Homesource, Corp. v. Retail Web Serv., LLC
Homesource, Corp. v. Retail Web Serv., LLC
2020 WL 12188147 (D.N.J. 2020)
March 30, 2020
Williams, Karen M., United States Magistrate Judge
Summary
HomeSource sought to amend the pleadings to include additional facts, new causes of action, and to name additional defendants related to ESI. The court accepted the proposed amendments and ordered HomeSource to file the second amended complaint, which included claims of ESI, such as the alleged unlawful computer access and impairment to the integrity or availability of HomeSource's data.
THE HOMESOURCE, CORPORATION, Plaintiff,
v.
RETAIL WEB SERVICES, LLC et al., Defendants
v.
RETAIL WEB SERVICES, LLC et al., Defendants
Civil No. 18-11970-ECR-KMW
United States District Court, D. New Jersey
Filed March 30, 2020
Counsel
Matthew Goldstein, Arthur R. Armstrong, Flaster/Greenberg P.C., Philadelphia, PA, Eric Robert Clendening, Kenneth S. Goodkind, Flaster/Greenberg, P.C., Daniel C. Epstein, Cherry Hill, NJ, for Plaintiff.Dominique J. Carroll, Fox Rothschild LLP, Lawrenceville, NJ, Alexandra S. Jacobs, Louis R. Moffa, Jr., Ethan A. Hougah, Montgomery McCracken Walker & Rhoads LLP, Cherry Hill, NJ, Melissa Elaine Scott, Fox Rothschild LLP, Exton, PA, for Defendants.
Williams, Karen M., United States Magistrate Judge
ORDER
I. Introduction
*1 THIS MATTER is before the Court on the Fourth Motion [Docket. No. 137] filed by Plaintiff, The HomeSource, Corporation, a New Jersey Corporation, (“HomeSource”) seeking leave to file a Second Amended Complaint (“SAC”) [Dkt. No. 138-1]. Defendant Retail Web Services, LLC (“RWS”), an Arizona limited liability company, opposes the Motion [Dkt. No. 144]. The Court further notes that HomeSource also filed a Motion for Sanctions for alleged discovery misconduct [Dkt. No. 106], which RWS similarly opposes [Dkt. No. 114]. Because the two motions are so interwoven, one Order economizes the record.
The Court has considered the submissions of the parties pursuant to Federal Rule of Civil Procedure 78 and for the reasons that follow, the Motion to Amend is granted, and the Motion for Sanctions is denied.
II. Background
The history of this matter is well known to the Court and the parties. The Court will, therefore, include only the information relevant to the instant Motions, excluding the parties’ acrimonious back-and-forth bickering and overall inability to exchange discovery independent of Court intervention.
HomeSource and RWS are direct competitors in the online retail market for the sale of major home appliances. Third Motion to file a Second Amended Complaint (“TSAC”) [Dkt. No. 88-1], at 2, ¶¶2-3; see also Third Brief in Opposition to the SAC (“TBO”) [Dkt. No. 89], at 1. While much of the major appliance market is dominated by national brands (e.g. Lowes, Home Depot, Sears, and Best Buy), the remaining market is generally comprised of independent retailers. TBO [Dkt. No. 89], at 1. HomeSource and RWS provide independent retailers with software and data solutions. TSAC [Dkt. No. 88-1], at 7, ¶¶42-44. For example, HomeSource's “proprietary software aggregates large amounts of data – including item numbers, product specs, training videos, and more – into one single, usable platform, which allows retailers and manufacturers to streamline various processes such as printing customized quotes, providing accurate shipping times, and real-time updates of sizes, colors, and options so dealers always have current and accurate information[,]” and RWS offers a similar platform through software called “RetailDeck/WebFronts.” Id.
On July 16, 2018, HomeSource acquired approximately two hundred RWS customers. Complaint [Dkt. No. 1], at 1, ¶2. HomeSource claims RWS responded to this customer loss by initiating a smear campaign that same day. Id. at 1, ¶3. Specifically, HomeSource claims RWS made “false and misleading statements about HomeSource” and disseminated this information via newsletters and phone calls to HomeSource's customers and potential customers. Id. HomeSource further claims: (1) RWS “impersonated a potential customer” and improperly accessed HomeSource's platform; (2) RWS “misrepresented security vulnerabilities of HomeSource's data and intellectual property” to third parties; and (3) RWS emailed HomeSource about a “security hole” in the platform and then proceeded to advertise, via online video, the existence of the security hole. Id. at 1-2, ¶¶4-5.
*2 On July 23, 2018, HomeSource filed the underling action asserting claims against RWS for false advertising, defamation, tortious interference with commercial relationships, and unfair competition. Complaint [Dkt. No. 1]. HomeSource's Complaint averred that RWS's “unlawful actions” caused damage to HomeSource's reputation and a loss of customers. Id. at 2, ¶6.
A. HomeSource's History of Seeking Amendments and the Pending Motion to File a Second Amended Complaint
HomeSource filed an Amended Complaint on September 4, 2018, First Amended Complaint (“FAC”), [Dkt. No. 12], asserting additional facts and claims against Defendant John Does 1-3. The FAC included events that occurred subsequent to the original Complaint. For example, HomeSource alleges that, on August 9, 2018, John Doe Defendant 1 engaged in a series of denial of service attacks (“DoS”) and/or distributed denial of service (“DDoS”) attacks on HomeSource's customers’ websites, in an apparent effort to slow down, interrupt, and/or crash those websites.” Id. at 2, ¶7. HomeSource further alleges that, on August 13, 2018, John Doe Defendant 2 attempted to “hack” into HomeSource's platform, and, that same day, RWS's CEO sent an email to HomeSource notifying HomeSource of the hacking. Id. at 2, ¶9. In addition, on August 18, 2018, HomeSource learned that Defendant John Doe 3 had allegedly sent emails to HomeSource's customers complaining about HomeSource's platform's functionality, and, on August 27, 2018, the John Doe Defendant(s) launched another DoS and/or DDoS attack. Id. at 3, ¶¶12-15. In response to these attacks, HomeSource's FAC asserted claims against the John Doe Defendants 1-3 for tortious interference with commercial relationships and violations of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030. Id. at 4, ¶18.
