Aviva USA Corporation et al v. Vazirani et al

Filing 101

ORDER that Plaintiffs' Motion to Dismiss the Vazirani Defendants' Counterclaims 53 is denied without prejudice. Plaintiffs may re- raise this issue on summary judgment if the evidence supports their original arguments. Plaintiffs' Motion for Entry of Partial Final Judgment on Liability as Sanctions for Spoliation of Evidence 66 is granted in part and denied in part as set forth in this Order. As set forth in this Order, Plaintiffs must file any reasonable request for att orneys' fees before February 6, 2012. That the Clerk of the Court shall strike Plaintiffs' Response to Vazirani Defendants' Motion for Judgment on the Pleadings (Doc. 84) and the Vazirani Defendants Reply Memorandum in Support of Mo tion for Judgment on the Pleadings on Plaintiffs' RICO Cause of Action (Doc. 87). Plaintiffs shall file their Response within fourteen days of the date of this Order. If Plaintiffs do not wish to make changes to their Response, Plaintiffs may re-file their current response. Defendants shall file their Reply within seven days of Plaintiffs' Response; Denying 73 Defendant Regan's Motion for Sanctions for Discovery Abuse. Signed by Judge James A Teilborg on 1/10/12.(DMT) *Modified to add additional text as to ruling on motions on 1/10/2012 (DMT).

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1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Aviva USA Corporation, an Iowa) corporation; and Aviva Brands Limited, a) ) United Kingdom limited company, ) ) Plaintiffs, ) ) vs. ) ) Anil Vazirani, an individual; Vazirani &) Associates Financial, LLC, an Arizona) limited liability company; Secured) Financial Solutions, LLC, an Arizona) limited liability company; James Regan, an) individual; and Regan & Associates, LLC,) an Arizona Limited liability Company ) ) ) Defendants. __________________________________) ) Anil Vazirani, an individual; Vazirani &) Associates Financial, LLC, an Arizona) limited liability company; and Secured) Financial Solutions, LLC, an Arizona) ) limited liability company, ) ) Counterclaimants, ) Aviva USA Corporation, an Iowa) corporation; and Aviva Brands Limited, a) ) United Kingdom limited company, ) ) Counterdefendants. ) No. CV 11-0369-PHX-JAT ORDER 26 27 Pending before the Court are: (1) Plaintiffs’ Motion to Dismiss Vazirani Defendants’ 28 Counterclaims for Failure to State a Claim Upon Which Relief Can be Granted (Doc. 53), 1 (2) Plaintiffs’ Motion for Entry of Partial Final Judgment on Liability as Sanctions for 2 Spoliation of Evidence (Doc. 66), and (3) Defendant James Regan’s Motion for Sanctions 3 for Discovery Abuse (Doc. 73). The Court now rules on these Motions. 4 I. 5 Plaintiffs Aviva USA Corporation and Aviva Brands Limited (collectively “Aviva”) 6 filed an Amended Complaint (Doc. 42) against Defendants Anil Vazirani, Vazirani & 7 Associates Financial LLC, Secured Financial Solutions, LLC (collectively the “Vazirani 8 Defendants”), James Regan, and Regan and Associates, LLC (collectively the “Regan 9 Defendants”) on June 14, 2011. BACKGROUND 10 Plaintiff Aviva USA is an Iowa Corporation that serves customers in the life insurance 11 and annuity sector. (Doc. 42 at 4, ¶ 7). Defendant Vazirani has two limited liability 12 corporations: Vazirani & Associates, LLC and Secured Financial Solutions, LLC, an 13 independent marketing organization that contracts with insurance companies to perform 14 distribution and other marketing functions for one or more of the insurance companies’ 15 products or product lines. (Doc. 75 at 4). From approximately 2005 to January 2009, 16 Defendant Vazirani and his companies worked as agents of Aviva, marketing Aviva’s life 17 insurance and annuity products. (Id.). Defendant Regan worked with Defendant Vazirani 18 and his company, Defendant Secured Financial Solutions, LLC, and also worked as an agent 19 marketing Aviva’s life insurance and annuity products. (Doc. 73 at 3). 20 In January 2009, Aviva terminated its contract with Defendants Regan, Vazirani and 21 Secured Financial Solutions, LLC. (Doc. 75 at 4-5). Thereafter, Defendant Vazirani 22 initiated lawsuits against Aviva’s executive vice-president, a former Aviva executive, and 23 an Aviva subsidiary relating to this termination. (Doc. 66 at 5). 24 A. The Amended Complaint 25 Plaintiffs allege that, in July 2010, Defendant Vazirani’s lawyer emailed Aviva 26 claiming that Defendants would hire a public relations firm to launch an internet smear 27 28 -2- 1 campaign if Aviva did not pay Defendant Vazirani off. (Doc. 42 at 7, ¶ 20).1 Plaintiffs 2 allege that when Aviva did not pay, Defendants hired Eric Starkman and his public relations 3 firm, Starkman & Associates, Inc., to develop a commercial website that infringed Aviva’s 4 trademark and trade dress rights and disparaged Aviva. (Id. at ¶ 21). Plaintiffs allege that 5 Defendants then made the website available to the public at various domain names, including 6 insideaviva.com, aviva-exposed.com, avivauncovered.com, and aviva-uncovered.com. (Id. 7 at 8, ¶ 31). 