DVSI_UnivPhx_Order_Feb14

A U.S. Magistrate in the Eastern District of Virginia took the extraordinary step of handwriting the denial of a motion by the parties to have spoliation sanctions vacated in Digital Vending Services International LLC v. The University of Phoenix Inc. et al., No. 2:09-cv-00555, E.D.Va. This could mark a new threshold in the courts of not “clearing the slate” which is a common component in settlements.

The parties had mutually filed a Consent Motion as part of the settlement to withdraw the sanctions but U.S. Magistrate Judge Tommy E. Miller crossing out the word “Granted” in the Order entered on February 5, 2014 and writing:

“Denied. The court will not agree to hide the discovery abuses of the plaintiff in this case by withdrawing the October 3, 2013” Opinion and Order.

Clearly the standard of conduct required to provoke such a response must have been egregious. The patent infringement case was initiated by the plaintiff Digital Vending Services International (DVSI) which has the mission of owning “intellectual property, to license that property, and to seek legal action against those who DVSI contends infringe on its property.” (p.14, Oct. 3, 2013 Order).

DVSI initiated the litigation in March 2008 in an effort to enforce a patent on managing courseware on computer networks. The case was transferred to the Eastern District of Virginia in October 2009. The matter of spoliation sanctions came to the fore in June 2013 when the Defendants filed a motion for sanctions due to the loss of a thumb drive labeled “Important DVSI Documents” and two interviews with the inventors of the patent.

The story gets a bit convoluted at this point. The thumb drive was indeed lost but the court found that no sanctions were warranted because “[d]efendants here have failed to prove intentional destruction and relevancy.” (p. 12, Oct. 3, 2013 Order) With regard to the interviews, they were recovered so no sanction was warranted. However, the court took exception with two aspects surrounding the interviews.

The first is that DVSI was inconsistent in disclosing them. The company, as well as the two people being interviewed, denied their existence. Meanwhile, the interviews had been previously cited in testimony.  While also arguing before the court that the interviews did not exist DVSI’s CEO was continuing to search for them. A by-product of the ultimately successful search for the interview was the discovery of 7,000 previously undisclosed documents. The Court wrote:

Although the loss of the thumb drive does not rise to the level of sanctionable spoliation, the Court is seriously concerned by DVSI’s recent disclosure of over seven thousand new documents, including inventor interviews that DVSI previously insisted did not exist. Because these documents were produced outside of the discovery period and in an untimely manner, the Court must address this rather unorthodox situation. (Citations omitted, p.12, Oct. 3, 2013 Order)

The Court found that DVSI should be sanctioned under a failure to disclose under Rule 37(c)(1) for disallowing late-disclosed evidence. In October 2013, Judge Miller ordered the prohibition of using as evidence at trial any of the new documents, payment of attorney’s fees related to the late disclosure and he also recommended to the trial judge an adverse inference instruction which prior to testimony would inform the jury that the Plaintiffs engaged in discovery abuses.

So that brings us back to the Order of February 5, 2014: What is the impact of denying this motion? It shows a new tactic on the part of the Courts of not concealing preservation abuses. While it will not have an effect on the settlement, the sanction against DVSI will remain on the record. It remains to be seen what impact this will have to DVSI’s reputation but it will be interesting to monitor if other courts follow suit and refuse to capitulate in vacating similar sanctions in the future.

Further Reading:

 

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