This Sidley Update addresses the following recent developments and court decisions involving e-discovery issues:
- a U.S. Court of Appeals for the Third Circuit decision holding that the district court exceeded its authority under Fed. R. Civ. P. 37 by piercing the corporate veil as a sanction for discovery misconduct and holding only one of the two company owners liable for a portion of the judgment and sanctions award entered against the company
- a Utah district court decision upholding a magistrate judge’s denial of a motion to require a producing party to disclose information about its use of technology assisted review where the movant had not identified any deficiencies in the production and the motion was filed at the close of fact discovery, well after the established date for such a filing
- a U.S. District Court for the Northern District of California ruling denying defendant’s requests to inspect forensic images of plaintiffs’ mobile devices and to review their web browsing history and the cookies stored on their devices as either not relevant or not proportional to the needs of the case due largely to privacy concerns over disclosure of such information
- a U.S. Court of Appeals for the Fifth Circuit opinion reversing and remanding an award of summary judgment after finding that the district court should have considered plaintiff’s pending discovery motion prior to granting summary judgment
1. In Clientron Corp. v. Devon IT, Inc., 894 F.3d 568 (3d Cir. 2018), the U.S. Court of Appeals for the Third Circuit held that the district court had exceeded its authority under Fed. R. Civ. P. 37 by piercing the corporate veil as a sanction for discovery misconduct and by holding only one of the two company owners liable for a portion of the judgment and sanctions award entered against the company.
In this suit to enforce an arbitration award and for fraud and breach of contract, defendants — a company and a husband and wife who owned the company as tenants by the entirety — had subcontracted with plaintiff to manufacture computers that defendants would sell to a third party under a purchase agreement. Id. at 571. After defendants stopped paying plaintiff, plaintiff initiated an arbitration proceeding in accordance with the terms of the contract. The arbitrator awarded plaintiff damages, an award that plaintiff moved to enforce as part of a civil lawsuit against defendants. In the civil lawsuit, plaintiff also alleged breach of contract and fraud related to purchase orders that were not covered by the arbitration. Id. at 572.
During pretrial discovery, defendants “continually failed to meet their obligations under the Federal Rules.” Defendants, among other things, asserted frivolous discovery objections, produced 93 boxes of irrelevant documents and failed to make available a corporate designee for a deposition. One of the owners of the company, who was also its chairman, claimed to be unfamiliar with any of the details of the dispute at his deposition and also admitted that he had continued his practice of deleting all of his personal emails even after this dispute had arisen. Plaintiff filed several motions to compel, and the district court in granting the motions concluded that defendants had acted in bad faith and had deprived plaintiff of relevant information. The district court imposed monetary sanctions on the defendant company and precluded some of defendants’ evidence from being introduced at trial but declined to impose any sanctions on the owners. Id. at 572-73.
The case proceeded to a jury trial where plaintiff argued, among other things, that the defendant company’s corporate veil should be pierced, and the husband and wife owners should be personally liable on an alter ego basis. Id. at 573. The jury ruled for plaintiff on the merits of the claims for breach of contract and fraud and to enforce the arbitration award but declined to pierce the corporate veil. The jury’s verdict on veil piercing was advisory, and, after post-trial briefing, the district court had the final say and declined to pierce the veil. Id. at 574. The district court concluded that plaintiff had not produced sufficient evidence to support veil piercing, although it acknowledged that the discovery conduct of the defendant company and its chairman/owner had impeded plaintiff’s ability to prove alter ego liability. Id. at 575. Based on the discovery misconduct, the district court issued a sanction that made the chairman/owner personally liable for a portion of the damages and discovery sanction entered against the company but did not hold the other owner personally liable.
On appeal, plaintiff argued that (1) the district court had erred in declining to piece the corporate veil and (2) in the alternative, the district court erred in not making both owners of the company personally liable. Id. at 575.
With respect to the merits of the veil piercing, Judge Joseph Greenaway, writing for a unanimous panel of the Third Circuit, agreed that plaintiff had presented insufficient evidence to establish alter ego liability. Under Pennsylvania law, which applied to the dispute, plaintiff needed to show, in essence, that the company was nothing more than a “sham” used to disguise the owners’ use of the company’s assets for the owners’ personal benefit. Id. at 576. Although plaintiff had presented evidence suggesting that the owners had transferred company funds to other companies they controlled and indicating that the owners had used company funds to pay personal expenses, Judge Greenaway held this was insufficient and, at most, established that the owners did not strictly adhere to corporate formalities. In the Third Circuit’s view, this evidence did not “overcome Pennsylvania’s strong presumption against piercing the corporate veil.” Id. at 576-77.
