Net-Com Services Inc v. Eupen Cable USA Inc et al

Filing 239

MEMORANDUM AND ORDER REQUIRING PLAINTIFF TO RESTORE AND PRODUCE ELECTRONIC DATA (Dkt. Nos. 128 & 210 ) by Magistrate Judge Suzanne H. Segal. Net-Com is ORDERED to restore and produce any relevant data from the subject hard drives within fourteen days of the date of this Order. Net-Com shall pay the full cost of restoration and production. (See document for further details). (mr)

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UNITED STATES DISTRICT COURT

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CENTRAL DISTRICT OF CALIFORNIA

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NET-COM SERVICES, INC.,

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Plaintiff,
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v.
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EUPEN CABLE USA, INC., et al.,
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Defendants.
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EUPEN CABLE USA, INC.,
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Counterclaimant,
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v.
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NET-COM SERVICES, INC., et al.,
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Counterdefendants. )
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NO. CV 11-2553 JGB (SSx)

MEMORANDUM AND ORDER REQUIRING
PLAINTIFF TO RESTORE AND PRODUCE
ELECTRONIC DATA
(Dkt. Nos. 128 & 210)

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On July 26, 2013, Net-Com filed a Notice of Submission indicating

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that it had submitted hard drives containing potentially relevant

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financial data to a vendor for forensic analysis.

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the reasons stated below, Net-Com is ORDERED to produce any relevant

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data recovered from the hard drives within fourteen (14) days of the

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date of this Order and to bear the full cost of restoration and

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production.

(Dkt. No. 231).

For

PRIOR PROCEEDINGS

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On November 14, 2012, the Court issued an Order granting in part

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Eupen USA’s Motion to Compel Production of Documents.

(See Dkt. No.

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128).

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requiring production of “Missing Accounting Information,” including

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financial data believed to be stored on purportedly “dead” hard drives.

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(Id. at 14-15).

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the financial records Eupen USA sought “may no longer exist because they

Among other documents, Eupen USA’s Motion sought an Order

In its Opposition to the Motion, Net-Com argued that

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were on computers that are now dead.

Net-Com’s principals have been

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trying to access the dead hard drives, but so far with no luck.”

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No. 117 at 5).

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“Missing Accounting Information,” with the exception of state and

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federal tax returns.

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production, the Court also ordered Net-Com to produce “the computer hard

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drives containing potentially relevant ESI that Net-Com has been unable

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to restore” to allow Eupen USA “to test Net-Com’s assertion that the

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information is inaccessible.”

(Dkt.

The Court ordered Net-Com to produce the requested

(Dkt. No. 128 at 15-16).

As part of that

(Id.).

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On July 11, 2013, the Court granted in part and denied in part

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Eupen USA’s Motion for Evidence Sanctions.

(Dkt. No. 228).

Eupen USA

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argued that Net-Com should be precluded from offering evidence of its

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damages because its production of financial data was incomplete and

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insufficient due to the loss of information “allegedly contained on a

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computer hard drive that was apparently no longer functional.”

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No. 210 at 1-2).

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evidence that the hard drives have been ‘irreparably damaged’ such that

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their contents are irretrievable.”

(Dkt.

Net-Com argued in opposition that “there is no

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(Dkt. No. 210 at 3).

The Court

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denied without prejudice Eupen USA’s Motion for evidence preclusion.

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(Dkt. No. 228 at 9).

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Court ordered Net-Com to submit the subject hard drives to a vendor for

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forensic analysis.

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file a Notice of Submission indicating (1) the name of the vendor and

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date of submission, (2) whether any of the files on the hard drives are

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recoverable, and, if so, (3) the vendor’s estimated cost of restoration

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and (4) the estimated length of time it would take to restore the data.

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(Id. at 10).

However, consistent with its prior Order, the

(Id. at 10).

The Order also required Net-Com to

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On July 25, 2013, Net-Com filed a Notice of Submission.

(Dkt. No.

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230).

