AngioDynamics, Inc. v. Biolitec AG et al
Filing
395
Judge Michael A. Ponsor: MEMORANDUM AND ORDER entered. As follows: For the reasons stated in the attached memo and order, Plaintiffs Motion for Sanctions Pursuant to Fed. R. Civ. P. 37, (Dkt. No. 327 ), and Plaintiffs Motion for Sanctions for Failur e of Managing Agents Brian Foley, Art Henneberger, and Bolesh Skutnik to Appear for Depositions, (Dkt. No. 350 ), are hereby ALLOWED. Plaintiffs Motion for Default Judgment Based on the Courts August 30, 2013, Memorandum and Order and Defendants Oc tober 1, 2013 Status Report, (Dkt. No. 359 ), is DENIED as moot. The clerk shall enter judgment for Plaintiff on the issue of liability. Plaintiff shall file a memorandum setting forth its position on the issue of damages no later than January 31, 2 014. Defendants response will be filed no later than February 17, 2014. The clerk will schedule a non-evidentiary hearing on the issue of damages for a date prior to March 1, 2014. It is So Ordered. See the attached memo and order for complete details. (Lindsay, Maurice)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
ANGIODYNAMICS, INC.
Plaintiff
v.
BIOLITEC AG,
WOLFGANG NEUBERGER,
BIOLITEC, INC., and
BIOMED TECHNOLOGY HOLDINGS,
LTD.
Defendants
)
)
)
)
) C.A. NO. 09-cv-30181-MAP
)
)
)
)
)
)
)
MEMORANDUM AND ORDER REGARDING
PLAINTIFF’S MOTIONS FOR SANCTIONS
(Dkts. No. 327, 350 & 359)
January 14, 2014
PONSOR, U.S.D.J.
I.
INTRODUCTION
Plaintiff has filed two motions, each pursuant to Fed.
R. Civ. P. 37, seeking sanctions and entry of default
judgment based on Defendants’ continuing failure to comply
with their discovery obligations.
(Dkt. Nos. 327 & 350.)
Plaintiff has also filed a motion for default judgment
arising from Defendants’ refusal to adhere to this court’s
preliminary injunction and order of contempt.
359.)
(Dkt. No.
Because Defendants’ misconduct during the course of
discovery has traveled well beyond the boundary of what is
even remotely acceptable in the conduct of litigation, the
court will allow the two Rule 37 motions and enter default
judgment against Defendants on liability.
While the
decision on Plaintiff’s discovery-related motions obviates
the need to rule on its contempt motion, Defendants’
obdurate defiance of this court’s preliminary injunction
order bolsters the conclusion that Defendants have conducted
themselves in bad faith.1
II.
A.
FACTS
The Litigation.
The facts underlying this litigation have been fully
detailed on previous occasions, and only a summary
recitation is necessary here.
AngioDynamics, Inc. v.
Biolitec AG, 910 F. Supp. 2d 346 (D. Mass. 2012);
AngioDynamics, Inc. v. Biolitec, Inc., 2011 WL 3157312, at
1
Because the court’s rulings dispose of this case
substantively, Defendants’ Motion for Summary Judgment,
(Dkt. No. 366), and Plaintiff’s Cross-Motion for Summary
Judgment, (Dkt. No. 372) will be denied as moot.
Defendants’ Emergency Motion for Extension of Time to
September 20, 2013, to Provide Defendants’ Expert Report,
(Dkt. No. 335), and Defendant’s’ Motion to Amend Answer to
Amended Complaint, (Dkt. No. 338), will also be denied.
-2-
*1-2 (D. Mass. July 25, 2011).
Plaintiff has brought suit
against Defendants Biolitec AG (“BAG”), Wolfgang Neuberger,
Biolitec, Inc. (“BI”), and Biomed Technology Holdings, Ltd.
Defendant Neuberger is the Chief Executive Officer (“CEO”)
of BAG and BI, and the majority shareholder of each company.
The present suit is based on a supply and distribution
agreement between Defendant BI, a subsidiary of BAG, and
Plaintiff.
Defendant BI agreed to defend and indemnify
Plaintiff against all third-party patent infringement claims
arising out of the marketing and distribution of Defendants’
products.
Despite this agreement, after Plaintiff found
itself embroiled in patent infringement litigation with a
third party, Defendant BI refused to indemnify Plaintiff,
and Plaintiff ended up having to pay substantial damages out
of its own pocket.
Litigation between Plaintiff and BI
thereafter ensued, with Plaintiff claiming that BI had
reneged on its prior agreement, and a court in the Northern
District of New York ultimately found Defendant BI liable to
Plaintiff for breach of contract in the amount of
$16,463,846.94 plus pre-judgment interest.
In the suit before this court, Plaintiff alleges that
-3-
Defendant BAG deliberately diverted virtually all the assets
out of its subsidiary BI to avoid payment of the New York
judgment, essentially looting BI to render it judgmentproof.
Among other allegations, Plaintiff also accuses
Defendant BAG and Neuberger of tortious interference with a
contract.
B.
The Preliminary Injunction and Defendants’ Contempt.
BAG is currently subject to a preliminary injunction,
issued by this court in 2012.
The facts underlying the
issuance of the injunction and Defendants’ ensuing
deliberate defiance of the injunction have been described in
detail in previous memoranda.
AngioDynamics, Inc. v.
Bioletec AG, 946 F. Supp 2d 205 (D. Mass. 2013).
In
summary, Plaintiff learned in the summer of 2012 that
Defendant BAG, a German corporation, intended to effectuate
a merger with an Austrian subsidiary.
This merger, as
Plaintiff alleged and the court ultimately found, would
render virtually impossible any effort by Plaintiff to
enforce any judgment against BAG in this court based upon
its systematic looting of its subsidiary BI.
The court
found, based on the parties’ submissions, that Plaintiff
-4-
would likely be able to enforce this court’s judgment in
Germany, whereas pursuit of BAG in Austria would require the
filing of an entirely new lawsuit.
In other words, the
downstream merger of BAG with its Austrian subsidiary would
render the protracted and very expensive litigation before
this court meaningless.