With respect to the merits of the discovery sanction the district court imposed, the Third Circuit held that the remedy was not authorized by state or federal law. Under Pennsylvania law, when piercing the corporate veil under the alter ego theory, there is no basis for distinguishing between two owners holding their interests as tenants by the entirety. Therefore, Judge Greenaway stated that the district court could not hold one owner of a company personally liable on an alter ego theory but not the other. Id. at 579.
Turning to federal law, the Third Circuit concluded that Rule 37 did not authorize the district court’s discovery sanction. Id. at 580. (While the district court’s inherent powers were an alternative source of authority to sanction parties, the Third Circuit did not address the district court’s inherent powers in this case, finding that Rule 37 provided an adequate basis for sanctions. Id. at 577.) Under Rule 37(b)(2)(A), a district court is authorized to impose sanctions for failure to obey an order to provide or permit discovery. Among the available sanctions listed in Rule 37(b)(2)(A) are “directing that the matters embraced in the order or other designated facts be taken as established for purposes of the action, as the prevailing party claims; ... prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence” and “rendering a default judgment against the disobedient party.”
In the view of the Third Circuit, the list of sanctions under Rule 37(b)(2)(A) was not exhaustive, but as a matter of due process any sanctions imposed under the Rule had to be “just” and “specifically related to the particular claim” at issue in the order to provide discovery. Id. at 580 (emphasis in original). The Third Circuit concluded that neither requirement was met in this case because the district court had circumvented state law, which does not allow one owner of an interest in the entirety to be found personally liable but not the other. Id. at 581. In addition, there was no specific nexus between the sanction and claim at issue “when the court inserts a new, judicially-created legal remedy into the lawsuit as a means of imposing the sanction.” The Third Circuit noted that courts could adopt “conclusions, presumptions, inferences, and evidentiary preclusion rules that operate within the confines of the claims and defenses the parties” had raised in the proceedings but cannot “create new federal law remedies that liberate the courts from those confines entirely.”
Plaintiff cited instances where other courts had pierced the corporate veil as a sanction for discovery misconduct, but the Third Circuit distinguished those cases on the grounds that the sanctions imposed — a default judgment, legal presumption or precluded evidence — were within the boundaries of the substantive law governing the dispute. In this case, however, the district court exceeded its authority under Rule 37 and abused its discretion by “failing to ground its veil piercing remedy in the substantive state law that governed the suit.”
On remand, the Third Circuit stated that it would still be within the district court’s discretion to impose a new discovery sanction consistent with Rule 37. Judge Greenaway noted that the co-defendant spouse had benefitted from the actions of her husband that impeded the plaintiff’s ability to prove its alter ego case and believed given the unique circumstances of this case that any limitations on the district court’s Rule 37 authority did not require that the spouse “be shielded entirely from the ramifications of a sanction imposed due to discovery misconduct committed by her co-defendant husband.” As examples of possible sanctions, the Third Circuit stated that the district court could issue an adverse inference or preclude evidence that the defendants might present but left the determination of such sanction to the district court. Id. at 583.
2. In Entrata, Inc. v. Yardi Systems, Inc., 2018 WL 5470454 (D. Utah Oct. 29, 2018), Judge Clark Waddoups upheld a magistrate judge’s denial of a motion to require a producing party to disclose information about its use of technology-assisted review (TAR) where the movant had not identified any deficiencies in the production and the motion was filed at the close of fact discovery.
In this litigation, the parties had discussed plaintiff’s use of TAR during multiple meet-and-confer sessions. Id. at *1. At these sessions, plaintiff answered questions from defendants regarding its use of TAR, including how plaintiff planned to identify seed documents and whether plaintiff would filter the data before applying TAR. Plaintiff also explained that it would use TAR to cull the document universe and perform a linear review of documents TAR identified as potentially responsive to defendants’ discovery requests. Plaintiff was apparently not willing to agree to minimum recall percentage during these discussions and, when defendants asked about sharing information about recall, plaintiff stated that the issue could be revisited.
While these discussions were ongoing, the magistrate judge issued, at the parties’ request, a discovery order regarding electronically stored information (ESI) providing that if the parties did not agree on a search methodology within 30 days, the parties would submit competing proposals to the court. Id. at *3. Neither party submitted a proposal by the 30-day deadline, even though the parties did not reach agreement on search methodology.
