Tradebank Int'l Franchising Corp. v. Florida Barter Exch., LLC
Tradebank Int'l Franchising Corp. v. Florida Barter Exch., LLC
2014 WL 12861202 (N.D. Ga. 2014)
May 29, 2014
Anand, Justin S., United States Magistrate Judge
Summary
Plaintiffs allege that Defendants breached a franchise agreement by soliciting customers of Plaintiffs. The Court found that Defendants acted in bad faith by allowing emails from the @floridatradebank.com and other domains to be destroyed, and by not producing other obviously discoverable emails. The Court found that ESI was important in this case, as it was the destruction of emails that likely denied Plaintiffs discoverable, relevant emails showing solicitation of Plaintiffs' customers.
TRADEBANK INTERNATIONAL FRANCHISING CORPORATION and TRADEBANK INTERNATIONAL, INC., Plaintiffs,
v.
FLORIDA BARTER EXCHANGE, LLC, TAIT CARSON, and BARTER REWARDS, INC., Defendants
v.
FLORIDA BARTER EXCHANGE, LLC, TAIT CARSON, and BARTER REWARDS, INC., Defendants
CIVIL ACTION NO. 1:12-CV-2810-RLV-JSA
United States District Court, N.D. Georgia, Atlanta Division
Filed May 29, 2014
Anand, Justin S., United States Magistrate Judge
ORDER AND FINAL REPORT AND RECOMMENDATION
*1 The above-captioned action is before the Court on the Plaintiffs' Motion for Spoliation Sanctions [132]. Plaintiffs make the disturbing allegation that Defendants destroyed discoverable emails after the initiation of this case and made false statements about the circumstances. Plaintiffs request that the Court strike the Defendants' answer as a sanction and impose a default judgment.
For the reasons explained below, the Court agrees that Defendants destroyed or failed to preserve relevant emails sought in discovery from certain email accounts and violated a Court Order by not producing other obviously relevant emails. The Court further finds that the Defendants have made statements about their compliance with preservation and production obligations which have been proven to be untrue and unfortunately appear to have been made in bad faith.
However, while sanctions are warranted, the undersigned recommends that the District Judge stop short of the case-dispositive sanctions requested by Plaintiffs such as striking of the answer and imposition of default. The prejudice to Plaintiffs can be addressed through severe, but not dispositive, relief, including monetary sanctions and evidentiary inferences. Thus, the undersigned RECOMMENDS that Plaintiffs' Motion for Spoliation Sanctions [132] be GRANTED IN PART AND DENIED IN PART.[1]
I. PROCEDURAL BACKGROUND
Plaintiffs Tradebank International Franchising Corporation and Tradebank International, Inc. (collectively “Tradebank”) filed this action on August 14, 2012. Tradebank International, Inc. is a company engaged in the processing of barter transactions and various bookkeeping functions associated therewith. Compl. [1] at ¶ 9. Tradebank International Franchising Corporation, a wholly-owned subsidiary of Tradebank International, Inc., provides franchising opportunities for regional barter exchange businesses and processes barter transactions for the members of the franchised regional barter exchanges. Id. at ¶ 10.
Tradebank alleges in the Complaint that Defendant Tait Carson (“Carson”) is the sole owner of Defendant Florida Barter Exchange, LLC (“FBE”), which was the owner of three Florida franchises operating under a Franchise Agreement with Tradebank. Id. at ¶¶ 11-12. According to Tradebank, the Franchise Agreement included a restrictive covenant providing that, in the event that the Agreement was transferred or terminated, FBE was prohibited from operating a competing business with Tradebank in the Territory covered by the Agreement, or soliciting Tradebank customers for any competing business in the Territory covered by the Agreement, for a period of twelve months following the transfer or termination of the Agreement. Id. at ¶ 13. Tradebank alleges that Carson established Defendant Barter Rewards, Inc. (“BRI”), a competing business with Tradebank, in or about April of 2012, and that Carson and BRI began soliciting Tradebank customers for that competing business in the Territory covered by the Franchise Agreement on or about August 2, 2012, although the Franchise Agreement between FBE and Tradebank had not been terminated at that time. Id. at ¶¶ 15-19. Tradebank alleges that Carson, acting in concert with the business entities that he owns or controls, FBE and BRI, violated the terms of the Franchise Agreement with Tradebank. Plaintiffs have asserted claims of breach of contract against Carson and FBE; amounts owed on Promissory Notes and for Loan and Line of Credit against Carson and FBE; and tortious interference with contracts, business relationships, and potential business relationships against all Defendants.
*2 On January 10, 2014, Plaintiffs filed a Motion for Spoliation Sanctions [132]. Plaintiffs contend that Defendants destroyed “critical” email evidence related to the Defendants' solicitation of Tradebank customers after the start of this litigation. As a sanction for the Defendants' misconduct, Plaintiffs request that the Court strike the Defendants' Answer, dismiss the Defendants' counterclaims, enter a default judgment in favor of Plaintiffs, and award Plaintiffs monetary sanctions for all amounts expended by Plaintiffs in discovery in this action.
The undersigned heard oral argument on the Plaintiffs' Motion for Spoliation Sanctions on March 6, 2014.[2] Thereafter, on March 20, 2014, the undersigned issued an Order (“March 20 Order”) stating that “[t]he undersigned finds that further clarification as to at least one issue is necessary before issuing a ruling on the Motion [for Spoliation Sanctions].” March 20 Order [154] at 1. On April 3, 2014, Defendants filed the Affidavits of Tait Carson and Jacqueline Oliver in response to the March 20 Order, and on April 7, 2014, Plaintiffs filed a Response to Defendants' Notice of Filing Affidavits in Opposition to Motion for Spoliation Sanctions [156]. On April 10, 2014, Defendants then filed a Motion to Strike Plaintiffs' Response to Defendants' Notice of Filing Affidavits in Opposition to Motion for Spoliation Sanctions or, in the Alternative, for Leave to File a Reply Memorandum [157]. The Court issued an Order denying the Motion to Strike, but granting the alternative relief requested by Defendants, that is, the opportunity to file a reply memorandum. See Order dated May 8, 2014 [162]. Defendants filed their Reply Memorandum on May 22, 2014 [168].[3]
II. DISCUSSION
Plaintiffs request that the Court “harshly sanction Defendants for their blatant destruction and failure to preserve email evidence critical to the claims in this action.” Pl. Mot. [132] at 1. Plaintiffs argue that Defendants willfully destroyed emails sent to Tradebank customers that included information about the newly established BRI and solicited those customers to defect from Tradebank to sign up with BRI, and that Defendants did so after the start of this litigation when they knew that those emails were relevant to the issues in the case.[4] Plaintiffs also argue that Defendants failed to comply with the Court's prior discovery orders. As a sanction, Plaintiffs request that the Court strike the Defendants' Answer, dismiss the Defendants' counterclaims, enter a default judgment in favor of Plaintiffs, and award Plaintiffs monetary sanctions for all amounts expended by Plaintiffs in discovery in this action.
*3 In response, Defendants deny that they willfully destroyed any emails or violated the Court's orders. To the extent some responsive emails were lost or not produced, Defendants contend that their actions were not intentional or willful, and that sanctions are not warranted under the circumstances presented. Defendants argue further that, even if some sanctions were warranted, Plaintiffs have not established that they are entitled to the “unusual and drastic” sanctions they have requested. Defs. Resp. [138] at 2.
Plaintiffs requested, among other things, “[a]ny and all communications between [Defendants] and any client or former client of Tradebank in which you mentioned Barter Rewards or encouraged such client or former client to join any other barter business.” See Pl. First Request for Production of Documents [62-6] at Request No. 9.