Everything would have to be
repeated in Austria ab initio.2
Convinced by Plaintiff of the bad faith underlying the
proposed merger, and finding that Plaintiff had demonstrated
both a likelihood of success on the merits and irreparable
harm, this court explicitly enjoined Defendants from
proceeding with the merger while this litigation was
pending.
Id.; (Dkt. No. 141).
Defendants appealed, and the
First Circuit affirmed this court’s decision to issue the
injunction.
AngioDynamics, Inc. v. Biolitec AG, 711 F.3d
248 (1st Cir. 2013).
On March 15, 2013, while the appeal of this court’s
preliminary injunction was pending before the First Circuit,
2
An affidavit by a former business associate of
Neuberger, submitted by Plaintiff in support of its Motion
for Preliminary Injunction, quoted Neuberger as informing
him that this was precisely the goal of the merger. (Dkt.
No. 110.)
-5-
Defendants -- in direct, admitted defiance of the injunction
-- went forward with the merger anyway.
200.)
(Dkt. Nos. 199 &
Plaintiff responded with a Motion for Contempt, and
Defendant Neuberger was ordered to appear in person at the
hearing on the motion to show cause why he should not be
held in contempt.
(Dkt. No. 242.)
Neuberger failed to
attend, and Defendants were held in civil contempt.
(Dkt.
No. 247.)
Neuberger’s explanation for his decision not to appear
was that, if he had come to court, the undersigned might
have imposed sanctions on him for his contumacious behavior.
According to his lawyer, Neuberger did not want, and should
not be required, to risk that.
Counsel announced that
Neuberger would be willing to appear at the contempt hearing
by telephone from Germany, to be sure that if the court
ultimately decided against him he would be safe from any
consequences.
Plaintiff’s counsel objected, pointing out
(among other things) that this arrangement would interfere
with his ability to cross-examine Neuberger, and the court
declined to afford Neuberger this privilege.
Following the hearing, the court rejected Defendants’
-6-
argument that they had somehow complied with the “spirit” of
the court’s injunction, while admittedly disregarding its
explicit terms.
The court also rejected the claim,
ambiguously presented, that Plaintiff was somehow no worse
off following the merger than before and that, since
Plaintiff was not harmed, it would be improper for the court
to enforce the preliminary injunction through any contempt
sanction.
Finally, the court was also not persuaded by
Defendants’ contention, later retracted, that once the
merger was completed, BAG was legally and logistically
unable to revoke it.
In the end, Defendants conceded that
it would be possible to take action that would effectively
place BAG in the position it was before the merger, though
the process would be inconvenient and would require some
months.
This Defendants refused to do.
(Dkt. No. 248.)
To coerce compliance with the preliminary injunction,
the court ordered Defendants to pay a series of escalating
fines until they effectively restored the status quo that
existed prior to the merger.
An arrest warrant was also
issued for Defendant Neuberger based on the finding of civil
contempt, and the court indicated that it would be referring
-7-
the matter to the United States Attorney’s Office for
criminal contempt prosecution.
In response, Defendants moved for reconsideration,
(Dkt. No. 269), filed a motion to disqualify the
undersigned, (Dkt. No. 274), and requested relief from the
preliminary injunction, (Dkt. No. 277).
denied.3
(Dkt. No. 341.)
Those motions were
Defendants have appealed the
initial contempt order and the court’s denial of their
subsequent motions.
The appeal of those decisions is still
pending.4
On May 24, 2013, Plaintiff filed a Motion for Default
3
Defendants then filed a Petition for Writ of Mandamus
with the First Circuit seeking an order directing the
undersigned to disqualify himself from further involvement
in this case. (Dkt. No. 356.) On November 18, 2013, the
First Circuit summarily denied Defendants’ Petition, noting
that “[t]he basis for the recusal request is that the judge
expressed entirely understandable dismay that petitioners
violated a preliminary injunction . . . and then attempted
to justify their behavior by arguing, in part, that their
actions did not violate the underlying purpose of the
injunction.” (Dkt. No. 380). The Petition, the First
Circuit concluded, was “entirely without merit.” (Id.)
4
At this time, no formal request has been made with
the U.S. Attorney’s Office to move forward with an
indictment for criminal contempt. If Defendants’ appeal is
unsuccessful, the court will promptly call for such action.
-8-
Judgment based on Defendants’ continued failure to comply
with the contempt order.
(Dkt. No. 279.)
On August 30,
2013, that motion was denied, but Defendants were ordered to
update the court on the steps they were taking to comply
with the contempt decision.
(Dkt. No. 342.)
In that
update, Defendants informed the court that they would not
produce Defendant Neuberger, that they would not pay the
assessed fines, and that they had no intention of taking any
action to undo the effects of the BAG merger.
Counsel
repeated the argument, rejected by this court, that since
(in Defendants’ view) the merger had caused no substantive
harm to Plaintiff, it was improper for the court to impose
contempt sanctions even though Defendants had, admittedly,
violated the terms of the injunction.
(Dkt. No. 355.)
In response to Defendants’ submission, Plaintiff filed
a renewed motion for a default judgment, which is currently
pending before this court.
(Dkt. No. 359.)
Since, for the
reasons set forth below, the court will be ordering entry of
judgment for Plaintiff based on Defendants’ egregious
misconduct during discovery, this motion will be denied as
moot.
-9-
C.
Discovery.
While pursuing injunctive relief, Plaintiff has been
attempting to conduct discovery to prepare for trial.
Plaintiff has been thwarted at virtually every turn by
Defendants’ outrageous misconduct.
Specifically, Defendants
have refused to produce Defendant Neuberger and other key
witnesses for their depositions, and they have failed to
produce documents available to them that are critical to
Plaintiff’s case.
1.
Neuberger’s Deposition.
On July 19, 2012, Plaintiff served Defendant Neuberger
with a notice of deposition scheduled to take place on
October 18, 2012, in Springfield, Massachusetts.
107.)
(Dkt. No.
Defendant Neuberger, in response, indicated that he
would not attend.
As a result, on October 10, 2012,
Plaintiff filed a Motion to Compel.
(Dkt. No. 107.)
While
that motion was pending, Defendants changed their position,
Plaintiff withdrew its motion, and the first day of the
deposition occurred on January 11, 2013, in Springfield.
However, at the time of Neuberger’s deposition,
Defendants had failed to produce a year’s worth of Board of
-10-
Directors’ Minutes.