Several months after the magistrate judge’s deadline and near the end of fact discovery, defendants demanded that plaintiff provide “complete information about its TAR process,” including “its recall results.” Plaintiff declined to provide this information, characterizing the request as “untimely and improper.” On the last day of fact discovery, defendants moved to compel production of “the complete methodology and results” of plaintiff’s TAR process. Id. at *4. Defendants argued that the TAR information was necessary to assess the adequacy of plaintiff’s production. The magistrate judge denied the motion, concluding that defendants had not offered any reason to believe that plaintiff’s production was deficient and finding that the request was untimely because defendants waited until the end of fact discovery to raise this issue.
Defendants filed objections to the magistrate judge’s order with Judge Waddoups, whose review pursuant to Fed. R. Civ. P. 72(a) was limited to determining whether the order was clearly erroneous or contrary to law. Id. at *5. Regarding the magistrate judge’s factual findings, Judge Waddoups did not find any clear error. Defendants argued that the magistrate judge had erroneously accepted plaintiff’s representation that it had cooperated and already provided defendants with information about the TAR process. Judge Waddoups rejected this argument, explaining that the magistrate judge had not made any factual findings about plaintiff’s transparency.
Turning to the legal basis of the magistrate judge’s order, Judge Waddoups agreed that defendants had failed to identify any provision of the Federal Rules or relevant case law that required plaintiff in the first instance to provide information about its TAR process. Id. at *5. Judge Waddoups noted that nothing in Rule 26(g) requires counsel to “disclose the manner in which documents are collected, reviewed and produced in response to a discovery request.” Id. at *6 (quoting Karl Schieneman & Thomas C. Gricks III, The Implications of Rule 26(g) on the Use of Technology-Assisted Review, 7 Fed. Cts. L. Rev. 239, 254 (2013)). In addition, in light of the fact that it is “black letter law” that courts will permit a producing party to use TAR, Judge Waddoups concluded that plaintiff was not required to seek approval from the magistrate judge before using TAR. Id. at *6.
Defendants had cited a number of cases to support its claim that the plaintiff was required to provide information about its TAR process. Id. at *6-*7 (citing Progressive Cas. Ins. Co. v. Delaney, 2014 WL 3563467 (D. Nev. July 18, 2014); Bridgestone Americas, Inc. v. Int’l Bus. Machines Corp., 2014 WL 4923014 (M.D. Tenn. July 22, 2014); Moore v. Publicis Groupe, 287 F.R.D. 182 (S.D.N.Y. 2012)). But Judge Waddoups found those decisions to be distinguishable because in those cases the parties had reached an agreement about search methodology, and the question before the court was whether to permit a party to depart from the terms of the original agreement. In this case, the parties had not agreed on a search methodology in the first instance.
Having found no factual or legal error with the magistrate judge’s order, Judge Waddoups denied defendants’ objections. Id. at *7. Judge Waddoups also rejected plaintiff’s request for attorney’s fees and costs in connection with defending against the motion to compel, concluding that defendants’ motion to compel was not unreasonable.
3. In Henson v. Turn, Inc., 2018 WL 5281629 (N.D. Cal. Oct. 22, 2018), United States Magistrate Judge Laurel Beeler denied defendant’s requests to inspect forensic images of plaintiffs’ mobile devices or to review their web browsing history and cookies stored on their devices as either not relevant or not proportional to the needs of the case due largely to privacy concerns over disclosure of such information.
The plaintiffs, subscribers to Verizon’s cellular and data services, brought this data-privacy class action against marketing company Turn, Inc., alleging that Turn developed a method to place so-called “zombie cookies” on users’ mobile devices so that even if users deleted their cookies, Turn could continue to track users on the web. Id. at *1.
Turn and other marketing companies use lines of code called “cookies” to track mobile device users through web browsers and other smartphone application software or “apps.” These companies then analyze the data to target advertisements that match a user’s profile. In surveys, online users have indicated that they are uncomfortable that such tracking occurs and concerned about their personal privacy. In response, mobile device manufacturers and software companies have created functions, which are now standard on all devices, to delete or block cookies. Id. at *1-*2.
Turn developed a method referred to as “respawning” that allegedly “made an ‘end-run’ around users’ cookie-blocking-and-deleting technologies.” Id. at *2. To do so, Turn used a Verizon function that created a persistent, unique identifier header (UIDH or X-UIDH) for each individual Verizon subscriber that was embedded in the header of every HTTP request that its customers made from their mobile devices. Turn monitored the web traffic of its customers’ websites, and upon receiving an HTTP request from a Verizon customer, Turn would check the X-UIDH value in the request against a database of values it had stored from previous cookies. If the X-UIDH value matched one previously stored, “Turn would place a new cookie on the user’s device that contained all of the values from the old cookies in its database that were associated with the same X-UIDH — even if the user had previously deleted cookies from her device in an effort to not be tracked.” Id. at *2.