The emails at issue in this dispute were sent by Defendants, or received by Defendants, in accounts in three separate email domains: @tradebank.com, @floridatradebank.com, and @barterrewards.com. Plaintiffs contend, and Defendants do not dispute, that Defendants sent emails to Tradebank customers related to Carson's newly formed business BRI from accounts within at least the @floridatradebank.com and @barterrewards.com domains, during the pendency of the litigation between the parties. Defendants, however, produced no emails from the @floridatradebank.com domain, and produced none of the specific customer solicitation emails discussed herein from the @barterrewards.com domain at least before this motion practice began. The Defendants' @tradebank.com email accounts were also nearly completely empty by the time Plaintiffs' took control of those accounts in August 2012. The specific facts with regard to the discovery of emails from these domains, or lack thereof, is explained below.
1. The Spoliation of the @floridatradebank.com Emails and Defendants' Evolving Explanations
FBE set up the domain @floridatradebank.com, and FBE employees used accounts from that domain for communications with Tradebank customers. See Oliver Dep., Pl. Ex. 3 [132-4], at 190-93. Defendants have not produced any emails from this domain, however, because those emails were destroyed by actions apparently taken by Defendants while the lawsuit was pending, as further described in detail below. Plaintiffs have obtained limited discovery of certain email communications from Defendants to Tradebank clients using this email domain, through third party discovery to those clients.
It is undisputed that, on August 2, 2012, an FBE employee named Jacqueline (Jacquie) Oliver, using the email address joliver@floridatradebank.com, sent an email to Tradebank customers[5] (the “August 2 email”) stating that it was sent “[o]n behalf of Tait Carson with Barter Rewards.” See Pl. Ex. 1 [132-2]. The email was titled “Farewell to Tradebank,” and included a large “Barter Rewards” logo, with directions to “click here” below the logo, and large text proclaiming “Barter Rewards Announcement.” Id. The text of the email read as follows:
The time has come after three and a half years for me to leave Tradebank. I want to take this opportunity to let you know what a great and distinct pleasure it has been to get to know each and every one of you. It is time to spread my wings beyond Tradebank with the current 21st Century of Barter.
I would love to meet with each and every one of you to thank you for support.
I am available always.
I can be reached on my cell phone at any time.
It is also undisputed that, on September 24, 2012, Jacqueline Oliver, using the email address joliver@barterrewards.com, sent an email to Tradebank customers (the “September 24 email”) stating that it was sent from “Tait Carson with Barter Rewards.” See Pl. Ex. 2 [132-3]. The email was titled “Last Chance to Transfer Trade,” and included a large “Barter Rewards” logo, with a sidebar directing recipients to “Call and See if you Qualify to join the Barter Rewards Network,” followed by a list of companies, apparently members of the network. Id. The text of the email read as follows:
Last Chance
We have had an overwhelming response with Trade Bank members wanting to convert their trade dollars into the new software. We will continue to convert some outstanding members that wish to join our team however, the cut off date for any transfer of trade dollars will end on September 28th.
Feel free to email us back or call the Barter Rewards office to see if you qualify to convert your trade dollars into the new software....
Once approved to become part of Barter Rewards you will be able to see the new members who have joined our network. Billboards, Restaurants, Tanning Salon, Laser hair removal, Roofer, Landscapers, Accountants, Doctors, Branding Company, Video Production, Attorneys, Handy Man, Car Lot, Taxidermist, and more.
Thank you for your time,
Tait Carson
Plaintiffs contend that, as a result of the August 2 and September 24 emails, and other emails sent by Defendants to Tradebank customers, more than 140 customers ultimately left Tradebank to join BRI. Pl. Br. [132-1] at 5. Plaintiffs further contend that, even after litigation began between the parties on July 25, 2012, the Defendants failed to preserve, and actively destroyed, many emails between the Defendants and the Tradebank customers establishing that Defendants solicited Tradebank customers in violation of the Franchise Agreement.
Defendants, however, produced neither of these nor any other emails from the @floridatradebank.com domain to Plaintiffs. First, in response to a Motion to Compel [62] filed by Plaintiffs on June 11, 2013, relating to the Plaintiffs' request to produce the emails at issue, the Defendants stated as follows in their response brief filed with the Court:
*5 On or about August 2, 2012, it was announced to the Florida Barter clients, to Tradebank and to others that Florida Barter and Carson would no longer be affiliated with the Tradebank system. At that time Tradebank terminated Florida Barter's franchise and cut off any access which Florida Barter and Carson had to the Tradebank computer server. All of Florida Barter's email and most of its business records were stored on the Tradebank server with Tradebank's consent. Thus both Florida Barter and Tradebank had access to all of that information while Florida Barter was affiliated with Tradebank.
Def. Resp. to Mot. to Compel [70] at 3. Defendants further stated that the Plaintiffs' Motion to Compel FBE to produce this information stored on Tradebank's server that “Tradebank possesses but refuses to turn over” to FBE is “puzzling, to say the least.” Id.
It appears to be undisputed that Defendants' statement to the Court that “all of Florida Barter's email” was stored on the Tradebank server was inaccurate, and Plaintiffs argue that Defendants knew that statement was false at the time it was made. The @floridatradebank.com email account used by Defendants to contact and solicit FBE clients was not stored on the Tradebank servers, but rather on the servers of a third party hosting service that Defendants paid for. Plaintiffs have produced email correspondence between Defendant Carson and the third party website administrator for the @floridatradebank.com domain as early as July 2012. See Pl. Ex. 8 [132-11] (email from Adam Taylor to Defendant Carson dated July 11, 2012, regarding Oliver's request to “cancel the website hosting”). FBE employee Oliver also testified during her deposition taken on July 10, 2013, that she used that email address with the domain @floridatradebank.com while she worked for FBE and used that domain for the majority of their communications with Tradebank customers. See Oliver Dep., Pl. Ex. 3 [132-4], at 190-93. Thus, Plaintiffs argue, the Defendants were aware that FBE employees were sending emails to Tradebank customers from the @floridatradebank.com account when they made the untrue statement to the Court that “all of Florida Barter's email” was stored on Plaintiffs' own server.
Judge Vining set a hearing on the Plaintiffs' Motion to Compel [62] for August 15, 2013. See Order [89] dated July 30, 2013. On that day, the parties entered a Consent Order in which the Motion to Compel was granted in large part. Consent Order Resolving Plaintiffs' Motion to Compel [97] (“Consent Order”) at 1 (“Plaintiffs' Motion to Compel is granted in the following manner.”). In the Consent Order, the Court ordered Defendants to “supplement their response to Interrogatory No. 8 to set forth the facts and circumstances relating to any loss of the email communications from the floridatradebank.com email addresses on or before August 21, 2013.” Id. at 1-2. The Court also ordered Defendants to “conduct a good faith search and produce all additional documents they can identify in response to Plaintiffs' First Request for Production of Documents,” but with certain limitations. Id.at 2. With respect to Plaintiffs' Requests to Produce Nos. 4, 9, and 10, for those current and former customers of Tradebank/FBE who joined BRI, the Court ordered Defendants to produce “all responsive documents up through, and fifteen days after, the date when such clients joined Barter Rewards.” Id. For those customers who did not leave Tradebank/FBE to join BRI, the Court ordered Defendants to produce “all responsive documents.” Id. In the Consent Order, Defendants also agreed, and the Court ordered them, to pay “as a discovery sanction to Plaintiffs, the sum of $4,000.00.” Id.at 3.