This dereliction was in direct
violation of a June 28, 2012, order from the Magistrate
Judge requiring them to do so.
As of the date of
Neuberger’s deposition, Defendants had also failed to
produce minutes from a crucial August 9, 2011, supervisory
board meeting, as well as internal corporate e-mails that
had been requested.5
Because Plaintiff’s counsel did not
have these necessary documents, it was obliged to postpone
the completion of Neuberger’s deposition pending their
production.
The parties jointly filed two notices with the
court acknowledging the need to continue the deposition to
obtain the required discovery.
(Dkt. Nos. 186 & 263.)
On June 27, 2013, Plaintiff sent Defendant Neuberger a
notice to continue his deposition for July 12, 2013.
However, on July 5, 2013, Defendants informed Plaintiff that
they intended to file, and then did file, a Motion for a
Protective Order.
Defendants argued that Neuberger risked
5
Although Defendants have produced some of these
documents, they have still not done so completely and thus
remain in violation of the June 28, 2012, court order.
Several of the minutes produced are heavily redacted, and no
privilege log respecting the redactions has been filed.
Defendants have also failed to produce any tax returns or
financial statements dated after June 30, 2011.
-11-
arrest if he came to the United States for the deposition
because of the contempt order issued on April 11, 2013.
On
July 6, 2013, Magistrate Judge Kenneth P. Neiman denied
Defendants’ Motion for a Protective Order.
(Dkt. No. 324.)
Judge Neiman based his decision on four grounds: (1) the
motion was not timely; (2) granting the motion would
unfairly prejudice Plaintiff’s efforts to prepare its case;
(3) there was no less burdensome manner for Plaintiff to
pursue this continued deposition; and (4) the court would
not protect Defendant from his own contemptuous behavior.
Following the court order, defense counsel informed
Plaintiff that Neuberger was unavailable for the July 12
deposition.
In their ensuing communications, Defendants
confirmed that they would not produce Neuberger, despite
Judge Neiman’s denial of their motion for a protective
order, until the contempt issue had been resolved and
Neuberger could come to the United States without risking
personal consequences for his acts of contempt.
According
to Defendants, Judge Neiman’s view notwithstanding, the
protective order they sought should have been issued.
Significantly, although the rules permit a party to seek
-12-
review by a district court judge of a magistrate judge’s
order, Fed. R. Civ. P. 72(a), Defendants did not do so.
They simply disregarded it.
On August 12, 2013, a month after the deposition should
have occurred, Defendants filed another Motion for a
Protective Order seeking permission to hold the deposition
via video-link.
(Dkt. No. 331.)
Judge Neiman again denied
this renewed motion, (Dkt. No. 334), incorporated
Plaintiff’s opposition, (Dkt. No. 332), into its decision,
and cited his earlier reasoning.
Neuberger continued to
take the position, consistently rejected by the court, that
given the potential contempt sanctions faced by him, it was
improper for the court to require him to participate in
discovery in person.
As a result of this conduct, Plaintiff filed its first
Motion for Sanctions under Fed. R. Civ. P. 37. (Dkt. No.
327.)
Although Defendants thereafter moved for Summary
Judgment, (Dkt. No. 366), they have still refused to
cooperate, placing Plaintiff in the impossible position of
having to respond to Defendants’ dispositive motion without
the opportunity to fully depose Neuberger, possibly the most
-13-
important witness in the case.
2.
Managing Agents’ Depositions.
On July 19, 2012, Plaintiff served notices of
deposition on Bolesh Skutnik, Brian Foley, and Art
Henneberger.
The three sat on the Board of Directors for
all U.S. Biolitec group entities.
Defendants have described
Foley and Henneberger as “key accounting staff and
managers.” (Dkt. No. 152, at 12.) Skutnik is the U.S.
General Counsel for Biolitec Group.
All three witnesses attended the first day of their
depositions on December 11, 2012, December 19, 2012, and
January 17, 2013, respectively.
Because critical documents
had not been produced, Plaintiff’s counsel suspended each
deposition.
In the joint filings previously referenced, the
parties acknowledged the need for these continuances in
light of Defendants’ failure to provide discovery.
In June 2013, Plaintiff asked Defendants for dates on
which they would be amenable to continue the depositions of
Foley and Henneberger.
One month later, Plaintiff
reiterated its request but with respect to all three
witnesses.
Based on Defendants’ reply, (Dkt. No. 352, Ex.
-14-
3), Plaintiff proposed the last week of August for the
depositions.
As August approached, Defendants suggested that the
depositions be moved to early September.
5.)
(Dkt. No. 352, Ex.
At the end of August, though, Defendants changed course
and simply refused to proceed with these depositions at all.
Relying on the discovery deadline of July 12, 2013,
Defendants declined to produce any of the three witnesses
for their continued depositions.6
(Dkt. No. 352, Ex. 7.)
In other words, after proposing the September date
themselves as a convenience for all parties, and knowing of
the July 12 cut-off date, Defendants recanted at the last
minute and refused to proceed.
In response, Plaintiff filed
another Motion for Sanctions pursuant to Fed. R. Civ. P. 37.
(Dkt. No. 350.)
III.
DISCUSSION
6
Although Judge Neiman declined to issue a formal
extension of the discovery deadline, he did inform the
parties that they were free to continue discovery upon
mutual agreement. (Dkt. No. 306.) Defendants have
attempted to snooker Plaintiff by negotiating past the
deadline, agreeing to an informal extension, and then
retracting their agreement and citing the deadline to avoid
producing essential witnesses.
-15-
While it is not common for a court to impose a default
judgment as a remedy for discovery abuse, the sanction is
supported by well-founded authority and is fully justified
in this case, especially when Defendants’ discovery
misconduct is viewed in the landscape of its overall
behavior during this litigation.
The analysis below will
begin with an overview of the applicable law and a summary
of the factors the court must weigh in determining the
appropriate sanction for discovery abuse.
It will then
proceed to apply these factors to Defendants’ conduct in
refusing to produce Neuberger for deposition in person and
in disingenuously ducking their agreement to produce the
managing agents.
A.
Discovery Sanctions.