The case was referred to Magistrate Judge Beeler for discovery issues. Specifically at issue were Turn’s requests that plaintiffs produce (1) their mobile devices for inspection or complete forensic images of their devices, (2) their full web browsing history from their devices and (3) all cookies stored on or deleted from their devices.
First, Turn requested that the court require the plaintiffs to produce their mobile devices for inspection, or, in the alternative, to produce complete forensic images of their mobile devices, arguing that the plaintiffs’ mobile devices “are at the very heart of this case” and should thus be entirely discoverable. The plaintiffs responded that Turn’s request “flies in the face of Rule 26(b)’s relevancy and proportionality requirements,” as it would force the plaintiffs to produce voluminous text messages, emails, photographs and other irrelevant information that had nothing to do with the issues in this case. Id. at *4.
Magistrate Judge Beeler denied Turn’s request, citing Federal Rule of Civil Procedure 26(b)(1)’s limitation of discovery to matters relevant to a party’s claim or defense and proportional to the needs of the case. Id. at *5. With respect to relevance, Magistrate Judge Beeler noted that such a broad discovery request threatened to sweep in information that was not relevant to the issues in the case. The magistrate judge also found the request disproportional to the needs of the case. “While questions of proportionality often arise in the context of disputes about the expense of discovery, proportionality is not limited to such financial considerations.” As other courts have noted, privacy interests are also a consideration, particularly with regard to inspection of personal electronic devices. Id. at *5 (collecting cases). “As the Supreme Court has recognized, ‘[m]odern cell phones are not just another technological convenience. With all they contain and all they may reveal, they hold for many Americans “the privacies of life.” ’ ” Id. at *6 (quoting Riley v. California, 134 S. Ct. 2473, 2494–95 (2014)). These privacies may be found in text messages, emails, photographs, calendars and internet browsing histories as well as the apps each user chooses to install, which may hold detailed information about all aspects of that person’s life. Id. (citing Riley, 134 S. Ct. at 2489-90).
Magistrate Judge Beeler clarified that forensic imaging itself was not at issue in this instance. Instead, Turn sought direct access to the plaintiff’s devices or forensic images, but the magistrate judge found that none of the cases Turn had cited supported such a request. Instead, such cases required the parties to forensically image their devices and produce relevant information from those images, a practice the plaintiffs in this case were already undertaking. Given this, and in light of concerns of privacy and of producing irrelevant or privileged information, the magistrate judge found Turn’s request for direct inspection to be not relevant or proportional to the needs to the case. Id. at *6-*7.
Second, Turn sought to review the plaintiffs’ complete web browsing history, arguing that to do so was necessary to investigate whether plaintiffs had visited websites associated with Turn cookies, to test the plaintiffs’ claims that they regularly deleted their browsing history to protect their privacy and to show that a protected privacy interest was not implicated. The plaintiffs responded that such a request was overbroad, irrelevant and invasive of privacy interests, arguing that Turn obtained web browsing information from its partner websites, using cookies to track users, but sought in discovery the plaintiffs’ browsing history for all websites, without regard to Turn’s involvement. Id. at *4.
Finally, Turn also sought to review all cookies stored on the plaintiffs’ mobile devices, with plaintiffs responding that the cookies implicated the same privacies as the web browsing history. Id. at *5.
Magistrate Judge Beeler denied Turn’s request to require the plaintiffs to produce their full web browsing history and cookie data. She stated that the web browsing request implicated significant privacy concerns, as recognized by the Riley court. “An Internet search and browsing history, for example, can be found on an Internet-enabled phone and could reveal an individual’s private interests or concerns — perhaps a search for certain symptoms of a disease, coupled with frequent visits to WebMD.” Id. at *8 (quoting Riley, 134 S. Ct. at 2490). The magistrate judge found that cookies are closely associated with websites and thus raise similar privacy concerns.
Magistrate Judge Beeler further found that all of Turn’s reasons for requesting the web browsing history and cookie data could be accomplished by a more limited production of information, most of which had previously been proposed by the plaintiffs. The plaintiffs had offered (1) to produce their web browsing history and cookies associated with Turn partner websites, (2) to produce the date fields (but not the content) of all other cookies and (3) to meet and confer with Turn to consider requests for specific cookies. The magistrate judge adopted these proposals, with the slight modification that plaintiffs must also produce the dates (but not the content) of the entries in their browsing history. Id. at *7-*8.