*6 After the Consent Order was signed by Judge Vining on August 15, 2013, the Defendants supplemented their discovery responses on August 19, 2013. See Pl. Ex. 4, Defs. Supp. Resp. to Interrogatories [132-5]. Defendants admitted in their supplemental responses that FBE employees did use the @floridatradebank.com email account to communicate with Tradebank customers, but stated that the @floridatradebank.com account had been discontinued and Defendants no longer had access to the emails on that account. Id. at 2-4. Carson explained that, when he stated in the Defendants' response to Plaintiffs' discovery requests that “all of Florida Barter's emails were done on the Tradebank.com server,” he “did not recall” that FBE employees had used the floridatradebank.com account. Id. He further explained that he had discontinued the use of the @floridatradebank.com account after August of 2012, because the account contained the name “Tradebank,” a trademark of Plaintiffs, and he believed that he was required to cease using that account. Id. Carson also identified Adam Taylor as the “website host” for the floridatradebank.com account. Id.at 3. Carson stated that, shortly after the termination of the relationship between Tradebank and FBE, he “advised the website host, Adam Taylor, that Florida Barter would not continue using the ‘floridatradebank.com’ website. When the website was discontinued, the email account was apparently discontinued with it.” Id. According to Carson, “it did not occur to me that we were supposed to continue it for purposes of a lawsuit.” Id. at 4.
Plaintiffs thereafter set Taylor's deposition for December 13, 2013, and two days before the deposition was scheduled, counsel for Defendants sent a letter to Plaintiffs' counsel dated December 11, 2013, in which they provided yet another response regarding the lost @floridatradebank.com emails, stating as follows:
Adam Taylor was an FBE client who used the Tradebank barter system. Taylor maintained the “Florida Tradebank” website while FBE was affiliated with the Tradebank barter system. When FBE's relationship with the Tradebank barter system was terminated in August 2012, Tait Carson notified Adam Taylor that the relationship had ended and that FBE understood that it was no longer to advertise any affiliation with Tradebank. This meant the website was useless to FBE. Taylor wanted a sum of money, believed to be several thousand dollars, from Carson to continue the website. Since it was of no use, Carson declined to pay the fee. Adam Taylor then cancelled the website, which also caused the cancellation of FBE's use of the “floridatradebank.com” email address. Tait Carson did not use the “floridatradebank.com” email, and it di [sic] not occur to him that he might need it in the future. Tait Carson called Adam Taylor after the “floridatradebank.com[”] issue arose in 2013. Taylor told Carson that he only kept the email for a short period of time after cancellation, and the email was no longer available. Barter Rewards did not ask Adam Taylor to join its barter system, and Taylor did not join the Barter Rewards barter system.
Pl. Ex., 5, Letter from Kenneth Rutherford to William Brent Ney and W. Bradley Ney, dated December 11, 2013 [132-6] (“Dec. 11 Letter”) at 2.
Plaintiffs argue that, much like Defendants' earlier statement that “all” of FBE's email was stored on the tradebank.com server turned out to be false, Defendants' statement in the Dec. 11 Letter regarding Taylor's demand of “several thousand dollars” from Carson to continue the floridatradebank.com account was also false. Taylor testified during his deposition on December 13, 2013, that the Defendants' website hosting fees of $14.99 per month had been prepaid through February 17, 2013. Pl. Ex. 6, Taylor Dep. [132-7] at 35-36; see also Pl. Ex. 8 (invoice marked “PAID” from “My Website Spot” to Tait Carson at “Tradebank International” dated July 5, 2012, indicating that the “bronze hosting package” was paid at a rate of $14.99 per month for a period of six months, from August 17, 2012, through February 17, 2013). According to Taylor, he never requested “thousands of dollars” from Defendants to continue hosting the website, and they were not required to pay any additional fees to maintain the website through February 17, 2013. Pl. Ex. 6, Taylor Dep. [132-7] at 36-37; see alsoTaylor Dep. at 73 (when shown the statement from Defendants' counsel in the Dec. 11 Letter that “Taylor wanted a sum of money, believed to be several thousand dollars, from Carson, to continue the website,” and asked “Is that sentence accurate?” Taylor responded “Absolutely not.”).
*7 Taylor testified further that the statement of Defendants' counsel in the Dec. 11 Letter that “Adam Taylor then cancelled the website, which also caused the cancellation of FBE's use of the ‘floridatradebank.com’ email address” was also false. Pl. Ex. 6, Taylor Dep. [132-7] at 75. According to Taylor, he did not take any steps to cancel the floridatradebank.com website. Id. Instead, Carson or someone else using the user name and password assigned to the owner of the domain name took active steps to disassociate the website's URL address from Taylor's server and apparently link it to another server. Id. at 75-76. As Taylor had previously advised Defendant Carson would happen as a result, this action caused all the emails in the @floridatradebank domain to “go down.”[6] Taylor testified that his server kept the email account active until October 12, 2012, and a backup of the emails would have been kept for approximately 30 days after that. Id. at 69-70, 76-77. Taylor testified further that Carson did not ask him for a backup of the emails on that account until July of 2013, which was after Plaintiffs filed their initial Motion to Compel. Id. at 95. As a result, the emails associated with the @floridatradebank.com domain no longer exist. The only emails obtained by Plaintiffs from these accounts have been produced by third parties who received those emails from Defendants.
2. Missing @tradebank.com Emails
In addition to the @floridatradebank.com account, Defendants also used an @tradebank.com account to send emails to Tradebank customers. See Pl. Ex. 9, Hale Decl. [132-12] at ¶ 3. According to Plaintiffs, Carson and FBE were provided with @tradebank.com email addresses in 2009 when they joined the Tradebank system, and those accounts were maintained through August of 2012. Id. Carson was provided with the email address of tcarson@tradebank.com and Oliver was provided with the email address of joliver@tradebank.com; both of them were provided with passwords to access those accounts. Id. at ¶ 4.
After the relationship between Tradebank and FBE ended in August of 2012, Tradebank reset the login credentials on Defendants' @tradebank.com accounts in order to deny Defendants access to those accounts. Id. at ¶ 5. According to Plaintiffs, in connection with this lawsuit, Tradebank used the new login credentials to access Defendants' email accounts on the @tradebank.com server to obtain any relevant emails for this litigation, but “it became apparent that Defendants had taken steps shortly before their termination to destroy email evidence that existed in those accounts.” Id. at ¶ 7. Plaintiffs then learned that all emails on the tcarson@tradebank.com account dated before August 2, 2012, the day Defendants announced the launch of their new barter exchange BRI, had been deleted, and all but five emails dated before August 2, 2012, had been deleted from joliver@tradebank.com. Id. Some of the emails that were not destroyed from the joliver@tradebank.com had been stored in “chat sessions,” so they were not stored in the “inbox” or “sent” folders of that account. Id. at ¶ 8; see also Pl. Ex. 10 (some of the “chat sessions” recovered from joliver@tradebank.com indicating communications with jeanatbarterrewards@gmail.com regarding customers' account information).
3. Missing and/or Non-Produced Emails from @barterrewards.com
After the Defendants established BRI, they also maintained email accounts at the domain barterrewards.com, and Plaintiffs contend that they used those accounts to communicate with Tradebank customers. As discussed above, in the Consent Order, Defendants agreed to produce the documents requested in Plaintiffs' Requests to Produce Nos. 4, 9, and 10, with certain limitations. Consent Order at 2. For those current and former customers of Tradebank/FBE who joined BRI, Defendants agreed to produce “all responsive documents up through, and fifteen days after, the date when such clients joined Barter Rewards.” Id. For those customers who did not leave Tradebank/FBE to join BRI, Defendants agreed to produce “all responsive documents.” Id.
*8 According to Plaintiffs, however, “Defendants inexplicably omitted all emails showing attempts by Defendants to solicit Tradebank customers.” Pl. Br. [132-1] at 11. Plaintiffs contend that Defendants failed to produce a number of emails with Tradebank customers, principally from the @barterrewards domain, that Plaintiffs were able to obtain independently from third parties. See Pl. Ex. 2 [132-3], Pl. Ex. 11-14 [132-14-17]. Although Plaintiffs admit that they “have no way of knowing whether Defendants have destroyed those emails or simply failed to produce them,” the Plaintiffs argue that Defendants should be sanctioned for their failure to produce the relevant emails, in blatant violation of the Consent Order. Pl. Br. [132-1] at 12.