The Notice reported that Net-Com submitted the subject hard

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drives to Ai Networks (DBA DriveCrash.com) in Irvine, California on July

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22, 2013.

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assessment is that “there is recoverable data on at least one of the

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hard drives” and that the estimated cost to stabilize and recover the

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data

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represented to Net-Com that it could complete the recovery within two

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to three weeks of being instructed to proceed.

was

(Id. at 1).

between

According to Net-Com, Ai Networks’ preliminary

$2,000

and

$3,000.

(Id.

at

2).

Ai

Networks

(Id.).

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BACKGROUND FACTS

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Net-Com instigated this litigation on February 8, 2011 in the Los

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Angeles County Superior Court.

(Dkt. No. 1 at 2).

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removed to this Court on March 25, 2011.

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Net-Com’s principals, admitted in deposition that he was responsible for

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maintaining care, custody and control of Net-Com’s documents, including

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its financial data.

(Id.).

The action was

Steve Moffatt, one of

(Dkt. No. 210, Malingagio Decl., Exh. 13, at 49).
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Moffatt testified that Net-Com stopped using its older accounting

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system, American Contractor, shortly after the company moved into

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“Avenue Penn.” (Id. at 23). Although Moffatt could not recall the year

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the company moved to Avenue Penn or the last time he saw the hardware

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with the American Contractor data, he believed that it must have been

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“lost or stolen” because he could not find it when he later looked for

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it.

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insurance claim regarding Net-Com’s allegedly lost or stolen property.

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(Id. at 48).

(Id. at 32).

However, Moffatt did not file a police report or an

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For the last three years of its operation, from approximately

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September 2008 to September 2011, Net-Com operated out of an office in

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Moffatt’s residence on Remington Road.

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doing business in October 2011. (Id. at 7). As the company was winding

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down, Moffatt rented out the home in September or October 2011.

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at 37).

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hardware and software systems that had accounting data in the garage of

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the Remington Road home.

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renters not to throw anything out, but he failed to take any other

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precautions to preserve Net-Com’s financial data.

(Id. at 36).

Net-Com stopped

(Id.

Before Moffatt moved out, he stored all of Net-Com’s computer

(Id. at 35 & 40).

Moffatt instructed the

(Id. at 37).

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When Moffatt drove by the home in September or October of 2011, he

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discovered that despite his instructions, the renters had put a “big

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pile of office equipment and everything else in the front yard, and they

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were being – they were thrown in dumpsters.”

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damaged hard drives that Moffatt later delivered to his attorneys were

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dug out of the renters’ trash by an associate named “Pablo” on a

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different occasion sometime in September 2011.
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(Id. at 38 & 60).

The

(Id. at 40 & 59).

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Moffat admitted that the Timberline accounting system on the now non-

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functional hard drives was functional up to September 2011.

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33).

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Moffatt assumes that the renters threw out the back-up drive along with

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Net-Com’s other hardware.

(Id. at

A back up of the Timberline system existed, (id. at 34), but

(Id. at 35 & 37).

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NET-COM IS RESPONSIBLE FOR ITS OWN NEGLIGENCE AND SHALL PAY

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THE FULL COST OF RESTORING AND PRODUCING ITS ELECTRONIC DATA

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Spoliation

is

“the

destruction

or

significant

alteration

of

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evidence, or the failure to preserve property for another’s use as

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evidence[,] in pending or reasonably foreseeable litigation.” Zubulake

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v. UBS Warburg LLC, 220 F.R.D. 212, 216 (S.D. N.Y. 2003) (emphasis

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added).

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pending or reasonably foreseeable, at which time a party is required to

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preserve all relevant evidence and put into place a litigation hold to

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preserve relevant documents.

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Barone, 2007 WL 1119196 at *1 (N.D. Cal. Apr. 16, 2007) (“‘The duty to

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preserve material evidence arises not only during litigation but also

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extends to that period before the litigation when a party reasonably

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should

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litigation.’”) (quoting Kronisch v. United States, 150 F.3d 112, 126 (2d

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Cir. 1998)); Zubulake, 220 F.R.D. at 216 (obligation to preserve

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evidence “arises when the party has notice that the evidence is relevant

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to litigation or when a party should have known that the evidence may

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be relevant to future litigation”).

