No. 02 C 1403
United States District Court, N.D. Illinois, Eastern Division
October 27, 2003
Dean A. Monco, Wood, Phillips, VanSanten, Hoffman & Ertel, Michael Robert McKenna, Law Firm of Michael R. McKenna, Lee F. Grossman, Eric P. Martin, Grossman & Flight, LLC, Chicago, IL, Joseph S. Beckman, The Intellect Law Group, Palm Beach, FL, for Plaintiff.
Michael J. Abernathy, Patricia Ann Kane, Bell, Boyd & Lloyd, Chicago, IL, Eric Meyertons, Dwayne Keith Goetzel, Ryan T. Beard, Eric B. Meyertons, Conley, Rose & Tayon, P.C., Austin, TX, for Defendant.
RULINGS ON OBJECTIONS TO REPORT AND RECOMMENDATION OF MAGISTRATE JUDGE
*1 On April 3, 2003, this court entered an order of referral, pursuant to Rule 72 of the Federal Rules of Civil Procedure and Local Rule 72.1 of this court, to the designated magistrate judge to conduct all necessary proceedings concerning the motion of defendant-counterplaintiff, Auto Wax Company (“Auto Wax”), for sanctions [Docket # 104] against the plaintiff, Kucala Enterprises, Inc., arising from allegations that counterdefendant John Kucala, individually and as agent of plaintiff-counterdefendant, Kucala Enterprises, Ltd., and counterdefendants KEL Manufacturing,
and Dawn Kucala, had engaged in document destruction to avoid discovery in this case, the most significant conduct being his use of computer software called Evidence Eliminator to remove relevant files from his computer. The magistrate judge conducted an evidentiary hearing and on May 23, 2003, entered a report and recommendation.
The report reviewed all of the evidence received at the evidentiary hearing and concluded that “Kucala has engaged in egregious conduct by his flagrant disregard of a court order requiring him to allow inspection of his computer and his utter lack of respect for the litigation process.” Report and Rec. at 19. The magistrate judge recommended that Kucala's claims be dismissed and that attorneys' fees and expenses which are attributable to the motion for sanctions be assessed against Kucala. Id.
Kucala has filed 27 pages of objections. Auto Wax has filed its own “response” to the report and recommendation as well as a response to the objections. Thereafter, Kucala filed a document entitled “Counter–Defendants' Notice of Auto Wax's Bad Faith Discovery Responses for Consideration In the Court's Ruling on Auto Wax's Motion for Sanctions,' to which Auto Wax also responded. This court stayed the case until it could rule on these matters, all of which are addressed herein. Because the magistrate judge has recommended dismissal of Kucala's claims and entry of a judgment to pay money, the standard of review is de novo. See
Retired Chicago Police Ass'n v. City of Chicago, 76 F.3d 856, 868 (7th Cir.1996), citing Alpern v. Lieb, 38 F.3d 933 (7th Cir.1994) (a magistrate judge's decision regarding discovery sanctions which requires one party to pay money to another is a dispositive matter.)
Rulings on Specific Objections
The following section addresses the specific objections which Kucala raises. Thereafter, this court reviews the magistrate judge's findings and recommendations in light of his comprehensive summary of the evidence and review of applicable law.
Objection 1. Kucala objects to the magistrate judge's finding that Jason Velasco (“Velasco”) inspected Kucala's computer “pursuant to court order” as opposed to specifically stating that the inspection was permitted by a court order granting Auto Wax's motion to compel. Kucala argues that the phraseology implies that Kucala was subject to an order which he violated. This objection is trivial. It is true that an order was entered permitting Velasco to inspect the computer. The corollary of such an order is that Kucala was obligated to allow the inspection.
*2 Objections to magistrate judge's reliance on Velasco report (Nos.2–5, 8, 22). Kucala objects to the magistrate judge's characterization of Velasco as a “computer specialist,” contending that he was never qualified under Fed.R.Civ.P. 702 as a witness with specialized knowledge, and further that, even if he is a computer specialist, Velasco did not testify; thus, the magistrate judge improperly received his hearsay report and opinions relating to deletion of computer files. Auto Wax responds that Kucala waived any objection it might have had to admission of the report because it failed to demand the presence of Velasco after being informed that he would not be called and it failed to object to admission of the report and opinions. Even without consideration of the report, Auto Wax further argues, Kucala's admissions that he intentionally deleted and endeavored to delete files is sufficient to support the magistrate judge's recommendations.