Because the emails identified by Plaintiffs were obviously discoverable and appeared to be clearly within the scope of the Consent Order requiring production of Defendants' communications with prospective clients, the Court ordered Defendants to explain whether Plaintiffs' Exhibits 2, 11-14 had been spoliated, or rather were withheld from production, and if so, why they were withheld. See March 20 Order [154] at 2-3.
On April 3, 2014, Defendants filed the Affidavits of Tait Carson and Jacqueline Oliver in response to the March 20 Order. Carson states that, in August, September, or October of 2013, he conducted a search of the tcarson@barterrewards.com account by entering the names and email addresses of all Barter Rewards clients who had present or former Tradebank accounts and who had converted their barter accounts to Barter Rewards. Carson Aff. [155-1] at ¶ 5. He states that he also used the keyword “Tradebank” in the search. Id. He claims that he did not search for email with Tradebank members who did not convert to Barter Rewards “because I did not think that those Tradebank members had anything to do with this case or that Tradebank wanted those documents.” Id. He also claims that he did not delete any emails. Id. at ¶ 6. According to Carson, he did not produce the email in Plaintiffs' Exhibit 14 because he believes that it was “privileged communication between Kelly Cary and me about her possibly being the attorney for Florida Barter and me against Tradebank.” Id. at ¶ 7.
Carson further states that he has recently “gone back and reviewed individually all of the email with my email address to attempt to be sure that I produced all of my email with former Florida Barter clients who were Tradebank members, regardless of whether or not they are members of Barter Rewards,” and he states that he has sent the results of that search to his attorney to produce to Tradebank. Id. at ¶ 9. He also states that, although he believed that Marlene Quattrini had conducted a search of her email account between August and October of 2013, he has “recently learned that Marlene may not have done that.” Id. at ¶ 10. He states that he has conducted a search of the marlene@barterrewards.com email account to obtain all email with Florida Barter clients who were also Tradebank members, regardless of whether they converted their accounts to Barter Rewards, and will forward the documents from that search to his attorney for production to Tradebank. Id.
Carson states that at least one of the solicitation emails obtained by Plaintiffs in third party discovery, Plaintiffs' Exhibit 11, is no longer on the @barterrewards server and appears to have been deleted. Id. at ¶ 8. Carson suggests that this deletion was not purposeful and appears to have been the action of a former employee who left the company. Id. The email was dated in January 2013, nearly six months into the litigation, and after Plaintiffs served their First Request for Production of Documents, which demanded production of prospective client correspondence. Defendants offer no information as to what steps were taken to preserve obviously discoverable emails such as Plaintiffs' Exhibit 11.
*9 In Oliver's Affidavit, she states that, after consulting with Carson, she conducted a search of the joliver@barterrewards.com account by entering the names and email addresses of all Barter Rewards clients who had present or former Tradebank accounts and who had converted their barter accounts to Barter Rewards. Oliver Aff. [155-2] at ¶ 5. She states that, like Carson she also used the keyword “Tradebank” in the search. Id. She states that she did not search for email with Tradebank members who did not convert to Barter Rewards “because I did not realize that Tradebank wanted those documents or that they had anything to do with this case.” Id.According to Oliver, she did not produce the “blast emails” from Barter Rewards to clients that were sent through constantcontact.com, because “I did not understand that Tradebank wanted those blast emails to be produced by Barter Rewards or that those documents had anything to do with this case.” Id. She claims that the “constant contact” blast emails “are being produced regardless of whether they are covered by the Order to Compel.” Id.
Oliver also claims that she did not delete any email, nor is she aware of anyone else deleting email. Id. at ¶ 7. She states that she had requested that Marlene Quattrini search her email account (marlene@barterrewards.com), but like Carson, she recently learned that Quattrini “did not conduct the search she agreed to do.” Id. at ¶ 6. She further states that she recalls seeing the “blast email” in Plaintiffs' Exhibit 2 during the search, but she did not produce it to Tradebank because “I believed that Tradebank already had it, and there was no need to give it to them again.” Id. at ¶ 9. She also states that the email in Plaintiffs' Exhibit 12 between her and Adam Taylor did not show up in her search because Taylor did not join Barter Rewards. Id. at ¶ 10.
4. Other Allegations
Furthermore, in addition to arguing that Defendants have engaged in active spoliation of evidence, and have otherwise failed to produce relevant and discoverable emails in violation of the Consent Order, Plaintiffs argue that Defendants have made other false statements during the course of discovery. According to Plaintiffs, the Defendants' numerous false statements support the Plaintiffs' argument that Defendants have acted in bad faith in failing to preserve the emails requested by Plaintiffs, and that strong sanctions are warranted as a result. Plaintiffs contend that Defendants falsely asserted that: Carson did not own BRI and had no control over it, when in truth he is the sole shareholder; FBE could recall no communications with Tradebank members after August 1, 2012, when in truth Oliver sent an email to all of FBE's Tradebank members on August 2, 2012; Oliver did not have any involvement with BRI until July 15, 2012, when in truth Oliver's employment with BRI began in at least February of 2012; and BRI employed no FBE employees other than Oliver, when in truth BRI employed a broker from FBE who was listed in the August 2 email. SeePl. Br. at 13; Pl. Reply in support of Mot. to Compel [81] at 2-3.
In response to the Plaintiffs' arguments, Defendants largely do not dispute most of the Plaintiffs' factual allegations. Indeed, at oral argument, counsel for Defendants admitted that Defendant Carson had been somewhat “loose” with the facts during discovery. Defendants argue, however, that, although it is “possible” that emails may have been lost on the tradebank.com and floridatradebank.com servers, Plaintiffs have not presented any evidence that Carson or anyone else acting on behalf of Defendants willfully destroyed the emails, such that the drastic sanctions requested by Plaintiffs are warranted. Defendants argue further that Plaintiffs have failed to present evidence that they have been prejudiced by any alleged spoliation of evidence, because Plaintiffs have admitted that they obtained many of the emails at issue by other means.
Plaintiffs have moved for sanctions against Defendants pursuant to Rule 37(b) and (c) of the Federal Rules of Civil Procedure. Plaintiffs request that the Court strike the Defendants' Answer, dismiss the Defendants' counterclaims, enter a default judgment in favor of Plaintiffs, and award Plaintiffs monetary sanctions for all amounts expended by Plaintiffs in discovery in this action as a sanction against the Defendants for their spoliation of critical evidence in this case.
*10 Rule 37(b) of the Federal Rules of Civil Procedure provides, in relevant part, as follows:
(b) Failure to Comply with a Court Order....
(2) Sanctions Sought in the District Where the Action is Pending.
(A) For Not Obeying a Discovery Order. If a party ... fails to obey an order to provide or permit discovery, including an order under Rule 26(f), 35, or 37(a), the court where the action is pending may issue further just orders. They may include the following: ...
(ii) prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence;
(iii) striking pleadings in whole or in part; ...
(vi) rendering a default judgment against the disobedient party ....
FED. R. CIV. P. 37(b)(2)(A).
In addition, Rule 37(c) further provides in relevant part, as follows:
(c) Failure to Disclose, to Supplement an Earlier Response, or to Admit.
(1) Failure to Disclose or Supplement. If a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at trial, unless the failure was substantially justified or is harmless. In addition to or instead of giving this sanction, the court, on motion and after giving an opportunity to be heard:
(A) may order payment of the reasonable expenses, including attorney's fees, caused by the failure;
(B) may inform the jury of the party's failure; and
(C) may impose other appropriate sanctions, including any of the orders listed in Rule 37(b)(2)(A)(i)-(vi).
FED. R. CIV. P. 37(c)(1).
