HighMark Digital, Inc. v. Casablanca Design Centers, Inc., et al No. CV 18-6105 SJO (ASx) United States District Court, C.D. California Filed October 03, 2019 Counsel Michael K. Friedland, Thomas Philip Krzeminski, Knobbe Martens Olson and Bear LLP, Irvine, CA, for HighMark Digital, Inc. Joceline Martha Herman, Martin Niels Jensen, Porter Scott APC, Sacramento, CA, Jeffrey A. Nordlander, Seyfarth Shaw LLP, Sacramento, CA, for Casablanca Design Centers, Inc., et al. Sagar, Alka, United States Magistrate Judge Proceedings (In Chambers): Order GRANTING IN PART Plaintiff's Application to File Exhibits 8 and B–D Under Seal (Dkt. Nos. 88–89, 98, 113) and DENYING Plaintiff's Motion for Sanctions Due to Spoliation (Dkt. Nos. 90–97, 105–108, 111–112) A. Introduction *1 On September 20, 2019, the parties filed a joint stipulation (“Joint Stip.”) regarding Plaintiff's motion to compel Defendants to provide supplement responses to Request for Production (“RFP”) No. 37, and alternatively, for sanctions due to spoliation, to include an order of adverse inference regarding the contents of destroyed documents and attorney fees and costs (“Motion”). (Dkt. Nos. 90–91). The Motion was accompanied by declarations in support of and in opposition to the Motion. (Dkt. Nos. 92–97). On the same date, Plaintiff filed an application to file certain exhibits under seal (“Application”). (Dkt. Nos. 88–89). On September 23, 2019, Defendants filed an opposition to the sealing request. (Dkt. No. 98). On September 25, 2019, the Court held a telephonic conference regarding the Motion and the Application. With regard to Plaintiff's Application, the Court ordered the parties to meet and confer, and if they reach an agreement to file a joint stipulation no later than October 3, 2019, identifying the exhibits to be filed under seal. (Dkt. No. 100 at 2). Because the discovery cutoff date is September 30, 2019, the Court found the request to compel supplementary responses to RFP untimely and denied this request without prejudice. (Id. at 1). Absent an order from the District Judge extending the discovery cutoff date, which has not occurred,[1] the Court will confine its ruling to Plaintiff's request for sanctions due to spoliation and an award of attorney's fees and costs in bringing the Motion. (Id.). On October 1, 2019, the parties filed supplemental memoranda and declarations in support of their positions on the Motion. (Dkt. Nos. 105–108).[2] On October 3, 2019, the parties filed a joint stipulation, identifying the exhibits to be filed under seal. (Dkt. No. 113). For the reasons discussed below, the Application to file exhibits under seal is GRANTED IN PART, and the Motion for sanctions is DENIED. B. Background In this action, HighMark Digital, Inc. (“Plaintiff”) sued Defendants Casablanca Design Centers, Inc. (“Casablanca”), Four Seasons Windows, Inc., Interior Door & Closet Co., One Day Doors and Closets, Inc., David Winter, and One Day Enterprises, LLC for misappropriations of Plaintiff's trade secrets and breaches of confidentiality. (Joint Stip. at 2). Plaintiff offers custom interior door replacement services and has “developed confidential and proprietary trade secrets to automatically convert data from three-dimensional measuring tools into a ‘HOP file’ readable by a specific type of automated woodcutting machine.” (Id.). For a number of years, Plaintiff generated HOP files for Defendants in exchange for license fees. (Id. at 3). In 2011, Plaintiff alleges that Defendants sent Plaintiff's trade secrets and confidential information to nonparty Prodim, a Netherlands company, for reverse engineering. (Id.). In November 2011, Defendants stopped licensing Plaintiff's technology and started using Prodim “to provide replacement services at lower costs.” (Id.). *2 In December 2018, Plaintiff served RFP No. 37, which requested all communications between Prodim and Defendants. (Joint Stip. at 4). In January 2019, Defendants