Teamlab Inc. v. Museum of Dream Space, LLC
Teamlab Inc. v. Museum of Dream Space, LLC
2022 WL 1590746 (C.D. Cal. 2022)
March 10, 2022

Phillips, Virginia A.,  United States District Judge

Instant Messaging
Legal Hold
Adverse inference
Sanctions
Scope of Preservation
Spoliation
Failure to Preserve
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Summary
The Court found that Defendants had an obligation to preserve chat messages containing material evidence, and that they acted with a culpable state of mind in permitting the messages to be destroyed. As a sanction, the Court issued an adverse inference instruction to the jury and permitted Plaintiff to discuss Defendants' spoliation at trial. The Court also noted that the ESI in this case was destroyed when Defendants ceased to use the Telegram account and deleted the WeChat group conversation.
Teamlab Inc.
v.
Museum of Dream Space, LLC et al
Case No. 2:19-cv-06906-VAP-GJSx
United States District Court, C.D. California
Filed March 10, 2022

Counsel

Benjamin S. Halperin, Pro Hac Vice, CeCe M. Cole, Pro Hac Vice, Elizabeth L. Safran, Pro Hac Vice, Scott J. Sholder, Pro Hac Vice, Cowan DeBaets Abrahams and Sheppard LLP, New York, NY, Nancy E. Wolff, Cowan DeBaets Abrahams and Sheppard LLP, Beverly Hills, CA, for Teamlab Inc.
Lawrence M. Hadley, Thomas P. Burke, Jr., Glaser Weil Fink Howard Avchen and Shapiro LLP, John M. Griem, Jr., Pro Hac Vice, Sarah H. Ganley, Carter Ledyard and Milburn LLP, New York, NY, Nicholas William Tapert, Pro Hac Vice, Carter Ledyard and Milburn LLP, ew York City, NY, for Museum of Dream Space, LLC, Dahooo American Corporation.
Phillips, Virginia A., United States District Judge

Proceedings: MINUTE ORDER GRANTING PLAINTIFF'S MOTION FOR SPOLIATION SANCTIONS [DKT. 131] (IN CHAMBERS)

*1 Before the Court is Plaintiff teamLab Inc.'s (“Plaintiff”) Motion for Spoliation Sanctions (“Motion,” Dkt. 131).
 
After considering all the papers filed in support of, and in opposition to, the Motion, the Court deems this matter appropriate for resolution without a hearing pursuant to Local Rule 7-15. The Court GRANTS the Motion.
 
I. BACKGROUND
The parties are familiar with the underlying factual dispute, so the Court provides only a brief summary here. In short, Plaintiff alleges that Defendants Museum of Dream Space, LLC (“MODS”) and Dahooo American Corp. (“Dahooo”) infringed Plaintiff's copyrights in several digital immersive art exhibits by creating and displaying their own substantially similar art exhibits. Plaintiff brings this Motion for Sanctions on the grounds that Charles Chang, the current CEO of both Defendants, deleted messages containing material evidence regarding the creation and design of Defendants' art exhibits.
 
Mr. Chang was deposed on January 6-7, and again on January 27. (Motion, at 2 n.1). According to his testimony, the MODS art exhibits were designed by Dahooo's Chinese parent company, two third-party Chinese contractors, and a third-party consultant based in the United States named Kristina Drobachevskaia. (Id. at 2). Mr. Chang testified that he communicated with Ms. Drobachevskaia through the messaging service Telegram. (Id.). Additionally, Mr. Chang testified that he communicated with Ms. Drobachevskaia and the Chinese designers in a group chat using the messaging service WeChat. (Id.).
 
Mr. Chang testified that Ms. Drobachevskaia used WeChat to message the Chinese design team pictures of other immersive art exhibits created by nonparty artists for inspiration in creating the MODS exhibits. Id. Although Mr. Chang first testified that Ms. Drobachevskaia sent him images of teamLab works at the beginning of their relationship, he later testified that no images of teamLab's artwork were ever sent to him or the design team while the MODS exhibits were being developed. Id. Mr. Chang also testified that he “stressed to [the] design team” to avoid plagiarizing any artwork. Id at 3. Mr. Chang was unable to provide a conclusive timeline for the development of the MODS exhibits, but he testified that the design phase began sometime in 2018 and ended in late 2018. Id.
 
