CTC Global Corp. v. Huang
CTC Global Corp. v. Huang
2019 WL 6357271 (C.D. Cal. 2019)
July 3, 2019
Guilford, Andrew J., United States District Judge
Summary
The Court found that Defendants had breached their duty to preserve evidence by destroying four main categories of ESI, including iPhone/WeChats, iPad, USB Drives, and JASONPC. The Court also found that Huang had spoiled his laptop and obscured his donation of it, resulting in an adverse jury instruction and sanctions for Defendants.
Additional Decisions
CTC GLOBAL CORPORATION
v.
JASON HUANG ET AL
v.
JASON HUANG ET AL
Case No. SACV 17-02202 AG (KESx)
United States District Court, C.D. California
Filed July 03, 2019
Counsel
Melissa Kunig, Deputy Clerk, Attorneys Present for Plaintiffs:Not Present, Court Reporter / Recorder, Tape No. Attorneys Present for Defendants:
Guilford, Andrew J., United States District Judge
Proceedings: [IN CHAMBERS] ORDER REGARDING CTC'S MOTION FOR DEFAULT JUDGMENT (DKT. 168) AND STATEMENT OF FEES (DKT. 212)
1. BRIEF BACKGROUND
*1 Plaintiff CTC Global Corporation filed a motion for default judgment and sanctions, accusing Defendants of widespread document spoliation in this case involving Defendants' termination of employment at CTC. (Dkt. 168.) After reviewing the prolific briefing and having a hearing on its tentative order, the Court had “concerns about the possibility of prejudicial spoliation in this case.” (See April 15, 2019 Order (Dkt. 210) at 9-10.) The Court found that further exploration and clarification of factual issues was necessary. Id. at 10; see also Federal Rule 55(b)(2). An evidentiary hearing took place on May 10, 2019. Expert witness Andrew Crain and Defendants Jason Huang and Rulong Chen testified.
The Court GRANTS IN PART Plaintiff's motion and awards sanctions as discussed in Sections 4, 5, and 6. (Dkt. 168.)
1.1 Substantive Allegations
Plaintiff CTC specializes in technologies used in electric utilities to improve the efficiency, capability, reliability, and resiliency of electric power grids. (Complaint (“Compl.”), Dkt. 1 at ¶ 18.) CTC manufactures and sells composite core for high-voltage power cables, though it doesn't have the ability to do its own stranding of the composite core for commercial sales of conducts. (Defendants' Proposed Statement of Uncontroverted Facts (“DSUF”), Dkt. 185-1 at No. 3.) Defendant and Counterplaintiff Jason Huang (“Huang”) is CTC's former CEO, CTO, and Board Member. (First Amended Complaint (“FAC”) ¶¶ 24, 28.) He was employed by CTC from May 2010 to January 2017 in various roles. (Id. ¶¶ 25, 76.) James Huang is Jason Huang's brother and is the sole named inventor on U.S. Patent No. 9,633,766 (the “766 Patent”). Rulong Chen is Jason Huang's wife and was CTC's systems consultant. (Id. ¶ 27.)
In 2014, CTC and a Chinese State-owned company, NARI Group (“NARI”), created a joint venture in China called Jiangsu NARI CTC Composite Material Co., Ltd. (the “JV”) to bring CTC's expertise in carbon fiber cores and conductors to the Chinese electric utility market. (FAC ¶ 29.) Huang was appointed as CTC's on-site representative and General Manager of the JV. (Id. ¶ 30.)
CTC's allegations are as follows. Around June 2014, Huang prompted the JV to enter an agreement with Tianjin Xinbo Power Composite Insulator Manufacturing Co. Ltd. (“Xinbo”), a potential stranding partner. (FAC ¶ 34.) Huang then sought a large amount of money from Xinbo in exchange for CTC's trade secret technology, which would allow Zinbo to manufacture carbon fiber core and conductor. (Id. ¶ 35.) Xinbo has since filed several patents “closely related to technology that CTC had developed and that Huang had worked on” during his employment with CTC. (Id. ¶ 37.) Huang received shares from Xinbo, which CTC alleges were in consideration for his disclosure of CTC's technology. (Id. ¶ 38.)
