I. Procedural Posture

Evidentiary hearings were conducted on Plaintiffs’ Motion on March 2, March 15, and March 22, 2018. On March 2, 2018, the Court heard oral argument from Plaintiffs’ Counsel Pavneet Singh Uppal (“Mr. Uppal”) and from Defendants’ Counsel David Barton (“Mr. Barton”). (Doc. 168). The Court heard testimony at this hearing from Katya Lancero (“Ms. Lancero”), co-counsel of Defendants. Ms. Lancero was questioned by Mr. Uppal until the end of the day. At the conclusion of the hearing, the Court stated that it would continue the hearing to allow cross-examination of Ms. Lancero by Mr. Barton, assuming that Mr. Barton wanted to cross-examine her. Mr. Barton responded that he intended to do so. (Doc. 172 at 58). The Court continued the hearing to March 7, 2018. (Doc. 168). The hearing was reset by the Court to March 15, 2018, due to a calendar conflict. (Doc. 171). Late in the day on March 14, 2018, Defendants filed a Motion to Continue the hearing scheduled for the following day because Ms. Lancero was “feeling ill and has a fever.” (Doc. 174). At the hearing on March 15, 2018, the Court denied the Motion to Continue the evidentiary hearing. (Doc. 180). Ms. Lancero did not appear at the hearing. At that hearing, Mark Cardwell, Plaintiffs’ expert forensic examiner, Defendant Troy Clawson, and Attorney David Barton testified. (Id.) The hearing resumed for a third day on March 22, 2015. (Doc. 191). Ms. Lancero again did not appear. At the conclusion of the testimony, the Court heard oral argument from both parties on the Motion.

At the conclusion of the March 22, 2018, hearing, the Court issued its preliminary ruling on the Motion. (Doc. 103). The Court held that Plaintiffs were prejudiced by Defendants’ actions and therefore granted Plaintiffs’ Second Motion for Sanctions. (Doc. 103). The Court also struck Defendants’ Answers (Docs. 22 and 23) and entered default against Defendants. The Court denied Defendants’ Motion to Strike Portions of the Expert Testimony of Mark Cardwell (Doc. 139) and vacated the Final Pretrial Conference. Both Mr. Barton and Ms. Lancero were ordered to self-report to the Arizona State Bar Association, and to provide a transcript of their testimony and a copy of this Order to the State Bar. Lastly, the Court granted Defendants’ Motion to Withdraw as attorneys for the Clawsons and Accurate Chemical & Services (“ACS”). (Doc. 188).[2] It was made clear to the parties, however, that the ruling was only preliminary and that a written order would follow. This is that Order.

II. Factual Background

*2 After Defendants removed this action to federal court, Plaintiffs filed their first amended complaint on June 21, 2015. (Doc. 8). Plaintiffs allege in the Amended Complaint that Defendant Troy Clawson (“Clawson”) violated terms of the Agreement that prohibited the disclosure or use of Swisher’s confidential information, and prohibited him from soliciting Swisher’s employees to leave and join him at ACS. (Doc. 8 at 3). Plaintiffs further allege that ACS participated in soliciting Swisher’s employees and encouraged former Swisher employees to use Swisher’s confidential information to benefit ACS. (Id.) Among other claims, Plaintiffs allege Unfair Competition, Breach of Contract, and Breach of the Covenant of Good Faith and Fair Dealing against Clawson on behalf of himself and ACS. (Doc. 8).

A. The Parties

Plaintiffs Swisher Hygiene Franchise Corp., Swisher Hygiene, Inc., and Swisher International, Inc., (“Swisher”) and Defendant ACS and are in the commercial hygiene products and services industry. (Doc. 92 at 3). Defendant Troy Clawson (“Clawson”) has worked in this industry for 29 years. (Id.) In late 2011, Swisher purchased Clawson’s former employer, ProClean (where Clawson had worked for 24 years), and hired Clawson to work for Swisher. (Doc. 92 at 3, 9). Defendants contend that Clawson was hired by Swisher in 2011 as the Area Sales Director for Arizona, and then became the Area Director for Arizona in 2013, both of which Plaintiffs dispute. (Doc. 92 at 9). After Swisher purchased ProClean, Swisher provided Clawson with a Confidentiality and Noncompete Agreement (the “Agreement”) that contains restrictive covenants. (Id.) Clawson signed the Agreement on September 19, 2011. (Doc. 8-1).

In early June 2015, Clawson left Swisher to join ACS as a Senior Business Development Executive. (Doc. 92 at 12-13). Swisher agrees that Plaintiff informed them he was leaving on June 5, 2015, but Swisher contends Clawson did not return equipment to Swisher at that time. (Doc. 92 at 12). Defendants assert that upon leaving Swisher, Clawson returned all of his equipment to Swisher, including a laptop and thumb drive that contained “working capital calculator” (“WCC”) documents. (Id.) Swisher, however, contends Clawson never returned a thumb drive or WCC documents. (Id.) Shortly after Clawson joined ACS, ACS President, Bradley Zell, issued Clawson a letter warning that he was prohibited from using Swisher’s confidential information and soliciting Swisher’s customers. Clawson signed this letter. (Doc. 92 at 14-15). As a Senior Business Development Executive for ACS, Clawson’s main objective was to develop business for ACS. (Doc. 92 at 16). Consequently, the ACS President asked Clawson to prepare a plan to develop ACS’s business, which Clawson did. (Id.)

B. Preliminary Injunction and Clawson Affidavit

Swisher filed an application for preliminary injunction, which was not ruled on by the Court because it was improperly filed.[3] (Doc. 25). The preliminary injunction sought to enjoin Defendants Clawson and ACS from soliciting any Swisher employee for two years and from using or disclosing any information gathered, prepared, or assembled on behalf of Swisher. Defendants answered the complaint stating that the request for preliminary injunction was an extraordinary request that was completely without merit.[4] (Doc. 24). In support of this argument, Defendants filed a sworn Affidavit of Troy Clawson dated July 31, 2015. (Doc. 24-1). This document was filed with the Answer on August 4, 2015.

