The dispute in this case centers primarily on the Plaintiffs' failure to produce the electronic financial records that it maintained in the ordinary course (specifically, via the program known as “Quickbooks”). The Defendant argues convincingly that it needs this data in electronic form so that its expert may analyze the financial compilations that the Plaintiff's supplied in discovery in support of their “diminution of value” claim.
The Defendant cites Fed.R.Civ.P. 37(c) (incorporated in this proceeding by Fed. R. Bankr.P. 7037) in support of his request that the Plaintiffs be precluded from offering any evidence at trial in support of their diminution of value claim. The first sentence of Rule 37(c)(1) provides for exclusion of evidence that a party fails to produce as required by Rule 26(a) or Rule 26(e), even absent a failure to comply with a prior order compelling discovery, unless the failure to produce was substantially justified or is harmless. In this case, Rule 26(e) is the applicable provision (“if the party learns that in some material respect the disclosure or response is incomplete or incorrect,” the party has a duty to supplement a response to discovery). Significantly however, the Defendant seeks relief, not under the first sentence of Rule 37(c), but under the second sentence
of the rule. The Defendant requests not only the exclusion of the withheld evidence,
but the exclusion of all evidence
on the subject matter. See Fed.R.Civ.P. 37(c)(1)(C) (incorporating discovery sanctions itemized in Rule 37(b)(2)(A)).
It is well established in this Circuit that “the exclusion of critical evidence is an ‘extreme’ sanction, not normally to be imposed absent a showing of wilful deception or ‘flagrant disregard’ of a court order by the proponent of the evidence.” Konstantopoulos v. Westvaco Corp., 112 F.3d 710, 719 (3d Cir.1997), cert.denied,
522 U.S. 1128 (1998) (quoting Dudley v. South Jersey Metal, Inc., 555 F.2d 96, 99 (3d Cir.1977)); accord
Merisant Co. v. McNeil Nutritionals, LLC, 242 F.R.D. 315, 326 (E.D.Pa.2007). Further, as the Defendant maintains,
[c]ourts in this Circuit consider four factors in determining whether the exclusion of evidence is an appropriate sanction for failure to comply with discovery duties: (1) the prejudice or surprise of the party against whom the excluded evidence would have been admitted; (2) the ability of the party to cure that prejudice; (3) the extent to which allowing the evidence would disrupt the orderly and efficient trial of the case or other cases in the court; and (4) bad faith or wilfulness in failing to comply with a court order or discovery obligation.
Merisant Co., 242 F.R.D. at 326 (citations and quotations omitted).
For several reasons, I am not convinced that the standard for exclusion of all of the Plaintiffs' evidence has been satisfied in this proceeding.
First, although the Plaintiffs failed to produce electronic documents in response to the Defendant's formal discovery request, they promptly acknowledged that the evidence existed when the Defendant made a specific inquiry. In that respect, there was no deception here. Further, the Plaintiff has produced a substantial amount of relevant financial data, including the content of the electronic documents in hard copy.
Second, there have been no court orders compelling discovery that were disregarded. Although a prior court order is not an absolute requirement and a party's flagrant disregard of its discovery obligations to the detriment of the opposing party may, in appropriate circumstances, justify the imposition of the extreme sanction requested here, the absence of a violation of a prior order is a factor to be considered in determining the severity of an appropriate discovery sanction.
Third, the Plaintiffs' failure to produce the required electronic documents was mostly confined to two (2) relatively short periods of time: (1) between December 17, 2009, when the Defendant's counsel specifically requested the documents in an e-mail and approximately December 28, 2009, when the Plaintiffs were locked out of their Conshohocken location and were denied access to the computer holding the relevant data; and (2) between approximately late January 2010 (when the Plaintiffs regained possession of the computer) and February 20, 2010 (when the Defendant filed the Motion). These facts, combined with the Plaintiffs' production of the information in hard copy form, suggest that the Plaintiffs may not have engaged in a blatant, bad faith obstruction of the discovery process.
Fourth, the Plaintiffs appear to have the ability to provide the requested documents in the immediate future, thereby preventing the Defendant from suffering any prejudice. This can be accomplished with only a modest extension of the present pre-trial schedule and therefore, employment of a less severe remedy will not disrupt the efficient pre-trial management of this proceeding.
At the same time, however, the Plaintiffs bear most of the responsibility for the breakdown of the discovery process. The electronic information was requested and was discoverable. It should have been produced without the need for the Defendant counsel's December 17, 2009 e-mail request and certainly, promptly thereafter. The Plaintiffs' argument that the belated production of the electronic information in hard copy fulfills their discovery obligation is utterly unconvincing. Further, the Plaintiffs' failure to explain the technological problems that allegedly precluded them from downloading to CD the Quickbooks data in a searchable format after they recovered possession of their computer in late January 2010 and their failure to be proactive in solving the problem (either by procuring necessary technical assistance or by offering the Defendant access to the working computer in which the data was stored) also raises some question regarding the Plaintiffs' good faith in the discovery process.
In the exercise of my discretion, based on all the circumstances mentioned above, I conclude that preclusion of all of the Plaintiffs' evidence on the business valuation is not warranted. But some judicial intervention is appropriate, as is some sanction. Therefore, I will issue an order compelling discovery, accompanied by a requirement that the Plaintiffs reimburse the Defendant for his reasonable expenses. See
Fed.R.Civ.P. 37(c)(1)(A). Also, over the Plaintiffs' objection, I will modify the pre-trial schedule to provide the Defendant with additional time to procure and analyze the electronic discovery belatedly obtained.