From 2015 through 2016, James Huang also filed several patents, which CTC asserts are closely related to its technology. (FAC ¶ 44.) CTC believes Jason Huang diverted CTC's technology to Xinbo's use through his brother's patent registrations. (Id. ¶ 47.) CTC also asserts that Huang failed to inform CTC of a corporate opportunity relating to carbon fiber composite materials, improperly sought investments from CTC's business partners on his own behalf, and engaged in self-dealing at the JV. CTC further alleges that James Huang improperly registered a patent (U.S. Patent No. 9,633,766, the “’766 Patent”) and filed a patent application (U.S. Patent Application 15/449,602 (the “’602 application”) without crediting CTC employees Eric Bosze, Doug Pilling, or Jason Huang. CTC states that in late 2016, CTC commenced an investigation into Huang's activities in China. (FAC ¶ 73.) CTC terminated Huang's and Chen's employment in February 2017. (Id. ¶ 76.)
2. LEGAL STANDARD
*2 “The Court's authority to sanction a party for despoiling evidence derives from two sources: ‘the inherent power of federal courts to levy sanctions in response to abusive litigation practices, and the availability of sanctions under Rule 37 against a party who fails to obey an order to provide or permit discovery.’ ” Columbia Pictures, Inc., 2007 WL 4877701 at *5 (quoting Leon v. IDX Systems Corp., 464 F.3d 951, 958 (9th Cir. 2006)).
Under Federal Rule of Civil Procedure 37(e), “[i]f electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court:
(1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or
(2) only upon finding that the party acted with the intent to deprive another party of the information's use in the litigation may:
(A) presume that the lost information was unfavorable to the party;
(B) instruct the jury that it may or must presume the information was unfavorable to the party; or
(C) dismiss the action or enter a default judgment.”
“ ‘The duty to preserve material evidence arises not only during litigation but also extends to that period before the litigation when a party reasonably should know that the evidence may be relevant to anticipated litigation.’ ” World Courier v. Barone, No. C 06-3072 TEH, 2007 WL 1119196, at *1 (N.D. Cal. Apr. 16, 2007) (quoting Kronisch v. United States, 150 F.3d 112, 126 (2d Cir.1998)). “As soon as a potential claim is identified, a litigant is under a duty to preserve evidence which it knows or reasonably should know is relevant to the action.” In re Napster, Inc. Copyright Litig., 462 F. Supp. 2d 1060, 1067 (N.D. Cal. 2006).
Terminating sanctions against a spoiling party are appropriate when the Court finds “willfulness, fault, or bad faith.” Leon, 464 F.3d at 958 (quoting Anheuser-Busch, Inc. v. Natural Beverage Distrib., 69 F.3d 337, 348 (9th Cir. 1995)); see also Columbia Pictures, 2007 WL 4877701 at *4-5 (granting default judgment due to evidentiary spoliation). “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.” Leon, 464 F.3d at 959 (emphasis in original) (internal quotation omitted). The Ninth Circuit has instructed courts to weigh five factors before imposing terminating sanctions. Id. at 958. They are “(1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its dockets; (3) the risk of prejudice to the party seeking sanctions; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions.” Anheuser-Busch, 69 F.3d at 348.
3. ANALYSIS
3.1 Overview of CTC's Spoliation Claims
CTC asserts that Defendants failed to preserve and instead destroyed evidence in this case, such that a just outcome cannot be had regarding CTC's claims for trade secret misappropriation, patent ownership, and breach of fiduciary duty. (Motion for Default (“Default Mot.”) (Dkt. 169-1).) Specifically, CTC states that Defendants destroyed four main categories of electronic evidence when litigation became imminent:
*3 • iPhone/WeChats (from a messaging app commonly used in China) – CTC asserts Huang deleted the WeChat application from his phone sometime between June 2016 and December 2016, and thus deleted messages relevant to this case.
• iPad – CTC asserts Chen set Huang's iPad back to factory setting before returning it to CTC, deleting all data in the device.
• USB Drives – CTC asserts Huang used several USB drives during the relevant time period for this case, and that forensic evidence shows the files related to CTC products and confidential materials. Chen admitted that she and Huang threw the drives away after they were terminated.
• JASONPC – CTC asserts Huang's PC would have had relevant information, but that he claims to have donated it to Goodwill in January 2017 during CTC's investigation.
