Zapproved Case Summary IconInternMatch, Inc. v. Nxtbigthing, LLC, No. 14-05438, 2016 WL 491483 (N.D. Cal. Feb. 8, 2016).

Applying Federal Rule of Civil Procedure 37(e), the court held that the defendants destroyed data willfully and in bad faith, based upon its findings that their representations were not credible and that they made no effort to recover data after the alleged power surge. The court stopped short of terminating sanctions since it could still resolve the case on its merits.

In this lawsuit disputing ownership over the trademark “InternMatch,” the plaintiff, InternMatch, accused defendant Nxtbigthing of fraudulently obtaining registration of the trademark “INTERNMATCH”; Nxtbigthing claimed it had been using that name since 2007, years before InternMatch began. In discovery, InternMatch asked Nxtbigthing to produce documents to support its claim that it had used the InternMatch mark “‘continuously and extensively.’”

To establish that use, Nxtbigthing’s owner, Chad Batterman, produced only 100 pages of documents that he had printed at his counsel’s request, claiming that the electronic copies had been “irretrievably lost in August 2011 due to a lightning strike, and in April 2015 due to a power surge.” After the lightning strike, Batterman had purchased a replacement computer and transferred documents to it using a backup thumb drive.

However, all data was subsequently lost during a supposed power surge that occurred during the pending litigation. Interestingly, 10 days before the surge allegedly occurred, Batterman had called his insurance company to ask how it would handle a power surge. As a result of the surge, which suspiciously affected only the home office of his apartment, Batterman claimed three computers, two or three hard drives, and other equipment were “fried.” Despite the insurer’s instructions regarding salvaging his equipment, he made no effort to recover any data before his wife threw the supposedly affected computers in the trash because they had an “unbearable” burnt smell. The loss of the devices made it impossible to determine when the defendants’ files using the mark were created or last modified.

The court found that the documents on the “discarded iMac desktop computer . . . were unarguably relevant” and should have been preserved. The defendants claimed that Batterman’s wife had no knowledge of their discovery obligations, but the court found this lack of communication simply another indication of the defendants “fail[ing] to meet their discovery obligations.” Citing a host of inconsistent statements Batterman made to his insurance companies, the sheer implausibility of the asserted facts surrounding the power surge, and expert opinions from both sides, the court concluded that Batterman “fabricated his account regarding the power surge.”

Further, “even if the Court accepted this strained version of events in its entirety (and it does not), the defendants would still be culpable for spoliation” because of their failure to ensure that relevant evidence was preserved: the allegedly affected computers were physically thrown away without any diagnostics, while the defendants “expressed concern about sensitive data” that they did not want to disclose. The court therefore found that the defendants “willfully spoliated evidence” and that the “extraordinary measures Batterman undertook to mislead opposing counsel and the Court merit a finding of bad faith.”

The court then weighed five factors to decide whether a terminating sanction would be appropriate: the public’s interest in speedy resolution of cases, the court’s need to manage its docket, the risk of prejudice to the affected party, the “public policy favoring disposition of cases on their merits,” and the availability of other sanctions. Ultimately, the court decided to impose “sanctions short of entry of default” since it could still resolve the case on its merits. The imposed sanctions included adverse inference instructions, preclusion of any claim by the defendants that the destroyed evidence supported their argument, and attorneys’ fees for the motion.

InternMatch, Inc. v. Nxtbigthing, LLC, No. 14-05438, 2016 WL 491483 (N.D. Cal. Feb. 8, 2016).

Takeaways

In a footnote, the court noted the recent amendments to Rule 37(e). Though observing the need for a uniform standard, the court remarked that an open issue was “[w]hether a district court must now make the findings set forth in Rule 37 before exercising its inherent authority to impose sanctions for the spoliation of electronic evidence.” The court avoided resolving this question and found sanctions appropriate because the defendants’ conduct satisfied Rule 37(e)(2): it was willful, was in bad faith, and intended “‘to deprive another party of the information’s use in the litigation.’”

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