G039500, Consol. w G039723, G039725, G039897.
Court of Appeals of California, Fourth Appellate District, Division Three
December 17, 2009
Morrison & Foerster, Shirley M. Hufstedler, Miriam A. Vogel, Benjamin J. Fox; Workman | Nydegger, Sterling A. Brennan and L. Rex Sears for Defendant, Cross-complainant and Appellant Novell, Inc.
Waldron & Olson, Gary A. Waldron, Carol A. Foster and Sherry S. Bragg for Defendant, Cross-complainant and Appellant TriPole Corporation.
Suojanen Law Office, Bill Suojanen; Law Offices of Michael G. York and Michael G. York for Plaintiffs, Cross-defendants and Respondents.
Defendant Novell, Inc. purchased assets of defendant and cross-complainant TriPole Corporation from TriPole, plaintiff Amer Jneid, and others not parties to this appeal. Part of the purchase price included contingent payments, and concurrently executed employment contracts with Jneid and plaintiffs Ali Beydoun and Craig Sheldon provided bonuses for them. All such bonuses and contingent payments were due only if certain revenue milestones were met. Claiming the minimum threshold was not met, Novell did not make any contingent payments to TriPole or bonus payments to plaintiffs. As a result, complaints and cross-complaints were filed. After a six-month jury trial millions of dollars in various amounts were awarded to plaintiffs and TriPole against Novell. Novell appeals the judgment on a variety of grounds, including that the court erred in ordering issue and evidentiary sanctions for its failure to produce computer embedded information in a timely manner. TriPole cross-appeals, claiming the court should have awarded prejudgment interest on a portion of the judgment.
We conclude the sanctions were broader than necessary to achieve the ends of discovery and on that basis reverse and remand. As a result we need not consider any of the other issues raised in the appeal or the cross-appeal. TriPole's motions to augment the record are granted.
The only relevant facts deal with the sanctions and are set out in the discussion.
Novell challenges issue and evidentiary sanctions imposed for its failure to produce approximately 17,000 pages of documents that it ultimately furnished 10 weeks after trial had commenced. In April 2003 plaintiffs served a request for production of documents on Novell seeking, among other things, "any and all iFolder data regarding or relating to OnDemand" or DeFrame and any emails to or from Brad Christensen relating to OnDemand, DeFrame, or ZENworks, another program into which OnDemand was integrated. Christensen was the director of product management for OnDemand and DeFrame and software product manager for Novell at the time it purchased DeFrame. Novell's response was 140 pages of objections; it produced no documents.
Plaintiffs also set the deposition of Christensen who, by the time it was taken, had left Novell's employ. During his deposition, under examination by Novell's lawyer, Christensen testified that when he was at Novell he had an iFolder (a Novell product used to manage and store electronic files) that had backed up "every bit of the data" he had had on his computer. He also testified the iFolder included "a folder called Big Deals" that contained documents showing instances where OnDemand had been given, not sold, to customers or where customers had "made improper payment." He could not remember the contents of those documents but said if he could "log into the iFolder for five minutes" he could probably provide the requested information. He also testified no one at Novell had instructed him to save his emails relating to OnDemand or DeFrame.
In February 2004, after Christensen's deposition about the iFolder, the court granted plaintiffs' motion to compel further responses to their request for production of documents. In April 2004 in an unverified document Novell responded with additional objections but also agreed to produce "non-privileged documents, if any, . . . which it is able to ascertain and locate after a reasonable search." Novell did not produce any of the documents in Christensen's iFolder.
At trial in 2006 Christensen again testified that when he left Novell his documents were burnt to a CD and all were backed up on a Novell server. About one month after Christensen's testimony concluded, while trial continued, by an unverified letter Novell produced 8 CD's containing over 17,000 pages of documents located in Christensen's iFolder.
Within the next week and a half plaintiffs and TriPole filed motions seeking evidentiary, issue, and terminating sanctions for Novell's failure to produce the documents when originally requested.