(Default Mot., 2-3.) CTC notes that while there is testimony and other evidence showing that Jason Huang worked with James Huang on the ‘766 patent application, no documents regarding Jason Huang's work on the application have been produced in this litigation.
(Default Mot., 6.) CTC argues that its employees discovered James Huang's patent registration in June 2016 and confronted Jason Huang that same month. (Id., 7.) CTC's counsel then informed Jason Huang that he had breached his fiduciary duty to the company and recommended that he retain an attorney. (Id.; Goodman Decl. ¶ 7.) CTC asserts that Huang has been on notice of potential litigation and has had a duty to preserve evidence since at least August 30, 2016, when he met with CTC's counsel. (Default Mot., 8.)
In November 2016, CTC opened an investigation into Jason Huang's activities, and in early December they suspended him without pay. (Default Mot., 8.) During this time, CTC states that it also asked Huang to turn over any company computers, phones, external hard drives, thumb drives, hard copy files, access cards, and keys, including his company-issued iPhone, iPad, and laptop. (Id.)
CTC engaged a forensic analyst, SETEC Investigations, to investigate the devices available to them. (Default Mot., 9.) CTC also offers Huang's and Chen's deposition testimony, declaration, and in-court testimony from the May 2019 evidentiary hearing.
SETEC found that Huang's iPhone had been wiped of data, but that it had been synced with his personal computer, JASONPC. (Sitton Decl. (Dkt. 162-2) ¶¶ 14, 15.) CTC thus requested to inspect JASONPC, but Defendants refused to produce it. CTC moved to compel, and Defendants responded that Huang had donated JASONPC to charity. (Huang Decl. (Dkt. 127-1) ¶ 8.) SETEC also found that all data on Huang's iPad had been deleted. (Kunkel Decl. (Dkt. 111) ¶ 13; see also Cain Expert Report (Dkt. 168-3) ¶¶ 32-33.) Chen testified that she intentionally wiped this data. (Chen Dep. 96:7-9.) CTC also asserts that after their termination, Huang and Chen threw away multiple USB drives, which Chen testified bore a CTC logo and may have contained CTC information. (Chen Dep. 75:21-76:19.)
Defendants dispute the impact of Huang's and Chen's disposal of electronic evidence rather than the fact of it, and they assert that CTC hasn't been prejudiced by any deletions. For example, they state that CTC was able to find a backup of all of Jason Huang's WeChat messages from 2013 through June 2016, and that the only messages CTC hasn't obtained are those from September to December 2016. (Opposition to Motion for Default Judgment (“Opp. to Default”), 4.) And more generally, they note that CTC has access to “mountains of evidence” regarding their claims and greater access to the relevant electronic record than Defendants have. For example, Defendants point to evidence not at issue in CTC's motion – including much of Huang's iPhone, his work laptop, and certain WeChat messages – that is available to CTC. Defendants also argue that the material relevant to this case was generated in 2014-2015, and that CTC's motion regarding conduct from 2016-2017 is thus a “red herring.” (Opp. to Default, 2-3.) Finally, much of Defendants' opposition is based on evidentiary objections and arguments regarding the absence of bad faith.
*4 After reviewing the parties' briefing, the Court decided that further exploration and clarification of certain issues was necessary to make a finding regarding spoliation and default judgment. See Federal Rule 55(b)(2) (“The court may conduct hearings ... when, to enter or effectuate [default] judgment, it needs to: ... (C) establish the truth of any allegation or evidence; or (D) investigate any other matter.”) An evidentiary hearing took place on May 10, 2019, focusing especially on the elements of (1) willfulness or bad faith and (2) prejudice. Expert witness Andrew Crain and Defendants Jason Huang and Rulong Chen testified.
3.2 Duty to Preserve
The Court previously held that the meeting between Huang and CTC's counsel in August 2016 put Defendants on notice of potential litigation and that Defendants' duty to preserve began at that point. The Court thus doesn't consider any accusations of spoliation that allegedly occurred before August 30, 2016. See Fed. R. Civ. Proc. 37(e), 2015 Committee Notes (Rule 37(e) does not apply to information that is lost before duty to preserve arose).
3.3 USB Drives
CTC claims that due to Defendant's spoliation, it is missing all USB drives that were connected to Jason Huang's CTC laptop between September 8, 2013 and November 22, 2016. (Supplemental Evidentiary Chart (Dkt. 226) at 1.) The parties agree that some USB drives were destroyed by Defendants after the August 2016 preservation date. (Id.) They dispute, however, the number and contents of those drives and Defendants' reasons for destroying them.