Fed. R. Civ. P. 37(d)(1)(A) provides that a court may
order sanctions where “a party or party’s officer, director,
or managing agent . . . fails, after being served with
proper notice, to appear for that person’s deposition.”
A
party is not excused from appearing “on the ground that the
discovery sought was objectionable, unless the party failing
to act has a pending motion for a protective order.”
-16-
Rule
37(d)(2).
Sanctions for failing to comply with this rule
may include entry of a default judgment against the
violating party.
Rule 37(b)(2)(A)(I)-(vi) & (d)(3).
This
sanction “must be available to the district court in
appropriate cases, not merely to penalize those whose
conduct may be deemed to warrant such a sanction, but to
deter those who might be tempted to such conduct in the
absence of such a deterrent.”
Nat’l Hockey League v. Metro.
Hockey Club, Inc., 427 U.S. 639, 643 (1976).
The First Circuit has enumerated a number of factors to
be weighed to determine whether the twin goals, punishment
and deterrence, justify a particular sanction in a specific
factual context.
Vallejo v. Santini-Padilla, 607 F.3d 1, 8
(1st Cir. 2010).
These factors help distinguish good faith
attempts to comply with discovery obligations from
deliberate, bad faith refusals to do so.
See Benitez-Garcia
v. Gonzalez-Vega, 468 F.3d 1, 5 (1st Cir. 2006).
The
factors serve as a guide and need not be applied
mechanically.
Id.
The Court of Appeals has directed trial judges to
consider: (1) the severity of the violation; (2) the
-17-
legitimacy of the party’s excuse for failing to comply; (3)
whether the violations have been repeated; (4) the
deliberateness of the misconduct; (5) any mitigating
excuses; (6) prejudice to the other side and to the
operations of the court; and (7) the adequacy of lesser
sanctions.
Vallejo, 607 F.3d at 8.
Procedurally, the court
should consider (1) whether the offending party was given
sufficient notice, and (2) whether the offending party has
been given an opportunity to explain its noncompliance or
argue for a lesser penalty.
Id.
Analysis of each of these factors confirms that default
judgment is the proper sanction here.
Obviously, the
procedural prerequisites have been satisfied.
Plaintiff has
filed a total of four motions seeking default judgment, two
on the issue of discovery.
Defendants have taken advantage
of their opportunity to respond at length to all the
arguments offered in these motions.
They have been on
notice that default judgment was a remedy sought by
Plaintiff since its first motion was filed in May 2013.
The
court also explicitly warned Defendants that default
judgment was a potential remedy in light on their refusal to
-18-
comply with court orders.
(Dkt. No. 342.)
In sum, no
argument can be made that Defendants have been caught off
guard or deprived of an opportunity to respond fully.
They
have suffered no procedural prejudice.
The substantive factors, though they require more
expanded discussion, offer no less compelling support for
the sanction of default judgment here, as a step-by-step
analysis fully demonstrates.
1.
The Failure to Produce Defendant Neuberger and
Default Judgment.
Defendants’ primary argument is that Neuberger cannot
attend his deposition given the outstanding warrant for his
arrest based on the contempt sanction issued against him for
proceeding with the Austrian merger in defiance of the
court’s preliminary injunction.
They argue, in essence,
that Neuberger is relieved of any obligation to attend his
deposition since the Magistrate Judge issued an erroneous
order, never appealed, that denied his Motion for a
Protective Order.
This argument is typical of the looking-glass logic
employed by Defendants for more than a year now.
-19-
First, the
contention is based entirely on the happenstance that
Neuberger is -- for the moment, but probably not forever -outside the physical grasp of the court and therefore in a
position to defy its orders.
If Neuberger were a citizen of
the United States, living within the boundaries of this
country, he would have long ago been taken into custody and
held until he made reasonable efforts to comply with the
court’s injunction, or until this court reconsidered, or a
higher court reversed, the order holding him in contempt.
It is only Neuberger’s own misconduct in defying the
injunction and then refusing to appear at the hearing on
Plaintiff’s motion for contempt -- out of fear that he might
have to face the consequences of his own gross misconduct -that has placed him in the awkward position he now finds
himself.
It compounds absurdity for him to press his position
one step further and now argue that based on his defiance of
the injunction and his refusal to face the resulting motion
for contempt, he is now absolved from complying with
discovery, because compliance would expose him to the
consequences of his own contemptuous behavior.
-20-
The speciousness of Defendants’ argument is further
illuminated by a review of the factors identified by the
First Circuit that govern this situation.
a.
Legitimacy of Excuse and Deliberateness.
The first two factors, the legitimacy of Defendants’
excuse for, and the deliberateness of their actions in,
frustrating discovery can be considered together.
A litigant’s good faith attempt to comply with a
discovery rule is generally a legitimate excuse for an
inadvertent or unintentional violation.
For example, in
Malot v. Dorado Beach Cottages Assoc., 478 F.3d 40 (1st Cir.
2007), the plaintiffs consistently and promptly advised the
court and the defendants that the dates of scheduled
depositions were problematic.
Although the plaintiffs kept
requesting extensions, and then one plaintiff failed to be
deposed within the discovery deadline, they were not actively
attempting to ignore any court order.
Id. at 44.
They
genuinely attempted to comply with their discovery
obligations and, in pointing this out, offered a legitimate
excuse to avoid a default judgment.
Id. at 44-45.
Certainly, there can be instances where objections to
-21-
discovery serve as a legitimate excuse for non-compliance.
However, the rule is explicit: the party must have a pending
motion for a protective order to invoke that justification.
Fed. R. Civ. P. 37(d)(2).
This underscores the principle
that a party acting in good faith, attempting to work within
the rules, will not face a harsh sanction.
Conversely, where the defendant’s wrongful intentions
are clear from the record as a whole, no credence is given to
their purported excuse.
In Global NAPs, Inc. v. Verizon New
England, Inc., 603 F.3d 71 (1st Cir. 2010), the defendants
were sanctioned with default judgment for willfully
concealing and destroying evidence.
The defendants claimed
that they were “guilty only of poor record keeping and
accidents,” despite overwhelming evidence, including expert
testimony detailing the destruction of electronic documents,
demonstrating otherwise.
Id. at 94.
The basic rule is
obvious: a party cannot avoid a Rule 37 sanction where the
excuse is contradicted by a record evidencing bad faith.
