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United States District Court,
S.D. New York.
METROKANE, INC., Plaintiff,
v.
BUILT NY, INC., Defendant.
Built NY, Inc., Plaintiff,
v.
Metrokane, Inc. and John Does 1-10, Counterclaim
Defendants.
and Consolidated Case.
Nos. 06 Civ. 14447(LAK)(MHD), 07
Civ.2084(LAK)(MHD).
Sept. 3, 2008.
MEMORANDUM & ORDER
MICHAEL H.
Magistrate Judge.
DOLINGER,
United
States
*1 Built NY, Inc. ("BNY"), the defendant in the
first-filed case and the plaintiff in the second, has
filed a motion seeking sanctions against its adversary
in both cases, Metrokane, Inc. The basis for this
demand is BNY's contention that Metrokane failed to
produce in discovery a series of e-mails said to be
highly damaging to Metrokane's case, and that BNY's
recent discovery of the existence of these e-mails
through production by a non-party comes too late to
permit BNY to pursue otherwise crucial discovery
concerning these communications. Metrokane in turn
opposes the motion, contending that BNY has failed
to comply with various procedural requirements
before filing the motion and that it has not
demonstrated any misconduct by Metrokane or any
prejudice.
For the reasons that follow, we conclude that BNY
has sufficiently demonstrated discovery misconduct
by Metrokane and resulting prejudice, and has
therefore justified the imposition of corrective
measures to alleviate the prejudice.
A. The Current Dispute
Metrokane commenced this set of twin lawsuits,
seeking a declaratory judgment of non-infringement
or unenforceability with respect to a number of
design patents, registered trademarks, and trade dress
rights covering a set of rubberized totes designed to
carry one or two wine bottles. It also asserts a claim
of tortious interference with its relationship with a
large customer. BNY in turn sued for infringement of
its patents, trademarks and trade-dress rights. The
parties pursued discovery, which ended June 30,
2007, although disputes about Metrokane's
performance led to additional motion practice,
particularly concerning enforcement of a deposition
subpoena for a man named Edward Kilduff, who is
said to have designed the Metrokane bags that BNY
claims are infringing. On October 31, 2007 this court
granted the motion of BNY to compel the deposition
of Mr. Kilduff and his production of pertinent
documents, rejecting Metrokane's assertion that the
notice had been untimely served.
Mr. Kilduff produced his documents on November
7, 2007 and was deposed by BNY on November 20,
2007. Among the documents produced by Mr.
Kilduff was a series of e-mails from May and July
2006 that he had sent to, and received from, various
representatives of Metrokane, including its corporate
principal, Riki Kane. Those e-mails, which--with one
partial, if significant exception-- Metrokane had
never produced, could fairly be read as potentially
damaging to several aspects of Metrokane's case.
The e-mails referred to an order by one of
Metrokane's principal customers, the department
store chain Kohls, which wanted one line of the
Metrokane totes supplied to it to be in one solid
color, as were the equivalent totes designed by BNY.
The e-mails also disclosed that, in contrast, Ms. Kane
had previously specified that the Metrokane totes be
multi-colored. (Decl. of Raymond R. Castello
executed Nov. 7, 2007 ("Castello Decl.") at Exs. 1, 48). The e-mails also contained comments by Mr.
Kilduff implying his understanding that the solidcolor Metrokane totes were likely to be confusingly
similar to the BNY totes and explicitly stating his
belief that Kohl's was seeking the solid-color version
to take advantage of that confusion with BNY's
product. (Id. at Exs. 2 & 3). This statement is, of
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course, inconsistent with Metrokane's contention that
the bags were not so similar.
*2 During the discovery period Metrokane had
produced one partially redacted page reflecting two
of these e-mails between Kilduff and Metrokane. The
portion provided by Metrokane contained the
statement by Kilduff that the order by Kohl's of a
solid-color bag reflected that Kohls "obviously
want[ed] to knock ... off" BNY's bag. (Id. at Ex. 3).