“Rule 37 sanctions are intended to prevent unfair prejudice to the litigants and insure the integrity of the discovery process.” Gratton v. Great Am. Commc'n, 178 F.3d 1373, 1374 (11th Cir. 1999) (per curiam). Furthermore, a district court has substantial discretion in deciding whether to impose sanctions under Rule 37. Chudasama v. Mazda Motor Corp., 123 F.3d 1353, 1366 (11th Cir. 1997); Malautea v. Suzuki Motor Co., Ltd., 987 F.2d 1536, 1542 (11th Cir. 1993). A court may consider various factors in considering what sanctions to impose upon a litigant who has failed to comply with the discovery obligations under the Federal Rules, including the unsuitability of another remedy, the intransigence of the party, and the absence of a reasonable excuse for the failure to comply. See National Hockey League v. Metro. Hockey Club, Inc., 427 U.S. 639 (1976).
In general, a severe sanction such as the striking of a pleading, entry of a default judgment, or the dismissal of a case should only be viewed as a last resort and should not be imposed if less drastic sanctions will ensure future compliance with the court's orders. See Malautea, 987 F.2d at 1542; see also Navarro v. Cohan, 856 F.2d 141, 142 (11th Cir. 1988); Hashemi v. Campaigner Publications, Inc., 737 F.2d 1538 (11th Cir. 1984); Equal Employment Opportunity Comm'n v. Troy State Univ., 693 F.2d 1353, 1358 (11th Cir. 1982). Nevertheless, a court is not required to impose lesser sanctions before imposing the severe sanction of striking a pleading or dismissing a case; when the court finds that less drastic sanctions would be ineffective, “Rule 37 does not require the vain gesture of first imposing those ineffective lesser sanctions.” Malautea, 987 F.2d at 1544.
*11 Before a district court may impose the ultimate sanctions of dismissal or a default judgment, the court must find that the litigant acted willfully or in bad faith in disobeying the court order. See Malautea, 987 F.2d at 1542. “Violation of a discovery order caused by simple negligence, misunderstanding, or inability to comply will not justify a Rule 37 default judgment or dismissal.” Id. (citing In re Chase and Sanborn Corp., 872 F.2d 397, 400 (11th Cir. 1989) (inability to comply); Equal Employment Opportunity Comm'n v. Troy State Univ., 693 F.2d 1353, 1357 (11th Cir. 1982) (“A party's simple negligence or other action grounded in a misunderstanding of a court order does not warrant dismissal.”)); see also Chudasama, 123 F.3d at 1371. The severe sanction of a default judgment or a dismissal is appropriate, however, when a party's failure to comply with its discovery obligations is “due to wilfulness, bad faith or fault.” Phipps v. Blakeney, 8 F.3d 788, 790 (11th Cir. 1993) (citing National Hockey League v. Metro. Hockey Club, Inc., 427 U.S. 639 (1976)).
Plaintiffs have moved for sanctions against Defendants specifically for their alleged spoliation of evidence, not merely for their alleged violation of the Consent Order in which they agreed to produce certain responsive documents. “Spoliation is the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation.” Graff v. Baja Marine Corp., 310 Fed. Appx. 298, 301 (11th Cir. 2009) (unpublished) (quoting West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999)); see also In re Delta/Airtran Baggage Fee Antitrust Litig., 770 F.Supp.2d 1299, 1305 (N.D. Ga. 2011) (Batten, J.). “This obligation to preserve evidence arises when the party has notice that the evidence is relevant to litigation—most commonly when suit has already been filed, providing the party responsible for the destruction with express notice, but also on occasion in other circumstances, as for example, when a party should have known that the evidence may be relevant to future litigation.” Kronisch v. United States, 150 F.3d 112, 126 (2d Cir. 1998)); (quoted in Griffin v. GMAC Commercial Fin. L.L.C., No. 1:05-CV-199-WBH-GGB, 2007 WL 521907, at *3 (N.D.Ga. Feb.15, 2007) (Brill, M.J.)). The party may be on notice of potential litigation, not only actual litigation. Griffin, 2007 WL 521907, at *3.
As the parties seeking sanctions against Defendants for the alleged spoliation of evidence, Plaintiffs must prove that: (1) the missing evidence existed at one time; (2) the Defendants had a duty to preserve the evidence; and (3) the evidence was critical to an element of the Plaintiffs' case. See Delta, 770 F.Supp.2d at 1305 (citing Walter v. Carnival Corp., No. 09-20962-CIV, 2010 WL 2927962, at *2 (S.D.Fla. July 23, 2010)); see also Dombrowski v. Lumpkin County, No. 2:11-CV-0276-RWS-JCF, 2013 WL 2099137, at *13 (N.D.Ga. Mar 21, 2013) (Fuller, M.J.), adopted by No. 2:11-CV-0276-RWS, 2013 WL 2096658 (N.D.Ga. May 13, 2013) (Story, J.). Significantly, even if the Plaintiffs are able to establish all three of these elements, “a party's failure to preserve evidence rises to the level of sanctionable spoliation ‘only when the absence of that evidence is predicated on bad faith,' such as where a party purposely loses or destroys relevant evidence.” Delta, 770 F.Supp.2d at 1305 (quoting Walter, 2010 WL 2927962, at *2) (quoting Bashir v. Amtrak, 119 F.3d 929, 931 (11th Cir. 1997)).
Once a court makes the finding that a party has engaged in the spoliation of evidence, the court must then determine whether sanctions are appropriate and what specific sanctions should be imposed. The Eleventh Circuit has held that five factors should be considered in determining what sanctions, if any, should be imposed on the offending party: (1) whether the opposing party was prejudiced as a result of the destruction of evidence; (2) whether the prejudice could be cured; (3) the practical importance of the evidence; (4) whether the spoliating party acted in bad faith; and (5) the potential for abuse if expert testimony about the evidence provided by the spoliator were not excluded.[7] Flury v. Daimler Chrysler Corp., 427 F.3d 939, 945 (11th Cir. 2005); see also Dombrowski, 2013 WL 2099137 at *13; Connor v. SunTrust Bank, 546 F.Supp.2d 1360 (N.D. Ga. 2008) (Vining, J.); Griffin, 2007 WL 521907, at *3.
*12 The Flury Court further stated that, with regard to the fourth factor, there need not be a showing of malice in order to find bad faith. Flury, 427 F.3d at 946. In addition, “[t]he court should weigh the degree of the spoliator's culpability against the prejudice to the opposing party.” Id.
The degree or nature of bad faith necessary for the imposition of spoliation sanctions is not entirely clear. The Eleventh Circuit has said that the key to unlocking a court's inherent power to sanction spoliation requires a finding of bad faith. Thus, even though other factors supporting a finding of spoliation may be present, an adverse inference is drawn from a party's failure to preserve evidence only when the absence of that evidence is predicated on bad faith.... While the degree of bad faith necessary to impose sanctions may not be entirely clear, it is clear that simple negligence is not enough but actual malice is not required.
Stanfill v. Talton, 851 F.Supp.2d 1346, 1362 (M.D.Ga. 2012) (quoted in Dombrowski, 2013 WL 2099137 at *13) (internal quotes and citations omitted); see also Mann v. Taser Int'l, Inc., 588 F.3d 1291, 1310 (11th Cir. 2009) (malice is not required for finding of bad faith); Bashir, 119 F.3d at 931 (more than “mere negligence” in losing or destroying evidence is required to sustain an inference of consciousness of a weak case); Preferred Care Partners Holding Corp. v. Humana, Inc., 2009 WL 982460 at *7 (S.D.Fla. 2009) (“grossly negligent” conduct is insufficient to support finding of bad faith).
1. Responsive Emails Were Destroyed In Violation Of A Duty To Preserve And Others Were Not Produced In Violation Of A Clear Court Order
The Court is compelled to agree with Plaintiffs that relevant emails were destroyed from the @floridatradebank email account after litigation began and/or was foreseeable, and that Defendants have made multiple inaccurate statements about the circumstances. The Court also finds that Defendants failed to preserve certain emails from the @barterrewarrds email account well after the institution of litigation, and failed to comply with a prior Court order to diligently find and produce other relevant emails from that account.