More pertinent here, a general fear of criminal
prosecution, particularly after a court has rejected that as
a basis to abstain from discovery, is not sufficient to free
-22-
a party from her obligations.
Particularly telling is Linde
v. Arab Bank, PLC, 269 F.R.D. 186 (E.D.N.Y. 2010), where the
Eastern District of New York sanctioned a defendant for
withholding relevant materials.
There, sanctions included:
the imposition of a number of adverse inferences against
Defendant, the preclusion of certain evidence, and the
allowance of a number of the plaintiff’s Requests for
Admissions.
This ruling issued despite the defendant’s claim
that it feared criminal prosecution under bank secrecy laws
if it turned over the documents.
Id. at 196.
The court
noted that “[t]his court has already rejected defendant’s
rationale for withholding the documents,” and therefore
“significant sanctions are both ‘just’ and ‘commensurate’
with defendant’s non-compliance.”
Id. at 197 (citations
omitted).
In this case, counsel for Neuberger readily admits that
Defendants are not producing Neuberger because they believe
the court should have issued a protective order absolving him
from any obligation to appear in person for his deposition.
In essence, Defendants contend that the court’s failure to
issue this protective order justifies Neuberger in engaging
-23-
in self help by declining to attend.
Defendants concede that
their actions have been knowing and deliberate.
Given this,
the first two factors identified by the First Circuit, the
legitimacy of the excuse and the degree of deliberateness,
weigh heavily against Defendants.
b.
Severity of Actions and Repetition of Behavior.
The next factors to consider are the severity and
consistency of the violations.
Only conduct that is either
so egregious on its face or representative of a pattern of
similar behavior deserves default judgment.
See Crossman v.
Raytheon Long Term Disability Plan, 316 F.3d 36, 39 (1st Cir.
2002)(“[T]he court must consider the nature and number of
violations on the part of counsel prior to taking such
action.”)(citations omitted).
Sometimes courts face misconduct that, while
frustrating, is not particularly severe.
That was the case
in Companion Health Services, Inc. v. Kurtz, 675 F.3d 75 (1st
Cir. 2012), where the plaintiff moved for sanctions against
litigants for failing to meet a single discovery cut-off
date.
The litigants were unrepresented at the time of that
deadline.
Id. at 86.
While the court suggested that there
-24-
were other facts in the record that could have justified a
default judgment, relying solely on that one instance was not
enough.
Id. at 84-85.
“This would be a different case if
. . . the District Court had supportably found that they
themselves had engaged in a deliberate pattern of
stonewalling with the aim of frustrating effective discovery
and the progress of the case.”
Id. at 85.
On the other end of the spectrum is a case like Remexcel
Managerial Consultants, Inc. v. Arlequin, 583 F.3d 45 (1st
Cir. 2009), where the defendants refused to produce certain
documents.
After the court ordered the production, the
defendants still resisted.
Id. at 49-50.
Over time, the
defendants violated a number of court orders regarding
discovery, with the result that default judgment was
eventually entered as a sanction.
Id.
“The court’s choice
of sanctions as well as the sternness of its warnings
gradually escalated over the course of the litigation in
response to defendants’ persistently troublesome conduct.”
Id. at 52.
In the end, the defendants’ consistent refusal to
abide by the court’s rulings warranted the heavy sanction.
See also Int’l Bhd. of Elec. Workers, Local Union No. 545 v.
-25-
Hope Elec. Corp., 380 F.3d 1084, 1106 (8th Cir. 2004)
(entering default judgment against the defendants who refused
to produce discovery, refused to participate in negotiations
prior to arbitration, refused to participate in arbitration,
and consistently violated court orders).
Defendants’ conduct in this case lines up neatly with
Arlequin and Hope Electrical Corporation.
Defendant
Neuberger did not just refuse to attend his deposition, but
continued his obduracy even after his motion for protective
order was denied, citing a justification that is inadequate
on its face.
The warnings to Defendants, particularly by the
extraordinarily patient Magistrate Judge, have gradually
increased in response to Defendants’ persistently troublesome
conduct.
See e.g., (Dkt. 5/13/11)(“The record demonstrates
that Plaintiff has been extremely diligent in attempting to
make service in the face of what appears to be deliberate
evasiveness on the part of Defendants Biomed and
Neuberger.”); (Dkt. No. 208)(“[T]he court finds Defendants
Biolitec, Biomed Technology, and Wolfgang Neuberger’s
opposition inappropriately hyperbolic and overwrought . . .
.”); (Dkt. No. 288)(“[T]he court finds inappropriate, if not
-26-
unbecoming of an officer of the court, Defendants’ counsel’s
threat to sue Bernard should he not voluntarily testify.”);
(Dkt. No. 321)(“It was the court’s intention when granting in
part Defendants’ First Motion to Compel that any subpoenaed
documents would be limited as well to ‘claims raised by
Plaintiff in . . . the instant matter.’(See Docket Entry 289)
While that intention may not have been made crystal clear by
the court, it would have been anomalous indeed for the court
to have limited the inquiries at the depositions, as it did,
while at the same time giving Defendants free rein to go
beyond that limitation with regard to sought-after
documents.”); (Dkt. No. 334)(“[T]he court is unwilling to
accommodate Defendants’ blatant attempt to have it facilitate
Neuberger’s wish to evade the consequences of his
contemptuous behavior.”).
In sum, the record confirms the extreme severity of
Defendants’ actions and the repeated instances of their
misconduct.
c.
Prejudice to Plaintiff.
The Defendants’ misconduct during discovery has not only
been offensive in itself but has resulted in severe,
-27-
manifest, and unfair prejudice to Plaintiff.
A party’s
failure to attend his or her own deposition presents probably
the grossest example of prejudicial discovery misconduct.
See e.g., Perez v. Berhanu, 583 F. Supp. 2d 87 (D.D.C. 2008);
Unifi Export Sales, LLC v. Mekfir Int’l Co., 233 F.R.D. 443
(M.D.N.C. 2005); Coastal Mart, Inc. v. Johnson Auto Repair,
Inc., 196 F.R.D. 30 (E.D. Pa. 2000).
Here, Plaintiff’s inability to adequately depose
Neuberger undermines its capacity to present its case.