The redaction by Metrokane, however, concealed a
follow-up exchange between Kane and Kilduff, in
which Kane appeared to state that Metrokane had
agreed to indemnify Kohls for such infringement,
leading to a brief, if pungent, comment by Kilduff
that if Metrokane was responsible for sales by Kohl's,
"We[']re in trouble then." (Id. at Ex. 2). This
statement by Kilduff is potentially helpful to BNY
for two reasons. First, it dramatically reinforces the
notion that Kilduff was aware of confusing similarity
between the two lines of totes. Second, it highlights
the fact that Kane knew of the similarity and the
problem. That said, it bears emphasis that the
redacted version of this e-mail originally produced by
Metrokane offered similar information since it
contained Kilduff's comment about Kohls' intention
to "knock ... off" BNY's tote. (Id. at Ex. 3).
BNY also points out that the other e-mails produced
by Kilduff, but not by Metrokane, reflect that Kane
had been clearly insisting before the Kohl's order that
the Metrokane totes be multi-colored. (BNY Mem. of
Law in Support of Motion for Discovery Sanctions
("BNY Sanctions Mem.") at 4 (citing Castello Decl.
at Exs. 1, 4-8)). BNY suggests that the disclosure of
this information indicates that Kane was aware that a
solid-color tote would potentially infringe on BNY's
intellectual property rights.
In addition, as noted, the e-mails produced by
Kilduff contained a statement by Ms. Kane--not
previously disclosed by Metrokane--that "Kohls is
100% indemnified", thus indicating that Metrokane
had fully indemnified Kohl's by that time. (Castello
Decl. at Ex. 2). That statement, if literally true, is said
to be inconsistent with representations made by
Metrokane in connection with its pending claim for
tortious interference with Metrokane's business
relationship with Kohl's. (BNY Sanctions Mem. at 56). As alleged by Metrokane, the claim rests on a
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letter sent by BNY to Kohl's many months after this
July 2006 e-mail exchange, in which BNY warned
Kohl's that the Metrokane bags that it was selling
infringed BNY's patents and trademarks. Metrokane
has asserted that this letter led Kohl's to demand an
indemnification agreement from Metrokane and
ultimately caused Kohl's not to re-order the product.
If, however, Kohl's already had an indemnification
agreement with Metrokane, that would contradict at
least a portion of Metrokane's narrative and also
throw some doubt on its contention that it was the
BNY letter that led Kohl's to discontinue selling these
totes.
BNY points out that the production by Kilduff took
place many months after the conclusion of discovery
and thereby deprived BNY of the opportunity to
explore these matters with Ms. Kane and other
Metrokane representatives. (Id. at 6). Accordingly, it
says, it has been irremediably prejudiced and
therefore seeks preclusive sanctions, including
dismissal of Metrokane's claims. (Id. at 8- 9).
*3 In responding, Metrokane offers both procedural
and substantive arguments. It first asserts that the
motion should be denied because BNY failed to
consult with Metrokane about the dispute before
bringing it to the court's attention, and then failed to
ask for a pre-motion conference before filing its
application. (Metrokane Mem. of Law in Opp. to
BNY's Cross-Motion for Sanctions ("Metrokane
Sanctions Opp. Mem.") at 1-2). As for the merits,
Metrokane offers no evidence to explain its failure to
produce the cited e-mails. Rather, it makes a vague
assertion in its attorney's memorandum of law that
the company had no written policy regarding the
retention of documents. (Id. at 7). The implication-although Metrokane makes no direct assertion to this
effect, either by competent testimony or even by the
assertion of its attorneys--is that Metrokane did not
produce the e-mails in question because they were no
longer in its system. As for BNY's assertion of
prejudice, Metrokane argues, albeit in vague terms,
that the e-mails that it failed to produce might be
construed as favorable to it and that in any event
BNY was lax in not pursuing the question of
Metrokane's document-retention policies during
discovery.
B. Assessment of BNY's Motion
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At the outset we reject the procedural defenses to the
motion advanced by Metrokane. A meet-and-confer
session would have been futile. The alleged injury to
BNY was imposed by the delay, and if we credited
Metrokane's implicit suggestion that it did not have
the e-mails anymore, then the meeting would not
have yielded any concrete result that would have
obviated the motion. As for a possible request for an
informal conference before the court, had we been
presented with one we would presumably have
instructed BNY to file a motion.