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\\

The duty to preserve evidence is triggered when litigation is

know

that

the

Id. at 218; see also World Courier v.

evidence

may

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be

relevant

to

anticipated

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The authority to impose sanctions for spoliation arises from a

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court’s inherent power to control the judicial process.

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Laboratory Mgmt. Consultants v. American Broadcasting Companies, Inc.,

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306 F.3d 806, 824 (9th Cir. 2002).

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powers must be applied with “restraint and discretion” and only to the

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degree necessary to redress the abuse.

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U.S. 32, 45, 111 S. Ct. 2123, 115 L. Ed. 2d 27 (1991).

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determination of an appropriate sanction for spoliation is “confined to

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the

sound

discretion

of

the

Medical

The exercise of a court’s inherent

trial

Chambers v. NASCO, Inc., 501

judge,

and

is

Accordingly, the

assessed

on

a

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case-by-case basis.”

Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423,

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436 (2d Cir. 2001) (internal citations omitted).

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specific spoliation sanction to impose, courts generally consider three

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factors: “(1) the degree of fault of the party who altered or destroyed

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the evidence; (2) the degree of prejudice suffered by the opposing

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party; and (3) whether there is a lesser sanction that will avoid

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substantial unfairness to the opposing party.”

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Electronics Co., Ltd., 888 F. Supp. 2d 976, 992 (N.D. Cal. 2012)

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(internal quotation marks omitted).

To decide which

Apple, Inc. v. Samsung

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Net-Com’s duty to preserve evidence arose at the very latest by

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February 8, 2011, when it filed suit. In the Complaint, Net-Com alleged

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that due to Defendants’ allegedly false representations, Net-Com lost

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“millions of dollars” which it sought to recover by this action.

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No. 1, Complaint, at 13).

Net-Com’s own complaint clearly placed Net-

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Com’s finances at issue.

Net-Com’s financial and accounting data is

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highly relevant to both Net-Com’s allegations and Eupen USA’s defenses.

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Nonetheless,

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abandoned the hardware and software containing Net-Com’s financial

seven

months

after

filing

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suit,

Moffatt

(Dkt.

effectively

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records by leaving the equipment and data in a garage in a house he

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rented out to third parties.

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of evidence was not intentional, it was definitely negligent.

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negligent spoliation of evidence may still be sanctionable where it

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results in prejudice to the opposing party because “each party should

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bear the risk of its own negligence.”

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DeGeorge Fin’l Corp., 306 F.3d 99, 108 (2d Cir. 2002).

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explained,

Even if the eventual loss and destruction
The

Residential Funding Corp. v.
As one court

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“It makes little difference to the party victimized by the

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destruction of evidence whether that act was done willfully or

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negligently.

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mechanism

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inference is adverse to the destroyer not because of any

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finding of moral culpability, but because the risk that the

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evidence would have been detrimental rather than favorable

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should fall on the party responsible for its loss.”

for

The adverse inference provides the necessary
restoring

the

evidentiary

balance.

The

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Id. (quoting Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68, 75

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(S.D. N.Y. 1991)).

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While it is not yet clear whether or to what degree Eupen USA has

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been prejudiced, the Court finds it appropriate for Net-Com, due to Net-

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Com’s negligence, to bear the full cost of restoring and producing data

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on the hard drives submitted to Ai Networks.

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ORDERED to restore and produce any relevant data from the subject hard

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Accordingly, Net-Com is

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drives within fourteen days of the date of this Order.1

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pay the full cost of restoration and production.

Net-Com shall

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IT IS SO ORDERED.

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DATED: August 5, 2013
/S/
SUZANNE H. SEGAL
UNITED STATES MAGISTRATE JUDGE

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The Court sets this deadline based upon Net-Com’s representations
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If more time is needed, the parties may either stipulate or apply ex
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