The day after the last motion was filed, after a nearly day-long hearing, the court granted issue and evidentiary sanctions, ruling that the documents were "very relevant to at least two of the major issues" being litigated, i.e., the products containing DeFrame and the amount of revenue derived from sales. It found Novell should have known the documents existed at the time the request for production of documents was served and, based on Christensen's deposition testimony, knew or should have known of them and produced them when the court granted the motion to compel their production. Failure to produce the documents was "grossly reckless." In its ruling at the hearing it amplified this point, stating "it would have been quite easy for someone to have asked . . . Christensen how he identified his iFolder" and the documents "could have been discovered with as much ease back in 2003 as it was recently [done] in 2006."
In the written ruling the court noted it disbelieved Novell's claim it did not know about the documents until Christensen testified at trial, and echoed this statement at the hearing where it stated it did not believe locating the documents "was the result of [the] fortuitous event" Novell claimed. Especially because of the delay in disclosure, failure to timely provide the documents "had an exceptionally severe consequence to plaintiffs and TriPole," interfering with their ability to prepare their experts, examine witnesses about product pricing and net revenue, and rehabilitate Jneid regarding sales of the product and his estimation of gross revenue. The court found failure to produce the documents constituted "intentional suppression of the evidence." It denied terminating sanctions but instead ordered evidentiary and issue sanctions to "tailor the remedy to the discovery abuse . . . ."
The evidentiary sanction precluded Novell from using any of the documents that had not been produced but allowed TriPole and plaintiffs to use them without any authentication. Further, Novell was prohibited "from introducing evidence concerning either the meaning of the term `net revenue,' or whether the minimum net revenue milestones were satisfied, and" "from arguing whether the minimum net revenue milestones in the contract were satisfied." In addition, Novell was forbidden from arguing that its failure to pay contingent payments or bonuses was not a breach of the purchase agreement and employment agreements, respectively.
For the issue sanction the jury was instructed immediately and at the close of trial as follows: "You are instructed to find that the net revenue generated by the sale or licensing of OnDemand and for all Novell products containing the DeFrame technology, whether embedded or bundled, and all products derived from the DeFrame technology, exceeded the minimum thresholds for each of the three years referenced in the [purchase agreement] . . . and the [employment agreements] for each of [the plaintiffs] . . . for each such year, respectively, the sums of $10 million, $15 million and $25 million. [ ] The court has found that Novell willfully concealed documents it was required to turn over . . . . Thus, you may but are not required to infer that any information contained in such documents was unfavorable to Novell's case."
Based on the record, we conclude that Novell, although less than diligent about producing the documents, did not act intentionally when it failed to deliver them before trial. Its final search and ultimate disclosure, although belated, militate against a finding Novell acted with the aim of failing to disclose the materials. "[A] sanction order cannot go further than necessary to accomplish the purpose of discovery . . . ." (Newland v. Superior Court (1995) 40 Cal.App.4th 608, 613.) Here the evidentiary and issue sanctions ordered by the court came close to a directed verdict and were more severe than necessary. There were other less drastic sanctions that could have been ordered to redress Novell's failure to produce the documents. As one of several alternatives Novell suggests that instead, the court could have declared a mistrial and charged it with the cost of trial incurred by plaintiffs and TriPole. During oral argument here, Novell reiterated the appropriateness of an order requiring it to pay that cost. Payment to plaintiffs and TriPole for the attorney fees, costs, and expenses they incurred for the already completed trial is an appropriate sanction sufficient to rectify the prejudice they suffered.
Plaintiffs and TriPole were deprived of the opportunity to examine the documents before trial, thus interfering with their ability to conduct discovery as to the contents, have the documents analyzed by their experts, depose witnesses, subpoena documents from third parties, and use the documents in trial preparation and trial. As an additional sanction Novell should be charged with the costs, including attorney fees, costs, and expenses, of any additional discovery resulting from the late production of the documents.
The judgment is reversed and the matter remanded for a new trial. The superior court shall determine the attorney fees, costs, and expenses incurred by plaintiffs and TriPole in connection with the already completed trial and order Novell to pay those amounts forthwith. In addition, the court shall determine the amounts Novell shall pay to plaintiffs and TriPole for additional discovery to be conducted because of the late production of the documents.
In the interests of justice plaintiffs and TriPole are awarded their costs on appeal from Novell. TriPole's motions to augment the record are granted.
SILLS, P. J.
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