At the evidentiary hearing, CTC's expert Andrew Crain testified that he used “system artifacts” from Huang's CTC laptop, to make findings about the Defendants' use of USB storage drives. (May 10, 2019 Hearing Transcript (“Tr.”) at 23:10-19.) These artifacts give only a partial view of the data contained on all devices that have been connected to the laptop. But in reviewing them, Crain determined that at least 52 different devices had been connected to Huang's laptop. (Id. at 27:3-5.) He compiled a list of file data – to the extent it is still available – and then compared that list to Defendants' production. See Notice of Lodging of Evidentiary Chart (Dkt. 214), Ex. E (“Emails Identified by CTC as Purportedly Missing”). Defendants filed responsive lists of documents that they claim match some of those purportedly missing from the USB drives, but exist elsewhere. See Notice of Lodging, Exs. F, H. Defendants stated at the hearing that given more time, they may be able to recover additional items from Crain's list from other sources. But on closer review, it appears that even the documents Defendants claim to have located from CTC's list of missing USB files are not necessarily matches. For example, Defendants have identified a folder (“Meng-L”) as a match for a word document (“Meng.doc”). (Tr. At 31:10-14.) Plaintiff has shown that many documents that once existed on the destroyed USB drives are non-recoverable from other sources.
Further, and considering especially Rulong Chen's testimony both at her deposition and the May 2019 evidentiary hearing, the Court finds that CTC destroyed USB drives knowing that they might be relevant in anticipated litigation. At her deposition, Chen stated:
Q. Is it possible that those USB drives have information from CTC on them?
A. It's possible, but after we were terminated, CT- -- well, I was CTC routinely gave out USB drives in CTC logo. After I and Jason were terminated, we throw away all those USB drives.
Q. You didn't return them to CTC. You threw them away; is that correct?
A. Correct. We don't like to see those yellow CTC logo here so we just put it in the dumpster.
*5 Q. Did you look at them to see what was on them before you threw them out?
A. No.
(Goodman Decl. (Dkt. 168-2), Ex. C (Chen Deposition) at 75:21-76:19) (emph. added.)
Chen's willful disposal of items she knew might be relevant shows an intent to hide information from CTC. Chen claims that her emotional reaction to the CTC logo prompted her to “just put [the devices] in the dumpster.” (Id.) But inconsistencies across Defendants' testimony, and between their testimony and other evidence, undermine their credibility. To provide just two examples, both Chen and Huang claim to have been the person who discarded the CTC-branded USB drives. (See, e.g, Tr. at 200:16-20; 122:6-10.) And Huang testified that he never “created copies or otherwise ‘synchronized’ any CTC Dropbox files on ... any [ ] personal device,” though forensic evidence shows that Huang copied Dropbox content to USB devices that were connected to his CTC laptop. See Huang 2016 Declaration, ¶ 5; Crain Rep. (Dkt. 168-3) at 8. Huang claims, somewhat unconvincingly, to no longer have access to his Dropbox account, and he hasn't made it available for inspection, though it might hold relevant data. See Crain Rep. at 8-9.
Defendants don't dispute that they intentionally destroyed the drives, nor that they contained CTC-related information. Rather, Defendants assert that the drives they discarded held files that aren't relevant. Such statements are unpersuasive, since at least some of the 52 drives detected in Crain's forensic analysis appear, based on file names and other artifacts, to have potential relevance. See Notice of Lodging Evidentiary Chart, Exs. B, H (Dkt. Nos. 214-2, 214-10.) See also Leon, 464 F.3d at 959 (“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.”) And in any case, “spoliation of evidence raises a presumption that the destroyed evidence goes to the merits of the case, and further, that such evidence was adverse to the party that destroyed it.” Apple Inc. v. Samsung Elecs. Co., 888 F Supp. 2d 976, 993 (N.D. Cal. 2012). Also, CTC's forensic analysis is necessarily limited by Defendants' admitted destruction of devices. (See, e.g., Tr. at 23:13-19; Crain Rep. at 7.) Crain's report thus provides an incomplete view of the universe of destroyed data, but one that shows at least some definitive prejudice to CTC.
