Southern Illinois Storm Shelters, Inc. v. 4semo.com, Inc.
Filing
230
ORDER GRANTING in part and DENYING in part 192 Motion for judgment without trial as sanction for spoliation of evidence and ADOPTING 222 Report and Recommendations. See Order for details. Signed by Judge David R. Herndon on 3/6/17. (klh)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS
4SEMO.COM, INC.,
Plaintiff,
v.
No. 13-0297-DRH
SOUTHERN ILLINOIS
STORM SHELTERS, INC.,
INGOLDSBY EXCAVATING, INC.,
and BOB INGOLDSBY,
d/b/a BOB INGOLDSBY EXCAVATING,
Defendants.
MEMORANDUM and ORDER
HERNDON, District Judge:
Pending before the Court is a Report and Recommendation (“the Report”)
issued by Magistrate Judge Stephen Williams on February 10, 2017 (Doc. 222).
The Report recommends that the Court grant in part and deny in part
4SEMO.com, Inc.’s motion for judgment without trial as sanction for spoliation of
evidence (Doc. 192). 1 Specifically, the Report recommends that the Court impose
a lesser sanction of prohibiting defendants from opposing plaintiff’s evidence
relating to its damages for infringement. 2 Here, both parties filed objections to
the Report (Docs. 227 & 228). Based on the pleadings and the applicable law, the
1
On November 17, 2016, Magistrate Judge Williams held an evidentiary hearing on the motion
and took the matter under advisement (Doc. 219).
2
In that motion, plaintiff asked the Court to enter judgment against all defendants and in favor of
4SEMO.com in the total of $13,466.049.00 as determined by the economic expert, Mark Hoffman,
or for such other or additional relief as the Court believes is just under the circumstances.
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Court adopts the Report and grants in part and denies in part the motion for
judgment without a trial.
The Court's review of the Report is governed by 28 U.S.C. § 636(b)(1),
which provides in part:
A judge of the court shall make a de novo determination of those
portions
of
the report or
specified
proposed
findings
or recommendations to which objection is made. A judge of the court
may accept, reject, or modify, in whole or in part, the findings
or recommendations made by the magistrate judge. The judge may
also receive further evidence or recommit the matter to the
magistrate judge with instructions.
Fed. R. Civ. P. 72(b) also directs that the Court must only make a de
novo determination of those portions of the report and recommendation to which
specific written objection has been made. Johnson v. Zema Sys. Corp., 170 F.3d
734, 739 (7th Cir. 1999). Whether to impose sanctions is a dispositive matter,
necessitating de novo review. See Retired Chi. Police Ass'n v. City of Chi., 76 F.3d
856, 869 (7th Cir. 1996) (explaining that “a request for sanctions, regardless of
when made, is a dispositive matter”). If no objection or only a partial objection is
made, the Court reviews those unobjected portions for clear error. Id. In
addition, failure to file objections with the district court “waives appellate review
of both factual and legal questions.” Id. Under the clear error standard, the Court
can only overturn a Magistrate Judge's ruling if the Court is left with “the definite
and firm conviction that a mistake has been made.” Weeks v. Samsung Heavy
Indus. Co., Ltd., 126 F.3d 926, 943 (7th Cir. 1997).
Specifically, Magistrate Judge Williams found:
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After careful review of the record, the undersigned finds that
Defendants have engaged in sanctionable conduct. The evidence
indicates that Defendants failed to preserve any underlying source
documentation after October 2014. In fact, it is clear that they
continued to engage in the same course of the conduct that they had
engaged in prior to the October 2014 hearing. In doing so, the
Defendants directly violated an order of the Court, and Defendants’
assertion that the Court’s October 2014 Order referred only to bank
records is disingenuous. The record, highlighted above through the
October 2014 transcript, as well as, letters drafted by Defendants’
own counsel, indicate that in addition to bank records, the
documents that the Court ordered Defendants to produce included
purchase orders, emails, and texts from dealers. The Court also
specifically advised Defendants of their ongoing duty to supplement
after the initial production of documents responsive to the Court’s
order.
Further, the undersigned does not find credible Robert
Ingoldsby’s testimony regarding the number of written purchase
orders SISS receives. His self-serving testimony that 70% of dealer
orders were placed over the phone is belied by the discussion at the
October 2014 conference, as well as, the letters from Defendants’
counsel representing that “orders’ were “discarded” and that “SISS
discards all source documents (e.g. purchase orders, invoices, etc.)”.
Moreover, Mr. Fielak testified that he always provided written orders
one way or another. Mr. Ingoldsby’s testimony, however, that Mr.
Fielak was the only dealer who sent written purchase orders is
simply too convenient and coincidental to be believable, not to
mention that it is contradicted by the October 2014 conference and
related correspondence.