Plaintiffs have pointed to several clearly discoverable emails by which Defendants contacted and in many cases blatantly solicited Plaintiffs' customers. The August 2, 2012 email from Defendants' employee Oliver's @floridatradebank.com email, sent “on behalf of Tait Carson with Barter Rewards,” announced Carson's departure from FBE, and attached a link to this new Barter Rewards announcement in which he declared he was joining “the current 21st Century of Barter.” Carson stated “I can be reached on my cell phone at any time,” and “I would love to meet with each and every one of you to thank you for your support.” Pl. Ex. 1 [132-2]. This email was sent less than two weeks before this lawsuit was filed, and after Defendant FBE initiated a competing lawsuit against Plaintiffs in Florida concerning this same subject matter. See July 24, 2012 lawsuit [10-2].
There is no dispute that this email–and all other @floridatradebank.com emails–were destroyed during the litigation. Plaintiffs have discovered it solely by a production from one of the third parties who received the solicitation. Plaintiffs have also established that the @floridatradebank.com domain housed the primary email accounts used by FBE employees to communicate with clients while they were under the franchise agreement with Plaintiffs. See Oliver Dep., Pl. Ex. 3 [132-4], at 190-93. It is therefore reasonable to infer that Plaintiffs' Exhibit 1 was not the only discoverable email that once existed in the @floridatradebank.com accounts but is now lost.
*13 An employee of Defendants also sent an email on August 2, 2012 from the @barterrewards.com domain to a Tradebank client, stating “What day can you meet with Tait? We have a lot of new exciting opportunities to share with you. I believe you will be happy :)” Pl. Ex. 13 [132-16]. Defendants followed up the August 2 solicitations with a more blatant solicitation on September 24, 2012, from the @barterrewards.com address, which announced the “last chance” to transfer, and that there had already been “an overwhelming response with Trade Bank members wanting to convert their trade dollars into the new software.” Pl. Ex. 2 [132-3]. Plaintiffs point to yet another email solicitation from the @barterrewards.com domain, on January 4, 2013, stating “[w]e have converted nearly every member from Trade Bank over to the new company and would like to do the same with you.” Pl. Ex. 11 [132-14]. Both of these blatant solicitations were sent during the pendency of this case.
There is no dispute that these @barterrewards.com emails were not produced either and, just like the August 2 @floridatradebank.com email, were obtained by Plaintiffs only in third party discovery. Nor do Defendants argue that they were unaware that emails of this sort would be a potential subject of discovery in this case. Indeed, from the inception of this case the litigation has circled on whether Defendants violated and/or are bound by the restrictive covenants preventing their solicitation of Plaintiffs' customers. It was plainly foreseeable that emails to Plaintiffs's customers would be discoverable in light of these claims.
As to Plaintiffs' Exhibit 11, Defendants state that this email does not exist on the server any more. Carson Aff. [155-1] ¶ 8. Defendants assert that this deletion was not purposeful and appears to have been the action of a former employee who left the company. Id. But this solicitation email was sent, and therefore also destroyed, after the inception of this case and after the service of the request that called for the document's production. Defendants do not establish what if any steps were taken to ensure preservation of such obviously discoverable email sent during the pendency of the litigation.
As to Plaintiffs' Exhibits 2 and 13, Defendants state that these emails were not destroyed and still exist. Exhibit 2 was purposefully not produced because the BRI employee who searched for responsive emails “believed Tradebank already had it, and there was no need to give it to them again,” and because it was a “blast” email that was sent through a different service. Oliver Aff. [155-2] at ¶ 9. Plaintiffs' Exhibit 13 has been located, but it “did not show up” in the original discovery search, because “none of the Tradebank members sending or receiving the emails ... became members of Barter Rewards.” Id. at ¶ 8. The Court's Order of August 15, 2013, however, had made expressly clear that correspondence was required to be produced even if the client did not switch to Barter Rewards. Consent Order [97] at 2 (“For current and former Tradebank/Florida Barter clients who did not join Barter Rewards, Defendants shall produce all responsive documents.”) (emphasis added). Nevertheless, even after this clear Order, Defendant Carson states “I did not search for email with Tradebank members who did not convert to Barter Rewards because I did not think that those Tradebank members had anything to do with this case or that Tradebank wanted those documents.” Carson Aff. [155-1] at ¶¶ 2-3.
Finally, Defendants had access to certain email accounts on the @tradebank.com server hosted by Plaintiffs until August 2, 2012, when Defendants announced their departure from Tradebank. Defendant Carson states that his @tradebank.com email account was his primary method of email communication at least through August 2, 2012. See Pl. Ex. 4, Defs. Supp. Resp. to Pl. First Interrogatories [132-5] at 2-3. Defendant Carson and Ms. Oliver deny that they deleted emails from this account. See Carson Aff. [155-1] at ¶ 6; Oliver Aff. [155-2] at ¶ 7. But after Plaintiffs took over these accounts on August 2–after Defendants' departure from Tradebank–Plaintiffs discovered no emails within the inbox or sent folders of Carson's @tradebank.com email account and only five emails from Oliver's @tradebank.com account (some of which were found in a folder including “chats” that were in a different folder than the ordinary inbox or sent items folders in the Oliver account). Pl. Ex. 9, Hale Decl. [132-12] at ¶¶ 1-7. These few “chat” files that were recovered confirmed that Ms. Oliver was using her @tradebank.com email account to engage in Barter Rewards's competing business. Unlike with the @floridatradebank.com account, however, Plaintiffs have not uncovered evidence of client solicitations using the @tradebank.com account.
*14 Thus, at a minimum, the Court finds that Defendants have failed to preserve obviously discoverable communications with Tradebank clients that Defendants were required to preserve, principally from the @floridatradebank.com email domain, but also in at least one case from the @barterrewards.com domain. The Court finds that Defendants also failed to preserve emails from the @tradebank.com domain likely related to the Barter Rewards business, although there is no concrete showing of customer solicitations from that account. And Defendants failed to produce other obviously discoverable documents, including customer solicitations, from the @barterrewards.com domain that the Court specifically ordered them to produce, even after monetary sanctions.
2. Defendants' Discovery Violations Reflect Bad Faith
The most difficult question is whether Defendants' discovery violations resulted from mere negligence, or rather reflect bad faith. Mistakes happen in discovery, and thankfully bad faith is rarely to blame. The Court, however, is troubled with the multiple compliance failures by Defendants, their apparent false statements about certain discovery issues, and their noncompliance with clear terms of a prior discovery order that imposed monetary sanctions. It bears recalling the highlights:
• Defendants stated in sworn interrogatory responses in April of 2013 that they did not “recall” initiating any solicitations of former clients whom Florida Tradebank represented in certain counties it described as the “former Florida Barter Territory.” Defs. Supp. Resp. to Pl. First Interrogatories [81-1] at 8.
• After Plaintiffs moved to compel, because Defendants objected to producing emails or other evidence of any communications with former Tradebank customers, Defendants asserted in Court filings, as late as June of 2013, that “All of Florida Barter's email and most of its business records were stored on the Tradebank server with Tradebank's consent. Thus both Florida Barter and Tradebank had access to all of that information while Florida Barter was affiliated with Tradebank ... [and] [Defendants] no longer have possession, custody or control, or even access, to the Florida Barter information stored on the server.” Def. Resp. to Mot. to Compel [70] at 3. Defendants do not now dispute that this statement was untrue because they were actually using accounts from at least two other email domains not housed on Tradebank's servers to communicate with prospective clients.
• The Defendants agreed to a Consent Order to compel, and monetary sanctions, after Plaintiffs revealed that Defendants had used other previously undisclosed email accounts, @floridatradebank.com and @barterrewards.com, to communicate with former Tradebank customers, and that these email accounts did not reside on Tradebank's servers.