Reviewing all the testimony and other evidence before it, and understanding the challenge of post hoc analysis of destroyed items, the Court finds (1) that Defendants failed to take reasonable steps to preserve the data on USB drives, (2) that such data should have been preserved in anticipation of litigation, (3) that it cannot be restored or replicated, and (4) that Defendants acted to deprive CTC of its use. See Fed. R. Civ. Proc. 37(e). The Court also finds that CTC was prejudiced by the loss of USB drives, dozens of which had been connected to Huang's CTC laptop, and none of which had been produced at the time this spoliation dispute arose. These findings justify sanctions under Federal Rule 37(e).
*6 The Court finds that the most extreme sanction of terminating the case is not appropriate here. See Leon, 464 F.3d at 958. However, the Court finds that an adverse jury instruction is necessary to counter the prejudice caused by Defendants' spoliation of USB drives. See Section 4.
3.4 Apple Devices
3.4.1 iPad
The parties agree that Defendants had an iPad which they restored to factory settings, but they disagree about the date and purpose of the reset. See Supp. Evid. Chart (Dkt. 226) at 5. CTC claims, based on forensic evidence, that the reset occurred on December 10, 2016, after the duty to preserve was in effect. (Id.) Defendants returned the iPad to CTC in December 2016, and CTC determined that it had been both reset and “initialized” (through the setup wizard), including by authenticating the device to Apple iCloud using the ID rulongc@yahoo.com. (Crain Rep. at 9.) Defendants don't directly contest the ample evidence showing a 2016 reset, but instead assert that Chen first reset the iPad in 2015 and then stopped using it. This timeline, which would place their relevant deletions before the preservation duty arose, relies entirely on Chen's testimony. Despite the somewhat dense and muddled record, one thing is clear – the December 2016 reset has made it difficult to confirm Defendants' narrative regarding 2014-2016 use of the iPad (including the alleged 2015 reset) and has created significant barriers to forensic analysis. (Id. at 12.)
CTC asserts that the factory reset destroyed data from the iPad's use between August 2013 and December 10, 2016. They claim this data included text messages, WeChat communications, Skype application use, Dropbox application use, web search histories, and email communications exchanged on the device (including from Gmail, Yahoo, or FRP Resources email accounts). (Supp. Evid. Chart at 5.)
Defendants counter that after the alleged 2015 reset, the iPad was only used by Chen's parents for personal purposes. (Supp. Evid. Chart at 5.) Chen testified that they purchased the iPad in March 2012, that Huang stopped using it in 2014, and that she reset it in 2015 before giving it to her parents. (See, e.g., Tr. at 187:22-23.) Defendants' story is confusing and inconsistent, however, and doesn't fully explain the chain of events. First, even assuming the iPad was reset in 2015 and not used by Defendants until they returned it to CTC, it is troubling that Defendants didn't disclose – and even obscured – the 2016 reset. This omission stands out, considering that Huang did disclose an alleged 2015 reset. (See Dec. 2, 2018 Huang Decl. ¶ 6.) Second, there is no forensic evidence of a 2015 reset. (See Supp. Evid. Chart at 6). Nor does the limited forensic evidence that is available support Defendants' statements regarding use of the iPad between 2015 and December 10, 2016. One analytical tool CTC does have that wasn't affected by the factory reset is a “recents log.” This data corresponds to the user's Apple ID, rather than the device. So when Chen reset the iPad in 2016, the data associated with her Apple ID came down to the device from the cloud. (Tr. at 40:1-11.) Among other things, recents logs show emails and other communications that have been sent from an IOS device (e.g. an iPad or iPhone). Like the system artifacts discussed in Section 3.3, this recents data helps fill in some of the gaps left by wiped or destroyed devices, but it doesn't offer a complete picture. In this case, it shows numerous emails sent from Chen's email address from the iPad in 2016. (See Notice of Lodging Evidentiary Chart, Ex. A.) This casts doubt on Defendants' testimony.