…
Accordingly, the undersigned acknowledges that the
Defendants reasonably concluded that they were not required to
change their practice in this regard to begin saving hard copies of
Quickbooks invoices since the invoices were contained in the
computer file in the same form in which they were sent out.
Nonetheless, it is also clear, however, that Defendants were ordered
to discontinue the process of destroying the documents relating to
written purchase orders for storm shelters. The undersigned finds
Defendants’ arguments that they concluded that the only records
being destroyed, and the ones referred to in the Court’s October 2014
order, were bank records, to be disingenuous and a deliberate
attempt to obscure what is an otherwise clear record on this point.
This clear record indicates that Defendants continued to destroy
underlying documents relating to purchase orders even after being
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(1) ordered by the Court in October 2014 to produce these
documents; (2) reminded by the Court of Defendants’ ongoing duty to
supplement these documents; and (3) being instructed by their own
counsel to stop destroying these documents.
It is clear the
defendants recklessly and in bad faith violated a discovery order of
the Court, and as such sanctions are appropriate under Rule 37(b).
…
Though the Defendants acted in bad faith, the undersigned is
of the view that a sanction of a default judgment would be
disproportionate to the circumstances surrounding the violation. …
Here, the prejudice issue weighs against the harsh sanction of a
default judgment. First, Defendants’ offensive conduct affects only
evidence relating to Plaintiff’s damages. Defendants’ acknowledgment
that they continue to use the mark renders this evidence irrelevant to
liability.
In destroying written source documents, Defendants
destroyed evidence as to Plaintiff’s damages, and this conduct largely
does not affect Plaintiff’s liability case. … In addition, the prejudice
to plaintiffs’ damages case is low. Plaintiff has plenty of evidence as
to the amounts of its damages from the Quickbooks files. Though
Plaintiff has suffered some prejudice in that it has not been provided
the underlying hard copies that went into those digital files, it is not
as if Plaintiff has no evidence it can present whatsoever. Though
Plaintiff stated that the reason it wanted the source documents was
due to its concern that the Quickbooks data had been altered, when
given a mirror image of the Quickbooks data, Plaintiff, incredibly, did
not have its expert perform an audit of the data to determine whether
it had been altered. At this point, the fact that Plaintiff does not
know whether the Quickbooks data was altered, is largely Plaintiff’s
own fault.
It is important to note that Plaintiff never brought any issues
concerning the lack of production of source documents to the
attention of the Court until it filed the motion at bar on the eve of
trial. The undersigned understands that Defendants continually
assured Plaintiff that they would provide the discovery, and that the
duty was on Defendants to follow the Court’s Order and the federal
rules and produce the discovery ordered. Plaintiff, however, did not
bring this issue to the Court’s attention until very late in the
ballgame, and should have done so much sooner that when it did. …
For these reasons, the undersigned finds that, although
Defendants’ actions were reckless and in bad faith, to sanction them
with a default judgment would be a stretch too far and would provide
Plaintiff an underserved windfall.
… In making this
recommendation, the undersigned is cognizant that he must consider
whether lesser sanctions are sufficient, and is aware that Defendants
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take the position that they essentially have no issue with the sanction
recommended today. Defendants assert that they will have to declare
bankruptcy regardless of the damages amount. … Nonetheless, the
sanction of default is too disproportionate to the circumstances
surrounding the offense, and there is no other suitable sanction.
Regardless, no matter what Defendants may say, the undersigned has
no doubt the sanction he recommends today is not a desirable
outcome for them. Preventing Defendants from opposing Plaintiff’s
damages evidence is the most appropriate sanction given the
circumstances.
(Doc. 222, ps. 11-17).
Both parties filed objections to the Report. 3
On February 24, 2017,
defendants filed a mere 4 page (including signature block) objections/response to
magistrate’s recommendations regarding sanctions and plaintiff’s motion for
judgement without trial (Doc. 227). 4 In this pleading defendants state: “[i]t is the
possible scope of that recommendation that concerns Defendants.
Defendants
should be entitled to at least cross examine Plaintiff’s damage witnesses.” Further,
defendants object “[d]efendants SISS and IEI requests that any sanction be
limited to the barring of the active presentation of any damage evidence other than
tax returns and dealer costs contained within the QuickBooks files examined by
Plaintiff’s expert and Defendants should be able to cross examine plaintiff’s
damage witnesses as in any other case. Defendant BIC objects to any sanction
being entered against him at all.”
That same day, 4SEMO.com filed a partial
objection to February 10, 2017 Report and Recommendation (objecting solely to
particular sanction recommended) (Doc. 228).
