plaintiff-Appellee-Cross-Appellant, ABC, Plaintiff,

v.

EPRO E-COMMERCE LIMITED, DBA DealExtreme, DBA Dealextreme.com, DBA DX, DBA Dx.com, Defendant-Appellant-Cross-Appellee,

Def; Big Box Store Limited, DBA Bigboxstore.com, DBA Bigboxsave.com; Zhongren Cao, DBA United Pacific Connections Company, DBA Atechport.com, DBA Wirelessspycamera.biz; Dandan Wu, DBA Pandawill.com; D201.Com, AKA PhoneII.com, AKA SinoPro.com; Shang Tao, DBA Pingu International Limited, DBA Airaccent.com; Shiming Zhang, DBA Best Discount Store; Kingspec SSD, DBA EEEPCSSD.com; EZU Energy Limited, DBA Beebond Co., DBA Beebond.com, DBA James Collen, DBA Beebond.co.UK; Mag Simon, DBA Bulkordering.com; McBub.com, AKA Sinadeal.com; Li Jin, DBA Kan72D7GB; Alex Chaow, DBA Advanced Plus Int’l Share Ltd., DBA Superluckymart.com; Yaoyao Mai, DBA Shenzhen Taobaodao Technology Co., Ltd.; Eachgame International (HK) Stock Co., Ltd., DBA Eachgame.com; Technoplus International Co., Limited, DBA Sertec, DBA SZSertec.com, DBA Dealingsmart.com; Yuedajie888999; Escalongtb, AKA Guderianygm; GH6G8YUH6; Zhaohua Luo, AKA Xu Yong Luo, DBA wholesalewill.com; XYZ Companies, 1-10; John Does 1-10; Jane Does 1-10, Defendants.[*]

Docket Nos. 16-3637-cv, 16-3726-cv

United States Court of Appeals, Second Circuit

January 25, 2018

Argued: October 26, 2017

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In the course of defending against claims that it sold counterfeit products, defendant-appellant ePRO E-Commerce Limited ("ePRO") engaged in persistent discovery misconduct. ePRO brings this interlocutory appeal challenging the resulting imposition of discovery sanctions, including, inter alia, an order that it pay the costs incurred by its opponent, plaintiff-appellee Klipsch Group, Inc., as a result of ePRO's misconduct, and a restraint on $5 million of ePRO's assets. ePRO raises various challenges to the district court's evidentiary rulings and factual findings. It also contends that the resulting sanctions are impermissibly punitive, primarily because they are disproportionate to the likely value of the case. Klipsch, on cross-appeal, argues that the district court erred by failing to infer that ePRO destroyed relevant sales data from the fact that it failed to retain backup copies of its live sales database.

We find no error in the district court's factual findings, and we conclude that the monetary sanctions it awarded properly compensated Klipsch for the corrective discovery efforts it undertook with court permission in response to ePRO's misconduct. The district court's orders imposing sanctions are therefore AFFIRMED in all respects.

G. ROXANNE ELINGS (L. Danielle Toaltoan, George Wukoson, on the brief), Davis Wright Tremaine LLP, New York, NY, for Plaintiff-Appellee-Cross-Appellant.

JOHN A. BASINGER, Saul Ewing LLP, Newark, N.J. (Hugh H. Mo, Pedro M. Medina, Law Firm of Hugh H. Mo, P.C., New York, NY, and Steven C. Bennett, Park Jensen Bennett LLP, New York, NY, on the brief), for Defendant-Appellant-Cross-Appellee.

