HOME INSTEAD, INC., a Nebraska Corp.; Plaintiff, v. DAVID FLORANCE, MICHELLE FLORANCE, FRIEND OF A FRIEND, INC., Defendants 8:12CV264 United States District Court, D. Nebraska Filed April 24, 2014 Zwart, Cheryl R., United States Magistrate Judge MEMORANDUM AND ORDER *1 This matter is before the court on Plaintiffs’ Motion for Sanctions, (Filing No. 148). For the reasons set forth below, the motion will be granted in part. As to the remainder of the motion, the court will hold an evidentiary hearing before issuing a ruling. BACKGROUND This lawsuit was initiated by Home Instead on August 1, 2012. (Filing No. 1). Shortly thereafter, Defendants’ counsel informed his clients that they had a duty to preserve relevant or potentially relevant documents.[1] Plaintiff issued a “cease and desist” letter to Defendants’ counsel instructing them to cease operating their business as a Home Instead franchise. (Filing No. 20-31). Defendants’ counsel forwarded that letter to his clients. Home Instead sent a second “cease and desist” letter to Defendants’ counsel instructing Defendants to discontinue the use of Home Instead’s Licensed Marks and Confidential Information and seeking confirmation that Defendants were winding up the business as a franchisee of Home Instead. (Filing No. 153-2). That letter also directed Defendants to comply with the post-termination provisions in the franchise agreements. Counsel forwarded this second letter to his clients as well. The court entered a final progression order on April 23, 2013 and discovery commenced shortly thereafter. Plaintiffs served discovery and began depositions. “David and Michelle Florance testified that after August 1, 2012, some of the information and materials responsive to Plaintiff’s discovery were sold, (Filing No. 98-7, at CM/ECF p. 3 at 42:14-44:12; Filing No. 98-8, at CM/ECF pp. 5-6 at 79:23-82:17); shredded, (Filing No. 98-7, at CM/ECF pp. 11-12 at 81:25-82:25, 84:22-85:25); donated, (Filing No. 98-7, at CM/ECF p. 21, 122:22-124:4; Filing No. 98-8, at CM/ECF p. 24, 168:1-25-169:25); and discarded, (Filing No. 98-7, at CM/ECF pp. 19, 24, 32 at 110:17-111:3, 133:6-134:10, 170:8-18; Filing No. 98-8, at CM/ECF pp. 11, 35 at 107:108:10, 209:20-210:4), including materials Home Instead claims [Defendants were] required to return after the parties’ franchise agreement expired. (Filing No. 98-8, at CM/ECF p. 38 at 213:6-214:8).” (Filing No. 118). Defendants objected to many of Plaintiff’s requests for production and interrogatories. Communication between the respective attorneys did not resolve the vast majority of the disputed issues. Unable to reach a resolution on the matter, Plaintiff filed a motion to compel. (Filing No. 97). This court granted the motion to compel in full with the court expressly finding “[t]he defendants’ effort to respond to discovery was inadequate.” (Filing No. 118 at CM/ECF p. 5). This court went on to specifically note that there was “no good faith argument supporting Friend’s continued refusal to respond” to at least one of the challenged interrogatories. Filing No. 118 at CM/ECF p. 8. Similarly, the court found Defendants’ challenges to the requests for production to be without merit and that David and Michelle Florance “have not been wholly forthcoming and honest during the discovery process ....” (Filing No. 118 at CM/ECF p. 16). *2 The court ordered Defendants to complete several steps, including providing signed statements regarding information they destroyed, deleted, sold, or otherwise discarded and to explain what effort they made to locate responsive documents. (Filing No. 118 at CM/ECF p. 18). Defendants were further ordered to verify when the litigation hold was put in place, the people to whom the litigation hold was communicated, and the directions conveyed for the preservation of documents. (Filing No. 118 at CM/ECF p. 19). Defendants were ordered to produce paper documents as they are kept in the ordinary course of business and to label and organize those documents according to Plaintiff’s discovery requests. Id. Finally, Defendants were directed to fully respond to the remaining disputed discovery requests. Id. Defendants sought additional time from Plaintiff and the court to file their notice of compliance with the court’s order on the motion to compel. Defendants filed their Notice of Compliance on December 13, 2013. (Filing No. 133). Plaintiff filed an objection to the Notice of Compliance on December 16, 2013. (Filing No. 134). The Objection noted several deficiencies in Defendants’ responses and their compliance with this court’s order. A hearing was held on the matter on December 23, 2013. After hearing argument, the court granted Plaintiff’s objection in part, instructing Defendants to produce documents in a way that more closely mirrored how the documents were kept in the normal course of business – e.g., providing