*7 The evidence concerning Defendants' production of WeChat messages is also troubling. When CTC filed this default judgment motion, Huang hadn't produced any WeChat messages postdating June 17, 2016 (when Huang's iPhone was last backed up on his laptop). Huang stated in his December 2, 2018 declaration that he “never used WeChat on [his] iPad.” (Huang Decl. ¶ 6; id. n. 2.) But a 2013 backup of Huang's iPad – the last full picture of the iPad that is available in this case – shows that Huang did send and receive WeChat communications on his iPad. (Crain Rep. ¶ 39; Tr. at 46:6-9, 47:1-3.) So the Court analyzes which of these, if any, may have been permanently spoiled by a 2016 reset.
Sometime before Huang returned his iPhone to CTC in December 2016, he deleted the WeChat app, thereby purging all messages from that device. (Id. ¶ 40.) (The loss of WeChat messages from the iPhone is discussed further in Section 3.5.) Considering the absence of corroborating evidence and the existence of evidence to the contrary, the Court doesn't give great weight to Defendants' testimony that they didn't use the iPad after 2015. So if Defendants hadn't reset it in 2016, the iPad may have contained relevant WeChats that had either been synced from the Huang's iPhone, or that only appeared on the iPad. Indeed, when Plaintiff compared the message population from the 2013 iPad backup to the 2016 iPhone backup, they found that most of the WeChats from the iPad (97%) were not available on the iPhone. (Tr. at 48:18-49:6.)
In reviewing this and other evidence before it, the Court finds that Defendants breached their duty to preserve data on the iPad, including WeChats and emails (from Gmail, Yahoo, and FRP Resources email accounts). So the Court turns to (1) whether Plaintiff is prejudiced by the loss of information, or (2) whether Defendants intended to prevent Plaintiff from using the information during litigation. See Fed. R. Civ. P. 37(e); see also Oppenheimer, 2017 WL 1807596 at *11.
On this point, CTC has failed to meet its burden of proof. CTC submitted several logs of communications that are unclearly marked and insufficiently explained. See Exhibits attached to Notice of Lodging (Dkt. 214); see also Exhibits C-F attached to Crain Report. The Court can't discern from these unclearly annotated and coded logs that messages or documents from the iPad that aren't available elsewhere were destroyed. In most cases, the logs aren't even labeled. In short, CTC hasn't adequately connected the dots between the iPad reset and the loss of relevant data that can't be recovered elsewhere.
The Court finds the record before it inadequate to sanction Defendants concerning Huang's iPad.
3.4.2 iPhone
Because of similarities between Huang's iPhone and iPad, the Court mainly focused on any cognizable differences in usage and data. The iPhone was backed up on June 17, 2016, so the Court is primarily concerned with Huang's use of the iPhone from that date until it was returned in December 2016. See Crain Rep. at ¶ 40. And again, the Court only considers information that was destroyed after the August 30, 2016 preservation duty cut-off (regardless of when the information was generated).
As of the filing of CTC's default judgment motion, Huang hadn't produced any WeChat messages dated from June 17, 2016 (iPhone backup) to December 6, 2016 (the date he returned the iPhone to CTC). Sometime before returning the phone, Huang deleted the WeChat app. Again, the Court looked to Plaintiff's briefing and oral presentation for clear evidence that potentially relevant WeChats (1) had been deleted after the preservation cut-off and (2) are unavailable elsewhere. Again, it finds the record lacking. While it seems unlikely that Huang simply stopped using WeChat after the June 2016 backup, there isn't clear proof to the contrary. See, e.g., Tr. at 51:20-25:
*8 Q. (Ms. Bent) And can you tell if the WeChat application was used after the date of the backup?
A. (Dr. Crain) No. I think we have a blind spot there just because, you know, this gap between the date of the backup and the date of the phone's return. And when it comes back, it doesn't have WeChat on it.)
And while data shows that Huang deleted the app between June 16 and December 6, 2016, CTC is unable to confirm the specific date within that window, leaving open the possibility that Huang deleted it before the preservation duty cutoff. See Crain Dep. (Dkt. 193-2) at 21:24.
CTC surmises that Huang may have deleted WeChat communications message by message, and that the decreasing volume of messages from 2014-2016 is indicative of deliberate, ongoing deletions. But again, CTC hasn't definitively tied any such activity to a date after August 30, 2016, and their theory relies too heavily on conjecture. (See, e.g., Tr. 87:5-22.) On the other hand, Huang testified that he didn't delete any WeChats after August 2016 that he believed to be relevant. (Id. at 118:16-21.) CTC also asserts that it is unable to recover email communications exchanged on Huang's iPhone using Gmail, Yahoo, or FRP Resources email accounts. The Court finds this argument to be similarly incomplete. Since emails are server-based communications, the devices used to send or receive them are not necessarily crucial to their production. In this case, Huang testified that he searched his Yahoo and Google accounts for responsive documents. (Id. at 129:4-13.)