In the Affidavit, Mr. Clawson acknowledged that he signed a non-competition agreement with Swisher. (Doc. 24-1, ¶ 5). Clawson attempts to downplay the significance of the non-compete agreement by stating that he was told “he needed to sign it and not to worry, that everything would be fine,” and further that he was told “it’s no big deal, just sign it.” (Id.) Paragraphs 17 and 18, the portion of the Affidavit garnering the most attention from the parties, states as follows:

(Doc. 24-1, ¶¶ 17-18) (emphasis added).

Plaintiffs subsequently withdrew their application for preliminary injunction for many reasons, including but not limited to a delay in the state court proceeding. The merits of the application for preliminary injunction were not reached by the Court at that time.

C. Notice of Errata

On April 27, 2016, about eight months after Clawson executed the original Affidavit, Defendants filed a “Notice of Errata” and submitted a new and corrected Affidavit of Troy Clawson that had been signed on April 21, 2016. (Doc. 42). This document was filed by Attorney David Barton of the Burns Barton law firm. Mr. O’Loughlin and the Quarles & Brady law firm moved to withdraw from the case on May 4, 2016, exactly one week after Mr. Barton filed the Notice of Errata. (Doc. 43). David Barton and Katya Lancero from the Burns Barton law firm remained as the only counsel of record for Defendants. (Doc. 44).

The Notice of Errata stated that Defendants “hereby notify the Court of an error appearing on page four in the Affidavit of Troy Clawson.” (Doc. 42). Paragraphs 17 and 18, the paragraphs quoted above, are located on page four of the original Affidavit. This Notice was signed by Mr. Barton on behalf of himself and Ms. Lancero as attorneys for Defendants. The “corrected” paragraph 17 states as follows:

(Doc. 42-1, ¶17).

Notably, the new Affidavit omits the statement “nor have I identified any Swisher customers that ACS should go after.”

D. First Motion for Sanctions and Response

On June 2, 2016, Plaintiffs filed their first Motion for Sanctions. (Doc. 48). The Motion alleged that the July 31, 2015, Affidavit filed with the Court and signed by Clawson was false in a substantial manner. The motion alleged that Defendants committed a fraud on the Court by filing a perjured Affidavit with the Court, and that Defendants attempted to cover up this fraud by filing a revised Affidavit as a “Notice of Errata” (Doc. 48). Moreover, Plaintiffs allege that Defendants attempted to shield this new information from the Court by failing to inform the Court that the original Affidavit was being replaced by one that was substantially different from that originally filed almost a year prior. Plaintiffs’ Motion sought a negative inference jury instruction regarding the alleged perjury and an order precluding Defendants from arguing that they did not make use of Swisher’s confidential client information. They also requested any other sanctions the Court found appropriate under the circumstances.

*4 Defendants’ Response asked the Court to deny the Motion “for three simple reasons: (1) Clawson did not knowingly make a perjured statement in his Affidavit, and in any event, Clawson and Accurate corrected the Affidavit; (2) Clawson did not take any Swisher confidential information with him when he left Swisher, and he did not use Swisher confidential information to write his plans for developing ACS’s business sent in a June 11, 2015, email to ACS CEO Bradley Zall (“Zall”); and thus (3) the entirety of Clawson’s Amended Affidavit and his deposition testimony is truthful.” (Doc. 53 at 2).

On or about April 26, 2016, Defendants produced a copy of a June 11, 2015, email from Clawson to ACS President Bradley Zall, along with printouts of two documents which were attached to Clawson email: (1) the “Accurate Northern Arizona Plan.docx,” and (2) the “Accurate Phoenix Arizona Plan.docx.” (Doc. 50). The Plans show that Clawson’s under oath statement that he had not “identified any Swisher customers that ACS should go after” was patently false. (Id.) In fact, Defendant Clawson emailed Zall detailed lists of “customers that we need to concentrate on,” identifying approximately 129 Swisher customers, customer account values, who to contact to solicit the customers, customer buying history, the identities of Swisher employees who managed the customer relationships, and additional confidential information.

In their Response, Defendants attempt to explain this discrepancy by arguing that Clawson collected business cards of customers and that over the years, his collection “turned into three towering binders full of business cards.”[5] (Doc. 53 at 2). Defendants state that “for almost four hours on June 11, 2015, Clawson mulled over his binders of business cards, using them to draft a plan for developing ACS’s business. Clawson picked the businesses he felt would bring ACS the most success. Importantly, about 15 of the businesses he listed in his plan were not Swisher customers.” (Doc. 53 at 3). Defendants state that “From memory, Clawson also listed percentages of sales, the ownership statuses of dishwasher machines, and sometimes the names of Swisher employees who had relationships with the customer. Clawson also listed some Swisher employees and their respective compensations in his plan, which he derived from memory.” (Id.) Defendants then state, “Although Clawson’s email to Zall stated that he would ‘work on Southern Arizona tomorrow,’ Clawson never actually ended up formulating a plan for Southern Arizona.” (Id.) (emphasis added). This phrase, that Clawson never ended up formulating a plan, has been greatly debated in these proceedings, and is the foundation upon which Defendants and Defense Counsel continued to mislead Plaintiffs and the Court.

E. Second Motion for Sanctions and Response

On March 9, 2017, Plaintiffs filed a Second Motion for Sanctions and Default Judgment against Defendants (Doc. 103) (“Second Motion”). In the Second Motion, Plaintiffs build on their assertions in the First Motion and now are seeking both sanctions and default.[6] Plaintiffs repeat their claim that Defendants knowingly submitted a perjured Affidavit from Troy Clawson. The main basis for the renewed Motion, however, was recently discovered information related to the “Plans” discussed in Clawson’s emails referenced above. Plaintiffs contend that “[r]ecent electronic discovery has revealed that Defendants again lied to the Court in response to Plaintiffs’ Motion for Sanctions.”(Doc. 103 at 1). As stated above, no Plan was disclosed to Plaintiffs through the discovery process. Plaintiffs hired a forensic examiner, Mark Cardwell, to examine Defendant’s laptop and thumb drive. On the thumb drive, Mr. Cardwell found traces of a document titled “Accurate Southern Arizona Plan” in unallocated space, indicating it had previously been deleted. The document was recovered by Mr. Cardwell.[7] The Plan identifies approximately 90 Swisher customers that could potentially be brought over to ACS. The plan also lists some Swisher employees “worth bringing over” and their salaries. (Doc. 91).