bookmarks at the beginning of new documents contained in one PDF file and perform optical character recognition on PDF files produced by Defendants. Defendants were also instructed to provide further information regarding their efforts to identify and collect responsive electronically stored information (“ESI”) including a specific PowerPoint presentation. The court also noted that Defendants had not properly communicated with their attorney regarding their efforts to comply with discovery. (Filing No. 142 at CM/ECF pp. 41-42). On January 21, 2014, Defendants filed a Notice of Serving Supplemental Discovery Responses and Compliance with Memorandum and Order. (Filing No. 145). On February 7, 2014, Plaintiff brought the motion for sanctions now before the court. (Filing No. 148). Plaintiff seeks an adverse instruction as to relevant documents and electronically stored information (“ESI”) the defendants have admitted to destroying or discarding. Plaintiff also seeks attorney’s fees associated with its successful motion to compel and the objection to Defendants’ notice of compliance and the corresponding hearing. Plaintiff seeks additional attorney’s fees due to Defendants’ alleged bad faith conduct in defending this law suit. ANALYSIS The court’s authority to sanction the misconduct of parties and their attorneys arises from the Federal Rules of Civil Procedure and in the inherent power of the court. See Fed. R. Civ. P. 11 & 37; Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991); Sylla-Sawdon v. Uniroyal Goodrich Tire Co., 47 F.3d 277, 280 (8th Cir. 1995). To the extent Defendants allege the court’s power to sanction is limited without an express finding that a court order was violated, Defendants are incorrect. This court undoubtedly has the inherent power to craft an appropriate sanction for any misconduct by a party, including an adverse jury instruction. See Stevenson v. Union Pacific R. Co., 354 F.3d 739, 745 (8th Cir. 2003)(“A court’s inherent power includes the discretionary ‘ability to fashion an appropriate sanction for conduct which abuses the judicial process.’ ”)(citing Chambers, 501 U.S. at 44-45). A. Motion to Compel Fed. R. Civ. P. 37 provides that if a motion to compel is granted the court “must ... require the party or deponent whose conduct necessitated the motion, the party or attorney advising that conduct, or both to pay the movant’s reasonable expenses incurred in making the motion, including attorney’s fees.” Fed. R. Civ. P. 37(a)(5). Rule 37 further instructs the court not to order the payment of attorney’s fees if (1) the parties did not engage in a meet and confer; (2) the opposition to the motion to compel was “substantially justified” or (3) the award of expenses would be “unjust.” Fed. R. Civ. P. 37(a)(5)(A)(i-iii). 1. The initial Motion to Compel. *3 This court granted Plaintiff’s motion to compel in its entirety. (Filing No. 118). And the court found the vast majority of Defendants’ objections to the specific interrogatories and requests for production to be without merit – i.e., without substantial justification, and in some cases made in bad faith. For instance, the defendants refused to respond to an interrogatory based on an obvious typographical error in the request, refused to fully answer an interrogatory because it did not specify a date range even though the relevant and only possible time period was less than a year, failed to produce documents as they were kept in the ordinary course of business, and argued certain terms like “client files” were vague, despite the fact one of the defendants had used that very term in depositions. (Filing No. 118 at CM/ECF pp. 8-12). Further, the court previously found Defendants’ overall efforts to comply with the rules of discovery were inadequate. As stated in the court’s order on the motion to compel: But David Florance also testified, and Michelle Florance’s testimony confirms, that the defendants did not thoroughly search email accounts for responsive documents ((Filing No. 98-7, at CM/ECF pp. 9, 13-14, at 74:15-24, 92:24-93:2; Filing No. 98-8, at CM/ECF p. 17-18, 35 at 140:25-141:20, 209:20-210:4). The defendants did not review client paper files, (Filing No. 98-7, at CM/ECF p. 14 at 95:21-96:6); employee files, (Filing No. 98-7, at CM/ECF p. 15 at 98:21-99:25); caregiver logs, (Filing No. 98-7, at CM/ECF p. 11 at 81:25-83:4); or client care plans or service contracts (Filing No. 98-8, at CM/ECF p. 31 at 195:17-196:25), and they were unable to explain what efforts their employees used to find responsive information. (Filing No. 98-8, at CM/ECF p. 6 at 81:15-82:17). The defendants’ electronic search consisted of looking for the words “Home Instead,” and then deleting any documents found without retaining a copy or forwarding it to counsel for this litigation. (Filing No. 98-8, at CM/ECF pp. 11, 17, 22 at 107:1-21, 