• The Consent Order required Defendants to produce emails and other correspondence “[f]or current and former Tradebank/Florida Barter customers who joined Barter Rewards ... up through, and fifteen days after, the date when such clients joined Barter Rewards. For current and former Tradebank/Florida Barter clients who did not join Barter Rewards, Defendants shall produce all responsive documents.” Consent Order [97] at 2.
• Defendants then issued supplemental discovery responses stating that the @floridatradebank.com website and emails had been discontinued and that Defendants no longer had access to them. In a letter from counsel dated December 11, 2013, Defendants asserted that in August 2012, Adam Taylor, the website administrator, “wanted a sum of money, believed to be several thousand dollars, from Carson to continue the website. Since it was of no use to Carson, Carson declined to pay the fee. Adam Taylor then cancelled the website, which also caused the cancellation of FBE's use of the ‘floridatradebank.com’ email addresses.” Pl. Ex. 5 [132-6] at 2.
*15 • Mr. Taylor, when deposed, specifically denied the facts asserted by Defendants on December 11, 2013. He stated that Defendants' website hosting fees (a mere $89.94 for six months) had been paid through February 17, 2013, and he had not demanded additional funds to maintain it. Pl. Ex. 6 [132-7] at 35-37. Taylor pointed to a paid invoice corroborating that Defendants' web hosting fees were paid through February 17, 2013. Id. at 36; Pl. Ex. 7 [132-8].
• Mr. Taylor, directly contradicting Defendants' statements, testified that he had taken no steps to cancel the email account, but that it was canceled because Defendant Carson (or someone with his login credentials) took an affirmative step to remove the website from Taylor's servers. Pl. Ex. 6 [132-7] at 69, 75-76. This affirmative act that resulted in destruction of the @floridatradebank.com emails occurred in October of 2012, two months after the start of this case. Id.Defendants do not deny that the story about Adam Taylor cancelling the website and destroying emails was untrue.
• After Defendants departed Tradebank on August 2, 2012, and Plaintiffs reviewed the emails left in Defendants' @tradebank.com email accounts, those accounts were nearly empty, despite Carson's testimony that this was the email account that he personally used. SeePl. Ex. 9, Hale Decl. [132-12] at ¶ 7; Pl. Ex. 4, Defs. Supp. Resp. to Interrogatories [132-5] at 2-3.
• Defendants also did not produce solicitation communications with former Tradebank clients from the second email account, @barterrewards.com, even after being ordered to do so. At least one such email, Plaintiffs' Exhibit 11, was destroyed after the document request calling for its production was served. At least two others were not produced, even after the Court's August 15, 2013 Order. In one case, Plaintiffs' Exhibit 2, it was purposefully withheld because Defendants “believed Tradebank already had it, and there was no need to give it to them again.” Oliver Aff. [155-2] at ¶ 9. It was also unilaterally decided, without apparent disclosure to Plaintiffs, that Tradebank did not want this email, because it was a “blast email” conducted through a service called “constantcontact.com,” which was used “by Barter Rewards primarily to advise Barter Rewards clients of various products and services being offered for purchase and sale in the Barter Rewards system.” Id. This was all so, even though this search and production effort was in the context of a Court-ordered “good faith” search for all solicitation correspondence with Tradebank/Florida Barter clients. Consent Order [97] at 2.
• In another case, Plaintiffs' Exhibit 13, the document “did not show up” in the discovery search, because “none of the Tradebank members sending or receiving the emails ... became members of Barter Rewards.” Id. at ¶ 8. This was so, even though the Court-ordered “good faith” search specifically required Defendants to produce communications with clients who declined to switch to Barter Rewards. Consent Order [97] at 2.
The combination of all of these and other misleading statements, changing stories, and failures to comply in good faith with Court orders, suggests at least seriously reckless disregard for Defendants' discovery obligations and for the Court's authority. The Court is forced to question why, for example, if the destruction of the @floridatradebank.com emails were a simple mistake, would Defendants assert a story about Adam Taylor demanding thousands of dollars in additional fees that was simply untrue. The Court also questions why, if Defendants were operating in good faith, would Defendants engage in such a dilatory search and production effort from the @barterrewards.com email account, even after they were sanctioned for prior discovery failings. It is the pattern and totality of violations that makes it exceedingly difficult to find good faith by Defendants or to credit their version of any factually disputed point.
*16 To be clear, the Court does not specifically find malice or fraud, because the existence of malice or fraud is not necessary to find. It is sufficient that the Court finds that Defendants acted in bad faith in allowing the @floridatradebank.com and other emails to be destroyed, and in not producing other obviously discoverable emails expressly required by Court order. And Defendants' evolving explanation of their email situation was seriously irresponsible and vexatious. This reflects a culpability beyond mere negligence.
3. These Discovery Violations Prejudice Plaintiffs
Plaintiffs' case is based on the allegation that Defendants breached restrictive covenants by soliciting Plaintiffs' customers. Defendants' email solicitations to Plaintiffs' customers are therefore exactly what Plaintiffs seek to prove liability and damages. Defendants' spoliation of emails and failure to comply with Court orders to produce such emails therefore likely denied Plaintiffs obviously discoverable emails relating to this core subject of discovery.
There is no question that discoverable emails were destroyed, because Plaintiffs have obtained some of those emails in discovery from third parties. In other words, we need not speculate as to whether Defendants contacted Tradebank clients via emails that have not been produced and in some cases were destroyed. We know that Defendants did so because Plaintiffs happened to discover some of these communications through independent investigation. Defendants' employees have also testified that they used the @floridatradebank.com account–which Defendants completely spoliated after this lawsuit began–as a mode of emailing Tradebank customers during the time period covered by the Franchise Agreement. See Pl. Ex. 3, Oliver Dep. [132-4], at 190-93. And Carson stated that he mainly used the @tradebank.com email account, which he left completely empty upon his departure on August 2, 2012. See Pl. Ex. 4, Defs. Supp. Resp. to Interrogatories [132-5] at 2-3; Pl. Ex. 9, Hale Decl. [132-12] at ¶ 7.
Because the few emails that have been obtained show active solicitation of Tradebank clients, it stands to reason that other emails of that same nature existed but were not obtained in the limited third party discovery Plaintiffs received. The facts therefore establish the likelihood that discoverable, relevant emails showing solicitation of Plaintiffs' customers and other subjects relating to this case were lost.
While Plaintiffs obtained Defendants' solicitation emails from certain third parties, third party discovery is not a substitute for complete responses from Defendants. Plaintiffs cannot meaningfully seek third party discovery from the 100 or more customers that Defendants appear to have contacted. And these third parties may not have maintained all relevant communications, as they were not under the same responsibility as the parties were to preserve obviously discoverable material relating to this case. To some unknown degree, therefore, Plaintiffs have been denied discovery as to the full extent of Defendants' solicitation of Plaintiffs' clients.
4. The Prejudice Is Reasonably Curable through Evidentiary, Monetary and Other Sanctions
Despite Defendants' inequitable conduct, the Court must give serious pause before recommending imposition of the case-dispositive sanctions requested by Plaintiffs. While the courts must not shirk from deterring discovery abuse, the courts also respect a “strong policy that cases be decided on the merits.” See U.S. v. Shaffer Equipment Co., 11 F.3d 450, 462 (4th Cir. 1993). Of course, even the harshest dispositive sanctions can be necessary in particular cases “to preserve the integrity of the judicial process in order to retain confidence that the process works to uncover the truth.” Silvestri v. Gen. Motors Corp., 271 F.3d 583, 590 (4th Cir. 2001).
*17 In this case, the Court finds that the prejudice to Plaintiffs is reasonably curable through sanctions less severe than default judgment or preclusion of defenses. We may not discover the exact scope of Defendants' solicitation of Plaintiffs' customers, particular in the first few months of the alleged breach, while the now-deleted @floridatradebank.com and @tradebank.com accounts were operational. But Plaintiffs have been able to discover generally that Defendants were contacting Tradebank clients, including through “blast” emails. Several of the emails obtained by Plaintiffs were obviously disseminated en masse, and appear to be generally addressed to all Tradebank clients. These emails on their face tend to prove that Defendants were contacting all of Tradebank clients and not just the particular recipients who happened to produce the emails in third party discovery.