*5 Plaintiffs claim that “[t]his additional perjury was only discovered through expensive and time-consuming electronic discovery because Defendants deleted and spoliated the electronic document which proves their sworn prevarication.” Plaintiffs sought default judgment in the Second Motion, as a sanction for the “repeated lies and fraud on the Court.” (Doc. 103 at 1-2). Plaintiffs claim that Defendants’ serious misconduct has harmed the integrity of the judicial process, and warrants the severe sanction of striking Defendants’ Answer, entering a default judgment, and determining appropriate sanctions.

In their Response, Defendants give a number of arguments as to why the Court should deny the Second Motion for sanctions and default. (Doc. 115). They argue: “(1) The mistake at issue is one of poor word choice – not fraud. Counsel should have used the word “finished” instead of “formulated” in the legal brief submitted to the Court (i.e. that Clawson never finished the Plan, rather than that he never formulated a Plan); (2) Defendants preserved in an email the Phoenix Arizona and Northern Arizona action plans along with their embedded electronically stored information; (3) Plaintiffs have failed to make a showing of the five factors courts take into consideration when determining whether to impose the drastic sanction of default judgment or dismissal under the Court’s inherent powers; (4) Plaintiffs actually have the Southern Arizona plan and its embedded metadata (with a creation date) in their possession, and thus no violation of Rule 37(e) of the Federal Rules of Civil Procedure occurred; and (5) Defendants did not act with the intention to deprive Plaintiffs of the Southern Arizona plan.” (Doc. 115 at 1-2). Defendants also contend that the plan “does not relate to matters in controversy in such a way as to interfere with the rightful decision of the case” because Clawson never sent the document to ACS president Zall. (Doc. 115 at 8). Moreover, the Defendants contend that Plaintiffs cannot show that they acted with the intent to deprive Swisher of this information because that argument assumes that Clawson did not simply delete the document in the ordinary course of business. (Doc. 115 at 10).

At the close of the third and final day of hearings on the Second Motion, this Court stated its preliminary ruling on the record. (Doc. 199). Over the course of the three days of hearings, the Court heard testimony from the following individuals: Attorney Katya Lancero, Defendant Troy Clawson, Mr. Mark Cardwell, and Attorney David Barton. Based on the evidence of record and the testimony the Court heard during the three days of hearings on the Motion, the Court makes the following factual findings.

III. Findings of Fact

After Swisher purchased Pro-Clean, Swisher provided Clawson with a confidentiality and non-compete agreement. Clawson accepted the terms of the agreement when he signed it on September 19, 2011. Defendants claim that on leaving Swisher, Clawson returned all of the equipment to Swisher, including a laptop and a thumb drive that contained the working capital calculator documents and other proprietary information of Swisher. Plaintiffs allege that Clawson never returned the thumb drive or the working capital calculator documents. After leaving Swisher, and shortly after Mr. Clawson joined ACS, ACS president, Bradley Zall, issued Clawson a letter warning that he was prohibited from using Swisher’s confidential information and soliciting Swisher’s customers. Clawson signed that letter.

Plaintiffs allege in their Amended Complaint that Clawson violated the terms of the agreement that prohibit the disclosure or use of Swisher’s confidential information and prohibit him from soliciting Swisher’s employees to leave and join him at ACS. Plaintiffs further allege that ACS participated in soliciting Swisher employees and encouraging former Swisher employees to use Swisher’s confidential information to benefit ACS. (Doc. 8).

A. Clawson’s Affidavits

*6 Plaintiffs filed an application for preliminary injunction, which was not ruled on by the Court. Clawson signed an Affidavit in response to the application, which was signed on July 31, 2015. That Affidavit ends in a declaration that it is signed under penalty of perjury. The Plaintiffs decided to withdraw their application at that time. While many reasons have been stated for the decision to withdraw the application, the Court finds that Clawson’s first Affidavit contributed to Plaintiffs’ decision not to refile their preliminary injunction and therefore resulted in some prejudice to the Plaintiffs.

Clawson then signed a revised Affidavit, which Defendants’ counsel, Mr. Barton and Ms. Lancero, filed as a Notice of Errata. In that Notice, neither counsel Barton nor Lancero explained the substantial and material differences between the two Affidavits. This is important not only because the entire nature of Clawson’s statement about the matter changed, but also because those amended statements are material to the allegations in the complaint.

The Court finds that Defendant Clawson created a false Affidavit containing multiple false statements, which he signed under penalty of perjury. The Court finds that the relevant false statements that are material to the allegations in the Complaint are as follows:

On April 26, 2016, an email dated June 11, 2015, written by Defendant Clawson to the president of ACS, was produced in discovery to Plaintiffs. This email contains discussions regarding approximately 129 Swisher customers, including confidential information about those customers. Moreover, the email refers to a plan of action being developed regarding those customers. Notably, the email also includes a list of salaries of current Swisher employees and particular individuals “worth bringing over and the cost of doing so.” For instance, the email states “We really need to consider Jay Dowling, his compensation and commission.” Jay Dowling is a name predominantly listed in the first Affidavit as well as the amended Affidavit.

Paragraph 19 of the original Affidavit is therefore relevant because the June 11, 2015, email discussed here is between Bradley Zall and Mr. Clawson. It is therefore inconsistent for Defendants to suggest that Clawson had not provided, or that ACS informed him that they are not interested in having him solicit, any Swisher employees or customers. Clawson specifically states in the email that he would create customer service lists that include Swisher customers. Defendants have not, and it appears based on the evidence and the testimony that they cannot, reconcile these statements.