8 Plaintiffs allege that these websites create a likelihood of confusion with Aviva’s 9 marks and trade dress, inflict commercial harm on Aviva, and unjustly capitalize on the 10 goodwill associated with the Aviva mark and Aviva’s protectable trade dress and other 11 trademark rights. (Id. at 8-9, ¶¶ 35, 36). Plaintiffs allege that Defendants’ websites contain 12 an identical design of Aviva’s AVIVA mark. (Id. at 15, ¶ 75). Plaintiffs allege that 13 Defendants use the AVIVA mark in close connection with advertising their products and 14 services in competition with Aviva (Id. at ¶ 76). Plaintiffs allege that Defendants copied 15 Aviva’s Trade Dress by using: (1) a yellow, blue, and green color scheme; (2) the appearance 16 of a ray of light emanating from the yellow background; and (3) a blue, serif, all capitals font 17 for the AVIVA mark in close connection with the advertising of Defendants’ products and 18 services. (Id. at 15-16, ¶ 78). 19 Plaintiffs further allege that Defendants impersonated an officer of Creative Marketing 20 International Corporation, an Aviva affiliate, and electronically submitted false and 21 fraudulent information corresponding to that officer’s identity to register certain domain 22 23 24 25 26 27 28 1 The email at issue states, “In light of Mr. Tripses’ threat, we plan to send a letter to all of the insurance carriers that Mr. Vazirani does business with that includes various nonconfidential disclosure documents that demonstrate that it is not Mr. Vazirani who has engaged in misconduct, but these defendants. We have also retained a PR firm to publicize the injustices suffered by Mr. Vazirani at the hands of your clients and Aviva. Prior to taking these actions, we wanted to give your clients the opportunity to discuss a fair and equitable settlement with Mr. Vazirani and/or to participate in an early mediation. If we don’t hear from you by close of business Monday, August 3, 2010, we will be left with no choice but to take the actions outlined above.” (Doc. 66, Exhibit 13). -3- 1 names. (Id. at 9, ¶ 39). Plaintiffs allege that Defendants launched a campaign of “blast 2 emails,” directed at Aviva’s agents, potential agents, and consumers, which disparaged 3 Aviva. (Id. at 11, ¶ 56). Plaintiffs allege that, in an attempt to hide their misconduct, 4 Defendants failed to preserve evidence and removed aspects of Aviva’s trade dress from one 5 of the websites. (Id. at 11, ¶ 58). 6 Plaintiffs allege that after the lawsuit was filed, Defendants began ten new websites 7 and registered these domain names with foreign registrars to evade the jurisdiction of the 8 U.S. Courts. (Id. at 12, ¶ 59). Plaintiffs allege that these fraudulently registered domain 9 names include aviva-lawsuit.com, aviva-problems.com, avivaplcsucks.com, aviva-litigation.com, 10 avivacomplaints.com, avivasucksusa.com, anilvsaviva.com, 11 anilvaziranivsaviva.com, avivavsanil.com, and avivavsanilvazirani.com. (Id. at 10, 21, ¶¶ 12 110, 118). 13 Based on the above facts,2 Plaintiffs allege that Defendants have (1) engaged in 14 trademark infringement in violation of section 32 of the Lanham Act, 15 U.S.C. § 1114 15 (Count One) (Doc. 42 at 18-19, ¶¶ 90-98); (2) engaged in trademark infringement, trade dress 16 infringement, and unfair competition in violation of section 43 of the Lanham Act, 15 U.S.C. 17 §1125(a) (Count Two) (Id. at 19-21, ¶¶ 99-108); (3) engaged in Federal Cyberpiracy and 18 violated § 43(D) of the Lanham Act, Anti-Cybersquatting Protection Act, 15 U.S.C. § 19 1125(d) (Count Three) (Id. at 21-22, ¶¶ 109-124); (4) engaged in unfair competition in 20 violation of Arizona common law (Count Four) (Id. at 22-23, ¶¶ 125-133); (5) engaged in 21 Federal Racketeering prohibited by 18 U.S.C. § 1964 (Count Five) (Id. at 24-25, ¶¶ 134- 22 142), and (6) Violated Arizona Revised Statutes section 13-2301, et seq.