Plaintiff alleges, without significant dispute, that he
directs and controls the actions of the other Defendants.
Neuberger, in Plaintiff’s view, is responsible for
choreographing Defendants’ campaign to elude paying the New
York judgment by looting Defendant BI of its assets and then
moving BAG from Germany to Austria.
Defendants’ request to hold the deposition over videolink does not change this analysis.
In fact, Defendants have
already been told that the option is inappropriate since
(among other reasons) it would not allow Plaintiff or the
court to assess the witness’s credibility adequately.
No. 334.)
-28-
(Dkt.
Finally, the prejudice to Plaintiff is compounded when
viewed in conjunction with Defendants’ other discovery
violations.
Not only have Defendants refused to produce
additional witnesses, but they have also refused to produce
relevant documents, including un-redacted versions of two
Board of Director’s minutes, a privilege log respecting the
redactions, and BAG’s tax returns or financial statements for
the period following June 30, 2011.
Defendants’ flouting of its discovery obligations is
compounded by the pendency of Defendants’ Motion for Summary
Judgment, (Dkt. No. 366), which Plaintiff is faced with
having to oppose without the basic opportunity to fully
depose the most significant witness in the case.
It simply
cannot be argued that Defendants’ failure to produce
discovery has had anything but a devastatingly prejudicial
impact on Plaintiff.
d.
Adequacy of Lesser Remedies.
If a sanction less drastic than default will accomplish
the goals of punishment and deterrence, such a penalty is, of
course, appropriate.
Nonetheless, an initial sanction of
default judgment may still be justified where the
-29-
circumstances require it.
As the First Circuit has said, if
“the sanction fits the misconduct, a trial court is not
obliged to withhold the sanction until it has first slapped
the offender on the wrist.”
Hooper-Haas v. Ziegler Holdings,
LLC, 690 F.3d 34, 38-39 (1st Cir. 2012); citing Kurtz, 675
F.3d at 84; cf. Damiani v. R.I. Hosp., 704 F.2d 12, 15 (1st
Cir. 1983)(“There is nothing in [Rule 37(b)] that states or
suggests that the sanction of dismissal can be used only
after all the other sanctions have been considered or
tried.”).
In this case it is clear that any of the other remedies
identified in Rule 37 would fail to address the seriousness
of Defendants’ misconduct.
Defendants’ behavior has, in
fact, clearly illustrated the futility of any lesser
sanction.
The contempt sanction, for example, has merely
prompted Defendants’ to continue ignoring the court’s
injunction.
See (Dkt. No. 355.)
Staying the matter pending the deposition, pursuant to
Rule 37(b)(iv), would actually reward Defendants with an
additional delay.
They have consistently attempted to stall
this litigation through their dilatory tactics.
-30-
See (Dkt.
5/13/11); (Dkt. 11/22/11); (Dkt. 6/28/12); (Dkt. No. 195);
(Dkt. No. 196); (Dkt. No. 290); (Dkt. No. 306); (Dkt. No.
321); (Dkt. No. 324); (Dkt. No. 334).
Furthermore,
compelling Neuberger to attend his deposition would be a
wasted effort, since he has already shown his determination
to ignore similar court orders.
(Dkt. No. 242.)
Finally, evidentiary sanctions suggested in the Rule,
such as striking Neuberger’s testimony, would not adequately
sanction Defendants’ violations.
Indeed, this approach would
actually reward Neuberger’s conduct, since he would be
officially relieved of the obligation to come to this
country, something he is determined to avoid in any event.
The only sanction that adequately addresses Defendants’
refusal to produce Neuberger for deposition, and the only
sanction that would discourage similar behavior in the future
from other litigants, is entry of default judgment.
The
necessity for this sanction is further confirmed by an
examination of other discovery misconduct by Defendants.
2.
The Depositions of Key Managing Agents.
Plaintiff’s additional Motion for Sanctions under Fed.
R. Civ. P. 37 is anchored on Defendants’ failure to provide
-31-
witnesses Foley, Henneberger, and Skutnik for the
continuation of their depositions.
Defendants raise two claims in opposition to this
motion.
First, the witnesses, they say, are not “managing
agents” and thus Rule 37 does not provide a remedy.
Second,
Defendants are not required to provide these witnesses since
the discovery deadline of July 12, 2013, has passed.
As to the first argument, the three identified
individuals clearly are “managing agents.”
The parties
correctly define the term as: (1) “a person invested by the
corporation with general powers to exercise his judgment and
discretion in dealing with corporate matters”; (2) “who could
be depended upon to carry out his employer’s direction to
give testimony at the demand of a party engaged in litigation
with the employer”; and (3) “who can be expected to identify
himself with the interest of the corporation rather than with
those of the other parties.”
Reed Paper Co. v. Proctor &
Gamble Distrib. Co., 144 F.R.D. 2, 4 (D. Me. 1992) citing
Rubin v. Gen. Tire & Rubber Co., 18 F.R.D. 51, 56 (S.D.N.Y.
1955)(citation omitted).
When there is a dispute, any
“doubts about an individual’s status as a ‘managing agent,’
-32-
at the pre-trial discovery stage, are resolved in favor of
the examining party.”
In re Honda Am. Motor Co., Inc.,
Dealership Relations Litig., 168 F.R.D. 535, 540 (D. Md.
1996)(citation omitted).
Defendants offer three arguments purporting to justify
their contention that these three individuals are not
“managing agents.”
First, Witness Henneberger cannot be a
“managing agent” since he has not worked for any member of
Biolitec Group since August 9, 2013.
Second, Plaintiff’s
argument contradicts its claim that Defendant Neuberger is
singularly responsible for all of Defendants’ actions.
Finally, the three have never had power to exercise judgment
and discretion over Biolitec AG, Neuberger, or Biomed
Technology Holdings, Ltd.
While Defendants concede that they
“certainly were ‘managing agents’ of Biolitec, Inc,” they
resigned from those positions on August 12, 2013.
(Dkt. No.
357, at 5.)
Defendants’ arguments fall flat for several reasons.
First, Defendants explicitly admit that the three witnesses
were “managing agents” of Defendant BI until August 12, 2013.
The events underlying this motion, such as the initial
-33-
depositions and the agreement to continue them, occurred
before that date.