139:11-17, 157:9-158:1). Filing No. 118 at CM/ECF p. 4-5. In short, many of the disputes that resulted in the motion to compel should have been resolved long before a formal motion to compel was necessary. Defendants’ objections, specifically those made to Interrogatory Nos. 5, 6, and 7 and Requests for Production Nos. 29, 30, 37, 38 and 66, lacked substantial justification. And Defendants’ efforts to comply with the rules of discovery were insufficient. Pursuant to Fed. R. Civ. P. 37(a)(5) and for the reasons set forth in the court’s prior memorandum and order (Filing No. 118), the plaintiff is entitled to its attorney’s fees related to bringing this motion to compel. These include the cost of bringing the motion and preparing the associated briefs and indexes of evidence. 2. Objection to Notice of Compliance. Additionally, the court will award attorneys’ fees associated with the Objection to Notice of Compliance filed by Plaintiff, including the fees and costs associated with the December 23, 2013 hearing. Despite Defendants’ characterizations to the contrary, this motion was essentially a motion to compel Defendants to comply with the court’s original order on the motion to compel and not a mere attempt to clarify the court’s instructions. Many of the issues related to whether Defendants properly complied with this court’s order could have been resolved had Defendants not adopted unreasonable positions. For instance, Defendant’s counsel was unable to tell the court what computers or other devices on which the defendants had searched for responsive information, presumably because the defendants did not tell their attorney about their specific efforts to locate ESI. Defendants did not produce responsive banking records although they were easily accessible electronically,[2] and were unable to identify several caregiver logs that Plaintiff believed were responsive. Defendants also produced documents electronically in a burdensome format consisting of one long PDF document without recognizable breaks between documents. Defendants’ continued non-disclosure and manner of production were not substantially justified and Plaintiff is entitled to its attorneys’ fees incurred in bringing the Objection to the Notice of Compliance and the corresponding hearing on the matter. The award of such fees will not be unjust. B. Adverse Instruction *4 Plaintiff seeks additional sanctions for what it characterizes as Defendants’ spoliation of evidence. In general, the court will not find a party engaged in spoliation of evidence absent “a finding of intentional destruction indicating a desire to suppress the truth.” Menz v. New Holland N. Am., Inc., 440 F.3d 1002, 1006 (8th Cir. 2006)(internal quotations omitted). In addition, the destruction of evidence must prejudice the opposing party’s case. Stevenson, 354 F.3d at 748 (8th Cir. 2004). A “finding of bad faith is not always necessary” for the court to exercise its inherent power to sanction for spoliation. See, e.g., Stevenson, 354 F.3d at 745. In Stevenson, the Eighth Circuit distinguished spoliation of evidence before litigation commences and spoliation of evidence after the commencement of litigation as it applies to a possible adverse inference jury instruction. Stevenson, 354 F.3d at 746-750. The Stevenson court expressly held a finding of bad faith was required to warrant an adverse jury instruction for pre-litigation destruction of documents. Id. at 748-49. But “even absent an explicit bad faith finding,” the court may sanction “the ongoing destruction of records during litigation and discovery by imposing an adverse inference instruction.” Id. at 750. In Stevenson, Union Pacific destroyed documents after the initiation of litigation. It claimed innocence because it asserted it destroyed documents pursuant to its routine document destruction policy. However, the district court determined Union Pacific had actual knowledge of the law suit and a specific document request made during discovery to which the destroyed documents were responsive. The court allowed an adverse inference even absent a finding the documents were destroyed in bad faith. Id. at 749-50. As suggested in Stevenson, district courts have significant latitude in crafting an appropriate sanction when the alleged spoliation occurred after litigation has commenced. To be sure, a district court does not abuse its discretion by imposing sanctions, even absent an explicit bad faith finding, where a party destroys specifically requested evidence after litigation has commenced. Stevenson, 354 F.3d at 749–50. However, where a court expressly finds, as here, that there is no evidence of intentional destruction of evidence to suppress the truth, then the district court also acts within its discretionary limits by denying sanctions for spoliation of evidence. See Morris v. Union Pac. R.R., 373 F.3d 896, 901 (8th Cir.2004) (“The most important consideration in our analysis is the district court’s own finding regarding Union Pacific’s intent.”). Gallagher v. Magner, 619 F.3d 823, 845 (8th Cir. 2010). Thus, while a finding of bad faith is not a prerequisite for the award of an adverse jury instruction, the court has discretion to consider the Defendants’ intent when fashioning the proper remedy for spoliation. 