(Organized Crime, 23 Fraud, and Terrorism) (Count Six) (Id. at 25-27, ¶¶ 143-154).3 24 25 26 2 The Court notes that its summary of facts in not intended to be all-inclusive and is not intended to limit Plaintiffs’ allegations in any way. 3 27 28 The Court notes that, in their prayer for relief, Plaintiffs request “a temporary restraining order, preliminary, and then permanent injunction.” (Doc. 42 at 27, ¶ 1). If Plaintiffs seek immediate relief, Plaintiffs must file a separate motion for injunctive relief. -4- 1 In their Answer and Counterclaim to Plaintiffs’ Amended Complaint (Doc. 50), the 2 Vazirani Defendants asserted affirmative defenses and counterclaims. The counterclaims 3 are: (1) Non-Infringement of § 32 of the Lanham Act, 15 U.S.C. § 1114 (Count One) (Id. at 4 10, ¶¶ 8-12); (2) Non-Infringement of Alleged Trade Dress Rights and Unfair Competition 5 (Count Two) (Id. at 11, ¶¶ 13-17); and (3) Lack of Federal Cyberpiracy, Violations of § 43(d) 6 of the Lanham Act and the Anti-Cyber Squatting Protection Act, 15 U.S.C. § 1125(d) (Count 7 Three) (Id. at 11-12, ¶¶ 18-22). For relief, the Vazirani Defendants request the following 8 judicial declarations: (1) that counterclaimants have not infringed counterdefendants’ 9 trademark rights or violated § 32 of the Lanham Act, 15 U.S.C. § 1114; (2) that 10 counterdefendants alleged trade dress rights are not protectable; (3) that counterclaimants 11 have 12 counterdefendants’ alleged trade dress rights and have not violated § 43(a) of the Lanham 13 Act, 15 U.S.C. § 1125 (a); and (4) that counterclaimants have not infringed upon 14 counterdefendants’ trademark rights, have not violated § 43(b) of the Lanham Act. and have 15 not violated the Anti-Cyber Squatting Protection Act, 15 U.S.C. § 1125(d). (Id. at 12, ¶¶ C- 16 F). 17 not II. infringed counterdefendants’ trademark rights in connection with 18 PLAINTIFFS’ MOTION TO DISMISS VAZIRANI DEFENDANTS’ COUNTERCLAIMS FOR FAILURE TO STATE A CLAIM UPON WHICH RELIEF CAN BE GRANTED. (Doc. 53). 19 Plaintiffs seek an order dismissing the Vazirani Defendants’ counterclaims for failure 20 to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 21 12(b)(6). Plaintiffs argue that the Vazirani Defendants’ counterclaims seeking declaratory 22 relief are inappropriate because they “are redundant of their denials and affirmative defenses” 23 and “ask the Court to decide the same issues as Aviva’s first, second, third, and fourth causes 24 of action.” (Doc. 53 at 3, 4). In response, the Vazirani Defendants argue that “finding in 25 favor of defendants on plaintiffs’ principal claims herein would not necessarily constitute an 26 affirmative declaration on any of the specific items as to which defendants seeks a 27 28 -5- 1 declaration in their Counterclaims” (Doc. 59 at 3). The Vazirani Defendants also argue that 2 their counterclaims “may become important for defendants’ protection if plaintiffs seek to 3 dismiss one or more of their principal claims.” (Id.). A. 4 Legal Standard & Analysis 5 “The Declaratory Judgment Act provides courts with discretion to either grant or 6 dismiss a counterclaim for declaratory judgment.” Southwest Windpower, Inc. v. Imperial 7 Electric, Inc., No. CV-10-8200-SMM, 2011 WL 486089 (D. Ariz. Feb. 4, 2011). There is 8 a split among district courts in the Ninth Circuit as to how to handle counterclaims for 9 declaratory relief if such claims are repetitious of issues already before the court via the 10 complaint or affirmative defenses. See id. (citing cases that dismiss such counterclaims); 6 11 CHARLES ALAN WRIGHT, ET. AL., FEDERAL PRACTICE AND PROCEDURE § 1406 (3d ed. 2011) 12 (discussing the split among courts and citing cases). Some courts have concluded that 13 Federal Rule of Civil Procedure 41(a)4 “contains sufficient protection for defendant against 14 plaintiff’s withdrawal and therefore a counterclaim for a declaratory judgment involving the 15 same transaction as plaintiff’s claim is wholly redundant and does not serve any useful 16 purpose.” 6 CHARLES ALAN WRIGHT, ET. AL., FEDERAL PRACTICE AND PROCEDURE § 1406 17 (3d ed. 2011). However, this conclusion has not been widely accepted because it “ignores 18 the possibility that it is very difficult to determine whether the declaratory judgment 19 counterclaim really is redundant prior to trial.” Id. 20 It appears that all of the Vazirani Defendants’ requests for declaratory judgment 21 would be resolved upon the Court’s determination of the issues contained in the Complaint 22 and the affirmative defenses. However, the Vazirani Defendants have met the 12(b)(6) 23 standard of stating a claim upon which relief can be granted. The Vazirani Defendants assert 24 25 26 27 28 4 Federal Rule of Civil Procedure 41(a) provides, “the plaintiff may dismiss an action without a court order by filing: (i) a notice of dismissal before the opposing party serves either an answer or motion for summary judgment; or (ii) a stipulation of dismissal signed by all parties who have appeared.” FED. R. CIV. P. 41(a)(1)(A)(i)(ii). Otherwise, “an action may be dismissed at the plaintiff’s request only by