The parties do not point in the record to the admission of the Velasco report into evidence.
The transcript reflects an assumption by the judge and Auto Wax's counsel that the report was in evidence. Viewed in the context of the motion for sanctions, this is understandable. In the typical discovery sanctions situation, the matter is decided without the formal taking of evidence; rather, the court relies on representations of counsel and proffers of evidence by affidavit as to what occurred. Here, the Velasco report was tendered to the court as prima facie
proof in support of the contention that sanctions were warranted and an evidentiary hearing was needed. Motion for Sanctions at 5.
Whatever Auto Wax's assumptions about what evidence it was obligated to produce at the hearing, the hearing was ordered because the allegations of misconduct were extraordinary and serious. Auto Wax has submitted no authority that the Federal Rules of Evidence are inapplicable or relaxed in this context. Because the record demonstrates that the report was not offered into evidence, Auto Wax's argument that Kucala waived objection to it is not well taken as Kucala had no occasion to object to its admissibility or to respond to an argument (now made) that the report was admissible under Rule 801(d)(2)(B) because Kucala had “manifested an adoption or belief in its truth.” Further, without a stipulation to its admissibility, the report was obviously inadmissible hearsay.
As a result, this court will consider only the evidence properly of record in ruling on the objections. Objections 2 and 3 are, therefore, sustained in that the court will disregard the report and qualifications of Velasco. To the extent Kucala objects to the finding that an inspection occurred or when it occurred, the objection is overruled insofar as it is relevant to Kucala's motive because the record otherwise reflects Kucala's expectation that a computer specialist would inspect his computer shortly after February 11, 2003. (See, e.g.,
Tr. 12: “Q: Mr. Kucala, the Court on February 11, I believe 2003, ordered that an inspection of your computer system was to go forward, isn't that correct? A: Yes.”). Objections 4 and 5 are sustained insofar as they object to the magistrate judge's quotation of information provided in the Velasco report. Kucala, however, has admitted that he bought Evidence Eliminator on or about February 14, 2003 and ran it in anticipation of Auto Wax's inspection. Tr. 18–21. Objections 8 and 22 are sustained.
*3 Objection 6. Kucala objects to the magistrate judge's reliance on “marketing information” concerning what Evidence Eliminator does. This objection is overruled because the magistrate judge acknowledged that Auto Wax was unable to prove that Evidence Eliminator eliminated Kucala's files; at the same time, he considered Kucala's admission that he bought Evidence Eliminator for that very purpose. Kucala objects also to the magistrate judge's reliance on Velasco's statement that 14,000 files had been deleted. This portion of the objection is sustained.
Objection 7. Kucala objects to the magistrate judge's finding that “Kucala admits that the EcoLab letter refers to infringement-related issues” on the basis that the letter pre-dates the lawsuit and contains nothing relevant to it. He then states that the letter could have no evidentiary bearing on infringement, thus is no basis for dismissal. The objection is overruled. Auto Wax produced the letter to show that documents that would be expected to be retained by Kucala were not retained. The magistrate judge, in general, adopted that point of view. In any event the finding itself is self-evident, i.e.,
that the letter refers to infringement-related issues, as Kucala admitted at the hearing. Tr. 37–38.
Objection 9. Kucala objects to the magistrate judge's finding that there was a “possibility that relevant documents were included in [the] mass deletion ... especially given the nature of Evidence Eliminator software and Kucala being advised by counsel not to use it.” This finding is supported by the record in that Kucala admitted that he bought the software because it was advertised as a device that would defeat discovery and this is what he intended to do with it. There being no evidence brought forward by Kucala that Evidence Eliminator did not accomplish Kucala's goal, and because Kucala conceded that Evidence Eliminator deleted documents (Tr. 70), the magistrate judge drew a reasonable inference that a “possibility” existed that relevant files were deleted. Furthermore, an examination of Kucala's arguments demonstrate that his protest is disingenuous. If the software was ineffective, surely Kucala would by now have retrieved the files and produced them to Auto Wax as it represented it was trying to do during April, 2003.
This court, at this point, can safely infer something more than a possibility. The objection is overruled.