B. Discovery of the Southern Arizona Plan – Spoliation

Based on the testimony of record, the Court finds that the Southern Arizona Plan was only uncovered after Plaintiffs’ forensic computer expert examined Clawson’s thumb drive and his laptop computer. The Court has considered the testimony of the computer forensic expert, Mr. Cardwell, and finds him credible as a qualified expert in this field. Mr. Cardwell testified that he found the Southern Arizona Plan in unallocated space of Clawson’s thumb drive. He testified that, in his experience, the unallocated space area where it was found is not easily accessible. And after a series of questions, he stated his conclusion that, in his experience, the Southern Arizona Plan was purposely hidden and had been intentionally deleted from Clawson’s device.

*7 Defendants, quite creatively, attempted to give a possible explanation for the deletion of the Southern Arizona Plan. Clawson testified in response to a question by Mr. Barton that either his wife or one of his children could have accessed the thumb drive and accidently deleted the Southern Arizona Plan. (Doc. 186). The Court does not find this testimony credible. Mr. Cardwell testified that any such scenario is highly unlikely, because any other person, such as a wife or child, would have to know where to go to access the specific file and then delete it. Therefore, that scenario is not credible in this circumstance.

Clawson also testified that the Southern Arizona Plan is more valuable than the Northern Arizona Plan and the Phoenix Plan because of the number and type of customers and accounts included in that plan. He also testified that he “forgot” that he had started the Southern Arizona Plan. He testified that he went on vacation, and never finished the plan. Clawson testified that Ms. Lancero asked him about the Southern Arizona Plan referenced in the June 11, 2015, email. Clawson told Ms. Lancero that he had just put down some “words on a page.” However, it is unclear to the Court who developed the phrase “words on a page.” The words were first uttered by Ms. Lancero during her testimony and only later described by Mr. Clawson when he took the stand. Clawson testified that he recalled using that phrase when speaking to Ms. Lancero. (Doc. 186 at 39-40).

The Court finds the entirety of Mr. Clawson’s testimony – that he forgot that he created the Southern Arizona Plan – unconvincing. First, the Southern Arizona Plan is remarkably similar to Clawson’s Northern Arizona Plan and the Phoenix Plan. Second, Mr. Clawson had just accepted a new job and that job was to create business opportunities for ACS. In doing so, he was in direct communication with the president of this company. Mr. Clawson testified that the Southern Arizona Plan was a more valuable plan, thus it seems improbable that he would have forgotten that he created a more valuable plan with 129 Swisher customers and other Swisher proprietary information.

The Court also finds it less than credible that this phrase “words on a page” to describe the Southern Arizona Plan could have been used, because it never previously appeared in the record. Moreover, the phrase first was uttered during the testimony of Ms. Lancero when she testified that Mr. Clawson described the plan he started as just being some “words on a page.” The phrase continued to be used throughout the three-day hearing by Ms. Lancero, Mr. Clawson, and Mr. Barton. In fact, the phrase “words on a page” appears in the hearing transcript a staggering 34 times. (Docs. 172, 184, and 189).

The Court finds, based on Mr. Cardwell’s testimony and his forensic analysis, that the Southern Arizona Plan was created but ultimately deleted on August 13, 2015. Cardwell further stated that the Accurate Phoenix Arizona Plan existed as an active file in allocated space as of October 20, 2015, that the Accurate Southern Arizona Plan existed as an active file in allocated space as of August 13, 2015, and that the Northern Arizona Plan existed as an active file in allocated space as of December 16, 2015. Cardwell was unable to find active files with those plans at the time of his analysis, meaning, according to his expert opinion, that they had all been deleted. Finally, based on the Windows event log, Cardwell testified that the Accurate Phoenix Arizona plan must have been deleted on or after October 20, 2015, the Accurate Southern Arizona Plan must have been deleted on or after August 13, 2015, and the Accurate Northern Arizona Plan must have been deleted on or after December 16, 2015. Cardwell’s declaration was signed on February 8, 2017. (Doc. 89-1).

*8 On January 20, 2017, Mr. Barton sent correspondence to Plaintiffs stating, “We have confirmed with Troy Clawson that although he deleted the Accurate Phoenix Arizona Plan and Accurate Northern Arizona Plan from his thumb drive, he did so in the usual course and according to his custom on June 11, 2015, well before Swisher filed the complaint on June 24, 2015.” Mr. Barton’s statement is in complete contradiction of Mr. Cardwell’s findings. Based on this evidence and the testimony, the Court finds that Mr. Clawson deliberately destroyed the Southern Arizona Plan and therefore engaged in spoliation of electronic discovery in violation of Rule 37. Furthermore, the Court finds that Clawson did so after Plaintiffs filed their original state court Complaint,[8] and after he was instructed by counsel to preserve all evidence, including electronic evidence.

With respect to the prejudice to Plaintiffs, the Court finds that the testimony and evidence is clear that, had Plaintiffs not engaged Mr. Cardwell, the Southern Arizona Plan and what was contained therein may have never been discovered. Had that information not been found, Plaintiffs clearly would have suffered prejudice in attempting to prove their case. The destroyed evidence goes to the heart of Plaintiffs’ claims. Therefore, the Court finds that Defendant Clawson knowingly and recklessly engaged in a violation of the discovery rules, which is relevant because it is a central component of Plaintiffs’ complaint, when he engaged in the spoliation of critical evidence.

C. Conduct of Counsel Barton and Lancero

Turning to the conduct of Defendants’ counsel, the Court makes the following findings. Mr. Barton filed Clawson’s “correct” Affidavit as a Notice of Errata. The one-page notice states that Defendants are “Notifying the Court of an error appearing on Page 4 in the Affidavit” and nothing more. Much has been made of the way in which this Affidavit was filed. However, the Court is not only concerned with the manner in which the corrected Affidavit was filed, as a Notice of Errata. The Court’s concern lies in the content of the Notice, or more importantly what is not in the Notice. The Court finds this, at best, to be a misuse of a Notice of Errata, which is generally used to correct small errors such as typographical errors or perhaps a misstatement of a date. At worst, this Notice of Errata was an attempt to replace a perjured sworn Affidavit. Filing it in this way avoided alerting the Court that the original Affidavit was perjured or that it contained material misstatements of fact relevant to Plaintiffs’ claims. Based on the record and considering counsel’s testimony, the Court finds the latter to be true.