court order, on terms that the court considers proper.” Id. at 41(a)(1)(B). -6- 1 that the relief they request will not be duplicative of the issues before the Court and 2 Plaintiffs’ assertion that allowing the counterclaims to proceed will expand discovery bolsters 3 the Vazirani Defendants’ argument that its counterclaims are somehow different than the 4 issues raised in the complaint and affirmative defenses. See Doc. 62 at 2-3. (“In opposition 5 to Plaintiffs’ motion, the Vazirani Defendants suggest that this Court should delay dismissal 6 until after the Parties—and this Court—have spent substantial time and resources in 7 discovery and motion practice.”). Accordingly, the Court finds that the safest course is to 8 deny the motion to dismiss the counterclaim. See 6 CHARLES ALAN WRIGHT, ET. AL., 9 FEDERAL PRACTICE AND PROCEDURE § 1406 (3d ed. 2011) (“the safer course for the court to 10 follow is to deny a request to dismiss a counterclaim for declaratory relief unless there is no 11 doubt that it will be rendered moot by the adjudication of the main action.”). 12 Perhaps Plaintiffs did not intend to imply that allowing the counterclaims to go 13 forward would require more discovery than would already be necessary, but, at this stage, 14 the Court finds that the best course is to deny Plaintiffs’ Motion to Dismiss the Vazirani 15 Defendants’ Counterclaims without prejudice. Plaintiffs may re-raise this issue on summary 16 judgment if the evidence supports their original arguments. III. 18 PLAINTIFFS’ MOTION FOR ENTRY OF PARTIAL FINAL JUDGMENT ON LIABILITY AS SANCTIONS FOR SPOLIATION OF EVIDENCE. (Doc. 66). 19 Plaintiffs argue that they are entitled to sanctions due to Defendant Vazirani’s and 20 Defendant Regan’s alleged spoliation of evidence. Plaintiffs argue that Defendants’ actions 21 entitle them to a determination of liability, leaving their remedies as the only remaining 22 issues for discovery, dispositive motions, and trial. 17 A. 23 Evidence of Spoliation 24 Plaintiffs argue that Defendants Vazirani and Regan have both perjured themselves 25 and destroyed evidence. Plaintiffs argue that the following facts show that Defendants 26 Vazirani and Regan have destroyed or failed to preserve evidence relevant to this litigation: 27 • 28 Although Plaintiffs have obtained numerous emails and text messages relevant to the litigation from third-parties Eric Starkman and his firm, Starkman & Associates, Inc. (collectively “Starkman”), neither Vazirani or Regan has produced any of these -7- 1 emails or texts in response to discovery requests, even though the emails and texts show that they were either senders or recipients of the emails and texts. (Doc. 66 at 3, 4). 2 3 • Before the emails and texts were produced in this litigation, Defendant Regan’s deposition was taken in another lawsuit. During that deposition, Defendant Regan swore he never discussed anti-Aviva websites with Starkman, that he never sent antiAviva documents to Starkman, that the first time he saw the emails posted on the alleged infringing websites was when he looked at those websites, that he first learned that Defendant Vazirani had surreptitiously recorded Aviva employee, Jordan Canfield, when he heard the recording on the websites and that he didn’t know of Greg Lowney doing any work for Defendant Vazirani besides work in 2011 relating to a virus on Defendant Vazirani’s computer. (Doc. 66 at 9, Exhibit 32). Each of these assertions was disproved by Starkman’s document production. (Id. at 10 (citing exhibits)).5 • The emails and texts that were produced by Starkman indicate that Defendant Regan sometimes avoided email in favor of telephone, fax, and text communications to hide what was being discussed. (Id. at 11 (citing exhibits)). • On February 24, 2011, the same day that Plaintiffs filed their Complaint, Defendant Regan sent an email to Starkman and Associates requesting that they “remove all indication of dates for updates on the site.” (Doc. 66 at Exhibit 59). • Defendant Regan produced screenshots of searches of keywords in his google email account to demonstrate that he did not have any emails that he was not producing in response to the subpoenas. However, many of the screenshots actually demonstrated that emails containing the keywords were placed in the “trash” folder of Defendant Regan’s email account. (See Doc. 66 at Exhibit 75 (At the bottom of screenshots depicting the search results to some “keywords,” a message read, “Deleted messages match your search View them6 or go to Trash to delete forever.”)). • Both Defendant Vazirani and Greg Lowney, an internet computer specialist who worked on Vazirani’s computer and was involved in registering domain names for Defendants, displayed significant gaps in their memories during their depositions, although many of the events they were questioned about occurred within the last two years. Defendant Vazirani equivocated throughout his deposition and claimed not even to know his own opinions in answer to various questions. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 In response to these allegations, Defendants argue that they have not destroyed 21 22 23 24 25 26 27 28 5 Defendant Regan argues that his answers to his deposition only related to one of the Aviva websites and Plaintiffs have misconstrued his answers to make it seem as if he is lying. The Court has read the relevant portions of Defendant Regan’s deposition and finds the assertion that Defendant Regan was only referring to one of the websites unconvincing. Further, even if Defendant Regan was only referring to one of the websites, many of his answers are still disproved by the emails produced by Starkman. 6 The bolded and underlined words are links to the folder containing the emails that matched the keyword searches that were placed in the trash folder. -8- 1 evidence relevant to the case. They further argue that the alleged spoliation does not hamper 2 Plaintiffs’ ability to prosecute their case because they have the emails and texts that were 3 allegedly destroyed.7 The Vazirani Defendants further argue that because Defendant 4 Vazirani admits to being involved in creating at least one of the websites, Plaintiffs have 5 enough information to prosecute this case. The Vazirani Defendants finally argue that, if the 6 Court believes Vazirani engaged in wrongdoing, an appropriate sanction would be a ruling 7 that Defendant Vazirani is responsible for the anti-Aviva messages on the websites on which 8 Defendant Vazirani disputes ownership. B. 9 Legal Standard and Analysis 10 The Court has discretion under its inherent powers to sanction a party who causes the 11 spoliation of evidence. See Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006). This 12 discretion is broad and can range from minor sanctions, such as the awarding of attorneys’ 13 fees, Leon, 464 F.3d at 961, to more serious sanctions, such as dismissal of claims, Id. at 958, 14 or instructing the jury that it may draw an adverse inference, In re Oracle Corp. Sec. Litig., 15 627 F.3d 376, 386-387 (9th Cir. 2010). Sanctions under these “inherent powers must be 16 exercised with restraint” and should be appropriate to the conduct that triggered the sanction. 17 Chambers v. NASCO, Inc., 501 U.S. 32, 44-45 (1991). 18 Destruction of evidence or the failure to preserve property for another’s use as 19 evidence in pending litigation constitutes spoliation. See United States v. Kitsap Physicians 20 Serv., 314 F.3d 995, 1001 (9th Cir. 2002). Specifically, failure to “preserve electronic or 21 other records, once the duty to do so has been triggered, raises the issue of spoliation of 22 evidence and its consequences.” Surowiec v. Capital Title Agency, Inc., 790 F.Supp.2d. 997, 23 1005 (D. Ariz. 2011) (quoting Thompson v. U.S. Dep’t. of Hous. & Urban Dev., 219 F.R.D. 24 93, 100 (D. Md. 2003)); see also Leon, 464 F.3d at 959 (noting willful destruction of 25 electronic files constituted spoliation). 26 27 28 7 Plaintiffs respond that they were only able to obtain some of the destroyed emails from Starkman. -9- 1 “A party seeking sanctions for spoliation of evidence must prove the following 2 elements: (1) the party having control over the evidence had an obligation to preserve it when 3 it was destroyed or altered; (2) the destruction or loss was accompanied by a ‘culpable state 4 of mind;’ and (3) the evidence that was destroyed or altered was ‘relevant’ to the claims or 5 defenses of the party that sought the discovery of the spoliated evidence[.]” Surowiec, 790 6 F.Supp.2d at 1005 (quoting Goodman v. Praxair Servs., Inc., 632 F.Supp.2d 494, 509 (D. 7 Md. 2009)). The Court will now examine each of these elements to determine if Plaintiffs 8 have sufficiently established that Defendants Regan and Vazirani engaged in conduct that 9 led to the spoliation of evidence and warrants sanctions. 10 i. Obligation to Preserve 11 “It is well established that the duty to preserve arises when a party knows or should 12 know that certain evidence is relevant to pending or future litigation.” Id. (internal citation 13 and quotation omitted). “Stated differently, the duty to preserve is triggered not only during 14 litigation, but also extends to the period before litigation when a party should reasonably 15 know that evidence may be relevant to anticipated litigation.” Id. (internal citations omitted). 