According to HomeSource, these alleged attacks originated from a supposedly compromised GoDaddy account, however, both HomeSource and GoDaddy are unable to identify the actual source. Proposed SAC [Dkt. No. 138-1], at ¶¶56-66. HomeSource avers the attacks suspiciously occurred at times when HomeSource was meeting with and pitching to RWS customers, as well as prior to trade shows and meetings in 2019. Id. at ¶71-73.
On February 8, 2019, HomeSource filed the First Motion for Leave to File a SAC. [Dkt. No. 54-1]. HomeSource's Motion claims RWS improperly (1) accessed HomeSource's computer systems while posing as a customer and (2) deployed spiders and/or crawlers to monitor and download information from HomeSource's websites. Id. HomeSource's proposed SAC also sought to add Local Retail Solutions, LLC (LRS) and Retailer Web Services II, LLC (“RWS II”) as defendants. Id.
On March 18, 2019, the Court issued an Order denying without prejudice the Motion to file the proposed SAC as procedurally deficient. March 18, 2019 Order [Dkt. No. 74]. The Court permitted HomeSource to file another Motion to amend, emphasizing that HomeSource needed to set forth a basis and provide an analysis as to why leave to amend should be granted. Id. Moreover, the Court instructed HomeSource to review and comply with the Local Civil Rules, as the Motion was procedurally deficient for failing to include a “redline” or track changes version of the complaint showing the proposed amendments. Id.
On March 13, 2019, HomeSource filed a Second Motion for Leave to File a SAC, [Dkt. No. 69], which it withdrew on May 20, 2019 based on the need to refile and amend to include newly discovered information. Letter dated May 20, 2019 [Dkt. No. 85]. Specifically, HomeSource claims that on March 13, 2019, RWS produced long awaited discovery that allegedly implicates Nationwide Marketing Group, LLC (“Nationwide”) and Gridiron Capital, LLC (“Gridiron”).
*3 On June 7, 2019, HomeSource filed a Third Motion for Leave to File a SAC, naming Nationwide, Gridiron, and RWS II as parties and adding new facts and claims. Third Motion to File SAC, [Dkt. No. 87].
The Court held a hearing on October 7, 2019 to address the Motion to file a SAC as well as various other disputes. On October 16, 2019, the Court issued an Order denying the Third Motion for Leave to File a SAC without prejudice. Order [Dkt. No. 129]. The Court determined that the pleading was replete with legal conclusions and an improper recitation of the case's procedural and factual history. Id. The Court determined the proposed SAC failed to comply with Rule 8’s requirement that the complaint be written in “short and plain statement[s].” Id. The Court nonetheless again granted HomeSource leave to file a renewed Motion to file a SAC. Id.
HomeSource filed a revised, Fourth Motion for Leave to File a SAC on November 8, 2019. Fourth Motion to File SAC, [Dkt. No. 137]. HomeSource's instant Motion seeks to substantially amend the pleadings to add new developments[1] and facts revealed through discovery to bolster the claims asserted in FAC, as well as to add new parties and claims. See Proposed SAC [Dkt. No. 138-1]. HomeSource seeks to add facts and to name RWS II as an additional Defendant to Counts I, II, III, IV, and V. See id. at ¶¶85-125. Second, HomeSource seeks to add Count VI “Violation of Computer Fraud and Abuse Act, 18 U.S.C. § 1030(a)(2)(C)” against RWS and RWS II. Id. at ¶¶126-134. Third, HomeSource seeks to add additional facts in support of Count VII “Violation of Computer Fraud and Abuse Act, 18 U.S.C. § 1030(a)(5)(A) against Defendant John Does.” Id. at ¶¶135-141. Fourth, HomeSource proposes to add Count VIII “Civil Conspiracy” against RWS, RWS II, Nationwide, and Gridiron, thereby naming Gridiron and Nationwide as additional Defendants to the action. Id. at ¶¶142-151. Finally, HomeSource seeks to add Count IX, a claim for Contributory Liability for False and Misleading Advertising under the Lanham Act, 15 U.S.C. § 1125(a), and Count X, a claim for Vicarious Liability for Counts II through V, against Nationwide and Gridiron. Id. at ¶¶152-169. In short, HomeSource seeks to add the proposed amendments from the First, Second, and Third Motions for Leave to File a SAC, as well as numerous further amendments.[2]
B. Sanctions
HomeSource claims RWS intentionally withheld evidence of Nationwide and Gridiron's involvement in the case until after the Court's deadline to seek amendments to the pleadings or to add new parties. Brief in Support of Sanctions (“Sanc. Br.”) [Dkt. No. 107]. HomeSource argues RWS withheld information about its Internet Service Providers (“ISPs”) and Internet Protocol Addresses (“IP addresses”) (collectively the “ISP information”) until April 12, 2019, and, as a result, allegedly relevant information that could have been obtained from the ISPs is now unavailable. Id.
*4 HomeSource filed the instant Motion for Sanctions on August 19, 2019.
1. RWS's Alleged Withholding of Evidence Concerning Gridiron and Nationwide's Involvement with the July 20, 2018 Newsletter.
As noted above, on July 23, 2018, HomeSource initiated the matter, filing the original Complaint and asserting claims of false advertising, unfair competition, tortious interference, and defamation against RWS. Specifically, the original action was filed based on an allegedly defamatory email newsletter RWS sent to HomeSource's customers and potential customers on July 20, 2018.
HomeSource suspected Gridiron and Nationwide were somehow involved with the newsletter and named them as potentially relevant parties in both the Complaint and the Rule 26(a) initial disclosures. In seeking to develop its theory of Nationwide and Gridiron's involvement, on August 27, 2018, HomeSource demanded RWS respond to the following discovery requests:
Interrogatory No. 3. Identify and describe the July 20th Email, attached to Plaintiff's Complaint as Exhibit A, including (a) every person involved; (b) his/her role in researching, drafting, revising, and/or transmitting the email; (c) the research performed to draft the email; and (d) a list of all persons and entities that the email was sent to.
Interrogatory No. 11. Identify all persons employed by or associated with Nationwide or Gridiron who provided information related to HomeSource to You, between August 2017 and the present. Attach any documents or communications that You exchanged with Nationwide or Gridiron during that time period related to HomeSource.