As stated previously, Attorney Katya Lancero testified on the first day of the hearing. Ms. Lancero testified that she informed Clawson of his obligation to preserve evidence at the outset of the case. She testified that she told him to image his computer, but that she never verified that he did so, nor did she ask him to produce his computer during the active discovery phase of this case. Apparently, Mr. Clawson was left on his own to determine how to image his computer; likewise, what to do with its contents was up to him. Neither Ms. Lancero nor Mr. Barton followed up with Clawson on the preservation of discovery.

Ms. Lancero’s testimony about the Southern Arizona Plan is extremely troubling. In response to a question about whether Clawson created a Southern Arizona Plan, Lancero testified that, “[Clawson] didn’t actually finish creating it, but he started on one.” (Doc. 172 at 28). Moreover, Lancero testified that she asked Clawson about the existence of the Southern Arizona Plan that he referred to in his email to Bradley Zall. She stated that Clawson was dismissive and stated something to the effect of “these were just words on a page,” and that Clawson told her he stopped working on it due to vacation plans. Lancero testified that this discussion occurred in June of 2016, after the June 11, 2015, email was discovered. If this exchange did indeed occur, Clawson’s statements about “words on a page” in response to his attorney’s question about the existence of a Southern Arizona Plan apparently did not cause Lancero to inquire further about the content of these “words on a page.” However, based on her testimony, Lancero was aware that Clawson started what is now known as the Southern Arizona Plan. Moreover, she apparently did not then inform Mr. Barton that their client told her that he had started the Southern Arizona Plan.

*9 In the discovery phase, the parties were attempting to work out the parameters of any forensic examination that would be conducted on Clawson’s devices. Ms. Lancero sent an email to Plaintiffs’ counsel stating that the Defendants would agree to the forensic examination, but they wanted to prevent the examination from looking into unallocated space on Clawson’s devices. Mr. Uppal asked Ms. Lancero about this topic at the hearing:

(Doc. 172 at 51).

That Defendants’ counsel attempted to limit the search parameters to exclude unallocated space, the exact space in which the deleted documents in question were ultimately found, is extremely suspect. And, as Ms. Lancero concedes, had the Plaintiffs agreed to their search parameters, the Southern Arizona Plan would have never been uncovered.

Moreover, Defendants filed a Motion to strike portions of the findings of Mark Cardwell, which related to the discovery of the Southern Arizona Plan, because they were untimely filed. (Doc. 139). In that Motion, Defendants offer that “Plaintiffs may try and argue that it was Clawson’s conduct in allegedly deleting the action plans that prevented Cardwell from timely disclosing his opinions. In truth, however, there is no evidence that Defendants did anything to delay Plaintiff’s review of the data in question.” (Doc. 139 at 6). Plaintiffs fully acknowledge that Cardwell did not identify, and therefore that Plaintiffs did not disclose, the deleted evidence by the expert disclosure deadline. (Doc. 199 at 249). It is abundantly clear from the evidence and testimony that the reason the information was not disclosed by the deadline was because the document had been deleted by Clawson, taking substantial time and effort on behalf of Mr. Cardwell to recover that evidence.

As described above, much has been made about certain statements made by Defendants in their various briefings to the Court. First, there is counsels’ statement that, “Although Clawson’s email to Zall stated that he would ‘work on Southern Arizona tomorrow,’ Clawson never actually ended up formulating a plan for Southern Arizona.” (Doc. 53 at 3) (emphasis added). This characterization is contextually relevant in analyzing Ms. Lancero’s and Mr. Barton’s testimony about the Southern Arizona Plan. In response to a question from Mr. Uppal, Ms. Lancero testified that after viewing the recently uncovered Plan, which, in her own words, is “a list of customers on this one and two pages, and then a third page has some words as well,” she continued to state that the Plan was not finished, nor was it formulated, and that it was simply some words on a page. (Doc. 172 at 31).

*10 The Court finds that Ms. Lancero’s testimony as to the existence of the Southern Arizona Plan to be non-responsive and misleading. Lancero’s testimony that the deleted Southern Arizona Plan was just “words on a page” when it is nearly identical to the Northern Arizona and Phoenix Plans, reflects a disturbing lack of candor to this Court. The following exchanges are particularly disturbing:

(Doc. 172 at 31-32).

(Doc. 172 at 35-36).

(Doc. 172 at 40).

(Doc. 172 at 45).

Mr. Barton also testified at the hearing. He was asked the same type of questions by Mr. Uppal related to the various words and phrases used by Defendants in this matter, and Mr. Barton testified under oath that Mr. Clawson never formulated a plan for Southern Arizona, even in the face of the actual document.

(Doc. 184 at 78-79).

(Doc. 184 at 79-80).

Even viewing the Southern Arizona Plan, Mr. Barton, while under oath, continued to characterize it as not finished or formulated even though it is virtually identical to the other plans he produced in discovery. Yet, the critical point is not whether the Plan was ever finished or formulated, or was just some “words on a page.” The Plan is evidence of Mr. Clawson’s intent, knowledge, and plan, and is relevant to Plaintiffs’ claims. It is protected evidence owned by Plaintiffs. It contains Plaintiffs’ customer information, their names and purchase information, and employee names and salaries. It matters not how the evidence is characterized. What matters is that this Plan was discoverable Rule 26(b) evidence that was required to be preserved and turned over to Plaintiffs. Defendants and counsel had a duty to protect and preserve relevant discoverable evidence, including the Southern Arizona Plan, and that was not done here. Lancero’s and Barton’s attempt at word play does not change that.