Objection 10. Kucala objects to the finding that the existence of two relevant letters (the Ecolab and Kodate letters) which Auto Wax obtained from non-party sources but which should have been produced by Kucala establishes “a great possibility that more of these letters exists, or did exist at one point, and that Kucala should have maintained them.” The magistrate judge referred to the letters as illustrative of documents that would reasonably be expected to be retained by a person doing business, expressing his disbelief that Kucala could run a business without retaining documents such as this (as well as invoices to customers which were also missing). This logic is reasonable. Kucala's argument that the finding is inadequate to support the sanctions recommended may be true, but it is evidence of Kucala's misconduct. The objection is overruled.
*4 Objection 11. Kucala objects to the magistrate judge's finding that Kucala discarded an old computer at the end of 2002, “although he testified that he knew the importance of discovery and preserving evidence.” The finding is fully supported by the record. The objection merely states argument that Kucala may not have intended to destroy evidence and may not have destroyed anything of importance to the case. The testimony reflects that by the time Kucala discarded the computer he had already deleted documents from his computers on the basis that he considered them not relevant and that he received the request for inspection in October 2002. That Kucala knew by the end of 2002 when he discarded the computer what his discovery obligations were is an inference that can be readily drawn from Kucala's testimony. This objection is overruled.
Objection 12. Kucala objects to the magistrate judge's observations of Kucala as a witness. The magistrate judge's observations are what they are. The objections are overruled.
Objection 13. Kucala cites the magistrate judge's finding that Kucala was “at fault by acting unreasonably ... and with gross negligence and in flagrant disregard of the court's order by speciously deleting files, in ‘the wee hours' of the morning, hours before Auto Wax's computer specialist was to take an image of Kucala's computer-and likely even before this time.” He objects that there is no evidence that Kucala deleted files in the wee hours of the morning. Insofar as the court found that the destruction occurred in the wee hours of the morning, the objection is sustained. Kucala has admitted, however, that before he purchased Evidence Eliminator he deleted documents that he felt were irrelevant, that he used Evidence Eliminator to make sure that his personal documents were not discovered by Auto Wax, and that “[i]f there was information on the hard drive that [he] didn't know about and it was deleted, then [some business information was deleted by virtue of running Evidence Eliminator.]” Tr. 70. The finding is supported by the record.
Objection 22. Kucala objects to the magistrate judge's reliance on the Velasco report for his statement that Evidence Eliminator was used on February 25, 2003. Where Kucala admits that he ran Evidence Eliminator after the court order allowing the inspection and before the inspection, this statement as to the particular time is immaterial.
Objections 14–21, 23. These objections in the main take exception to the magistrate judge's conclusions that Kucala's conduct was deliberate, willful, and prejudicial to Auto Wax and to the administration of justice, and to his recommendation that Kucala's claims be dismissed. Kucala argues that Auto Wax has failed to prove prejudice, that evidence relevant to infringement would not be found on the computers in any event. At the same time Kucala concedes that evidence of inducement to infringe and damages might have been found on the computers. Essentially, Kucala argues that Auto Wax should be able to work around the problem he created and thus dismissal of his claims is too severe a sanction. He suggests monetary sanctions, or “an adverse inference ruling.” These objections are dealt with in the section that follows.
Review of Report and Recommendation
*5 The court has carefully read the motion for sanctions, reviewed all materials submitted therewith (except the Velasco report), including the transcript of the evidentiary hearing, the report and recommendation, Kucala's objections, and Auto Wax's responses, and concludes that the magistrate judge's material findings of fact are fully supported by the record: (1) that Kucala knew that the pending litigation required him to turn over documents and information relating to the issues in the law suit; (2) that Kucala's counsel had advised him of his obligations, but in spite of these facts, Kucala bought Evidence Eliminator after being ordered to allow inspection of his computers, and (3) with the intention of destroying files on his computers so they could not be read by Auto Wax, that Kucala ran the software prior to the scheduled inspection. Although the magistrate judge was unable to conclude that in fact Evidence Eliminator destroyed relevant files, his findings that documents that one would reasonably expect to be found were not produced or discovered, and that there is no way now to know what has been destroyed, are supported by the record. Further, the magistrate judge relied on Kucala's own admissions that he deleted files and emails according to his personal judgment about whether they were relevant, threw away a computer that had been used for his business, never produced any back up documents he claimed to have copied before throwing away the computer, and arrogated to himself the decision as to whether documents were relevant to the litigation. The record is undisputed, as well, that Kucala has produced but two invoices for the relevant period, even though he claims to have 200 customers, indisputably important documents for purposes of damages. The record further reflects that Kucala actually changed labels on the ingredients that are used to make the accused product so as to foil Auto Wax's discovery and at his deposition claimed lack of memory about such important matters as the formula for the product (he is the only person who ever knew this information), who his suppliers are, and the equipment and process used for manufacture. Thus the magistrate judge's conclusion that Kucala's conduct was “egregious” and “in flagrant disregard of a court order” is fully supported by the record.