3
Specifically, 4SEMO.com takes
The Court notes that neither party objected to the Reports recitation of the facts of the history of
the case. Thus, the Court finds it unnecessary to recite them in this Memorandum and Order.
4
Defendants’ objections/response does not contain a single case citation, rule of law or statute in
support.
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issue with the severity of the sanction recommended stating that the
recommended sanction will not properly implement the purpose of the sanctions,
because defendants have repeatedly acknowledged that they simply do not care
about the damage amount in issue. 4SEMO.com proposes that if the Court enters
judgment in favor of it on its direct trademark infringement count, it will
voluntarily dismiss its claims for contributory/vicarious infringement and its
contract claims without prejudice, to allow the Court’s ruling to be final and to
avoid the need for trial on this action.
“Federal Rule of Civil Procedure 37(b)(2)(A) grants district courts the
power to impose appropriate sanctions for violations of discovery orders.” Sik
Gaek Inc. v. Harris, 789 F.3d 797, 800 (7th Cir. 2015); Melendez v. Illinois Bell
Telephone Co., 79 F.3d 661, 670 (7th Cir. 1996), (“Rule 37(b) sanctions provide
the district court with an effective means of ensuring the litigants will timely
comply with discovery orders.”). Rule 37(b)(2)(A) states:
If a party ... fails to obey an order to provide or permit discovery ...
the court where the action is pending may issue further just orders.
They may include the following:
(i) 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;
(ii) prohibiting the disobedient party from supporting or opposing
designated claims or defenses, or from introducing designated
matters in evidence;
(iii) striking pleadings in whole or in part;
(iv) staying further proceedings until the order is obeyed;
(v) dismissing the action or proceeding in whole or in part;
(vi) rendering a default judgment against the disobedient party; or
(vii) treating as contempt of court the failure to obey any order except
an order to submit to a physical or mental examination.
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Fed.R.Civ.P. 37(b)(2)(A).
An award of sanctions under Rule 37 for failure to cooperate in discovery
or appear at a deposition requires a finding that the offending party's actions
“displayed willfulness, bad faith, or fault.” Collins v. Illinois, 554 F.3d 693, 696
(7th Cir. 2009). “‘Bad faith’ ... is characterized by conduct which is either
intentional or in reckless disregard of a party's obligations to comply with a court
order. ‘Fault,’ by contrast, doesn't speak to the noncomplying party's disposition
at all, but rather only describes the reasonableness of the conduct—or lack
thereof—which eventually culminated in the violation.” Marrocco v. General
Motors Corp., 966 F.2d 220, 224 (7th Cir. 1992).
Rule
judgment.
37 sanctions
may
include
dismissal
See Fed.R.Civ.P. 37(b)(2)(A); Fed.R.Civ.P.
of
a
case
37(d)(3);
and
default
Secrease
v.
Western & Southern Life Ins. Co., 800 F.3d 397, 400 (7th Cir. 2015).
(Rule 37(b)(2)(A) (v) and (vi) authorizes both the dismissal of the action and the
entry of a default judgment against the offending plaintiff or defendant; and the
court's inherent power to sanction misconduct is likewise symmetrical.) See also,
e.g., Philips Medical Systems Int'l, B.V. v. Bruetman, 982 F.2d 211, 214 (7th Cir.
1992) (affirming default judgment as sanction for defendant's bad faith failure to
comply with discovery order and deception of court); Profile Gear Corp. v.
Foundry Allied Industries, Inc., 937 F.2d 351, 353–54 (7th Cir. 1991) (same); Hal
Commodity Cycles Mgmt. Co. v. Kirsh, 825 F.2d 1136, 1138–39 (7th Cir.
1987) (affirming default judgment against defendant for willful delays and
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dishonesty). Before issuing a sanction in a case under Rule 37(b), “a court must
have clear and convincing evidence of willfulness, bad faith or fault.” Maynard v.
Nygren, 332 F.3d 462, 468 (7th Cir.2003). “Factors relevant to the decision to
dismiss include the … pattern of and personal responsibility for violating orders,
the prejudice to others from that noncompliance, the possible efficacy of lesser
sanctions, and any demonstrated merit to suit.” Pendell v. City of Peoria, 799
F.3d 916, 917 (7th Cir. 2015)(citations omitted).
First, defendants request that any sanction be limited to barring of the
active presentation of any damage of evidence other than tax returns and dealer
costs contained within the QuickBooks files examined by Plaintiff’s expert and
that Defendants should be entitled to cross examine plaintiff’s damages
witnesses. 5 The Court rejects this argument as the Court finds the recommended
sanction is proper under the scope of Rule 37(b)(2). While the Court is mindful
that the sanction recommended is extreme; it is not as extreme as the one
proposed by Plaintiff. The Court agrees with the Report that there is no other
suitable sanction.