As to Ms. Lancero’s credibility, the Court finds her not credible. Ms. Lancero engaged in unprofessional and unhelpful word play in this hearing, by using language such as ‘formulated’ versus ‘finished’ and ‘words on a page.’ At one point, Ms. Lancero argued with Mr. Uppal about whether she had carefully reviewed a document. Mr. Uppal asked: “So, Ms. Lancero, did you carefully read the plaintiffs’ controverting statement of facts?” Lancero responded: “I certainly read it. It’s hard to say whether the word carefully, to what extent that means.” (Doc. 172 at 29). The Court finds this testimony irresponsible, and indicative of a lack of appreciation for the seriousness of the proceedings. At the same time, Mr. Barton agreed that he had a supervisory obligation over Ms. Lancero. He advanced the same wordsmithing by continuing to use the phrase “words on a page,” by continuing to argue that the plan was never “formulated” or finished, and by stating that differing minds could “argue about the linguistics.” (Doc. 184 at 78-79). Mr. Barton’s testimony was equally troubling.

*12 It is clear that Defendants’ counsels were alerted of a potentially discoverable piece of information specifically related to Plaintiffs’ claims, and they chose not to preserve or investigate that information. Yet, even after the deleted plan was discovered, Lancero did not relent and testified to the Court that it was not finished. Barton then testified that he stood by what was written initially, stating that he believed that the statement regarding the plan never being formulated “could be read as true.” (Doc. 184 at 79). Neither counsel has ever conceded that the Southern Arizona Plan, and the lists of information in it, was or is discoverable. That is simply unacceptable.

There is no contrition or acknowledgment by Lancero or Barton that matters could have been more appropriately handled. Had counsel testified to errors in judgment in the discovery process, the Court may have a different view. That obviously did not occur here. Rather, Mr. Barton and Ms. Lancero doubled-down on their previous statements and made them more forcefully under oath. Prior to testifying, Mr. Barton characterized the Court’s proceedings on this matter as a “side show” that had become an attack on his law firm. (Doc. 184 at 73). However, Mr. Barton agreed that he should testify to clear up the record. (Id.) While Mr. Barton believed this Court’s proceedings were a “side show,” the need to have the hearings to begin with lies with him and Ms. Lancero.

The Court finds that there is clear and convincing evidence that Defendant Clawson engaged in the spoliation of evidence, that he attempted to cover up that spoliation, and thus that he has engaged in a fraud on the Court. He also did so when he signed the first perjured Affidavit that was then filed with the Court. The Court finds that the briefing submitted and the testimony at the hearings are clear and convincing evidence that Ms. Lancero and Mr. Barton facilitated and continued to cover up Clawson’s fraud and their own irresponsible conduct.

Having determined that Defendants engaged in spoliation of evidence, the Court will now analyze the merits of Plaintiffs’ Motion for Default.

IV. Legal Standards for Imposition of Sanctions

“There are two sources of authority under which a district court can sanction a party who has despoiled evidence: [1] the inherent power of federal courts to levy sanctions in response to abusive litigation practices, and [2] the availability of sanctions under Federal Rule of Civil Procedure 37 against a party who ‘fails to obey an order to provide or permit discovery.’ ” Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006) (quoting Fed. R. Civ. P. 37(b)(2)(A)). The Court’s inherent authority includes the power to dismiss an action “when a party has willfully deceived the court and engaged in conduct utterly inconsistent with the orderly administration of justice.” Wyle v. R.J. Reynolds Indus., Inc., 709 F.2d 585, 589 (9th Cir. 1983). “This inherent power is not limited by overlapping statutes or rules” and “can be invoked even if procedural rules exist which sanction the same conduct.” Haeger v. Goodyear Tire & Rubber Co., 813 F.3d 1233, 1243 (9th Cir. 2016) (citations and internal quotations omitted). Although Rule 37 of the Federal Rules of Civil Procedure “also provides a method to sanction a party for failing to comply with discovery rules, it is not the exclusive means for addressing the adequacy of a discovery response.” Id. at 1243-44.

“Because of their very potency, inherent powers must be exercised with restraint and discretion.” Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991). The imposition of sanctions pursuant to the district court’s inherent power “is warranted where a party has acted in bad faith, that is, ‘vexatiously, wantonly, or for oppressive reasons.’ ” Surowiec v. Capital Title Agency, 790 F.Supp.2d 997, 1010 (D. Ariz. 2011) (quoting Chambers, 501 U.S. at 45-46); see also Haeger, 813 F.3d at 1244 (holding that “[b]efore awarding sanctions pursuant to its inherent power, the court must make an express finding that the sanctioned party’s behavior constituted or was tantamount to bad faith”) (internal quotations and citations omitted); Anheuser-Busch, Inc. v. Natural Beverage Distributors, 69 F.3d 337, 348 (9th Cir. 1995) (“For dismissal to be proper, the conduct to be sanctioned must be due to willfulness, fault, or bad faith.”) (internal quotations and citations omitted). In addition, “[d]ue process concerns further require that there exist a relationship between the sanctioned party’s misconduct and the matters in controversy such that the transgression ‘threaten[s] to interfere with the rightful decision of the case.’ ” Id. (quoting Wyle v. R.J. Reynolds Indus., Inc., 709 F.2d 585, 591 (9th Cir. 1985)). “A party’s destruction of evidence qualifies as willful spoliation if the party has “some notice that the documents were potentially relevant to the litigation before they were destroyed.” United States v. Kitsap Physicians Serv., 314 F.3d 995, 1001 (9th Cir. 2002) (emphasis added).

*13 Before dismissing a case or declaring a default as a sanction, a district court must consider five factors: “(1) the public’s interest in expeditious resolution of litigation; (2) the court’s need to manage its docket; (3) the risk of prejudice to the other party; (4) the public policy favoring the disposition of cases on the merits; and (5) the availability of less drastic sanctions.” Anheuser-Busch, 69 F.3d at 348 (same); Leon, 464 F.3d at 958 (same). The district court, however, “need not make explicit findings regarding each of these factors” but must make a finding of “willfulness, fault, or bad faith” for dismissal or default to be proper. Leon, 464 F.3d at 958.