16 At the very latest, Defendant Vazirani’s duty to preserve his computer’s hard drive and 17 electronic data arose when he was served with Plaintiffs’ Complaint on February 25, 2011. 18 Although Defendant Regan was not named as a Defendant in the original Complaint, at the 19 very latest, his duty to preserve evidence arose on April 4, 2011 when he received a subpoena 20 in this matter. 21 From the facts presented, it appears that Defendants Vazirani and Regan have engaged 22 in a pattern of hiding and/or failing to preserve relevant evidence. For instance, Defendant 23 Regan ordered a Starkman employee to delete information from one of the websites that is 24 the subject of this lawsuit the day the Complaint was filed. Although Defendant Regan was 25 not then a party to this action, the totality of the facts presented suggest that Defendants 26 worked together with third parties to destroy and/or hide evidence. It would be a perversion 27 of justice to allow Defendants to claim they are not personally responsible for the destruction 28 of relevant evidence when third parties were acting at their behest. Accordingly, Plaintiffs - 10 - 1 have made a showing that at least some of the spoliation occurred after Defendants’ duty to 2 preserve had arisen. 3 ii. Culpable State of Mind 4 “Courts have not been uniform in defining the level of culpability—be it negligence, 5 gross negligence, willfulness, or bad faith—that is required before sanctions are appropriate.” 6 Id. at 1006 (internal quotation and citation omitted). “Nor is there consensus as to how the 7 level of culpability is to be determined, or what prejudice, if any, may be presumed from 8 culpable conduct.” Id. at 1006-1007. However, it is clear that “[a]n allegedly spoliating 9 party’s culpability must be determined case-by-case.” Id. at 1007. 10 In this case, Defendants have provided no reasonable explanation for their failure to 11 preserve. The totality of the facts presented shows that Defendants Regan and Vazirani 12 deleted relevant records relating to this lawsuit. Further, the evidence suggests that as the 13 lawsuit progressed, Defendants began communicating through telephone and faxes to avoid 14 creating a record through email and text messaging technology that could later be discovered 15 through forensic imaging. Moreover, although it appears from the evidence that Defendant 16 Vazirani and Greg Lowney have significant knowledge that would be responsive to questions 17 asked during their depositions, both displayed significant, unexplained gaps in memory 18 regarding the events related to this lawsuit during those depositions. Finally, the evidence 19 shows that Defendant Regan lied in his deposition about the events relating to this lawsuit. 20 Accordingly, the Court finds that Defendants acted in bad faith and, thus, with a culpable 21 state of mind. 22 iii. Relevance to the Claims 23 Plaintiffs have shown that the evidence destroyed was likely relevant to their claims. 24 Starkman produced numerous emails that were also sent to Defendants Regan and Vazirani. 25 Defendants Regan and Vazirani did not produce any of these emails. Further, the screenshots 26 of Defendant Regan’s email account show that information related to the relevant “keyword” 27 searches were placed in the trash folder of his email and never produced. Accordingly, the 28 Court finds that Defendants destroyed and/or hid information relevant to this case. - 11 - 1 iv. Appropriate Sanction 2 Plaintiffs argue that Defendants’ actions entitle them to a determination of liability, 3 leaving Aviva’s remedies as the only remaining issues for discovery, dispositive motions, 4 and trial. In the alternative, Plaintiffs request a determination that Aviva has established a 5 prima facie case on each of its claims, thereby shifting the burden of proof on liability on 6 each of those claims to Defendants, or a ruling that Aviva is entitled to adverse inference 7 instructions on each element of each of its claims in this case. Aviva also requests an award 8 of attorneys’ fees and costs incurred in connection with seeking the spoliated evidence and 9 incurred in connection with this motion. The Court “must determine which sanction best (1) 10 deters parties from future spoliation, (2) places the risk of an erroneous judgment on the 11 spoliating party, and (3) restores the innocent party to their rightful litigation position.” Id. 12 at 1008 (internal quotation and citation omitted). 