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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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 12 13 14 15 16 17 18 19 20 NET-COM SERVICES, INC., ) ) Plaintiff, ) ) v. ) ) EUPEN CABLE USA, INC., et al., ) ) Defendants. ) ) EUPEN CABLE USA, INC., ) ) Counterclaimant, ) ) v. ) ) NET-COM SERVICES, INC., et al., ) ) Counterdefendants. ) ) NO. CV 11-2553 JGB (SSx) MEMORANDUM AND ORDER REQUIRING PLAINTIFF TO RESTORE AND PRODUCE ELECTRONIC DATA (Dkt. Nos. 128 & 210) 21 22 On July 26, 2013, Net-Com filed a Notice of Submission indicating 23 that it had submitted hard drives containing potentially relevant 24 financial data to a vendor for forensic analysis. 25 the reasons stated below, Net-Com is ORDERED to produce any relevant 26 data recovered from the hard drives within fourteen (14) days of the 27 date of this Order and to bear the full cost of restoration and 28 production. (Dkt. No. 231). For PRIOR PROCEEDINGS 1 2 3 On November 14, 2012, the Court issued an Order granting in part 4 Eupen USA’s Motion to Compel Production of Documents. (See Dkt. No. 5 128). 6 requiring production of “Missing Accounting Information,” including 7 financial data believed to be stored on purportedly “dead” hard drives. 8 (Id. at 14-15). 9 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 10 were on computers that are now dead. Net-Com’s principals have been 11 trying to access the dead hard drives, but so far with no luck.” 12 No. 117 at 5). 13 “Missing Accounting Information,” with the exception of state and 14 federal tax returns. 15 production, the Court also ordered Net-Com to produce “the computer hard 16 drives containing potentially relevant ESI that Net-Com has been unable 17 to restore” to allow Eupen USA “to test Net-Com’s assertion that the 18 information is inaccessible.” (Dkt. The Court ordered Net-Com to produce the requested (Dkt. No. 128 at 15-16). As part of that (Id.). 19 20 On July 11, 2013, the Court granted in part and denied in part 21 Eupen USA’s Motion for Evidence Sanctions. (Dkt. No. 228). Eupen USA 22 argued that Net-Com should be precluded from offering evidence of its 23 damages because its production of financial data was incomplete and 24 insufficient due to the loss of information “allegedly contained on a 25 computer hard drive that was apparently no longer functional.” 26 No. 210 at 1-2). 27 evidence that the hard drives have been ‘irreparably damaged’ such that 28 their contents are irretrievable.” (Dkt. Net-Com argued in opposition that “there is no 2 (Dkt. No. 210 at 3). The Court 1 denied without prejudice Eupen USA’s Motion for evidence preclusion. 2 (Dkt. No. 228 at 9). 3 Court ordered Net-Com to submit the subject hard drives to a vendor for 4 forensic analysis. 5 file a Notice of Submission indicating (1) the name of the vendor and 6 date of submission, (2) whether any of the files on the hard drives are 7 recoverable, and, if so, (3) the vendor’s estimated cost of restoration 8 and (4) the estimated length of time it would take to restore the data. 9 (Id. at 10). However, consistent with its prior Order, the (Id. at 10). The Order also required Net-Com to 10 11 On July 25, 2013, Net-Com filed a Notice of Submission. (Dkt. No. 12 230). The Notice reported that Net-Com submitted the subject hard 13 drives to Ai Networks (DBA in Irvine, California on July 14 22, 2013. 15 assessment is that “there is recoverable data on at least one of the 16 hard drives” and that the estimated cost to stabilize and recover the 17 data 18 represented to Net-Com that it could complete the recovery within two 19 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.). 20 BACKGROUND FACTS 21 22 23 Net-Com instigated this litigation on February 8, 2011 in the Los 24 Angeles County Superior Court. (Dkt. No. 1 at 2). 25 removed to this Court on March 25, 2011. 26 Net-Com’s principals, admitted in deposition that he was responsible for 27 maintaining care, custody and control of Net-Com’s documents, including 28 its financial data. (Id.). The action was Steve Moffatt, one of (Dkt. No. 210, Malingagio Decl., Exh. 13, at 49). 3 1 Moffatt testified that Net-Com stopped using its older accounting 2 system, American Contractor, shortly after the company moved into 3 “Avenue Penn.” (Id. at 23). Although Moffatt could not recall the year 4 the company moved to Avenue Penn or the last time he saw the hardware 5 with the American Contractor data, he believed that it must have been 6 “lost or stolen” because he could not find it when he later looked for 7 it. 8 insurance claim regarding Net-Com’s allegedly lost or stolen property. 9 (Id. at 48). (Id. at 32). However, Moffatt did not file a police report or an 10 11 For the last three years of its operation, from approximately 12 September 2008 to September 2011, Net-Com operated out of an office in 13 Moffatt’s residence on Remington Road. 14 doing business in October 2011. (Id. at 7). As the company was winding 15 down, Moffatt rented out the home in September or October 2011. 16 at 37). 17 hardware and software systems that had accounting data in the garage of 18 the Remington Road home. 19 renters not to throw anything out, but he failed to take any other 20 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). 21 22 When Moffatt drove by the home in September or October of 2011, he 23 discovered that despite his instructions, the renters had put a “big 24 pile of office equipment and everything else in the front yard, and they 25 were being – they were thrown in dumpsters.” 