1. Defendants’ intent. The parties disagree as to what showing, if any, of Defendants’ intent or bad faith is required before an adverse instruction may be imposed as a sanction. Defendants assert that the court must find Defendants acted with the intent to suppress the truth. Plaintiff argues no such finding is necessary if documents are destroyed after litigation commences. Although an express finding of bad faith is not necessary when post-litigation spoliation is involved, at least some courts have held a parties’ intent is still relevant in determining what sanction is appropriate. See, e.g., American Builders & Contractors Supply, Co., Inc. v. Roofers Mart, Inc., case no. 1:11cv19, 2012 WL 2992627 at *4 (E.D. Mo. July 20, 2012)(finding a laptop’s operating system was replaced with the intent to suppress evidence before finding an adverse instruction was an appropriate remedy for spoliation). *5 In this case, Defendants do not dispute that they destroyed documents and eliminated ESI sometime after this litigation began. With respect to the documents, Defendants assert that many of the documents that would have otherwise been responsive to Plaintiff’s discovery requests were mistakenly destroyed. That is, Defendants claim they interpreted a cease and desist letter from Plaintiff as instructing Defendants to destroy or otherwise discard any documents with Home Instead’s licensed marks or containing confidential information. This was allegedly due to “a combination of confusion and a literal interpretation of the terms of [those] letters.” Filing No. 152 at CM/ECF p. 2. This destruction occurred despite the fact the defendants were represented by counsel and were advised to retain and preserve documents relevant to the litigation. Based upon the review of the evidence submitted, the court finds Defendants’ assertions of confusion and literal interpretation to be very unpersuasive. The plain language of the two “cease and desist” letters direct Defendants to comply with the terms of the franchise agreements, which in turn direct the defendants to return all materials related to the operation of the franchised business to Home Instead. Filing No. 20-14; Filing No. 20-15. The explanations for deleting ESI and discarding a laptop computer are equally tenuous. Defendants essentially argue these instances of alleged spoliation occurred as part of their normal course of business and through circumstances outside of their control (e.g., Google’s policy on deactivating email accounts). With respect to the discarded laptop, David Florance stated that Defendants took the laptop to a computer technician “where it was diagnosed with a malfunctioning hard drive” and “was not worth repairing.” (Filing No. 145-1, ¶7 at CM/ECF pp. 2-3). Based on the information of record, most, if not all, of the destruction of ESI and the disposal of the laptop occurred after litigation commenced and Defendants were represented by counsel. Therefore, a claim that the destruction occurred in the normal course of business is precarious, at best. Defendants had an obligation to preserve potentially responsive information and suspend their regular document destruction policies. See, e.g., John B. v. Goetz, 531 F.3d 448, 459 (6th Cir. 2008)(“[I]t is beyond question that a party to civil litigation has a duty to preserve relevant information including ESI ...” when the party has actual notice or should know that evidence may be relevant to future litigation.); Doctor Johns’s, Inc. v. City of Sioux City, Ia, 486 F. Supp. 2d 953, 954-55 (N.D. Iowa 2007)(duty to preserve evidence was triggered when the party knew or should have known the evidence was relevant to pending or imminent litigation). Further, while a computer technician may have opined that the laptop was “not worth repairing”, there is a significant difference between restoring a computer to full operating use and conducting a forensic examination to determine whether “lost” or deleted data can be retrieved. There is no indication from Defendants that such an analysis was done prior to discarding the laptop.[3] While there is significant evidence to support Plaintiff’s request for an adverse jury instruction, such a sanction is very serious. Out of an abundance of caution, the court will conduct an evidentiary hearing on the matter to assess Defendants’ credibility in explaining their acts of destroying or discarding relevant documents and ESI. The defendants shall personally appear at the hearing. 