produced a September 2011 email from Casablanca employee Mike MacGilvray to Prodim (the “Prodim Email”). The Prodim Email, which was sent from an @interiordoorco.com email account, stated: HERE IS THAT FILE FROM OUR SERVER IN A HOPS FILE JUST SO YOU CAN SEE [T]HE CONVERSION AND JAROM IS GETTING US MORE INFO AS WELL AS SOON AS HE [E]MAILS ME I WILL FORWARD IT TO YOU[.] ... DAIRL AND [GLENN] ARE TRYING TO KEEP THIS QUIET SO WE DON'T GET CUT OFF WITH [W]HAT WE[']RE USING RIGHT NOW SO IF YOU CAN KEEP US CONFIDENTIAL FOR NOW [W]ITH HOLZHER WE WOULD APPRECIATE IT AND ALSO GLENN WAS WONDERING IF YOU [H]AD MORE OF AN IDEA OF WHEN YOU GUYS WOULD BE COMING DOWN TO SET ANY OF [T]HIS UP THEY JUST WANT AN UPDATE[.] (Id. at 3, 16, 35) (capitalization in original). Thereafter, Plaintiff “repeatedly sought the referenced HOP file sent to Prodim, ‘MORE INFO’ forwarded to Prodim, and all of Defendants other communications with Prodim.” (Id. at 4). In July 2019, Defendants responded that the mikemac@interiordoorco.com email account was deleted on November 7, 2014. (Id.). Plaintiff contends that Defendants' deletion of the mikemac@interiordoorco.com email account constitutes spoliation, and as a remedy, Plaintiff is entitled to an adverse inference jury instruction. (Id. at 14). C. Legal Standards “Spoliation is the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation.” West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999). “Evidence of spoliation may be grounds for sanctions, which may include an adverse inference instruction.” Apple Inc. v. Samsung Elecs. Co., 888 F. Supp. 2d 976, 989 (N.D. Cal. 2012). As the Ninth Circuit has observed: The adverse inference is based on two rationales, one evidentiary and one not. The evidentiary rationale is nothing more than the common sense observation that a party who has notice that a document is relevant to litigation and who proceeds to destroy the document is more likely to have been threatened by the document than is a party in the same position who does not destroy the document. [¶] The other rationale for the inference has to do with its prophylactic and punitive effects. Allowing the trier of fact to draw the inference presumably deters parties from destroying relevant evidence before it can be introduced at trial. Akiona v. United States, 938 F.2d 158, 161 (9th Cir. 1991) (citation omitted). Spoliation sanctions can be imposed pursuant to either the court's “inherent power” or under Rule 37. See Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006); Fed. R. Civ. P. 37(e); see also Glover v. BIC Corp., 6 F.3d 1318, 1329 (9th Cir. 1993) (“A federal trial court has the inherent discretionary power to make appropriate evidentiary rulings in response to the destruction or spoliation of relevant evidence. Such power includes the power where appropriate to order the exclusion of certain evidence.”). “The bare fact that evidence has been altered or destroyed does not necessarily mean that the party has engaged in sanction-worthy spoliation.” Reinsdorf v. Skechers U.S.A., Inc., 296 F.R.D. 604, 626 (C.D. Cal. 2013) (citation omitted). While the Ninth Circuit has approved the use of adverse inference sanctions for evidence spoliation, it has not set forth a precise standard for determining when such sanctions are appropriate. Apple, 888 F. Supp. 2d at 989. Instead, district courts have widely adopted the Second Circuit's three-part test, which provides that the party seeking the sanction must demonstrate, *3 (1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense. Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 107 (2d Cir. 2002) (citation omitted); accord Apple, 888 F. Supp. 2d at 989 (collecting cases); see also Reinsdorf, 296 F.R.D. at 626 (“The party seeking spoliation sanctions has the burden of establishing the elements of a spoliation claim.”). “When evidence is destroyed in bad faith (i.e., intentionally or willfully), that fact alone is sufficient to demonstrate relevance. By contrast, when the destruction is negligent, relevance must be proven by the party seeking the sanctions.” Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 220 (S.D.N.Y. 2003) (citation omitted). “[T]he 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.” Reinsdorf, 296 F.R.D. at 626–27 (citation omitted); see Micron Tech., Inc. v. Rambus Inc., 645 F.3d 1311, 1320 (Fed. Cir. 2011) (“The duty to preserve evidence begins when litigation is pending or reasonably foreseeable.”) (citation omitted). “This is an objective standard, asking not whether the party in fact reasonably foresaw litigation, but whether a reasonable party in the same factual circumstances would have reasonably foreseen litigation.” Micron, 645 F.3d at 1320. “As soon as a potential claim is identified, a litigant is under a duty to preserve evidence which it knows or reasonably should know is relevant to the action.” Realnetworks, Inc. v. DVD Copy Control Ass'n, Inc., 264 F.R.D. 517, 523 (N.D. Cal. 2009); see Fujitsu Ltd. v. Fed. Exp. Corp., 247 F.3d 423, 436 (2d Cir. 2001) (“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.”). The future litigation must be “probable,” more than a mere “possibility.” Hynix Semiconductor Inc. v. Rambus Inc., 645 F.3d 1336, 1345 (Fed. Cir. 2011); accord Realnetworks, 264 F.R.D. at 524. Thus, “[a] general concern over litigation does not trigger a duty to preserve evidence.” Realnetworks, 264 F.R.D. at 526. D. Discussion 1. Application to Seal After meeting and conferring, the parties have reached an agreement regarding the exhibits to be filed under seal and those exhibits that can be de-designated as confidential. (Dkt. No. 113). Defendants have agreed to withdraw their confidentiality designation of the information contained in Exhibit C, and Plaintiff withdraws its request to file Exhibit C under seal. (Id.). Plaintiff has agreed to withdraw its confidentiality designation of the information contained in Exhibit D and withdraws its request to file Exhibit D under seal. (Id.). The Court, having reviewed and considered Plaintiff' Application to file Exhibit 8 to the Declaration of Thomas P. Krzeminski in Support of Plaintiff's Motion to Compel and Exhibits B–D to the Declaration of Martin N. Jensen in Support of Defendants' Opposition to Plaintiff's Motion to Compel Under Seal (Dkt. No. 88), having held a hearing on the same (Dkt. No. 100), and having reviewed and considered the parties' joint stipulation (Dkt. No. 113), finds good cause to file Exhibits 8 and B under seal. 2. Motion for Sanctions *4 Plaintiff contends that the deletion of the mikemac@interiordoorco.com email account constitutes spoliation of evidence, which was needed by Plaintiff to “establish the full extent of its confidential information revealed by Defendants to Prodim.” (Joint Stip. at 14). Defendants do not dispute that the deleted information could be relevant to Plaintiff's claims. Instead, Defendants assert that they were under no duty to preserve the information. (Id. at 31). Plaintiff has not demonstrated that Defendants had an obligation to preserve the email account at the time it was destroyed. See Apple, 888 F. Supp. 2d at 989. The deletion occurred well before Defendant Dave Winter's resignation from HighMark in July 2015 and nearly four years prior to Plaintiff filing its July 2018 complaint. There is no evidence that in 2014, when the email account was deleted, any of the Defendants were under notice that the email account contained evidence which they knew or reasonably should have known was relevant to a potential claim. Realnetworks, 264 F.R.D. at 523. Indeed, the email account was routinely deleted in the normal course of business in 2014 because of non-use since September 2011. (Joint Stip. at 31); see United States v. $40,955.00 in U.S. Currency, 554 F.3d 752, 758 (9th Cir. 2009) (“A party does not engage in spoliation when, without notice of the evidence's