26 damaged hard drives that Moffatt later delivered to his attorneys were 27 dug out of the renters’ trash by an associate named “Pablo” on a 28 different occasion sometime in September 2011. 4 (Id. at 38 & 60). The (Id. at 40 & 59). 1 Moffat admitted that the Timberline accounting system on the now non- 2 functional hard drives was functional up to September 2011. 3 33). 4 Moffatt assumes that the renters threw out the back-up drive along with 5 Net-Com’s other hardware. (Id. at A back up of the Timberline system existed, (id. at 34), but (Id. at 35 & 37). 6 7 NET-COM IS RESPONSIBLE FOR ITS OWN NEGLIGENCE AND SHALL PAY 8 THE FULL COST OF RESTORING AND PRODUCING ITS ELECTRONIC DATA 9 10 Spoliation is “the destruction or significant alteration of 11 evidence, or the failure to preserve property for another’s use as 12 evidence[,] in pending or reasonably foreseeable litigation.” Zubulake 13 v. UBS Warburg LLC, 220 F.R.D. 212, 216 (S.D. N.Y. 2003) (emphasis 14 added). 15 pending or reasonably foreseeable, at which time a party is required to 16 preserve all relevant evidence and put into place a litigation hold to 17 preserve relevant documents. 18 Barone, 2007 WL 1119196 at *1 (N.D. Cal. Apr. 16, 2007) (“‘The duty to 19 preserve material evidence arises not only during litigation but also 20 extends to that period before the litigation when a party reasonably 21 should 22 litigation.’”) (quoting Kronisch v. United States, 150 F.3d 112, 126 (2d 23 Cir. 1998)); Zubulake, 220 F.R.D. at 216 (obligation to preserve 24 evidence “arises when the party has notice that the evidence is relevant 25 to litigation or when a party should have known that the evidence may 26 be relevant to future litigation”). 27 \\ The duty to preserve evidence is triggered when litigation is know that the Id. at 218; see also World Courier v. evidence may 28 5 be relevant to anticipated 1 The authority to impose sanctions for spoliation arises from a 2 court’s inherent power to control the judicial process. 3 Laboratory Mgmt. Consultants v. American Broadcasting Companies, Inc., 4 306 F.3d 806, 824 (9th Cir. 2002). 5 powers must be applied with “restraint and discretion” and only to the 6 degree necessary to redress the abuse. 7 U.S. 32, 45, 111 S. Ct. 2123, 115 L. Ed. 2d 27 (1991). 8 determination of an appropriate sanction for spoliation is “confined to 9 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 10 case-by-case basis.” Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423, 11 436 (2d Cir. 2001) (internal citations omitted). 12 specific spoliation sanction to impose, courts generally consider three 13 factors: “(1) the degree of fault of the party who altered or destroyed 14 the evidence; (2) the degree of prejudice suffered by the opposing 15 party; and (3) whether there is a lesser sanction that will avoid 16 substantial unfairness to the opposing party.” 17 Electronics Co., Ltd., 888 F. Supp. 2d 976, 992 (N.D. Cal. 2012) 18 (internal quotation marks omitted). To decide which Apple, Inc. v. Samsung 19 20 Net-Com’s duty to preserve evidence arose at the very latest by 21 February 8, 2011, when it filed suit. In the Complaint, Net-Com alleged 22 that due to Defendants’ allegedly false representations, Net-Com lost 23 “millions of dollars” which it sought to recover by this action. 24 No. 1, Complaint, at 13). Net-Com’s own complaint clearly placed Net- 25 Com’s finances at issue. Net-Com’s financial and accounting data is 26 highly relevant to both Net-Com’s allegations and Eupen USA’s defenses. 27 Nonetheless, 28 abandoned the hardware and software containing Net-Com’s financial seven months after filing 6 suit, Moffatt (Dkt. effectively 1 records by leaving the equipment and data in a garage in a house he 2 rented out to third parties. 3 of evidence was not intentional, it was definitely negligent. 4 negligent spoliation of evidence may still be sanctionable where it 5 results in prejudice to the opposing party because “each party should 6 bear the risk of its own negligence.” 7 DeGeorge Fin’l Corp., 306 F.3d 99, 108 (2d Cir. 2002). 8 explained, Even if the eventual loss and destruction The Residential Funding Corp. v. As one court 9 10 “It makes little difference to the party victimized by the 11 destruction of evidence whether that act was done willfully or 12 negligently. 13 mechanism 14 inference is adverse to the destroyer not because of any 15 finding of moral culpability, but because the risk that the 16 evidence would have been detrimental rather than favorable 17 should fall on the party responsible for its loss.” for The adverse inference provides the necessary restoring the evidentiary balance. The 18 19 Id. (quoting Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68, 75 20 (S.D. N.Y. 1991)). 21 22 While it is not yet clear whether or to what degree Eupen USA has 23 been prejudiced, the Court finds it appropriate for Net-Com, due to Net- 24 Com’s negligence, to bear the full cost of restoring and producing data 25 on the hard drives submitted to Ai Networks. 26 ORDERED to restore and produce any relevant data from the subject hard 27 28 7 Accordingly, Net-Com is 1 drives within fourteen days of the date of this Order.1 2 pay the full cost of restoration and production. Net-Com shall 3 4 IT IS SO ORDERED. 5 6 7 8 DATED: August 5, 2013 /S/ SUZANNE H. SEGAL UNITED STATES MAGISTRATE JUDGE 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 1 The Court sets this deadline based upon Net-Com’s representations 27 regarding the time needed for Ai Networks to restore the hard drives. If more time is needed, the parties may either stipulate or apply ex 28 parte, with good cause, for a brief extension of the deadline. 8

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