Document Request No. 10. All documents related to communications between you and Gridiron, You and Nationwide, or You and ADC relating to HomeSource (including but not limited to relating to HomeSource's products/services, principles, and employees).
Document Request No. 19. All documents related to Nationwide's ownership of and/or investment in RWS.
Sanc. Br. [Dkt. No. 107], at 3.
Thereafter, HomeSource, dissatisfied with RWS's responses, issued multiple requests for supplemental responses and document productions. Refusing to accept the dearth of materials relating Nationwide and Gridiron to the July 20, 2018 Newsletter, HomeSource pointedly notes that, prior to the Court's February 8, 2019 deadline to add parties and amend the pleadings, (1) RWS's rolling document production suspiciously “jumped chronologically from July 19, 201[8] to July 21, 201[8]” and (2) RWS's “other newsletter drafts were reviewed, revised and approved by Nationwide and Gridiron, [yet] there was no evidence in the production that Nationwide and Gridiron had reviewed, revised, and approved the July 20, 201[8] Newsletter that prompted this lawsuit.” Sanc. Br. [Dkt. No. 107], at 4-5.
For its part, RWS responded to the interrogatories, production requests, and HomeSource's follow-up demands, emphasizing that “RWS has collected over 2.5 million pages of documents, has been diligent with its review, and its production was part of a rolling production that the parties agreed to.” Opposition to Motion for Sanctions (“Sanc. Opp. Br.”) [Dkt. No. 114], at 1. RWS further emphasized in conversations between the parties, which HomeSource allegedly recorded, that: (1) “we will not withhold relevant documents unless there is a valid objection like attorney-client privilege or others. Right now, we are not withholding anything yet. I think we are just moving through the documents;” (2) “We are moving through the documents, you know, diligently. We produced a whole slew of them. Are we complete? No. But we are moving through them. We are trying to get you as many documents as fast as possible;” (3) “We are not going to do little piecemeal searches here or there, that's not efficient. We are either going to do the search you asked us to do, or we could just do specific days, but the search you asked us to do presumably would have encompassed that;” (4) “we are not done. So, we are moving through diligently. I can assure you there was no calculation to do one day first or one day last.” Sanc. Br. [Dkt. No. 107], at 5-6.
*5 Nonetheless, RWS did not provide additional discovery responses or document production linking Nationwide and Gridiron. Concerned with the impending amendment deadline, HomeSource requested that the Court extend the deadline, to which, RWS opposed any extension.
On March 13, 2019, a day after the Court's March 12, 2019 Hearing wherein the Court extended all deadlines, RWS produced thousands of pages of additional discovery, which included (according to HomeSource) “smoking gun emails” demonstrating that Nationwide and Gridiron reviewed, revised, and approved the July 20, 2018 Newsletter before RWS issued it. Sanc. Br. [Dkt. No. 107], at 7-14. The production resulted in the instant Motion for Sanctions as HomeSource alleges RWS intentionally withheld key information until after the amendments deadline to prejudice HomeSource from amending the Complaint to include Nationwide and Gridiron. Moreover, the production necessitated HomeSource to file a Third Motion[3] for leave to file a SAC naming Nationwide, Gridiron, and RWS II as parties and asserting new facts and claims. Third Motion to File SAC, [Dkt. No. 87].
2. RWS Withheld the ISP Information Until April 2019; Now Some Information Is Lost.
As noted in the FAC and the multiple, proposed SACs, HomeSource claims John Does launched various cyber attacks against its websites and its customers’ websites from August 9, 2018 through August 27, 2018, again on September 26, 2019, and at unspecified dates in 2019[4] when HomeSource was presenting its services to RWS's customers at tradeshows and meetings. HomeSource further alleges that the hackers curiously only attacked websites belonging to customers who switched from RWS to HomeSource.
In addition, as set forth in the proposed SAC, HomeSource alleges that: (1) RWS logged into HomeSource's systems and obtained proprietary information using HomeSource's customers’ usernames and passwords without authorization and in contravention of HomeSource's and/or HomeSource's customers’ websites’ Terms and Conditions; and (2) RWS designed and deployed software (spiders or crawlers) to monitor and download information from HomeSource's and/or HomeSource's customers’ websites—which HomeSource claims damaged the websites by slowing the websites’ functionality. Proposed SAC [Dkt. No. 138-1], at 11-12, ¶¶74-84.
Accordingly, HomeSource requested that RWS produce the ISP information, which resulted in a protracted discovery dispute spanning numerous letters, emails, meet and confers, hearings, and motions. As early as October 2018, HomeSource sought Court intervention and emphasized (1) the importance of obtaining the ISP information because the ISPs maintain ISP information for short periods and (2) the fact that HomeSource would need to subpoena RWS's ISPs to obtain the needed information before the ISPs stopped preserving the information. Sanc. Br. [Dkt. No. 107], at 8. Specifically, HomeSource points to the following discovery requests as alerting RWS of the need to produce and preserve the ISP information:
*6 1. On August 15, 2018, HomeSource sent RWS a preservation letter, stating: “HomeSource hereby demands that you preserve all documents, devices, tangible things, and electronically stored information potentially relevant to the issues addressed in this letter ... all data and documents related to software, programs, or bots that view websites, examine code, explore potential security issues; all audio and audiovisual recordings of Jim Kane or any other RWS principle or employee related to HomeSource; all data and documents reflecting logs related to efforts to examine the code of HomeSource's customer's websites.” Id. at 8-9.
2. On August 27, 2018, HomeSource submitted:
a. Rule 26(a) initial disclosures, identifying as relevant “documents concerning RWS's (or a third party associated with RWS's) attempts at hacking and/or slowing down HomeSource's websites and/or its customers’ websites through the use of programs, bots, and third parties[.]” Id. at 9.
b. Interrogatory Request Number 18, requesting that RWS “[i]dentify all of Your employees (including officers and owners) and any material related to their online presence: (a) home address; (b) public IP address; (c) the browser and version running on their personal and business computers; (d) the make and model of their cell phones; and (e) the operating system and version running on their cell phones.” Id.
c. Document Production Request Number 16, requesting that RWS produce “[a]ll documents of any and all code that was written or used to extract data from the HomeSource platform, including but not limited to, any data center that you operate out of (including city, state and public IP addresses that You have). Id.