The Court declines to sanction Defendants regarding spoliation of evidence on the iPhone. However, the Court ORDERS Defendants to conduct another search across all email accounts and messaging applications within their control for responsive items. Defendants' counsel are responsible for ensuring this search is conducted properly. The search methods described at pages 162-170 of the hearing transcript are inadequate, and Defendants must make all efforts to recover the messages and emails described therein and similar documents.
3.5 JASONPC
Huang testified that he donated his home computer (“JASONPC”) to charity in January 2017. (Jan. 25, 2019 Huang Decl.) He stated that his laptop was smoking and locking up. (Id. ¶ 3.) The timing of this donation, right in the middle of CTC's investigation into Huang's activities in China, is certainly unusual. Whether the laptop was smoking or, as Huang alternately testified, showing a red screen, CTC could have attempted to retrieve relevant information from it had Huang not discarded it. See, e.g., Tr. at 55:22-56:5; 57. See also Dorchester Fin. Holdings Corp. v. Banco BRJ S.A., 304 F.R.D. 178, 182-83 (S.D.N.Y. 2014) (The “duty to preserve did not end when the computer allegedly crashed,” and “[t]he fact that a personal computer stops functioning is by no means a death knell for the data it contains.”)
Defendants submit as evidence of Huang's donation a Goodwill receipt, which shows that 2 computers were allegedly donated. But this receipt doesn't provide serial numbers and isn't wholly reliable. Nor is the alleged Microsoft support service ticket (Bates No. HUANG0069987) strong support for Huang's narrative, as it turns out to be a Microsoft BitLocker Recovery Key that isn't on its face linked to JASONPC. (Crain Deposition (Dkt. 193-2) at 16:3-16.) It is also concerning that when CTC requested to inspect JASONPC, hoping to recover data that had been wiped from the company devices, Defendants didn't mention that Huang had donated it, but simply refused to produce it. (Kunkel Decl. ¶ 14-15.) It was only when CTC moved to compel production that Defendants explained it had been donated to charity. (Def. Jdg. Mot. at 10.)
*9 As discussed in Section 3.4.2, there is insufficient evidence that the WeChat app was deleted after August 30, 2016 or that emails from Huang's Gmail, Yahoo, and FRP email accounts are unrecoverable. So the Court turns to the other types of data CTC claims were spoiled when Huang donated JASONPC. Perhaps most compelling is the loss of evidence regarding whether JASONPC was functional or locked and overheated, in other words, evidence relevant to the current dispute over ESI preservation. When Huang donated the laptop in 2017, he had already been suspended and had been informed of his preservation obligations. See Sitton Decl. (Dkt. 162-2) ¶¶ 8-9. And since Defendants had already wiped the iPhone and iPad of useful data, JASONPC – which had been synchronized with Huang's CTC iPhone – would have contained information that's now unavailable elsewhere. (Tr. at 53:20-54:4.)
Considering the entire record before it, the Court finds that Defendants spoiled JASONPC before allowing CTC to inspect it, and then obscured their alleged donation, to deprive CTC of potentially relevant information. The Court further finds that this spoliation prejudiced CTC by destroying, among other things, any record either confirming or challenging Defendants' explanation for the donation. This forensic evidence isn't available from any other source. In this case, Defendants have a variety of explanations for why four different types of devices with potentially relevant information –USBs, an iPad, an iPhone, and a laptop – were spoiled during a short span of time and in the midst of conflict with CTC. When Defendants had reason to believe litigation was imminent, they began actively destroying evidence, and this course of conduct has resulted in great cost to CTC, both in terms of litigation and loss of information. See, e.g., Goodman Decl. (Dkt. 168-2), Ex. C (“Chen Depo.”), 122:20-123:6 (emph. added):
Q Earlier today, you testified your agreement with CTC wasn't terminated until February 2017. So my question is why would you start deleting information concerning CTC from your computer in December 2016 before your agreement with the company was terminated?