V. Analysis

Plaintiff has presented substantial and compelling evidence that demonstrates serious misconduct by Defendants and their counsel. The Court will thus proceed to weigh the five Anheuser-Busch factors to determine whether default judgment is warranted.

1. The public’s interest in expeditious resolution and the Court’s docket

Defendants’ acts in the Rule 26 discovery phase have caused substantial delay in the proceedings. The replacement of Clawson’s Affidavit, the spoliation of electronic discovery, and the failure to produce the Plan, required Plaintiffs to hire a forensic computer examiner, and to file and/or respond to the following:

Plaintiffs also prepared for and attended the three-day evidentiary hearing on Defendants’ spoliation of discovery and counsels’ failure to produce discovery. Defendants’ act caused significant expense to the parties and delayed expeditious resolution of the case. Additionally, Defendants’ acts created unnecessary work for the Court, including conducting a three day hearing, a review of needless motions and hundreds of pages of documents, emails and transcripts, and this written Order. The culmination of these events significantly delayed Plaintiffs’ case and weigh in favor of granting default judgment.

2. The risk of prejudice to the other party

The prejudice inquiry “looks to whether the [Defendants’] actions impaired [the Plaintiffs’] ability to go to trial or threatened to interfere with the rightful decision of the case.” Leon, 464 F.3d at 959 (quoting United States ex rel. Wiltec Guam, Inc. v. Kahaluu Const. Co., 857 F.2d 600, 604 (9th Cir. 1988).

Testimony from the evidentiary hearing, deposition testimony, and documentary evidence combine to show a concerted effort to wrongfully withhold evidence, misrepresent the fact that discoverable evidence existed, and mislead Plaintiffs and the Court. It is abundantly clear that Plaintiffs were prejudiced here.

Defendants and their counsel did not preserve relevant discoverable evidence, rather, they knew of it and withheld it. Defendant Clawson created a list of Plaintiffs’ customers – the Southern Arizona Plan – attempted to hide that fact, and ultimately deleted it (or believed he had). Upon learning that Clawson “developed” or “formulated” that Plan, Defendants’ counsel failed to further investigate or preserve what was obviously discoverable information that Plaintiffs were entitled to. They did so by ignoring requests for production of documents which specifically relate to Plaintiffs’ claims of Unfair Competition, Conversion, Breach of Contract, and Breach of the Covenant of Good Faith and Fair Dealing. What is more, the Southern Arizona Plan evidence was deleted after Plaintiffs filed their complaint, thus while Defendants were under a duty to preserve such evidence. Had Plaintiffs embarked on trial without this evidence, they would have incurred substantial prejudice and/or reduced damages. See Leon 464 F.3d at 959. As previously noted, the parties had undergone settlement discussions. Plaintiffs would be prejudiced if those discussions were premised on an understanding that Clawson created no plan, or Defendants argued as much to bolster their settlement position.

*14 Clearly, Defendants sought to prevent Plaintiffs from learning the truth about the Plans existence and its deletion. Mr. Barton’s and Ms. Lancero’s acts and omissions further prejudiced Plaintiffs when they filed misleading motions and responses regarding Clawson’s changed Affidavit and the Plans existence. Even more troubling, counsel filed a motion to strike Plaintiffs’ forensic computer expert’s testimony about spoliation of evidence based not on materiality or relevance but based on late disclosure. This factor weighs heavily in favor of granting default judgment.

3. Public policy favoring the disposition of cases on the merits

Of course public policy always favors a disposition of a case on the merits rather than a court’s grant of default judgment. However, when parties engage in conduct that results in an inability to judge the merits or enter judgment on them, the balance tips in favor of a default judgment. Through a substantial duration of this case, Defendants’ and counsels’ conduct thwarted Plaintiffs’ right to obtain relevant discovery relating to the specific causes of action. Plaintiffs were deprived of determining the strength of their case, particularly as it relates to the claims against Clawson (whether he breached the terms of the Swisher’s non-compete and anti-solicitation agreement) and ACS (whether it aided and abetted Clawson’s breach of fiduciary duty, and Unfair Competition). The hidden discovery – the Southern Arizona Plan – factually supports Plaintiffs’ claims. Under these circumstances, it is difficult to see how Defendants’ conduct, coupled with the actions of counsel, merits anything less than the imposition of severe sanction of default judgment.

4. The availability of less drastic sanctions

While less drastic sanctions are always available (and would be available in nearly all conceivable cases) the Court finds that Defendants’ and counsels’ on-going deceptive and misleading conduct warrants the Court striking Defendants’ Answer (Doc. 22) and entering a default judgment in Plaintiffs’ favor. While this Court takes its obligation to exercise restraint and discretion before imposing such severe sanctions, Defendants’ and counsels’ ongoing deceptive and misleading conduct warrant this result. Indeed, all five factors weigh in favor of granting default judgment, thus it is only appropriate to do so.

Importantly, the Court finds a strong relationship exists between Defendants’ and counsels’ misconduct and the matters in controversy. See Anheuser-Busch, 69 F.3d at 348 (“[d]ue process concerns further require that there exist a relationship between the sanctioned party’s misconduct and the matters in controversy such that the transgression threaten[s] to interfere with the rightful decision of the case.”) (internal quotations and citations omitted).