RWS resisted producing the ISP information on various grounds. For example, RWS asserted that it needed time to retain an expert on the subject, RWS asserted concerns that the ISP information remain protected and designated “attorneys eyes only,” and RWS claimed the need for simultaneous disclosure of the ISP information alongside HomeSource's own deficient discovery production of its server logs of the allegedly malicious traffic to guard against HomeSource manipulating the data.
The Court addressed the dispute and attempted to direct a resolution at the November 7, 2018, November 28, 2018, and December 17, 2018 status conferences. The parties failed to reach a resolution, and on December 17, 2018, the Court issued an Order requiring the parties to “submit an agreed upon search protocol by December 21, 2018,” and “[i]n the event the parties are unable to agree upon a search protocol, then, on or before January 11, 2019, Plaintiff is hereby granted leave to file a motion to compel the production of a list of Defendant's IP.” December 17, 2018 Order [Dkt. No. 39]. Thereafter, the parties failed to reach an agreement, issued further bickering letters, and HomeSource prematurely filed its Motion to Compel on January 10, 2019.
On March 12, 2019, the Court heard oral argument on the Motion to Compel (as well as other motions and disputes), and on March 18, 2019, issued an Order resolving the dispute. March 18, 2019 Order [Dkt. No. 74]. The Court held:
Plaintiff's Motion, [Dkt. No. 43], seeking to compel RWS to produce a complete list of RWS's IP addresses utilized by RWS between June 1, 2018 to present is GRANTED. Moreover, RWS's request for the HomeSource to provide RWS with any and all information concerning the alleged denial of service and/or hacking attacks is also GRANTED.
Id. (emphasis in original). However, in a letter dated April 5, 2019, HomeSource alerted the Court that RWS was still withholding the ISP information, namely failing to produce the full list of all of RWS's IP addresses. Letter dated April 5, 2019 [Dkt. No. 77].
*7 On April 8, 2019, the Court held an on-the-record telephone status conference to address the on-going discovery disputes. Hearing [Dkt. No. 80]. On April 9, 2019, the Court issued an Order holding:
Within five (5) business days of April 8, 2019, [RWS] shall provide Internet Protocol (“IP”) addresses for all electronic devices, including but not limited to computers, network servers, desktops, laptops, notebooks, mainframes, and personal devices used for work purposes, that are within its possession, custody and control. This does not include IP addresses for employees’ personal non-work related electronic devices.
April 9, 2019 Discovery Order [Dkt. No. 81].
On April 12, 2019, RWS complied with the Court's Order and provided HomeSource with its ISP information. Sanc. Opp. Br. [Dkt. No. 115], at 23. Included in the ISP information, RWS disclosed that it possessed a Verizon Wireless Hotspot device and disclosed three IP addresses registered with the device. Sanc. Br. [Dkt. No. 107-5], Exhibit J. RWS admits it used the Verizon Hotspot to monitor HomeSource's websites, but it did not record all of the IP addresses that were used. Sanc. Br. [Dkt. No. 107], at 10. RWS further admits that:
In late January or early February 2018,[5] RWS assigned an intern [ ] to check the websites of certain ADC members to see if any members left RWS's services for another service provider. About four days a week, [the intern] would quickly review approximately 120 websites to determine which websites were still operated by RWS, or if any had changed to another service provider. [The intern] made a record of her visits to the ADC websites, many of which were produced to HomeSource in discovery. Because search engines often default to show cached content, [the intern] used a Verizon hotspot device (typically used to connect to the internet during trade shows) to check the websites, which enabled viewing the websites as they appeared in real-time, as opposed to old cached versions. She also automated opening the websites simultaneously to avoid the inefficiency of opening each website individually.
Sanc. Br. [Dkt. No. 107, at 11, citing Sanc. Opp. Br. [Dkt. No. 89], at 4.
HomeSource contacted Verizon on April 12, 2019 to investigate the matter. Sanc. Br. [Dkt. No. 107], at 11. HomeSource examined its logs and claims it found hundreds of thousands of Verizon hits, which may or may not be associated with RWS. Id. Verizon informed HomeSource that “[s]ome of the records that you requested no longer exist because they are beyond Verizon's period of retention,” moreover, information about “[w]ebsites visited is not available; it is only available for 180 days.” May 8, 2019 Letter from Verizon [Dkt. No. 106-7], Exhibit K. Thus, Verizon only possessed limited information concerning RWS's IP addresses for the Verizon Hotspot.
III. Discussion
The Court will first address HomeSource's Motion for Sanctions, and then consider HomeSource's Motion for Leave to File a SAC as this reflects the chronological order in which the motions were filed.
A. The Motion for Sanctions
For the reasons set forth below, the Court finds sanctions are not appropriate at this time based on the record presented.
1. RWS's Discovery Production Delay Regarding Nationwide and Gridiron Does Not Warrant Sanctions at this Time
*8 HomeSource alleges RWS intentionally withheld critical discovery, which implicates Nationwide and Gridiron, until after the February 8, 2019 amendments deadline to prevent HomeSource from amending the Complaint to assert claims against Nationwide and Gridiron. HomeSource claims the withholding of this evidence prejudiced HomeSource by: (1) forcing HomeSource to withdraw the Second Motion for Leave to File a SAC [Dtk. 69] and file the Third Motion for Leave to File a SAC [Dkt. No. 87]; (2) forcing HomeSource to expend time and resources to resolve the discovery dispute; and (3) forcing HomeSource to file the Motion for Sanctions. HomeSource requests that RWS be forced to pay HomeSource's attorneys’ fees and costs associated with filing the Motions for Leave to File the SAC (and all responses and replies thereto), as well as HomeSource's attorneys’ fees and costs associated with filing the Motion for Sanctions.
In opposition, RWS denies any intention to withhold evidence from HomeSource. RWS notes that discovery between the parties was ongoing and asserts that the allegedly withheld information was produced in accordance with the parties’ agreed-to, rolling discovery production. Moreover, RWS claims HomeSource suffered no prejudice as the Court extended the amendments deadline thereby alleviating HomeSource's concerns about filing within the Court's deadline. Similarly, RWS avers HomeSource will have ample time to present its case against Nationwide and Gridiron if leave to amend is granted.