As for the substance of BNY's motion, we start with
certain basic premises. Where a party claims that its
adversary failed to produce required discovery about
which the complaining party did not know, and that
this failure prejudiced the party, the court has broad
discretion in providing a remedy. E.g., Residential
Funding Corp. v. DeGeorge Financial Corp., 306
F.3d 99, 107 (2d Cir.2003. Moreover, although Fed.
R. Civ. Proc. 37(b) outlines a non-exclusive range of
remedies available for a party's failure to comply
with a prior discovery order, even in the absence of
such an order the court may impose sanctions for
discovery misconduct as an assertion of its inherent
powers. E.g., id ...
In this case BNY notes that, long after the conclusion
of discovery and the full briefing of summaryjudgment motions, a nonparty produced a series of emails that he had exchanged with Metrokane, and it
accuses Metrokane of having failed to turn over--with
one limited exception--its copies of these documents
during discovery. It also notes that Metrokane
vigorously resisted compelling the witness to produce
documents and appear for a deposition.
There is no question that the e-mails are highly
relevant to the claims and defenses in this case, and
there is no dispute that they come within the scope of
BNY's written discovery requests. There is also no
serious question that if BNY had received them in a
timely fashion from Metrokane, it would have
pursued questioning about them with one or more of
Metrokane's representatives, including Ms. Kane.
*4 In opposing BNY's motion Metrokane fails to
offer any evidence on which to premise an
explanation for its failure to produce these
documents, and indeed offers no explicit explanation.
Its only reference to the possibility of an explanation
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is (1) a cryptic assertion in its memorandum of law
that BNY did not pursue during discovery the
question of Metrokane's document retention
practices, (Metrokane Sanctions Opp. Mem. at 7),
and (2) an equally cryptic statement in that same
memorandum that Metrokane did not have any
policies regarding document retention. (Id.). If
Metrokane is seeking to imply that it disposed of
these e-mails before their production was called for,
its position is unsustainable for a variety of reasons.
First, in the absence of any evidence from
Metrokane, we cannot find, as it seems to be subtly
hinting, that it did not have possession or control of
the e-mails in question when called upon to produce
relevant documents in this case. Plainly the
knowledge of whether the company had access to
those e-mails at the pertinent time rests solely with
Metrokane, and its failure to proffer any evidence
pertinent to that question impels an inference that it
cannot demonstrate non-possession.
Second, that inference is further strengthened by
Metrokane's production of a fragment of the e-mails
dating from July 6, 2006. (Castello Decl. at Ex. 3). If
its employees had been systematically purging emails from their computer files, we would not expect
the company to be able to produce the two e-mails
that it did disclose, albeit in redacted form.
Third, we note the very careful avoidance by
Metrokane of any direct representation--even in the
form of a non-admissible attorney's assertion--that
the company did not have the unproduced e-mails in
its possession.
Fourth, even if we concluded, notwithstanding the
absence of any evidence, that Metrokane no longer
had the e-mails in question during discovery, that
would not help the company. The courts have
repeatedly noted that a person or entity that is aware
of the potential for involvement in litigation has an
obligation to preserve relevant files and computer
data. As recently summarized:
"The obligation to preserve evidence arises when
the party has notice that the evidence is relevant to
litigation or when a party should have known that
the evidence may be relevant to future litigation."
Fujitsu Ltd. v. Federal Express Corp., 247 F.3d
423, 436 (2d Cir.2001). Thus, "[o]nce a party
reasonably anticipates litigation, it must suspend its
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routine document retention/destruction policy and
put in place a 'litigation hold' to ensure the
preservation of relevant documents." Zubulake v.
UBS Warburg LLC, 220 F.R.D. 212, 218
(S.D.N.Y.2003) ("Zubulake IV" ).
Treppel v. Biovail Corp., 2008 WL 866594, *5
(S.D.N.Y. April 2, 2008).
At the very least, by the time of the July 2006 e-mail
exchanges Metrokane was manifestly aware of the
potential for litigation with BNY, as evidenced by the
discussion between Mr. Kilduff and Ms. Kane about
the indemnification arrangement with Kohl's and the
apparent intention of Kohl's--in Mr. Kilduff's view-to infringe BNY's protected interests in a wine-bottle
carrier. If Metrokane destroyed the e-mails in
question at some time thereafter it was in evident
violation of its obligation of preservation, and may
thus be charged with the consequences of its
spoliation. See, e.g., Zubulake, 220 F.R.D. 212, 216
(S.D.N.Y.2003).
