It is not a good thing for a litigant when an esteemed United States District Judge begins a decision with a statement such as the following:
As the court has repeatedly told defendants … this case has generated more meritorious motions to compel and for sanctions against defendants for failure to produce documents than any other case in which this court has presided in more than 37 years.
So wrote Judge Mark L. Wolf of the United States District Court for the District of Massachusetts in a lengthy memorandum and order entered in Red Wolf Energy Trading, LLC v. Bia Capital Management, LLC, Civil Action No. 19-10119-MLW, 2022 WL 4112081, at *1 (D. Mass. Sept. 8, 2022).
What You Need to Know:
- Repeated failures to respond fulsomely and accurately to discovery requests, and to comply with court orders pertaining to those requests, can lead to the imposition of sanctions against a party or its counsel.
- Although rarely done, a court can enter a default judgment as a sanction for repeated and serious discovery violations.
- Parties and their counsel should ensure that they take their discovery obligations seriously and that they utilize appropriate resources to satisfy those obligations.
Red Wolf Energy Trading, LLC (“Red Wolf”) initiated the action in January 2019, asserting claims against defendants Bia Capital Management, LLC (“Bia”) and its founder and managing director Gregory Moeller (“Moeller”), as well as several others, under the federal Defend Trade Secrets Action and the Massachusetts statute prohibiting unfair and deceptive trade practices. Red Wolf, which is an energy trading firm, contended that a former employee used Red Wolf’s proprietary software for the benefit of Bia, shared Red Wolf’s confidential information including trading algorithms with Bia, and became a member of Bia after leaving Red Wolf’s employ, all in violation of his employment agreement with Red Wolf. Id. at *3-*4.
Faced with what the Court characterized as “repeated misconduct” by Bia and Moeller, including the failure to search for and produce documents after twice being ordered to do so and after being given increasingly stern warnings of what might occur if they continued to flout their discovery obligations, as well as Moeller’s submission of false affidavits regarding the searches for and the production of electronic documents and Slack messages, and given the prejudice that both the Court and Red Wolf suffered as a result of the delays and obfuscations, the Court entered a default judgment against Bia and Moeller and in favor of Red Wolf pursuant to Rule 37(b)(2) of the Federal Rules of Civil Procedure (the “Rules”). Id. at *2.
Bia and Moeller Repeatedly Thwarted Red Wolf’s Efforts to Obtain Relevant and Responsive Documents and Communications
Red Wolf served its first request for the production of documents in October 2019, in which it sought, amongst other things, communications between its former employee and Moeller or other individuals associated with Bia, and communications concerning Red Wolf and trading, including those sent or received via Slack. Id. at *5. While Bia and the others produced some documents in response to Red Wolf’s request, Red Wolf contended in a motion filed in March 2020 that it had not received all of the relevant documents it sought, including some of the communications and the Google Suite documents linked to documents that had been produced. In addition, Red Wolf claimed that it had not received all documents relevant to determining the veracity of statements regarding Bia’s development of its own trading algorithm that were made in support of Bia’s opposition to Red Wolf’s effort, earlier in the litigation, to obtain a temporary restraining order. Id.
The Court granted most of Red Wolf’s motion, finding that certain communications were discoverable and ordering their production, as well as the production of the Google Suite documents. Id. at *6. The Court admonished Bia and its co-defendants and informed them that sanctions could be entered if they did not produce what they were ordered to produce. Id. It also ordered them to review their prior production and to file an affidavit confirming that they had done so and stating either that additional documents had been disclosed or that there were none to produce. Id. Shortly thereafter, Moeller filed an affidavit stating that he worked with counsel to identify additional documents as required and that he had reviewed the Slack communications and had provided all responsive threads. Id. at *7.
Believing the defendants’ document production to be complete, Red Wolf then deposed Moeller and others. In August 2021, Red Wolf informed the Court that based on Moeller’s deposition testimony, it believed not all relevant and responsive Slack threads had been produced. The Court reminded Bia and the other defendants of their obligation to supplement their production if it was determined to be incomplete, and ordered them to file another affidavit after any necessary supplementation to their production was made. Id. at *8. In September 2021, Moeller filed an affidavit in which he stated that he believed a “good faith search” had been conducted and that there were no more documents to produce. Id.
Dissatisfied, Red Wolf filed another motion to compel in November 2021, which sought an order requiring Bia and the other defendants to produce all Slack communications sent or received by its former employee to a number of named individuals over a period of approximately five years. Id. In opposing that motion, Bia argued that it had applied agreed-upon search terms to the Slack messages and produced those that contained one or more of those terms, and Moeller stated in an affidavit that in 2019, there was “no ready mechanism” to search Slack messages, so he retained a consultant to develop a program to use in searching and producing responsive messages. Id. While Red Wolf’s motion was pending, Moeller filed yet another affidavit, in which he informed the Court that 47 documents were found in Bia’s Google Vault, which is part of Google Suite. Id. at *9.
Those 47 documents included images of Red Wolf’s system, a spreadsheet containing data from Red Wolf’s software, and a Power Point presentation that had screenshots of Red Wolf’s proprietary software and user interface, the last of which the Court called “important evidence” that undermined statements previously made to the Court on Bia’s behalf regarding the allegations of misappropriation of Red Wolf’s trade secrets. Id. Highlighting one of the problems that can result from permitting a litigant to self-collect documents and data without the assistance of counsel or consultants, Moeller told the Court that the documents were inadvertently overlooked because the individual at Bia who conducted the search had made some errors. Id.