“Rule 37 of the Federal Rules of Civil Procedure authorizes the Court to sanction a party for discovery abuses.” Wachtel v. Health Net, Inc., 239 F.R.D. 81, 99 (D.N.J. 2006). Rule 37 provides:
If a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially justified or is harmless. In addition, to or instead of this sanction, the court, on motion and after giving an opportunity to be heard:
(A) may order payment of the reasonable expenses, including attorney's fees, caused by the failure;
(B) may inform the jury of the party's failure; and
(C) may impose other appropriate sanctions, including any of the orders listed in Rule 37(b)(2)(A)(i)—(vi).
Fed. R. Civ. P. 37(c)(1). In short, the rule is designed to: “(1) penalize the culpable party or attorney; (2) deter others from engaging in similar conduct; (3) compensate the court and other parties for the expense caused by the abusive conduct; and (4) compel discovery and disclosure.” Id.
The Third Circuit instructs “a district court must ensure that there is an adequate factual predicate for flexing its substantial muscle under its inherent powers, and must also ensure that the sanction is tailored to address the harm identified.” Republic of the Philippines v. Westinghouse Elec. Corp., 43 F.3d 65, 73 (3d Cir. 1994). Instructively, in determining whether to impose sanctions, the Court considers: (1) the prejudice or surprise to the moving party; (2) the ability of the moving party to cure the prejudice; (3) the likelihood of disruption; and (4) the non-moving party's bad faith or unwillingness to comply. Wachtel, 239 F.R.D. at 105 (citing Newman v. GHS Osteopathic, Inc., 60 F.3d 153, 156 (3d Cir. 1995).
Applying the Wachtel factors to the record here, the Court finds that all factors militate against sanctions. First, the record does not definitively demonstrate RWS acted in bad faith or showed an unwillingness to comply. HomeSource points to the chronology of events to “impl[y] that RWS intentionally withheld highly pertinent documents in order to prevent HomeSource from adding Nationwide and Gridiron to this case.” Sanc. Br. [Dkt. No. 107], at 12-13 (emphasis added). However, the Court rejects HomeSource's mere implication as evidence of bad faith. RWS claims the documents were never intentionally withheld, and, as promised, RWS produced the allegedly withheld discovery in accordance with the parties’ agreed-to, rolling document production.
*9 Second, there is little to no prejudice presented, and the Court finds HomeSource has had ample opportunity to cure any prejudice it alleges. Although RWS produced the discovery after the Court's original February 8, 2019 amendment deadline and HomeSource filed the First Motion for Leave to File a SAC within the deadline, the Court ultimately extended the deadline, denied the First Motion as procedurally deficient, and allowed HomeSource to file another motion for leave to file a SAC. In fact, the Court has granted HomeSource four opportunities to submit a motion for leave to file a SAC. Therefore, the Court finds that HomeSource has not suffered any prejudice in its ability to amend the pleadings or present its case.
Lastly, as RWS notes, this is a relatively nascent case. A trial date has yet to be determined and discovery is ongoing, thus HomeSource still has a full opportunity to develop its case. The Court finds that the production delay has not disrupted the case to the extent that warrants the imposition of sanctions.
2. RWS Did Not Spoliate Evidence
HomeSource next argues RWS spoliated evidence of the IP addresses corresponding to the Verizon Wireless Hotspot. HomeSource claims information was not preserved due to RWS's withholding of the ISP information, thereby depriving HomeSource of essential discovery proving HomeSource's claim, Count VI – Violation of Computer Fraud and Abuse Act, 18 U.S.C. § 1030(a)(2)(C), that RWS unlawfully accessed HomeSource's systems.
According to HomeSource, because the IP range used by Verizon for the Verizon Wireless Hotspot is constantly changing and ISPs preserve IP address information for brief periods of time, Verizon no longer has records of all the IP addresses utilized by the Verizon Hotspot prior to September 2018. Sanc. Br. [Dkt. No. 107], at 11. After requesting records from Verizon on April 12, 2019, HomeSource asserts that “[n]o data [is] available prior to August 6, 2018, and only partial data was available between August 6, 2018 and September 2018.” Id. HomeSource claims “due to RWS's failure to disclose that Verizon was its ISP and to preserve the Verizon IP addresses that it used, HomeSource will never be able to ‘fact check’ the actual allegations of RWS above or to determine what exactly RWS's intern was doing on HomeSource's sites between January 2018 and August 2018.” Id. Thus, HomeSource claims “some of the evidence which existed to prove that RWS unlawfully accessed HomeSource's computer using the Verizon ISP has been destroyed.” Id. at 16.
According to HomeSource, there is no possible restoration or additional discovery that could resolve the spoliation. HomeSource claims the only remedy is sanctions. HomeSource further claims that it was forced to expend additional resources filing the various motions for leave to file a SAC as a result of RWS's delay in producing the requested information. HomeSource therefore requests that the Court: (1) order RWS to pay its attorney's fees and costs incurred by HomeSource for having to file the Motions for Leave to File a SAC and the Motion for Sanctions; and (2) enter a default judgment against RWS on Count VI – Violation of Computer Fraud and Abuse Act, 18 U.S.C. § 1030(a)(2)(C) as set forth in the proposed SAC or order a negative inference such that the Court instructs the jury that it may presume that the destroyed information was unfavorable to RWS. Sanc. Br. [Dkt. No. 107], at 2.
RWS strongly disagrees. RWS claims the Verizon Wireless Hotspot's IP addresses are neither relevant nor proportional to the claims in the case. Specifically, the IP information was never relevant to the claims asserted in the original complaint or the FAC, thus RWS had no knowledge of the need to preserve the IP address information until months into litigation. Critically, RWS asserts it never created or maintained records of the Hotspot's IP addresses, and that RWS never had possession, custody, or control over Verizon's records documenting the IP addresses. Thus, RWS avers it had no duty to preserve what it otherwise lacked control over and what was otherwise outside the scope of the case. RWS further asserts that HomeSource is not prejudiced by the missing IP address information, as there exists an abundance of other discovery readily available to supplant the loss. Last, RWS claims it never intentionally sought to deprive HomeSource of the information, thus the severity of spoliation sanctions is not proportional to the alleged harm.