*5 The remaining question concerns what measures
are appropriate to purge whatever prejudice BNY
may have suffered by virtue of Metrokane's failure to
make timely production of the e-mails. The
determination of the sanction should be a product of
the court's assessment of the degree of fault of the
party against whom sanctions are sought and the
extent of the prejudice to the moving party. See, e.g.,
Reilly v. Natwest Markets Group, Inc., 181 F.3d 253,
267- 68 (2d Cir.1999); Treppel, 2008 WL 866594 at
*11; Klezmer v. Buynak, 227 F.R.D. 43, 51
(E.D.N.Y.2005).
Given the evidentiary record, including the complete
silence of Metrokane as to why it failed to produce
the e-mails in question, we infer at a minimum that it
was negligent either in failing to produce documents
available to it or in failing to preserve documents that
it was obliged to safeguard. We are not prepared to
find any greater degree of fault with respect to the
bulk of the e-mails, particularly in view of the
company's production of those e-mails that reflect
Mr. Kilduff's apparent view that the solid-color bags
ordered by Kohl's would infringe on BNY's
intellectual property rights. The two exceptions are
the deletion of Mr. Kilduff's last comment about
Metrokane being in trouble, since that redaction was
plainly deliberate and inexcusable, and Metrokane's
failure to disclose Ms. Kane's seeming reference to an
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existing indemnification of Kohl's.
As for the degree of prejudice, BNY substantially
overstates the impact of the non-production, which is,
in any event, in large measure remediable. BNY was
on timely notice, at the very least from the fragments
of e-mails actually disclosed by Metrokane, that the
question of whether the Metrokane totes should be in
a solid color or multi-colors was a topic of discussion
within Metrokane and between it and Kohl's and that
Metrokane had reason to believe that the decision
might impact whether those bags would be
confusingly similar to those of BNY. Moreover, the
extent of Ms. Kane's original intention to make them
multi-colored was clearly-enough tagged as an issue
in the disclosed e-mails to have permitted BNY to
pursue the matter in depositions.
The most troubling issue is the impact of
Metrokane's concealment of Ms. Kane's statement
that Kohls was "100% indemnified" many months
before the BNY letter that forms the basis for
Metrokane's claim for tortious interference. That nondisclosure prevented BNY from questioning Ms.
Kane and others at Metrokane and possibly Kohl's
about this statement, pursuing the possible existence
of relevant indemnification documents, or arguing the
point in connection with the pending summaryjudgment motions. In addition, the failure to turn
over this portion of the e-mail appears, as we have
noted, to have been deliberate as well as completely
unjustified.
To address these varied difficulties, we conclude that
the following remedies are appropriate. First, for
purposes of the summary-judgment motions, we
deem Ms. Kane's statement in her e-mail about the
indemnified status of Kohl's to be binding and
included within the summary-judgment record.
Second, if the tortious-interference claim survives
summary judgment, [FN1] Metrokane will be
required, at least two weeks before trial, to make Ms.
Kane and any other Metrokane witness competent to
testify about the timing and substance of the
indemnification of Kohls available for deposition by
BNY, with the costs of that deposition, as well as
reasonable attorney's fees incurred in preparing for it
and conducting it to be borne by Metrokane. Third, at
such a trial, BNY will be permitted to offer evidence
as to Metrokane's concealment of this e-mail and will
be entitled to a jury instruction as to the possible
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inferences that the jurors may draw from the
concealment of this e-mail. Finally, BNY is awarded
the expenses, including reasonable attorney's fees,
incurred in preparing and briefing this sanctions
motion. BNY may serve and file an affidavit within
two weeks documenting those expenses. Metrokane
may respond to this submission within one week
thereafter.
FN1. In a contemporaneously filed Report
and Recommendation, we recommend that
summary judgment be granted dismissing
this claim for other reasons. Metrokane, Inc.
v. Built New York, Inc., 06 Civ. 14447 & 07
Civ.2084(LAK)(MHD),
Report
&
Recommendation at 85-96 (S.D.N.Y. Sept.
2, 2008)
CONCLUSION
*6 For the reasons stated, the sanctions motion of
BNY is granted to the extent stated.
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