The magistrate judge concluded with this observation: “There is an Orwellian irony to the proposition that in order to get relief for a company’s alleged surreptitious monitoring of users’ mobile device and web activity, a person has to allow the company unfettered access to inspect his mobile device or his web browsing history.” Id. at *8. She noted that allowing such invasive discovery could deter current and future plaintiffs from pursuing relief. While there may be an instance where a request for complete production of web browsing history or cookies would be relevant and proportional, that situation did not present itself in this case. Therefore, Turn’s requests were denied.
4. In Brand Servs., L.L.C v. Irex Corp., 2018 WL 5023783 (5th Cir. Oct. 17, 2018), the U.S. Court of Appeals for the Fifth Circuit held that a district court should have considered plaintiff’s pending discovery motion prior to granting defendant summary judgment, reversed the summary judgment award and remanded the case to the district court.
Plaintiff Brand Services, L.L.C. filed suit against Irex Corp., claiming that plaintiff’s former employee stole trade secrets and confidential and proprietary information when he left plaintiff to work for the defendant. Id. at *1. Plaintiff asserted claims under the Louisiana Uniform Trade Secrets Act (LUTSA) and for common law conversion.
Plaintiff stated that in response to its first request for production, defendant made improper blanket objections and repeatedly promised to produce responsive documents but had not done so by the discovery deadline. After the discovery deadline passed, plaintiff moved to compel production of responsive documents, but the magistrate judge denied the motion as untimely, although the magistrate judge reminded defendant of its duty to supplement under Fed. R. Civ. P. 26(e). However, the defendant never supplemented its discovery responses.
The district court then granted defendant summary judgment on plaintiff’s LUTSA claim, holding that plaintiff failed to offer evidence sufficient to create a fact issue on the amount of unjust-enrichment damages defendant obtained from allegedly using plaintiff’s trade secrets. Plaintiff then moved for reconsideration of the summary judgment ruling, and defendant moved for summary judgment on the remaining conversion claim. While these motions remained pending, plaintiff discovered responsive documents that had been produced in a related Pennsylvania proceeding. Plaintiff moved to compel production of these documents, but because they were provided under a protective order in the Pennsylvania case, plaintiff was unable to acquire the documents in time to satisfy the Louisiana magistrate judge. The magistrate judge thus denied plaintiff’s motion to compel. Thereafter, when plaintiff procured exemplar documents from the Pennsylvania case, plaintiff moved for reconsideration of the magistrate judge’s discovery ruling.
While the motion to reconsider remained pending before the magistrate judge, the district court granted defendant’s summary judgment motion, holding that LUTSA preempted plaintiff’s conversion claim. Id. at *2. Without addressing the pending discovery motion, the district court also denied plaintiff’s motion for reconsideration of the ruling dismissing the LUTSA claim, re-emphasizing plaintiff’s failure to provide specific evidence to establish its damages. Plaintiff appealed to the Fifth Circuit, arguing that the district court prematurely granted summary judgment because plaintiff’s discovery motion was never ruled upon.
The Fifth Circuit stated that “[a] district court has discretion to deny as untimely a motion filed after the discovery deadline.” Id. at *3. However, the Fifth Circuit also noted that “when a properly filed discovery motion is pending, a district court should not grant summary judgment without first considering whether more discovery is required.”
In applying these standards, the Fifth Circuit indicated that the district court did not address plaintiff’s motion for reconsideration of the discovery ruling despite plaintiff’s procurement of documents purporting to show that defendant failed to properly respond to the discovery requests and to supplement as the magistrate judge directed. The Fifth Circuit reasoned that even though plaintiff did not discover the responsive documents from the Pennsylvania litigation until after the discovery deadline had passed, plaintiff was nonetheless diligent in seeking those documents. In particular, the Fifth Circuit pointed out that there was some indication that plaintiff could not have reasonably discovered the documents sooner, as defendant only responded to plaintiff’s discovery requests with improper blanket objections and thereafter made little effort to comply with those requests. In the Fifth Circuit’s view, defendant’s “conduct in this discovery proceeding [was] highly questionable and bears further examination in light of the exemplar documents.”
In light of these facts, the Fifth Circuit held that the district court improperly granted summary judgment without fully examining plaintiff’s unaddressed discovery motion and remanded the case to the district court.
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