*10 The movant carries the burden of demonstrating that spoliation[6] occurred and what sanctions are appropriate. McCann v. Kennedy Univ. Hosp. Inc., No. 12-1535, 2014 WL 282693, at *4 (D.N.J. Jan. 24, 2014); Goldrich v. City of Jersey City, Civ. No. 15-885 (SDK/LDW), 2018 U.S. Dist. LEXIS 162044, at *23 (D.N.J. Jul. 25, 2018). Spoliation requires a two-step analysis. Bull v. UPS, 665 F.3d 68, 77 n.5 (3d Cir. 2012). First the Court determines if spoliation occurred, and second, the Court evaluates what sanction is appropriate. Id.
Critically, because the spoliation issue here concerns electronically stored information (“ESI”), Federal Rule of Civil Procedure 37(e) governs the Court's spoliation analysis. Rule 37(e) provides as follows:
(e) Failure to Preserve Electronically Stored Information. If 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.
Accordingly, for the Court to first make a finding that spoliation occurred pursuant to this Rule, HomeSource must show: (1) certain ESI should have been preserved in anticipation or conduct of litigation; (2) that evidence was lost; (3) the ESI was lost because RWS failed to take reasonable steps to preserve it; and (4) that it cannot be restored or replaced.[7] Goldrich, 2018 U.S. Dist. LEXIS 162044, at *23.
First, it is important to note that the Verizon Wireless Hotspot is simply a device that enables the user to obtain access to the Internet under a given IP address. When the device accesses a website, the website notes activity from that IP address.
As a preliminary issue, RWS claims it did not violate a duty to preserve information regarding the Hotspot's IP address(es). RWS asserts it did not create or maintain records of the IP addresses corresponding to the Verizon Wireless Hotspot; nor did RWS have possession, custody, or control over such records. Rather, it is undisputed that Verizon created and maintained these records. Thus, the Court finds HomeSource has not met its burden in establishing the first prerequisite of the Rule 37(e) spoliation analysis.
*11 Moreover, the fourth element—that the lost information cannot be restored or replaced—weighs strongly against a finding of spoliation based on the present record. HomeSource has a wealth of information that can otherwise replace and or supplant the IP address information that it seeks. Contrary to HomeSource's claim that the information concerning the Verizon Wireless Hotspot's IP addresses is unavailable prior to August 6, 2018 and that there is only limited data from August 6, 2018 and September 2018, counsel for RWS essentially declares that relevant and proportional information is available.[8] Sanc. Opp. Br. [Dkt. No. 114], at 11. For example, RWS declares:
1. Verizon produced every IP address that it assigned to the Hotspot device for all searches conducted between July 2, 2018 and January 24, 2019.
2. Verizon also produced the connection start time, connection end time, source IP address, destination IP address (for the websites visited), IP bytes from the mobile device, the IP bytes to the mobile device, and the flow direction of “from mobile” from August 6, 2018 through January 24, 2019.
3. RWS provided HomeSource with a range of IP addresses that belong to Verizon that could be searched against HomeSource's server logs.
Sanc. Opp. Br. [Dkt. No. 114], at 11-12.
Although HomeSource claims the loss of the IP address information forever prevents HomeSource from determining what RWS's intern was doing on HomeSource's websites via the Hotspot's records, as suggested by RWS, this issue can easily be resolved by deposing the intern. There is nothing preventing HomeSource from deposing the intern. RWS has produced saved copies of every email the intern prepared for each of the intern's website visits from February 2, 2018 to February 19, 2019. According to RWS, the emails document every website visited, the intern's findings, and the intern's work product. Furthermore, the intern sent these emails to her supervisor, who, according to RWS, is also available for HomeSource to depose. Therefore, HomeSource has months of IP address information, emails, and multiple witnesses it can depose to fact check the intern's activities on HomeSource's websites via the Hotspot. In short, whatever information might have been lost, can now be restored or replaced, thereby resolving entire the spoliation issue.
B. The Fourth Motion for Leave to File a SAC
HomeSource's proposed SAC seeks to substantially amend the pleadings to include additional facts, new causes of action, and to name additional defendants. Specifically, HomeSource seeks leave to amend to: (1) “include claims against the related entity [RWS II] for tortious interference with commercial relationships, defamation, unfair competition and violations of the [CFAA];” and (2) “assert claims against the related entities [Nationwide and Gridiron] for civil conspiracy to commit the aforementioned torts, contributory infringement under the Lanham Act, and in the alternative, vicarious liability.”
HomeSource claims it acted as diligently as possible in seeking the amendments and the Court should grant the requested amendments “because new information has only recently come to light through the discovery process that requires HomeSource to assert additional claims against additional parties.” HomeSource further claims RWS has been on notice of the proposed amendments since the FAC as the proposed amendments overlap in subject matter with the claims asserted in the FAC (defamation, tortious interference with business relationships, and violations of the CFAA). HomeSource asserts the amendments will not prejudice RWS, as there is ample time to conduct discovery.
*12 RWS opposes the amendments on the grounds of futility and avers that HomeSource's pleading antics and bad faith have prejudiced RWS. Specifically, RWS argues that the proposed amendments of Counts III, IV, VI, VII, VIII, IX, and X are futile.
The decision to grant or deny leave to amend is “committed to the sound discretion of the district court.” Arab African Int'l Bank v. Epstein, 10 F.3d 168, 174 (3d Cir. 1993). Federal Rule of Civil Procedure 15 provides that leave to amend shall be freely given when justice so requires. Fed. R. Civ. P. 15(a)(2). Thus, leave should generally be granted absent undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, or futility of amendment. Foman v. Davis, 371 U.S. 178, 182 (1962).
The Court will first address RWS's argument that HomeSource acted in bad faith and that the proposed amendments are prejudicial to RWS. Lastly, the Court will address the futility of the proposed amendments.
1. Bad Faith and Prejudice
RWS argues that HomeSource's pattern of seeking amendments to the SAC and delaying discovery was made in bad faith, and thus allowing HomeSource's amendments would unduly prejudice RWS.