It is the witnesses’ status at the time of
the deposition that is determinative.
See U.S. v. Afram
Lines (USA), Inc., 159 F.R.D. 408, 414 (S.D.N.Y.
1994)(emphasizing the phrase “at the time of taking the
deposition” in Rule 32(a)(2)(citing Reed Paper, 144 F.R.D. at
2)).
Furthermore, Plaintiff has demonstrated that the
witnesses meet the relevant requirements to be considered
“managing agents.”
First, all three were officers and
directors of BI and have been specifically identified by
Defendants as “key accounting staff and managers throughout
the world.”
(Dkt. No. 152 at 12)
Second, the witnesses are
not only technically qualified to give testimony at BAG’s
direction, but have actually done so in this case.
(Dkt.
Nos. 23, Ex. 3; 57; 58; 68; 100; 144, Ex. 3; 147; 160; 215,
Ex. 3; 282, Ex. 2; & 307, Ex. 4.)
Finally, in this case and
in BI’s chapter 11 case in bankruptcy court (No. 13-11157
(DHS)), the witnesses have been supportive of Defendants’
interests and hostile to Plaintiff.
Finally, even if some ambiguity may exist as to whether
-34-
these witnesses satisfy the “managing agent” test, it is, at
minimum, a close question, and that is enough.
See Felman
Prod., Inc. v. Indus. Risk Ins., No. 309-cv-00481, 2010 WL
5110076, at *2 (S.D.W.Va. Dec. 9, 2010)(“The courts are in
agreement that the burden is on the discovering party to
establish the status of the witness, and doubts are resolved
in favor of the discovering party.”)(citations omitted).
Defendants’ argument that it is relieved of the obligation of
producing these three witnesses because they are not managing
agents does not hold water.
Given their status, a review of the factors identified
by the First Circuit confirms that the sanction of default
judgment is appropriate on the ground that Defendants have
improperly shielded these three witnesses from deposition.
a. Legitimacy of Excuse and Deliberateness.
Defendants contend that the discovery deadline has
passed, and they thus have no obligation to produce these
witnesses.
There are three problems with this claim.
First, rather than relieving Defendants from their
obligation, their failure to meet the discovery deadline
provides yet another instance where they have ignored a court
-35-
order.
The parties were explicitly ordered to complete all
“previously noticed but canceled or suspended depositions” by
July 12, 2013.
(Dkt. No. 290.)
Despite Plaintiff’s attempt
to work with defense counsel in June to schedule the
depositions, Defendants failed to comply.
Defendants cannot
now excuse their behavior by citing a deadline that they
themselves deliberately avoided.
Second, Defendants agreed to produce these witnesses
irrespective of the discovery deadline.
A generally
applicable limit may be lifted “where the parties stipulate
or the court orders otherwise.”
F.3d 122, 130 (1st Cir. 2011).
Vazquez-Rijos v. Anhang, 654
The failure of a party to
comply with its own agreement is sanctionable by a court.
Id.
Since the court left open the possibility that the
parties could continue discovery by agreement, (Dkt. No.
306), and the parties explicitly did so, (Dkt. Nos. 186 &
263), Defendants’ obligation was not extinguished by the
passing of the discovery cut-off date.
To conclude otherwise
would be to allow a party to circumvent her discovery
obligations by stalling until the deadline passes.
Finally, Defendants do not even take their own argument
-36-
seriously.
Defendants insist that the discovery deadline was
a strict cut-off, and its passing discharges their
obligation.
Despite these protestations, on October 18,
2013, they filed an Emergency Motion to Modify [the] Summary
Judgment Briefing Schedule.
(Dkt. No. 363).
To justify
their position, they argued,
In the Court’s June 25, 2013 order denying the
Biolitec’s assented-to motion to extend pre-trial
discovery deadlines [ECF 306], the Court stated
that the “parties are free to mutually agree to the
requested extensions, but those extensions will not
have the imprimatur of the court lest they lead to
yet further requests for extensions of the
remaining schedule.” The parties thereafter
mutually agreed to extend certain deadlines,
including the deadline to complete expert
depositions. The expert depositions are currently
scheduled to take place on November 4 and 5, 2013.
(Dkt. No. 363 at 2).
As a matter of equity, the court cannot
allow Defendants simultaneously to insist upon the
immutability of a discovery deadline and to urge flexibility
when it suits their needs.
In sum, no legitimate explanation justifies Defendants’
deliberate refusal to produce these three witnesses for
deposition.
b.
Severity of Action and Repetition of Behavior.
-37-
Although the failure to produce these witnesses is not
as severe as the refusal to produce Neuberger, the manner of
dodging these depositions has its own distinctly sour aroma.
While Defendants could have moved for a protective order, or
insisted that the depositions end after one day, they chose
to string Plaintiff along.
After the depositions began but
needed to be suspended due to Defendants’ failure to provide
documents, Defendants agreed to a continuance and confirmed
this with the court.
Throughout the summer, they made a show
of cooperating as they attempted to arrange new dates with
Plaintiff.
Plaintiff was led to believe that it would have
the opportunity to complete deposing these witnesses before
their opposition to summary judgment was due.
Instead,
despite months of suggesting otherwise, Defendants refused to
proceed at the last minute.
As discussed previously, this is
just one example of Defendants’ unprofessional conduct and
furthers the finding that their behavior has been
contumacious.
c. Prejudice to Plaintiff.
The failure to produce these witnesses compounds the
prejudice to Plaintiff.
As noted, Defendants have relied on
-38-
these witnesses extensively in the course of this case.
More
recently, they have relied on them in their Motion for
Summary Judgment.
(Dkt. No. 366.)
In support of that
Motion, they filed: two affidavits signed by Bolesh Skutnik
(Dkt. No. 367, Ex. 4 & 5); a letter from Bolesh Skutnik (Dkt.
No. 367, Ex. 6); a declaration signed by Art Henneberger
(Dkt. No. 367, Ex. 7); and a letter to Bolesh Skutnik (Dkt.
No. 367, Ex. 11).
They also rely on these exhibits in their
Statement of Material Facts.
(Dkt. No. 368.)
It would be manifestly unfair for the court to consider
these exhibits while Plaintiff has not had a full opportunity
to depose the witnesses.