Moreover, the sanction of prohibiting defendants from
opposing plaintiff’s evidence relating to its damages for its infringement claims
serves to punish defendants for their inappropriate conduct and serves to deter
other parties from similar conduct in the future.
5
As indicated previously, the Report states: “Defendants take the position that they essentially
have no issue with the sanction recommended today.” (Doc. 222 p. 16). Likewise, defendants’
objection states: “It is the possible scope of that recommendation that concerns Defendants. … If
the recommendation is to bar Defendant SISS from introducing any evidence of its own, such as
evidence the Magistrate thought should have been produced, Defendant has no objection to that.
In fact, Defendant has no evidence which is why it wasn’t produced.” (Doc. 227, p. 1).
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Second, defendants contend that the sanction should not be meted against
Bob Ingoldsby Construction as the Report does not give any analysis as to why
any sanction would be appropriate against him and there were no specific
allegations of wrong doing on his part. The Court also rejects this argument. The
defendants in this case appear to be one and the same. SISS is a corporation that
manufactures, markets and sells storm shelters. Ingoldsby Excavating Inc. is the
name Bob Ingoldsby and SISS use when selling and installing the shelters at retail
in the area surrounding their factory.
Bob Ingoldsby, SISS and Ingoldsby
Excavating all operate out of the same location, using the same phone numbers,
same quick books software and computers and use the same personnel. They are
all represented in this action by the same lawyers. Moreover, the record is clear
that sanctions should apply to all of the named defendants. In fact, the Report
mentions Robert Ingoldsby and finds that his testimony is not credible, selfserving and too convenient and coincidental. As stated supra, the Report finds:
“[t]he undersigned does not find credible Robert Ingoldsby’s
testimony regarding the number of written purchase orders SISS
receives. His self-serving testimony that 70% of dealer orders were
placed over the phone is belied by the discussion at the October 2014
conference, as well as, the letters from Defendants’ counsel
representing that ‘orders’ were ‘discarded’ and that ‘SISS discards all
source documents …. Mr. Ingoldsby’s testimony … is simply too
convenient and coincidental to be believable, not to mention is
contradicted by the October 2014 conference and related
correspondence.”
(Doc. 222, p. 12).
Lastly, as to 4SEMO.com’s partial objection to the Report, 4SEMO.com
argues that Magistrate Judge Williams erred when he refused to admit into
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evidence and consider the history of defendants’ discovery violations prior to the
October 2014 order; that Magistrate Judge Williams erred because the Report
does not give proper consideration to the harm defendants’ discovery violations
have done to 4SEMO.com’s liability case and to the integrity of the Court, the
rules of discovery and the federal judicial system and that Judge Williams erred
because the recommended sanction fails of its purpose and it would not be
sufficient as defendants have acted in bad faith throughout the case. The Court
does not agree with plaintiff.
After reviewing the record, the Court concludes, as Magistrate Judge
Williams’ concluded, that the motion for judgment without a trial as sanction for
spoliation of evidence should be granted in part and denied in part. The Court
finds that Magistrate Williams’ February 10, 2017 Report is well written and
clearly sets out the reasons for his recommendation of issuing a lesser sanction.
The Court agrees with Judge Williams Report and finds not one reason to disturb
his findings. Further, the Court finds that the lesser sanction recommended by
Magistrate Judge Williams is on target and reasonable.
Moreover, the Court
concludes that defendants’ conduct was limited to the one aspect of the case and
that 4SEMO.com was not exactly diligent in coming to the Court for relief for the
defendants’ failure to comply with discovery as 4SEMO.com waited until almost
the eve of trial. The Court finds that defendants’ conduct is not excusable in the
least and it certainly warrants sanctions but a $13.6 sanction resulting from a
default judgment is too harsh in light of the circumstances of this case.
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The
sanction recommended is measured; it is not simply a slap on the wrist; it
certainly does not condone defendants’ action and it sends a clear message to
defendants and to other litigants that this type of conduct will not be tolerated.
Accordingly, the Court ADOPTS the Report in its entirety (Doc. 222). The
Court GRANTS in part and DENIES in part the motion for judgment without a
trial as sanction for spoliation of evidence and failure to comply with Court
Orders and discovery obligations (Doc. 192).
The Court SANCTIONS all
defendants by prohibiting them from opposing plaintiff’s evidence relating to
damages for infringement.
IT IS SO ORDERED.
Signed this 6th day of March, 2017.
Digitally signed by
Judge David R.
Herndon
Date: 2017.03.06
11:47:04 -06'00'
United States District Court
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