potential relevance, it destroys the evidence according to its policy or in the normal course of its business.”). Plaintiff has not met its burden to demonstrate that Casablanca, or any of the other Defendants, knew or should have reasonably foreseen litigation when the mikemac@interiordoorco.com email account was deleted. Nevertheless, Plaintiff contends that the Prodim Email itself demonstrates that Defendants were anticipating possible litigation. (Joint Stip. at 14; Dkt. No. 105 at 2). Plaintiff argues that the Email's instructions to “keep this quiet” demonstrates Defendants' “actual knowledge of foreseeable litigation if HighMark ever gained awareness of the evidence.” (Joint Stip. at 14) (emphasis omitted). But the language selectively quoted by Plaintiff does not establish that Defendants knew or should have known that the Prodim Email would be relevant to future litigation. See Realnetworks, 264 F.R.D. at 526 (“A general concern over litigation does not trigger a duty to preserve evidence.”). The Prodim Email continued, “so if you can keep us confidential for now ... we would appreciate it.” (Joint Stip. at 35–36) (emphasis added). Thus, the Email merely indicates that Defendants did not want Plaintiff to terminate their relationship prior to Prodim having its alternative system debugged and fully operational. Plaintiff argues that the Prodim Email indicates that “Defendants sent HighMark's confidential information in the form of HOP files and other information to Prodim to improperly reverse engineer the ‘conversion’ of measurements into HOP files.” (Joint Stip. at 16) (emphasis omitted). But “Prodim's development of software capable of converting door measurement data into code readable by a CNC machine long predated [the] September 2011 [Prodim Email].” (Joint Stip. at 33). Indeed, HighMark considered purchasing such software from Prodim in 2006. (Id. at 33 n.11; see Jensen Decl. (Dkt. No. 97) Ex. D at 24–27). Plaintiff argues Defendants knew that “sending HighMark's HOP file was a material breach of their Master Agreement with HighMark” and thus “[a]ny reasonable party would foresee a litigation claim.” (Dkt. No. 105 at 2). But there is no evidence that the attached HOP file belonged to HighMark. Indeed, Plaintiff does not have a proprietary interest in “HOP” files; to the contrary, the “hop file extension is associated with HippOnProtect, a software for Microsoft Windows operating system, used to protect sensitive data.” <https://www.file-extensions.org/hop-file-extension> (last visited October 3, 2019). Further, MacGilvray testified that the HOP file attached to his September 2011 email was a Prodim file, not a HighMark file. (Dkt. No. 107 at 3; see Jensen Decl. (Dkt. No. 112) Ex. I at 52, 56–57). *5 Even if the Prodim Email suggests a wrongful act by Defendants, the Email cannot by itself place Defendants on notice of impending litigation such that they would have had a duty to preserve the mikemac@interiordoorco.com email account. See Garcia v. United States, No. EDCV 13-0112, 2014 WL 12709430, at *2 (C.D. Cal. Sept. 3, 2014) (“the fact that a tort might have occurred cannot by itself be sufficient to place a defendant on notice of impending litigation”). Otherwise, the “ duty to preserve would always attach automatically from the time when a plaintiff alleges a defendant committed a culpable act.” Id.; see, e.g., Putscher v. Smith's Food & Drug Centers, Inc., No. 13 CV 1509, 2014 WL 2835315, at *7–8 (D. Nev. June 20, 2014) (finding that a defendant supermarket had no duty to preserve surveillance footage of a slip-and-fall, even when an employee contemporaneously filled out a report marked “prepared in anticipation of litigation”); Galicia v. Nat'l R.R. Passenger Corp., No. CV 17-8020, 2018 WL 6314191, at *4 (C.D. Cal. July 20, 2018) (rejecting the plaintiff's argument that “given the nature of the incident and the extent of her injuries, [the defendants] should have anticipated