13 There is a five-part test to determine whether a sanction determining liability in favor 14 of one party is just: “(1) the public’s interest in expeditious resolution of litigation; (2) the 15 court’s need to manage its docket; (3) the risk of prejudice to the other party; (4) the public 16 policy favoring the disposition of cases on their merits; and (5) the availability of less drastic 17 sanctions.” Dreith v. Nu Image, Inc., 648 F.3d 779, 788 (9th Cir. 2011) (internal citation 18 omitted). 19 The first two factors favor judgment for Plaintiffs on liability. Because the Court and 20 the public have a strong interest in judicial efficiency and the prompt resolution of litigation, 21 Defendants’ failure to preserve evidence, and the resulting delay caused by discovery 22 disputes and the instant motion for sanctions, weigh in favor of judgment for Plaintiffs on 23 liability. See Surowiec, 790 F.Supp.2d at 1009. Nonetheless, the Court finds that the final 24 three factors weigh against a liability-determining sanction. The third factor, prejudice, 25 “looks to whether the spoliating party’s actions impaired the non-spoliating party’s ability 26 to go to trial or threatened to interfere with the rightful decision of the case.” Leon, 464 F.3d 27 at 959 (citation and brackets omitted). While it is apparent that Plaintiffs have been 28 prejudiced by the spoliation, the Court finds that a lesser sanction would correct any - 12 - 1 interference with a rightful decision of the case attributed to the spoliation. See id. (quoting 2 Rimkus Consulting Group, Inc.v. Cammarata, 688 F.Supp.2d at 618 (S.D. Tex. 2010)) 3 (“When a party is prejudiced, but not irreparably, from the loss of evidence that was 4 destroyed with a high degree of culpability, a harsh, but less extreme sanction than dismissal 5 or default is to permit the fact finder to presume that the destroyed evidence was 6 prejudicial.”). Accordingly, the Court finds that a sanction granting judgment for Plaintiffs 7 on liability would be inappropriate in this case. 8 Plaintiffs have requested alternative sanctions of a determination that Aviva has 9 established a prima facie case on each of its claims, thereby shifting the burden of proof on 10 liability on each of those claims to Defendants or a ruling that Aviva is entitled to adverse 11 inference instructions on each element of each of its claims in this case. The Court finds 12 adverse inference instructions to be warranted to the extent Defendants’ spoliation affects 13 Plaintiffs’ ability to prove their claims. The Parties shall submit proposed adverse inference 14 instructions with the other jury instructions to be filed before trial. 15 If Plaintiffs believe that Defendants’ spoliation affects their ability to dispute summary 16 judgment, Plaintiffs may propose an appropriate adverse inference in response to any motion 17 for summary judgment.8 If Plaintiffs propose inferences in response to a summary judgment 18 motion, they must specify how Defendants’ spoliation has prevented them from disputing 19 specific facts, the discovery they have undertaken to obtain those facts, and how an inference 20 in their favor would prevent summary judgment as a matter of law. 21 Accordingly, Plaintiffs’ Motion for Entry of Partial Final Judgment on Liability as 22 Sanctions for Spoliation of Evidence is denied with respect to judgment for Plaintiffs on 23 liability, but granted as to the request for adverse inference instructions. C. 24 Attorneys’ Fees 25 26 27 28 8 The Court is aware that Defendants have already moved for summary judgment on Plaintiffs’ Rico cause of action. Accordingly, the Court will strike Plaintiffs’ Response and Defendants’ Reply in Support of that motion to give Plaintiffs the opportunity to respond in accordance with this Order. - 13 - 1 Plaintiffs also request an award of attorneys’ fees and costs incurred in connection 2 with seeking the spoliated evidence and incurred in connection with this motion. “Under its 3 ‘inherent powers,’ a district court may also award sanctions in the form of attorneys’ fees 4 against a party or counsel who acts in bad faith, vexatiously, wantonly, or for oppressive 5 reasons.” Leon, 464 F.3d at 961 (internal quotation and citation omitted). “Before awarding 6 such sanctions, the court must make an express finding that the sanctioned party’s behavior 7 constituted or was tantamount to bad faith.” Id. (citation omitted). “A party demonstrates 8 bad faith by delaying or disrupting the litigation or hampering enforcement of a court order.” 9 Id. (internal citation omitted). “The bad faith requirement ensures that the district court’s 10 exercise of its broad power is properly restrained, and preserves a balance between protecting 11 the court’s integrity and encouraging meritorious arguments.” Id. (internal quotation and 12 citation omitted). “Additionally, the amount of monetary sanctions must be reasonable.” 