2. Prejudice. *6 There is little question Plaintiff has been prejudiced by Defendants’ destruction, disposal, or failure to retain certain responsive documents. Defendants failed to preserve their Gmail accounts which were established for the sole purpose of communicating with clients once Defendants were denied access to Home Instead’s computer servers. Likewise the destroyed or discarded client logs may have contained information regarding Defendants’ compliance with the terms of the franchise agreements and may have revealed instances of potential client confusion once Defendants were no longer acting as a Home Instead franchise. The destroyed or deleted information may also indicate the extent of Defendants’ use of Plaintiff’s confidential and trade secret information. Accordingly the court finds Plaintiff was prejudiced by Defendants’ destruction, deletion, or failure to retain evidence. C. Additional Attorney Fees Plaintiff also seek a recovery of attorney fees for Defendants’ conduct during this litigation. Such an award necessitates a finding of bad faith. Stevenson, 354 F.3d at 750. The Plaintiff alleges Defendants’ submission of false testimony in connection with Defendants’ motion for preliminary injunction and during the course of discovery establishes that the Defendants acted in bad faith. Defendants argue any potentially misleading testimony and mistakes were not committed in bad faith. Although there is currently strong evidence before the court to support a finding of bad faith, the court will afford Defendants an opportunity to answer questions regarding their actions so that the court may address their level of culpability. Accordingly, IT IS ORDERED: 1) Plaintiff’s request for attorney’s fees and costs associated with its Motion to Compel and its Objection to Defendants’ Notice of Compliance (Filing No. 148) is granted in part. Plaintiff shall submit an itemized billing statement of its fees and expenses associated with bringing those motions. Plaintiff shall refer to NECivR 54.4 for guidance in preparing the statement. 2) The court will conduct an evidentiary hearing on the remainder of Plaintiff’s request for relief including its request for an adverse jury instruction and any attorney fees beyond those already granted in this order. Defendants shall appear in person at the hearing. Within 10 days of this order, the parties shall confer and provide the court with proposed dates and times for holding the hearing. Dated this 24th day of April, 2014. *This opinion may contain hyperlinks to other documents or Web sites. The U.S. District Court for the District of Nebraska does not endorse, recommend, approve, or guarantee any third parties or the services or products they provide on their Web sites. Likewise, the court has no agreements with any of these third parties or their Web sites. The court accepts no responsibility for the availability or functionality of any hyperlink. Thus, the fact that a hyperlink ceases to work or directs the user to some other site does not affect the opinion of the court. Footnotes [1] The exact timing of the litigation hold and what precisely was communicated to the defendants and their employees was one of the many topics addressed by Plaintiff’s motion to compel. [2] Defendants argue electronic banking records, including copies of checks, were not within their custody and control because they did not receive or maintain physical copies of those records. The definition of “custody and control” advanced by the defendants is much too narrow considering most archived electronic banking records can be obtained easily by the account holder through his or her online account access and a few simple clicks of the mouse. Fed. R. Civ. P. 34(a)(1) requires the production of documents in a parties’ possession, custody, or control. The defendants’ bank account information and related documents may not be in their physical possession, but they are in their custody or control via online access or a request for the records presented to the bank. See, e.g., Triple Five of Minnesota, Inc. v. Simon, 212 F.R.D. 523, 527 (The question ... is not only whether the documents are within the physical possession of the party, but also whether the party has a legal right to the documents or practical ability to obtain the information.”). Defendants’ argument to the contrary is without merit. [3] Likewise, David Florance represented that a PowerPoint presentation requested by Plaintiff may have been on another computer. However, in June 2012 the computer “had a fatal error that required reformatting and reloading all software and all data on [the] computer was lost.” (Filing No. 145-1, ¶8 at CM/ECF p.3). Again, Defendants provide no indication they attempted any type of forensic examination to determine if any potentially responsive documents could be recovered.