In opposition, HomeSource avers this is not a proper basis under Rule 15 to oppose the proposed amendments. HomeSource contends RWS is in fact responsible for delaying the case by refusing to cooperate in producing discovery. In fact, according to HomeSource, RWS's withholding of relevant discovery and ad hoc rolling production of key discovery is the very reason why HomeSource has had to file, withdraw, and amend the proposed SAC four times. The Court agrees.
In discussing prejudice in the context of Rule 15, the Third Circuit has held that “the non-moving party must do more than merely claim prejudice; ‘it must show that it was unfairly disadvantaged or deprived of the opportunity to present facts or evidence ...’ ” Bechtel v. Robinson, 886 F.2d 644, 652 (3d Cir. 1989) (citation omitted).
Plainly stated, RWS has not established prejudice as that factor is contemplated by the standard. The Court will not credit RWS's broad statements that HomeSource acted in bad faith and prejudiced RWS by repeatedly seeking to file a SAC. To the contrary, RWS's rolling production of discovery is what necessitated the instant Motion. Had RWS produced the aforementioned ISP information and other discovery sooner, HomeSource could have sought the instant amendments in its First Motion for Leave to File a SAC.
2. Futility
In determining whether a proposed amendment would be futile, the Court applies the same standard of legal sufficiency that applies to a motion to dismiss filed under Rule 12(b)(6). Travelers Indemnity Co. v. Dammann & Co., 594 F.3d 238, 243 (3d Cir. 2010).
The Third Circuit has instructed courts to follow a three-step process to determine the sufficiency of a complaint in accordance with Twombly and Iqbal. Schuchardt v. President of the United States, 839 F.3d 336, 347 (3d Cir. 2016).
First, [the court] must take note of the elements the plaintiff must plead to state a claim. Second, it should identify allegations that, because they are no more than conclusions, are not entitled to the assumption of truth. Finally, when there are well-pleaded factual allegations, the court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.
*13 Id. at 347, n. 6.
i. Unopposed Amendments and Improper Opposition
No opposition was filed in relation to the proposed amendments concerning Counts I, II, and V, therefore, the Court accepts the changes as written. In addition, for the reasons set forth below, the Court also accepts HomeSource's proposed changes to Counts III, IV, VII, IX, and X.
RWS opposes the proposed amendments to Counts III and IV as factually deficient for failing to identify with specificity the existing or prospective customer relationships and contracts that RWS allegedly interfered with and asks that the Court not allow HomeSource to plead the claims. The Court, however, reminds RWS that although the Court applies the same standard as a motion to dismiss under a futility analysis, opposition to a motion to amend is not the same as an actual motion to dismiss. Given that claims III and IV are plainly asserted in the operative pleading, the FAC, the Court will not dismiss existing claims under a motion to amend standard. If RWS seeks to oppose these claims, it must file the proper motion.
Similarly, RWS argues that the Court should dismiss Count VII and claims HomeSource is attempting to improperly join RWS and the John Doe defendants under a CFAA claim. Again, the Court will not dismiss the CFAA claim against the John Doe hacker defendants as it is already plead under the FAC, and, for the record, there are two separate and distinct CFAA claims: (1) Count VII against the John Doe hacker defendants for the various cyber attacks and (2) Count VI against RWS for allegedly crawling, using spiders, and/or improperly accessing HomeSource's websites. Again, opposition to a motion for leave to file an amended complaint is not the proper channel to dismiss a claim that is already present in the case.
Moreover, RWS lacks standing to oppose the proposed amendments to Count VII – the CFAA claim against the John Doe hacker defendants, Count IX – Contributory Liability for False and Misleading Advertising under the Lanham Act against Nationwide and Gridiron, and Count X – Vicarious Liability for Counts II through V against Nationwide and Gridiron. As a preliminary matter to the futility analysis, the Court first considers whether RWS has standing to challenge amendments to claims against other, proposed defendants. Current parties “unaffected by [the] proposed amendment” do not have standing to assert claims of futility on behalf of proposed defendants. Custom Pak Brokerage, LLC v. Dandrea Produce, Inc., Civ. No. 13-5592 (NLH/AMD), 2014 WL 988829, at *2-9 (D.N.J. Feb. 27, 2014) (citation omitted). RWS only possesses standing to challenge the proposed amendments regarding the John Doe, Gridiron, and Nationwide defendants on the grounds of undue delay and/or prejudice. Id. at 7. RWS does not oppose the addition of Counts VII, IX, and X on the grounds of undue delay and/or prejudice; rather, RWS opposes these amendments solely on the grounds of futility. Even if counsel for RWS were acting as counsel for Nationwide and Gridiron, the futility arguments would still be improper as proposed defendants lack standing to oppose a motion to amend because they are not yet named parties. Accordingly, the Court finds RWS lacks standing to oppose the Motion with respect to counts VII, IX, and X.
ii. Count VI Is Not Futile
*14 According to RWS, the SAC fails to state a claim for relief under the CFAA because HomeSource has not alleged a cognizable “loss” or “damage,” as is required to state a civil claim. The Court disagrees. The Count finds HomeSource has alleged sufficient facts to warrant the amendment.
The CFAA makes it unlawful to “intentionally access[ ] a computer without authorization or exceeds authorized access, and thereby obtains ... information from any protected computer. 18 U.S.C. § 1030(a)(2)(C). To maintain a civil action for a CFAA violation, a plaintiff must allege conduct involving one of five enumerated factors, which reads:
(g) Any person who suffers damage or loss by reason of a violation of this section may maintain a civil action against the violator to obtain compensatory damages and injunctive relief or other equitable relief. A civil action for a violation of this section may be brought only if the conduct involves 1 of the factors set forth in subclauses [subclause] (I), (II), (III), (IV), or (V) of subsection (c)(4)(A)(i).
Id. § 1030(g).