13 Id. (internal quotation and citation omitted). The Court has already found that Defendants 14 Regan and Vazirani acted in bad faith. 15 reasonable attorneys’ fees incurred in connection with this motion and seeking spoliated 16 evidence. Accordingly, Plaintiffs are entitled to their 17 The Parties are directed to confer in good faith to resolve any disputes concerning the 18 amount of reasonable expenses and fees. See LRCiv 54.2(d)(1). If the Parties are unable 19 to agree, Plaintiffs may file a motion pursuant to Local Rule 54.2. Any such motion shall be 20 filed, with a supporting memorandum, on or before February 6, 2012, with the response and 21 reply briefs due in accordance with the time periods provided in Local Rule 54.2(b)(3) and 22 (4). 23 IV. DEFENDANT JAMES REGAN’S MOTION FOR SANCTIONS FOR DISCOVERY ABUSE (Doc. 73). 24 Defendant Regan alleges that, in response to discovery requests by Aviva, he allowed 25 Aviva’s computer expert to attempt to obtain discoverable information from the hard drive 26 of his computer. Defendant Regan alleges that, when Aviva’s computer expert returned his 27 computer to him, it was severely damaged and he had to replace it. Defendant Regan further 28 - 14 - 1 alleges that he has submitted his $900 bill for the damage to his computer to Aviva and 2 Aviva has refused to pay it. 3 immediately payable sanction of $900 to pay for the computer destroyed by Aviva’s 4 computer ‘expert.’” (Doc. 73 at 10). 5 Plaintiffs argue that their expert did not damage Defendant Regan’s computer. (Doc. 81). 6 This is not the type of situation where a sanction would be appropriate or warranted. 7 The substance of Defendant Regan’s motion convinces the Court that he is not seeking a 8 sanction for an abuse of discovery, but is seeking a sanction for damage to property that 9 allegedly occurred during the discovery process. These two situations are not equivalent. 10 For example, if Plaintiffs’ expert intentionally destroyed evidence relevant to the case, at 11 Plaintiffs’ direction or to assist Plaintiffs in obstructing the discovery process, a sanction for 12 abuse of discovery would be appropriate. Conversely, if Plaintiffs’ expert and Defendant 13 were involved in a car accident in the parking lot of the law firm where Defendant’s 14 deposition was to take place, this Court could not order Plaintiffs (or their expert) to pay for 15 the damage to Defendant’s car as a sanction for abuse of the discovery process. The conduct 16 at issue here is akin to the latter example. Defendant Regan “asks that the Court award him an In their Response to the request for sanctions, 17 Further, the alleged damage is not attributable to Plaintiffs, but to their expert. 18 Defendant Regan may have a separate cause of action against Plaintiffs’ expert for the 19 damage done to his computer, but the Court does not have jurisdiction within this case over 20 a claim between Defendant Regan and a third-party involving issues and facts distinct from 21 the issues and facts necessary to the resolution of the dispute in this case. Accordingly, 22 Defendant Regan’s Motion for Sanctions for Discovery Abuse is denied. 23 Based on the foregoing, 24 IT IS ORDERED that Plaintiffs’ Motion to Dismiss the Vazirani Defendants’ 25 Counterclaims (Doc. 53) is denied without prejudice. Plaintiffs may re-raise this issue on 26 summary judgment if the evidence supports their original arguments. 27 IT IS FURTHER ORDERED that Plaintiffs’ Motion for Entry of Partial Final 28 Judgment on Liability as Sanctions for Spoliation of Evidence (Doc. 66) is granted in part - 15 - 1 and denied in part as set forth in this Order. As set forth in this Order, Plaintiffs must file any 2 reasonable request for attorneys’ fees before February 6, 2012. 3 IT IS FURTHER ORDERED that the Clerk of the Court shall strike Plaintiffs’ 4 Response to Vazirani Defendants’ Motion for Judgment on the Pleadings (Doc. 84) and the 5 Vazirani Defendants Reply Memorandum in Support of Motion for Judgment on the 6 Pleadings on Plaintiffs’ RICO Cause of Action (Doc. 87). Plaintiffs shall file their Response 7 within fourteen days of the date of this Order. If Plaintiffs do not wish to make changes to 8 their Response, Plaintiffs may re-file their current response. Defendants shall file their Reply 9 within seven days of Plaintiffs’ Response. 10 11 12 IT IS FINALLY ORDERED that Defendant Regan’s Motion for Sanctions for Discovery Abuse (Doc. 73) is denied. DATED this 10th day of January, 2012. 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 16 -

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