A Well, after December 6, I was -- I and Jason was escorted out by J.D. Sitton. And I know I will eventually be terminated by CTC.
Q So you deleted the information in anticipation of being terminated; is that correct?
A That's correct.
To partly compensate for the loss of evidence and prejudice to CTC, the Court will issue an adverse jury instruction regarding the spoliation of JASONPC.
4. SANCTIONS
For the reasons stated in this Order and considering all the evidence before it, the Court DENIES Plaintiff's request for default judgment and imposes a lesser penalty, as described in the following sections.
4.1 Adverse Instruction
To counter the prejudicial effects of Defendants' spoliation, the Court will issue an adverse jury instruction at trial. See Fed. R. Civ. Proc. 37(e)(2)(B); see also UMG Recordings, Inc. v. Hummer Winblad Venture Partners et al., 462 F. Supp. 2d 1060, 1066 (N.D. Cal. 2006) (discussing district court's inherent authority to issue sanctions for spoliation). The instruction will inform the jury of Defendants' destruction of USB drives and JASONPC and instruct them that they may presume the data Defendants destroyed was unfavorable to Defendants. See, e.g., Oppenheimer v. City of La Habra, Case No. SACV 16-00018 JVS (DFMx), 2017 WL 1807596, at *13 (C.D. Cal. Feb. 2, 2017) (Selna, J.). Before trial, Plaintiff may present further argument about the instruction and related details.
4.2 Monetary Sanctions
In addition to the adverse instruction, monetary sanctions are appropriate to compensate CTC for prejudice, under Rule 37(e) and the Court's inherent authority. Defendants are ORDERED to pay CTC's reasonable attorney's fees and costs related to CTC's motion for default judgment. This award includes the cost of retaining expert Andrew Crain only through the first expert report. It excludes the cost of drafting joint, supplemental briefing as ordered by the Court.
*10 CTC must first submit a statement of costs and fees to Defendants. The parties are ORDERED to meet and confer substantially and attempt to reach agreement regarding the fee award before filing any related motion. Any such motion must be accompanied by a declaration describing good faith efforts to reach a resolution.
5. CTC'S STATEMENT OF FEES REGARDING SETTLEMENT CONFERENCE
In April 2019, the Court granted CTC's motion for sanctions against Huang. (Order, Dkt. 210.) These sanctions resulted from Huang's willful violation of court orders regarding settlement confidentiality. (Id.) CTC filed a statement, claiming $52,897.50 in fees and costs. See Statement, Dkt. 212. Defendants filed a response that reargued the substantive legal authorities for the sanctions and inaccurately describes the Court's April 15, 2019 Order. See Response, Dkt. 221. Here, the Court doesn't reconsider the proprietary of its sanction. Instead, the Court considers the reasonableness of CTC's fees and costs statement.
CTC's claim for $52,897.50 includes attorney fees, interpreter costs, and travel and meal expenses related to the settlement conference. See Statement. First, the Court notes that billing records are different than payment records. CTC's statement is unclear regarding whether it describes amounts actually paid by the company or merely invoices to be negotiated and paid in part. CTC's records appear to be the latter. Second, some of the redactions obscure CTC's billing narrative, making it difficult to confirm that the tasks performed were reasonable and pertain to mediation. An in camera report without redactions may have been more useful. Third, the interpreter invoice includes a late payment fee, which is not a reasonable charge. And finally, while the Court values Mr. Alexander Okun's presence at the settlement conference, the travel costs incurred are excessive. See id. Considering these and other factors, including the cost to CTC of filing a sanctions motion, the Court AWARDS $15,000 to CTC for Huang's violation of court orders regarding settlement. The Court will look unfavorably on a failure to promptly pay this award.
6. DISPOSITION
The Court GRANTS IN PART Plaintiff's Motion for Default Judgment or, in the Alternative, for Sanctions. (Dkt. 168/169.) The jury will receive an ADVERSE INSTRUCTION regarding Defendants' spoliation of evidence. Defendants are further ORDERED to pay CTC's reasonable attorney's fees and costs concerning CTC's motion for default judgment.
Having previously granted Plaintiff's Motion for Sanctions regarding mediation misconduct, the Court AWARDS $15,000 in fees and costs to Plaintiff. See Section 5. A separate order will issue regarding the parties' motions for summary judgment.
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