that litigation was imminent”). Instead, prospective litigation must be more than a “general concern” and “more than a possibility” of occurring. Garcia, 2018 WL 631491, at *1; Realnetworks, 264 F.R.D. at 524; Apple, 888 F. Supp. 2d at 991. Plaintiff has failed to meet its burden to establish that Defendants had an obligation to preserve the mikemac@interiordoorco.com email account. Finally, even if the Court were to find that Defendants had obligation to preserve the email account, which the Court has not found, the Motion would be denied for Plaintiff's failure to seek the information from other sources. Rule 37 proscribes a spoliation sanction if the lost information can be “restored or replaced through additional discovery.” Fed. R. Civ. P. 37(e); see Hugler v. Sw. Fuel Mgmt., Inc., No. 16 CV 4547, 2017 WL 8941163, at *8 (C.D. Cal. May 2, 2017) (“if the despoiled information can be restored or replaced through additional discovery, the Court cannot impose sanctions under Rule 37(e)”); Envy Hawaii LLC v. Volvo Car USA LLC, No. CV 17-0040, 2019 WL 1292288, at *3 (D. Haw. Mar. 20, 2019) (“Rule 37(e) sanctions are foreclosed if the purportedly ‘lost’ electronically stored information may be retrieved from additional discovery or discovery from third-parties.”). Plaintiff contends that it “has exhausted all alternative sources of finding the [destroyed] information,” arguing that because “the Prodim employee who received the Prodim Email ... works for Prodim International and resides in the Netherlands, [the employee is] beyond the Court's subpoena power.” (Dkt. No. 105 at 3). But Plaintiff never tried to obtain the deleted information from either Prodim or Prodim USA, LLC, located in Florida. (Dkt. No. 105 at 3–4; Dkt. No. 107 at 4). Without making a credible effort to seek the information from Prodim, Plaintiff cannot establish that Prodim would not have cooperatively provided the deleted emails or that the emails were not within Prodim USA's “possession, custody, or control.” Fed. R. Civ. P. 34(a)(1); see, e.g., United States v. Bennett, 621 F.3d 1131, 1139 (9th Cir. 2010) (because of the “endless variety of parent-subsidiary relationships,” a court needs specific facts to determine whether either has “possession, custody, or control” of particular information). Under these circumstances, Plaintiff was obligated to seek the missing information from Prodim prior to requesting an adverse instruction sanction. E. Conclusion Plaintiff's Application for Leave to File Exhibits 8 and B–D Under Seal [88] is GRANTED IN PART. Plaintiff is granted leave to file Exhibit 8 to the Declaration of Thomas P. Krzeminski in Support of Plaintiff's Motion to Compel and Exhibit B to the Declaration of Martin N. Jensen in Support of Defendants' Opposition to Plaintiff HighMark's Motion to Compel under seal. Plaintiff's request to file Exhibits C and D to the Declaration of Martin N. Jensen in Support of Defendants' Opposition to Plaintiff HighMark's Motion to Compel under seal are WITHDRAWN. *6 Plaintiff's Motion for Sanctions Due to Spoliation [90] is DENIED. Plaintiff's request for fees and costs is DENIED. The parties may avail themselves of the Court's informal discovery dispute resolution process to resolve any remaining discovery issues. (See Judge Sagar's Procedures). IT IS SO ORDERED. Footnotes [1] On September 30, 2019, Plaintiff filed an ex parte application to extend the discovery cutoff date to October 14, 2019, for the limited purpose of allowing Defendant David Winter to supplement his document production—unrelated to the instant dispute—and for Plaintiff to depose Winter regarding any newly produced documents. (Dkt. Nos. 101–104). The Court will address this request in a separate order. [2] Defendants' supplemental declaration was erroneously titled as a supplemental declaration in support of “Defendants' Ex Parte Application” (Dkt. No. 108) and was subsequently corrected (Dkt. Nos. 111–112).