Before: Jacobs and Lynch, Circuit Judges, and Crotty, District Judge.[**]

OPINION

Gerard E. Lynch, Circuit Judge:

In the course of defending against claims that it sold counterfeit products, defendant-appellant ePRO E-Commerce Limited (" ePRO" ) engaged in persistent discovery misconduct: it failed to timely disclose the majority of the responsive documents in its possession, restricted a discovery vendor’s access to its electronic data, and failed to impose an adequate litigation hold even after the court directed it to do so, which omission allowed custodians of relevant electronic data to delete thousands of documents and significant quantities of data, sometimes permanently. As a result, the United States District Court for the Southern District of New York (Vernon S. Broderick, J. ) concluded that ePRO had willfully engaged in spoliation. It accordingly granted in substantial part plaintiff-appellee Klipsch Group, Inc.’s (" Klipsch" ) motion for discovery sanctions, including a $2.7 million monetary sanction to compensate Klipsch 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 Klipsch’s ability to recover damages and fees at the end of the case. ePRO now brings this interlocutory appeal, raising various challenges to the evidentiary rulings and factual findings undergirding those sanctions. It also contends that the resulting sanctions are impermissibly punitive, primarily because they are disproportionate to the likely value of the case. Klipsch, on cross-appeal, argues that the district court erred by failing to infer that ePRO destroyed relevant sales data from the fact that it failed to retain backup copies of its live sales database.

We find no error in the district court’s factual findings, and we conclude that the monetary sanctions it awarded properly compensated Klipsch for the corrective discovery efforts it undertook with court permission in response to ePRO’s misconduct. In particular, we emphasize that discovery sanctions should be commensurate with the costs unnecessarily created by the sanctionable behavior. A monetary sanction in the amount of the cost of discovery efforts that appeared to be reasonable to undertake ex ante does not become impermissibly punitive simply because those efforts did not ultimately uncover more significant spoliation and fraud, or increase the likely damages in the underlying case. The district court’s orders imposing sanctions

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are accordingly AFFIRMED in all respects.

BACKGROUND

The facts presented below are drawn principally from the district court’s findings of fact.

I. Initial Steps in the Litigation

In August 2012, Klipsch, a manufacturer of sound equipment including headphones, sued DealExtreme.com, a subsidiary of ePRO, a Chinese corporation, alleging that it was selling counterfeit Klipsch headphones. ePRO 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. Klipsch alleged that ePRO sold at least $5 million in counterfeit or otherwise infringing Klipsch products. ePRO, on the other hand, has consistently presented evidence that the sales of the relevant products amounted to less than $8,000 worldwide. The district court initially found ePRO’s evidence persuasive and did not substantially revise its view of the case’s value even after Klipsch’s investigators uncovered two other counterfeit Klipsch products being sold on ePRO’s sites a few months into the litigation.

As the case proceeded, however, ePRO’s failure to comply with its discovery obligations began to cast doubt on the reliability of its representations. By March 2013, as Klipsch was preparing to take depositions of ePRO’s employees in Hong Kong, ePRO had produced fewer than 500 documents. ePRO insisted that it did not possess any original sales documents, and instead turned over spreadsheets created specifically for this litigation that purported to list all relevant sales. In support of its contention that those sales records were complete, ePRO points out that each of the undercover purchases made by Klipsch’s investigators was accounted for therein, even though ePRO would have had no a priori means of identifying those transactions.

During a deposition of ePRO’s CEO, Daniel Chow, it became clear that ePRO had not placed a litigation hold on a substantial portion of its electronic data, including any emails or faxes. Around the same time, ePRO also admitted that it did possess transactional sales documents that should have been disclosed. In order to remedy those problems, ePRO agreed to retain a discovery vendor, FTI Consulting, to conduct a keyword search of its electronic documents. FTI’s search resulted in the production of an additional 40,000 documents, including 1,236 original sales documents. Some of the documents that were produced contradicted Chow’s testimony, suggesting that ePRO had misidentified the suppliers of the counterfeit products. And although the new production was voluminous, there were also indications that ePRO had artificially limited FTI’s investigation into its electronic records. In light of the new discovery, the magistrate judge supervising discovery (Michael H. Dolinger, M.J. ) deemed it necessary for Klipsch to re-depose ePRO’s employees.1 At Chow’s second deposition in November 2013, it became clear that, despite the magistrate judge’s clear directive, ePRO still had not imposed an adequate litigation hold. It is not contested that ePRO’s counsel had advised compliance and warned that noncompliance would bring consequences.

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II. The Motion for Discovery Sanctions

In December 2013, Klipsch moved for...

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