Furthermore, given the involvement
these individuals have had in Defendants’ business dealings,
it is likely Plaintiff would have discovered information
relevant to its own case-in-chief if given a full opportunity
to depose them.
The prejudice suffered by Plaintiff has been
substantial.
d.
Adequacy of Lesser Remedies.
If this were the initial or sole instance of misconduct,
the court might consider as a sanction simply striking the
witnesses’ exhibits and precluding them from testifying at
-39-
trial.
Rule 37(b)(2)(A)(ii).
In light of Defendants’
consistent misconduct, that sanction does not adequately
penalize Defendants.
Default judgment is fully justified as
a sanction for these violations, when the specific misconduct
related to these witnesses is viewed in the totality of the
circumstances.
B.
Contempt.
Plaintiff’s final motion for sanctions stems from
Defendants’ continued defiance of this court’s order of
contempt.
The court denied a previous motion seeking the
same remedy, but explicitly left open the possibility for
reconsideration.
(Dkt. No. 342.)
While Defendants fulfilled
their obligation to submit a status report, they simply
reaffirmed their intent to maintain their defiance of the
court’s order.
As such, their actions serve as further proof
of their bad faith, and are relevant in the decision to enter
default judgment.
The earlier denial of Plaintiff’s motion for default
judgment opted for “a restrained approach” to give Defendants
more time to update the court and comply with the prior
orders.
Relying on Hovey v. Elliot, 167 U.S. 409, 444-45
-40-
(1897), the order noted that generally a court lacks
“inherent power to strike a defendant’s answer and enter a
default judgment as a sanction for contempt.”
at 4.)
(Dkt. No. 342
It also expressed doubts as to whether HMG Property
Investors, Inc. v. Parque Indus. Rio Canas, Inc., 847 F.2d
908 (1st Cir. 1988), the case primarily relied on by
Plaintiff, applied here.
(Dkt. No. 342 at 5.)
As a result,
the court denied the motion.
It is well established that civil contempt sanctions
should seek “to coerce compliance rather than to punish past
noncompliance.”
Hawkins v. Dep’t of Health & Human Servs.,
665 F.3d 25, 32 (1st Cir. 2012)(citations omitted).
Indeed,
entry of default judgment against a defendant as a sanction
for contempt, when the contempt is unrelated to the merits of
the case, is generally not an appropriate tool to force
compliance.
See Televideo Sys., Inc. v. Heidenthal, 826 F.2d
915, 916-17 (9th Cir. 1987).
However, a federal district court does have the inherent
power to control its docket and to impose “appropriate
sanction(s) for conduct which abuses the judicial process.”
Chambers v. NASCO, Inc., 501 U.S. 32, 44-45 (1991).
-41-
As the
Seventh Circuit has observed, “[I]n appropriate cases this
power would even permit a court to impose the ultimate
sanction of a grant of judgment.”
Diettrich v. NW Airlines,
Inc., 168 F.3d 961, 964 (7th Cir. 1999).
Although the court previously suggested that HMG Prop.
Investors is not directly on point, the case did offer a
broad view of this inherent power.
As the First Circuit
explained,
We start with the proposition that the rules of
civil procedure do not completely describe and
limit the power of district courts. Such courts
have inherent powers, rooted in the chancellor’s
equity powers, to process litigation to a just and
equitable conclusion. In general, except where a
statute or rule holds to the contrary, federal
courts enjoy the inherent power to provide
themselves with appropriate instruments required
for the performance of their duties.
HMG Property Investors, 847 F.2d at 915-16 (internal
citations and quotations omitted); see also John’s Insulation
v. L. Addison & Assoc., 156 F.3d 101, 108-109 (1st Cir.
1998)(affirming dismissal of a complaint and the entry of
default judgment on the defendant’s counterclaim based on the
court’s “inherent powers” to penalize a party’s “protracted
delay and repeated violation of court orders”).
-42-
These broad pronouncements respecting a court’s inherent
power to ensure the orderly flow of the judicial process are
telling.
At a minimum, they justify taking into
consideration the Defendants’ refusal to comply with the
court’s contempt order when fashioning an appropriate remedy
for their discovery violations.
That is, even if the
violation of the contempt order on its own were not an
independent justification for an entry of default judgment,
Defendants’ defiance of the order is probative on the issue
of Defendants’ willfulness and therefore relevant in ruling
on the Rule 37 motions.
Defendants have made it crystal clear in their status
report that they do not intend to comply either with the
court’s preliminary injunction or with the orders issued by
the court to compel compliance with the preliminary
injunction.
They have the power to undo the effects of their
merger and to return the situation substantially to where it
was before the merger took place in defiance of the court’s
order.
In other words, they have the ability to remedy their
failure, or refusal, to honor this court’s order.
flatly refuse to do this.
-43-
They
Defendants have reiterated their refusal to produce
Defendant Neuberger and confirmed their unwillingness to pay
the assessed fines.
Their disagreement with the court’s
preliminary injunction, even after its affirmance by the
First Circuit, and their disagreement with the contempt
sanction, trumps, in their view, both the orders of this
court and of the Court of Appeals.
At the end of this long
road of blatant misconduct, there is only one terminus: entry
of judgment by default.
IV.
CONCLUSION
For the foregoing reasons, Plaintiff’s Motion for
Sanctions Pursuant to Fed. R. Civ. P. 37, (Dkt. No. 327),
and Plaintiff’s Motion for Sanctions for Failure of Managing
Agents Brian Foley, Art Henneberger, and Bolesh Skutnik to
Appear for Depositions, (Dkt. No. 350), are hereby ALLOWED.
Plaintiff’s Motion for Default Judgment Based on the Court’s
August 30, 2013, Memorandum and Order and Defendants’ October
1, 2013 Status Report, (Dkt. No. 359), is DENIED as moot.
The clerk shall enter judgment for Plaintiff on the issue
of liability.
Plaintiff shall file a memorandum setting
forth its position on the issue of damages no later than
-44-
January 31, 2014.
Defendants’ response will be filed no
later than February 17, 2014.
The clerk will schedule a non-
evidentiary hearing on the issue of damages for a date prior
to March 1, 2014.
It is So Ordered.
/s/ Michael A. Ponsor
MICHAEL A. PONSOR
U. S. District Judge
-45-
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?