In sum, the connection between the misconduct and the matters in controversy is overwhelming. The pleadings and testimony show that Defendant Clawson created a Southern Arizona Plan from proprietary Swisher information, including customer lists, financial information, and lists of employees that he would recruit to ACS, Swisher’s competitor. He signed and filed in court a false Affidavit, stating he did not have any Swisher information or create any plans. Yet, an email dated June 11, 2015, from Clawson to co-defendant ACS President Zall was disclosed to Plaintiffs stating that Clawson was going to start working on a Plan. Defendants then, attempt to cover up Clawson’s previous false statement by filing a “correct” Affidavit, which Mr. Barton filed as a Notice of Errata (Doc. 42) on April 27, 2016. Plaintiffs then file its Motion for Sanctions alleging fraudulent behavior. Defendants responded that although the email mentions a plan, Clawson “never ended up formulating a plan.” Plaintiffs’ forensic expert, Mark Cardwell, then discovers a document titled “Southern Arizona Plan” in unallocated space on Clawson’s thumb-drive. Mr. Cardwell concludes that the Plan had been deleted and he testified that the document was deleted after Plaintiffs filed its case. Once the Plan was discovered, Plaintiffs filed a Second Motion for Sanctions. Defendants responded that they had previously made a poor word choice when filing their briefing and should have stated that Clawson never “finished” the Plan, rather than stating that he never “formulated” the Plan. That Motion led to the evidentiary hearing and testimony as to whether the Plan document was “formulated,” or “finished,” or just some “words on a page.” What is clear is that these actions were a failure to preserve relevant evidence of Clawson’s and ACS’s conduct, the spoliation of relevant evidence by Clawson, and an unconvincing excuse for counsel not to preserve, produce or admit that relevant discoverable evidence exists. Without question, Defendants and conduct of counsel interfered with Plaintiffs due process.

*15 Moreover, Defendants had “some notice that the document was potentially relevant to the litigation before they were destroyed.” United States v. Kitsap Physicians Serv., 314 F.3d 995, 1001 (9th Cir. 2002). The Court finds that the evidence and testimony overwhelmingly demonstrates that Defendants’ and counsels’ misconduct was willful and done in bad faith. See Leon, 464 F.3d at 958 (holding that the district court must make a finding of “willfulness fault or bad faith” for dismissal or default to be proper). Defendants have “engaged deliberately in deceptive practices that undermine the integrity of judicial proceedings.” Leon, 464 F.3d at 958.

What is more, Defendants had previously moved for summary judgment (Doc. 71) that this Court chiefly denied (with the exception of Plaintiffs’ Conversion claim). (Doc. 129). Notably, the Court observed in that Order that Defendants mislead the Court by failing to mention a critical fact when arguing that Plaintiffs’ Confidentiality and Non-Compete Agreement was unenforceable. That is, Defendants urged the Court to apply Arizona law to so find. Critically, Plaintiffs pointed out that the Agreement included a choice of law provision that North Carolina law applies. In denying summary judgment, the Court stated “Defendants, whether intentional or not, misled the Court by failing to mention this critical fact. Instead, they argue at length that the relevant provisions are unenforceable under Arizona law, without acknowledging that the Agreement itself expressly states it is governed by North Carolina law.” (Doc. 129 at 5). This conduct adds to the Court’s finding of willful deception.

Plaintiffs recognize, as does this Court, that default is a drastic sanction that should not be entered lightly. However, the Court also recognizes that, inherent in its powers, it has the authority to do so both when a party engages in abusive litigation practices and, under Rule 37, when a party fails to obey an order to provide and permit discovery. Sadly, the Court finds that this case is one of the exceptional cases that warrants such a drastic sanction.

As to whether additional sanctions, including but not limited to attorneys’ fees is warranted, the Court will issue a briefing schedule and allow the parties to address those matters.

Accordingly,

IT IS HEREBY ORDERED that Plaintiffs shall have fourteen days from the date of this Order to file a brief, with a limit of ten-pages, as to appropriate sanctions. Defendants shall have fourteen days from the date of Plaintiffs’ filing to file a Response, with a limit of ten-pages. There will be no reply.

IT IS FURTHER ORDERED that the following rulings of the Court are AFFIRMED: Plaintiffs’ Second Motion for Sanctions (Doc. 103) is granted; the Defendants’ Answers (Docs. 22 and 23) are stricken from the record; Default against Defendants shall be entered; Defendants’ Motion to Strike Portions of the Expert Testimony of Mark Cardwell (Doc. 139) is denied; the Final Pretrial Conference is vacated; Defendants’ Motion to Withdraw (Doc. 188) is granted; Defendants’ Motion for Extension of Time (Doc. 201) is denied; and Mr. Barton and Ms. Lancero are ordered to self-report to the Arizona State Bar Association, and to provide a transcript of their testimony.

IT IS FURTHER ORDERED that Defendant ACS’s Motion to Set Aside the Default (Doc. 206) is denied without prejudice.

IT IS FINALLY ORDERED that counsel for Defendants shall provide a copy of this Order to the Arizona State Bar Association in relation to the self-reporting of Mr. Barton and Ms. Lancero.

Subsequent to the Court’s oral ruling, Defendant ACS prematurely filed a Motion to Set Aside the Default. (Doc. 206). Because it was clear to all parties that the Court’s oral ruling was preliminary only and that a formal written Order would follow, the Court will deny this Motion without prejudice to renew.

Subsequent to the Court granting their Motion to withdraw from the case, Mr. Barton, on behalf of himself and Ms. Lancero, filed a Motion for extension of time to file a Motion for Reconsideration (Doc. 201). The Court denied that Motion on the basis that Barton and Lancero are no longer counsel of record in this case, nor are they parties to the case, and therefore it is not proper for Barton to file a motion on behalf of himself and Lancero with the Court. (Doc. 202).

Although improperly filed, the Court refers to it as part of the background of this case.

At the time, Defendants were represented by Mr. Craig O’Loughlin of Quarles & Brady.

Defendants state that with regard to the business card collection that “Clawson collected business cards from not only ProClean or Swisher customers, but also customers of other companies, such as Ecolab, Inc. and Auto-Chlor,1 and he would also collect business cards from businesses he visited for personal reasons, such as his dry cleaners, different marinas where Clawson harbored his boat, and a bottled water company from which he bought water for his family.” (Doc. 53 at 2).

The Court denied the First Motion as moot because Plaintiffs’ Second Motion sought relief based on the same conduct alleged in the First Motion. (Doc. 105).

Defendants filed a motion to strike portions of the declaration of Mark Cardwell on the basis that his report was not disclosed by the deadline. (Doc. 139). The Court denied that Motion.

The Complaint was filed in state court on June 25, 2015. Mr. Cardwell’s expert opinion is that the Southern Arizona Plan was deleted on August 13, 2015.