The District Court can also deliver–and the undersigned recommends that it deliver–an adverse inference instruction to the jury. Specifically, the District Court may instruct the jury that emails were not maintained by Defendants in violation of a duty to maintain them, and that the jury may infer that those emails would have revealed further solicitation of Tradebank clients consistent with the other emails presented in the case. This is a powerful inference that allows Plaintiffs an evidentiary foundation to argue that all of the Tradebank clients who switched to Defendants during this period did so as the result of a solicitation, whether an email to every such client is introduced in evidence or not. At the same time, the adverse inference instruction is narrowly tailored to the specific prejudice Plaintiffs have suffered, that is, the denial of discovery of Defendants' solicitation efforts.
The Court is concerned that more wide ranging, dispositive sanctions would be disproportionate to the harm imposed. Defendants' discovery violations relate to a single issue that, while important, is but one issue in the case. Defendants have asserted legal defenses that, if found to be meritorious, would render moot the question of whether they improperly solicited Plaintiffs' clients. Specifically, Defendants have moved for summary judgment asserting that the covenants were not enforceable as a matter of law. See Defs. Mot. for Partial Summary Judgment [133]. Striking the Defendants' answer or defenses or counterclaims would unnecessarily destroy such unrelated legal defenses or positions. By contrast, an adverse inference is enough to reasonably address the prejudice imposed while not impeding resolution of other unrelated legal and factual issues in the case.
There remains, of course, another substantial category of prejudice that Plaintiffs have suffered, that is, the expense and delay that has resulted from Defendants' vexatious and inequitable discovery conduct. In addition to compensation to Plaintiffs for this expense and delay, monetary sanctions are necessary to deter this sort of misconduct. Plainly, the $4,000 prior discovery sanction was not sufficient to get Defendants' attention, so amounts substantially in excess of that amount are necessary now.
The undersigned recommends that Defendants be liable to Plaintiffs for Plaintiffs' reasonable costs and fees associated with their pursuit of their discovery requests in this case, including depositions and preparation for such, pursuit of third party discovery, and any motion practice relating to Plaintiffs' discovery requests. The Court does not envision that this fee award would be limited to activities related specifically to this email issue but rather it would encompass all of Plaintiffs' activities in pursuing their own discovery requests to date. Not all of Plaintiffs' discovery related to these email issues, but it appears that much of it did, and many of the depositions covered questioning on this topic. Plaintiffs are entitled to the broadest formulation of this sanction to ensure that their harms are compensated. And to the extent they receive compensation in excess of the actual costs imposed by Defendants' spoliation and vexatious explanations, then that excess serves a purpose of deterrence as well.
*18 Finally, the Court ORDERS that the Defendants immediately: (a) implement procedures aimed to ensure no further destruction of potentially discoverable emails, (b) search for and produce responsive documents currently in their possession, custody and control within the scope of the Consent Order, (c) state in exact detail the search criteria that was implemented (including search terms) to gather responsive documents, and (d) provide certifications by counsel to Plaintiffs and the Court attesting that counsel has reviewed and supervised the development and implementation of the search criteria and certifies that to the best of their knowledge and due diligence the search and production is in compliance with the Consent Order.
III. CONCLUSION AND RECOMMENDATION
For the reasons discussed above, IT IS RECOMMENDED that Plaintiffs' Motion for Spoliation Sanctions [132] be GRANTED IN PART AND DENIED IN PART. Specifically, IT IS RECOMMENDED that the District Judge enter an order sanctioning Defendants by: (1) authorizing an adverse evidentiary inference as discussed above, and (2) awarding reasonable fees and costs as explained above. Otherwise, IT IS RECOMMENDED that the District Judge decline to strike any portion of the Answer and Counterclaims or preclude the submission of any defenses.
The Court also ORDERS that Defendants immediately provide the further discovery and certifications described in detail above.
This action has been referred to the undersigned pursuant to Local Rule 72.1A for the purpose of resolving any and all discovery motions, including the Plaintiffs' Motion for Spoliation Sanctions. See Order [123] dated December 4, 2013; Order [160] dated April 28, 2014; LR Rule 72.1A, NDGa. The discovery period ended on December 13, 2013, and there are no other discovery or other motions pending before the undersigned. SeeOrder [93] dated August 5, 2013. There may be future disputes of a similar nature that result in a subsequent referral back to the undersigned, for example as to the recommended award of attorney's fees. But at this time there is no matter pending that falls within the scope of the referral order, and thus the Clerk is DIRECTED to terminate the reference of this matter to the undersigned.
IT IS SO ORDERED and RECOMMENDED this 29th day of May, 2014.
Because Plaintiffs have requested dispositive relief, the undersigned treats the Motion for Spoliation Sanctions as governed by Fed.R.Civ.P. 72(b), which provides that a Magistrate Judge presented with a dispositive motion, absent consent from the parties, must present a recommended ruling to the District Judge.
The Court also heard oral argument on Defendants' Motion to Compel [103] and Plaintiffs' Motion to Quash Subpoenas [131]. The Court has issued a separate Order ruling on the Motion to Compel and Motion to Quash. See Order dated May 13, 2014 [164].
On May 29, 2014, after this Order had been drafted but before it was filed with the Clerk, Plaintiffs filed a Supplemental Brief in Support of the Motion for Spoliation Sanctions [170]. Plaintiffs contend that they have recently learned new information that they claim is relevant to their request for sanctions because it demonstrates the Defendants' bad faith. The undersigned has reviewed the Supplemental Brief and concludes that Plaintiffs' alleged new information does not change the rulings and recommendation contained herein, and therefore does not consider it material to this motion. The Court already independently finds bad faith. The allegations further do not alter the Court's assessment of appropriate sanctions. Even if the allegations are true, it remains that any prejudice suffered from the violations that are the subject of this motion can be addressed through the sanctions recommended herein. Moreover, Plaintiffs have not established how the April 2014 email that is the subject of the Supplemental Brief is relevant to their allegations in this lawsuit, which relates to alleged breaches of restrictive covenants extending for twelve months after termination of the Franchise Agreement in August of 2012. See Compl. [1] at ¶¶ 13-19.
This lawsuit was filed on August 14, 2012, but the litigation between the parties began several weeks earlier, on July 25, 2012, when Defendant FBE filed its own lawsuit against Plaintiffs in Florida on this same subject. See Florida Complaint [10-2]. That lawsuit has since been dismissed but the issues presented were substantively identical.
Because the Defendants failed to preserve these emails, or produce the emails to Plaintiffs, it is unknown how many Tradebank customers received this August 2 email. It is undisputed, however, that Oliver sent this email to at least some Tradebank customers, and Plaintiffs were able to obtain a copy of the email from some of the customers who received it. See Pl. Ex. 1 [132-2] (email dated August 2, 2012, from “On Behalf of Tait Carson with Barter Rewards,” joliver@floridatradebank.com, to Tradebank customer Cheryl Kelley, kelleychry@aol.com). The email itself appears to be addressed generally to numerous clients, and mass-disseminated. It does not appear to be specifically addressed to the particular recipient who produced it to Plaintiffs.
In response from a request from Oliver to cancel the website hosting in July 2012, Taylor sent an email to Carson confirming that request: “Tait, Jacquie asked to cancel the website hosting, I just need to confirm that you're aware of this. What are we doing with the website and emails? they will all go down too.” Pl. Ex. 8 [132-11], email from Adam Taylor (ataylor@mywebsitespot.com) to Tait Carson (tcarson@tradebank.com) dated July 11, 2012, at 1.