HomeSource alleges the first of those factors, which specifies the alleged unlawful computer access must have caused “a loss to 1 or more persons during any 1-year period ... aggregating at least $5,000 in value.” Id. § 1030(c)(4)(A)(i)(I). The statute defines “loss” as “any reasonable cost to any victim, including the cost of responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense, and any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service.” Id. § 1030(e)(11). In addition, the statue defines “damage” as “any impairment to the integrity or availability of data, a program, a system, or information. Id. § 1030(e)(8). This Court has held that “the meaning of ‘loss’ must pertain to ‘a cost of investigating or remedying damage to a computer, or a cost incurred because the computer's service was interrupted.’ ” Chas S. Winner, Inc. v. Polistina, Civ. No. 06-4865 (NLH), 2007 U.S. Dist. LEXIS 40741, at *10-11 (D.N.J. June 4, 2007) (citing Nexans Wires S.A. v. Sark-USA, Inc., 319 F. Supp. 2d 468, 475 (S.D.N.Y. 2004), aff'd, 166 Fed. Appx. 559 (2d Cir. 2006)).
Here, HomeSource alleges: (1) RWS accessed HomeSource's website(s) without permission while posing as a customer; (2) RWS crawled and/or deployed spiders on HomeSource's website(s); (3) this conduct slowed down the website(s) functionality; and (4) as a direct result of RWS's conduct, HomeSource has suffered at least $5,000 in damages in the past year through analyzing, investigating, and responding to RWS's allegedly unlawful accessing and crawling of HomeSource's systems, specifically, HomeSource claims it was forced to conduct a damage assessment and determine the extent of the breach after each allegedly unlawful act by RWS.
Thus, taking the pleadings as true as required by the Rule 12(b)(6) standard, HomeSource alleges facts that RWS's conduct may have impaired the integrity or availability of HomeSource's data by slowing down the functionality of HomeSource's website(s) and resulted in HomeSource investigating the damage. The pleadings therefore set forth a cognizable claim for relief.
iii. Count VIII Is Not Futile
*15 Last, RWS argues that Count VIII – Civil Conspiracy against RWS, RWS II, Nationwide, and Gridiron is futile because related entities cannot engage in a conspiracy. HomeSource disagrees, as it contends inter alia that RWS, RWS II, Nationwide, and Gridiron are independently controlled entities.
Under New Jersey law, the tort of civil conspiracy requires: “(1) a combination of two or more persons; (2) a real agreement or confederation with a common design; (3) the existence of an unlawful purpose, or of a lawful purpose to be achieved by unlawful means; and (4) proof of special damages.” Morganroth & Morganroth v. Norris McLaughlin & Marcus, P.C., 331 F.3d 406, 414 (3d Cir. 2003). However, the Supreme Court holds that a parent company and its wholly owned subsidiary are legally incapable of conspiring with one another, as the parent and subsidiary always share a “unity of purpose or common design” due to the power the parent. Siegel Transfer, Inc. v. Carrier Exp., Inc., 54 F.3d 1125, 1134 (3d Cir. 1995) (citing Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984)).
Here, RWS argues that the doctrine of intra-corporate conspiracy immunity, as held in Copperweld, precludes Count VIII because “Nationwide, Gridiron, and RWS [(collectively RWS and RWS II)] are related companies,” and therefore any alleged torts or violations of the Lanham Act cannot be applied to a conspiracy claim. Proposed SAC [Dkt. No. 138-1], at ¶3.
It is noted that RWS's interpretation of the law has merit. Indeed, if there were a single decision-making source exercising definitive control over the entities at issue, then the conspiracy claim would be futile. However, there is sufficient evidence in the record to the contrary,[9] and, given the liberality of the standard to amend pursuant to Rule 15, the Court concludes that at this juncture RWS has failed to demonstrate the claim is futile. As HomeSource aptly points out, the record does not present the kinds of clear facts that would otherwise prohibit a conspiracy claim under Copperweld. Further discovery may lead to a different conclusion, however, that issue is properly presented to the district court judge after said discovery is concluded.
Consequently, IT IS on this the 30th day of March, 2020, hereby
ORDERED that HomeSource's Motion for Sanctions [Dkt. No. 106] is DENIED; and it is further
ORDERED that HomeSource's Motion for Leave to File a Second Amended Complaint [Dkt. No. 137] is GRANTED; and it is further
ORDERED that on or before April 6, 2020, Plaintiff shall file the second amended complaint in the form found at Docket Number 138-1 without any exhibits.
Footnotes
For example, HomeSource claims the hacker(s) again, although unsuccessfully, attempted to launch attacks on September 26, 2019. Proposed SAC [Dkt. No. 138-1], at ¶¶70-72.
As a point of clarification, the Court reminds HomeSource that the operative pleading is the FAC, thus HomeSource's redline version of the proposed SAC should have tracked the changes and differences between these two documents. HomeSource incorrectly tracked the changes between different versions of the proposed SAC. Nevertheless, the Court will proceed to the merits of the Motion.
HomeSource filed two prior Motions for leave to file a SAC on February 8, 2019 and March 13, 2019 respectively. The Court denied the first motion without prejudice as procedurally deficient and HomeSource withdrew the second motion based on RWS's March 13, 2019 newly produced information. This forms the basis of HomeSource's claim that it was compelled to file the Third Motion.
Vague assertions as presented here are unacceptable in a complaint; HomeSource should have provided greater detail.
RWS avers the records now confirm the intern began visiting websites on February 2, 2018.
“Spoliation occurs where: the evidence was in the party's control; the evidence is relevant to the claims or defenses in the case; there has been actual suppression or withholding of evidence; and, the duty to preserve the evidence was reasonably foreseeable to the party.” Bull, 665 F.3d at 73. This standard governs the Court's spoliation analysis in all instances beyond ESI evidence.
Upon a finding of spoliation, the Court then considers what constitutes an appropriate sanction. However, because the Court finds no spoliation here, the analysis of what constitutes an appropriate sanction is moot.
The Court recognizes that in restoring or replacing the information regarding the Hotspot's IP addresses, HomeSource must accept the truthfulness of the Declaration and rely on the intern's candor during her deposition. However, this reflects the nature of litigation.
Specifically, the Court considered the certified statements of Jim Kane, the CEO of RWS and RWS II, which provides persuasive information demonstrating there is no direct parent-subsidiary relationship between the proposed defendants. Moreover, there is nothing in the record establishing that the entities at issue operate under a single unity of control. To the contrary, the present records shows that management of RWS and Nationwide operate independently with separate spans of control.