These failures led Red Wolf to file a motion seeking the imposition of sanctions. After holding a hearing on the pending motion to compel and that motion, the Court ordered the defendants to produce all of the requested Slack communications without regard to the search terms the parties had negotiated, finding, however, that the parties had not fully agreed on the scope of the production earlier in discovery. Id. at *10. The Court also permitted Red Wolf to depose Moeller and certain others again in order to question them about the 47 documents, and ordered the defendants to pay the reasonable expenses Red Wolf had incurred in filing its motion for sanctions. Id. at *11. Not surprisingly, the Court again admonished Bia and its co-defendants for having violated the Court’s orders and their obligation to supplement their production under Rule 26. Id.
Red Wolf received the Slack messages in April 2022 and learned for the first time that Bia had not produced ones with the search terms that should have been produced in 2019. Red Wolf deposed Moeller the following month and learned that those messages had not been produced because Bia’s consultant made an error when writing his search protocol two years earlier. Id. at *11. Other facts of which Red Wolf belatedly became aware included that Bia’s consultant was an independent contractor in Kazakhstan who received equity in Bia as payment for his services, whom Moeller retained based on his assertion that Bia could not afford a litigation consultant, and that Moeller had not reviewed the prior productions as he stated he had in his affidavits. Id. at *11-*12. Red Wolf also learned when deposing the individual whom Moeller had blamed for failing to conduct a proper search of the Slack messages that that individual had informed Moeller that he was not familiar enough with Slack to conduct the search. Id. at *12.
Red Wolf Requested the Entry of a Default Judgment Against Bia and Moeller, and the Court Granted That Request
As would be expected, in June 2022, Red Wolf filed a second motion for sanctions. Id. While that motion was pending, and after Moeller’s second deposition, Bia produced yet another 56 Slack messages. Id. at *13. The Court heard Red Wolf’s motions in August 2022 at a time when trial would have begun but for the discovery-related delays and disputes, and ordered the defendants to turn over Bia’s entire Slack archive from 2019 to be searched by Red Wolf’s litigation consultant. Id. at *14-*15. Red Wolf subsequently informed the Court that its consultant found at least 128 more Slack messages that should have been produced in 2019 because they contained an agreed-upon search term, including what Red Wolf called a “smoking gun” in which Moeller and another defendant discussed, shortly after Red Wolf initiated the action, how to hide the fact that Bia’s algorithm was derived from Red Wolf’s. Id. at *15.
Red Wolf’s consultant informed the Court in an affidavit that notwithstanding the position taken by Bia’s consultant, the Slack archive could have been searched in 2019 for a cost of approximately $10,000 and that the approach Bia’s consultant took was “not technologically sound” and “outside of universally accepted standards and best practices for legally defensible data collection, preservation and production.” Id. at *15-*16. Red Wolf’s consultant also opined that Bia’s consultant’s process may have been undertaken “deliberately in order to withhold potentially relevant data during discovery,” and identified 87 empty folders in the Slack archive, the existence of which suggested that data had been deleted after being exported from Slack but before transfer to Red Wolf. Id. at *16.
Although the defendants tried to justify and explain away their failures, their efforts were too little and too late. The Court reviewed the obligations that Rule 26 imposes upon parties, including the duty to supplement, id. at *17, and the law governing Red Wolf’s claims against Bia and the other defendants, id. at *18, before turning to the discussion of the sanctions that could be entered against them under Rule 37. Id. at *18-*19. Finding that the defendants’ discovery violations were “serious” and resulted from their “reckless disregard of their obligations to produce documents and obey court orders,” and that not only Red Wolf but the Court itself had been “seriously prejudiced” and “injured” by the defendants’ misconduct, id. at *19, after recounting the many failures, the Court concluded that the appropriate remedy was to enter a default judgment under Rule 37(b)(2) against Bia and Moeller. Id. at *19-*25. The Court also ordered Bia and Moeller, pursuant to Rule 37(c)(2)(C), to pay the reasonable attorneys’ fees and expenses Red Wolf incurred in connection with its second motion for sanctions. Id. at *26. In a rebuke to the defendants’ attorneys, the Court stated that if Bia and Moeller could not pay the fees and expenses in full, the Court would hear from their attorneys as to whether they should be ordered to pay any deficiency under Rule 37(b)(2)(C). Id.
Bia’s and Moeller’s failures to comply with the Rules and the Court’s orders clearly frustrated the Court. As the Court made clear in its memorandum and order, Bia and Moeller could have engaged a qualified consultant early in the litigation for a reasonable cost to assist them with their discovery obligations, but they chose not to do so, opting instead to take a “hide and seek” approach to discovery. Id. at *22. They also should have been more thorough in their efforts to identify and produce the responsive documents and Slack messages, and more transparent in describing those efforts to the Court. The entry of the default judgment against Bia and Moeller as a result of their repeated discovery violations should serve as a warning to litigants and counsel alike that courts view parties’ discovery obligations extremely seriously and will not hesitate to impose that ultimate sanction in appropriate circumstances.
To read the full memorandum and order, click here.