The applicable law is set out in the report and will not be repeated here. The court is conscious that dismissal and default are ultimate sanctions to be avoided if a lesser sanction will suffice to remedy the prejudice inflicted on the opponent. All but conceding misconduct, Kucala urges the court not to accept the recommended dismissal of his claims of invalidity and non-infringement, arguing that such a sanction is too severe. Kucala argues that the lost evidence is not material, thus Auto Wax has not been prejudiced. Responding first to the report and recommendation, Auto Wax points out that mere dismissal of Kucala's claims will not suffice because its corresponding counterclaims for infringement, inducement of infringement and contributory infringement would remain pending with the same difficulties of proof resulting from Kucala's actions. Auto Wax requests that the recommendation be accepted but modified so as to include defaulting Kucala on the counterclaims as well. In response to Kucala, Auto Wax contends that it can no longer prove certain of Kucala's acts or statements that support infringement and can no longer prove damages beause the invoices and business records have been destroyed.
*6 Kucala, seeing himself as David, took the law into his own hands in the short-sighted belief that sabotaging discovery would fell his Goliath. He was represented by counsel, had been advised of his obligations to make discovery, resisted at every turn, and eventually took the drastic step of running Evidence Eliminator. The result is multiplication of expense, delay, and ravage of the common law method of seeking the truth in his case. Clearly, Kucala's conduct has made Auto Wax unable to establish its claims for contributory infringement and inducement of infringement and unable to establish its damages because Kucala held the archive from which discovery of these matters should have been obtained. Kucala's argument that Auto Wax could obtain the discovery from third-party subpoenas of Kucala's customers (only some of which are known to Auto Wax) is unduly burdensome and expensive and impracticable at best.
Furthermore, Kucala through his utter disrespect for the litigation opportunity that the system of justice afforded him has forfeited any right to use this court to assert invalidity of Auto Wax's patents. See
Computer Assoc. Int'l, Inc. v. American Fundware, Inc., 133 F.R.D. 166, 170 (D.Colo.1990) (“One who anticipates that compliance with discovery rules, and the resulting production of damning evidence, will produce an adverse judgment, will not likely be deterred from destroying that decisive evidence by any sanction less than the adverse judgment he (or she) is tempted to thus evade.”)
The court has considered, however, whether because Kucala continues to manufacture its product, the claim of infringement could still be established if Kucala were to be forthcoming about its formula and methods. See
Rice v. City of Chicago, 333 F.3d 780 (7th Cir.2003) (“[I]t is well settled in this circuit that the ultimate sanction of dismissal should be invoked only in extreme situations, when there is a clear record of delay or contumacious conduct, or when other less drastic sanctions have proven unavailable.”) (internal quotations and citations omitted). Auto Wax argues that emails and other written communications can be extremely important in proving infringement, citing a document discovered in another Auto Wax case in which the defendant admitted “it wanted to get [its] clay product as close as possible to Auto Wax's clay products.” Although this is evidence of motive and intent which might go to willfulness, it would not affect the substance of an infringement claim, which is fundamentally a comparison of one process or device to the claims of a patent. Thus, the court is not persuaded that a default judgment of infringement is a necessary last resort.
The court believes the interest of justice is served by the adjudication of the infringement claim and counterclaim on the merits if that can be done. Allowing the case to go forward would entail, of course, a complete change of heart on John Kucala's part, a change that would include complete and truthful responses to all outstanding discovery. The court is willing to give Kucala an opportunity to demonstrate his willingness to make the discovery that would permit the infringement case to be tried. Absent full cooperation, however, a default judgment on infringement will be the inevitable consequence.
*7 With respect to damages and willfulness issues, the jury will be allowed to hear evidence of Kucala's conduct with respect to destruction of invoices and consider that evidence in assessing damages should it find for Auto Wax on infringement.
Finally, the court accepts the magistrate judge's measured recommendation that Kucala bear the expenses, including attorney's fees incurred by Auto Wax as a result of Kucala's conduct, as set out by the magistrate judge.
Kucala's “Notice of Auto Wax's Bad Faith Discovery Responses....”
After the referral of this case to the magistrate judge was closed, Kucala filed a document alleging that Auto Wax has acted in bad faith in refusing to respond to discovery requests served by Kucala during May, 2003. Auto Wax responded to the requests on June 11, after the magistrate judge had issued his report and recommendation, by asserting the position that Kucala's case should be dismissed, which would moot the discovery requests. On June 12, this court suspended all proceedings until further order of court. In light of these events, this court finds no evidence of bad faith in Auto Wax's awaiting the court's orders to see whether the discovery would be required. This situation reflects no mutual disregard of obligations that led the court in Rice,
on which Kucala relies, to reverse a sanction of dismissal against one of the parties.
Auto Wax seeks the imposition of sanctions against Dawn Kucala, arguing that she is in privity with John Kucala and the Kucala entities, and that she should be precluded from benefitting from her husband's conduct or asserting Kucala's claims or defenses that are foreclosed by this order. Dawn Kucala's conduct was not at issue in the motion for sanctions. Although there appears to be no ground for Dawn Kucala to attempt to relitigate any matters determined herein, as the order binds all the Kucala entities and their agents, the court imposes no sanctions personal to Dawn Kucala in the order that follows.
CONCLUSION AND ORDER
With the specific exceptions set out above, the court adopts the findings of the magistrate judge. It adopts his recommendations with the one exception that it will permit Kucala to proceed on its claim of non-infringement and to defend the infringement counterclaim, on condition that all discovery be made forthwith. The court hereby directs the clerk to enter judgment in favor of Auto Wax on Kucala's claim for declaratory judgment that United States Patent Nos. 5,727,993 and 5,476,416 are not valid. If Auto Wax prevails on its infringement claim, then the court will direct entry of judgment on the claims for inducement of infringement and contributory infringement. Auto Wax has until December 31, 2003, to submit and serve a declaration supporting an award of expenses, including an attorney's fee. This case will be called for status hearing on November 18, 2003 at 9:30 a.m. Counsel for both parties are directed to appear.
The magistrate judge referred to all Kucala entities as “Kucala,” stating that the business entities and John Kucala, their owner, “are so closely related [that] essentially when referring to one, the other is necessarily invoked.” This court follows the same course in reviewing the magistrate judge's findings and conclusions and uses the personal pronoun “he” in reference to the plaintiff and counter-defendants. Dawn Kucala is John Kucala's wife. An issue relating to her is addressed separately.
The only offer of exhibits into the record is at page 72 where the court received Exhibits 1 through 5 over Kucala's counsel's ambiguous objection, “My objection would be reserving as to hearsay, that is, the documents themselves.” Tr. of Proceedings Before The Hon. Arlander Keys, April 21, 2003 (“Tr.). Because Auto Wax does not dispute Kucala's assertion that the Velasco report was not offered into evidence at the hearing, the court assumes it was not among these exhibits (which have not been identified for this court).
It is noted also that counsel who represented Kucala at the hearing had very recently appeared in the case, curtailing his time to prepare. At the same time, Auto Wax had stated in response to a motion for continuance of the hearing that it did not intend to call Velasco and thus there was no need to depose him or continue the hearing. (The docket does not reflect a ruling on this motion but the hearing was not continued, so it must have been denied.) Knowing the report itself was hearsay, Kucala's counsel likely assumed from this that Velasco's opinion would not be offered.
Kucala states, “... Kucala's present counsel, having appeared in the case less than 1 week prior to the April 21, 2003, Evidentiary Hearing, contacted forensic experts with the intention of attempting to recover any deleted files on the Kucala computer. These forensic experts claimed to have successful experiences recovering data allegedly deteted with “Evidence Eliminator.” Kucala's objections 9.
Business documents containing information relating to the process of manufacture are relevant to the validity and infringement claims, and information concerning customers might go to contributory infringement, inducement of infringement, willfulness, and would certainly go to damages. That one cannot know for sure whether there were any such documents because Kucala has either destroyed them or does not remember anything about them is not a fact in mitigation but rather reinforces the conclusion that the proof of this case has become virtually impossible. Further, as indicated above, Kucala's protests that maybe the documents were not really destroyed is unbelievable because he has had several months since the hearing to come forward with retrieved documents and recovered memory but has not done so.
End of Document.