Around the end of May 2019, the relationship between Mr. Chang and Ms. Drobachevskaia soured and ended. Id. at 4. Mr. Chang stopped communicating with Ms. Drobachevskaia via Telegram, stopped using Telegram altogether, deleted Ms. Drobachevskaia from the WeChat group chat, and “dismantled” the WeChat group chat. Id. Plaintiff alleges that these actions had the effect of destroying all Telegram and WeChat messages between Ms. Drobachevskaia, Mr. Chang, and the Chinese design team. The Telegram messages were destroyed because Mr. Chang's account automatically “self-destructed” after he stopped using the account and did not log back in for more than six months. Id. at 4-5. The WeChat messages were destroyed because Mr. Chang “dismantled” and deleted the group chat, which permanently erased those communications. Id. at 5.
 
*2 Plaintiff alleges that Mr. Chang's actions with respect to the Telegram and WeChat messages amount to spoliation because Defendants were already on notice of a potential copyright infringement lawsuit. Plaintiff had already sent two cease-and-desist letters to Defendants related to copyright infringement issues. On February 7, 2019, counsel for teamLab's agent Pace Gallery sent Mr. Chang a letter requesting that MODS cease publishing copyrighted images of teamLab's artwork on MODS' website. The letter threatened a lawsuit if MODS did not cease and desist from displaying those images. Subsequently, on April 22, 2019, teamLab's counsel sent another letter addressing the use of infringing images on MODS website, and additionally addressing the concern that MODS was creating “substantially similar works” of digital art. Id. at 6. The April 22 letter demanded that MODS “remove[ ] all of the Infringing Works from any current MODS exhibition” and that MODS not exhibit any infringing works in the future, or a lawsuit would be filed. Id. Plaintiff alleges that Defendants did not institute a litigation hold until August 2019—more than five months after the first cease-and-desist letter was received. Id. at 7.
 
Plaintiff further claims that it has attempted to seek the missing chat records from elsewhere, including from Dahooo China, but Defendants refused to produce any documents from their parent company. Id. Plaintiff filed the instant Motion for Sanctions on January 31, 2022, seeking an adverse inference instruction explaining that the jury should presume that the destroyed messages were unfavorable to Defendants. Defendants filed an Opposition on February 28, 2022 (“Opp'n,” Dkt. 142) and Plaintiff filed a Reply on February 28, 2022 (Dkt. 145).
 
II. DISCUSSION
“Spoliation is ‘the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence[,] in pending or reasonably foreseeable litigation.’ ” Reinsdorf v. Skechers U.S.A. Inc., 296 F.R.D. 604, 625-26 (C.D. Cal. July 19, 2013) (quoting Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 216 (S.D.N.Y. 2003)).
 
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 [Fed. R. Civ. P.] 37 against a party who ‘fails to obey an order to provide or permit discovery.’ ” Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006) (quoting Fed. R. Civ. P. 37(b)(2)).[1] Evidence of spoliation may be grounds for sanctions, which may include an adverse inference instruction. Apple Inc. v. Samsung Elecs. Co., 888 F. Supp. 2d 976, 989 (N.D. Cal. 2012) (citation omitted).
 
Trial courts in the Ninth Circuit have adopted a three-part test to determine when adverse inferences are appropriate as sanctions for spoliation of evidence. See id. Under this test, “a party seeking an adverse inference instruction based on the destruction of evidence must establish[:] (1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed ‘with a culpable state of mind’; and (3) that the evidence was ‘relevant’ to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.” Id. at 989–90 (citations omitted). The Court addresses each of these factors in turn.[2]
 
A. Whether Defendants Had an Obligation to Retain the Chat Messages
*3 Plaintiff argues that Defendants had an obligation to preserve the Telegram and WeChat messages well before they were destroyed. Plaintiff points out that it sent cease-and-desist letters to Mr. Chang on February 7, 2019, and April 22, 2019, which made litigation reasonably foreseeable and triggered the parties' obligation to preserve relevant documents. Defendants respond that litigation was not reasonably anticipated at the time the chat messages were lost.
 
“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). Although the Ninth Circuit has not precisely defined the contours of the duty to preserve, trial courts considering the issue have recognized that “[t]his is an objective standard,” relying upon whether “a reasonable party in the same factual circumstances would have reasonably foreseen litigation.” Apple Inc., 888 F. Supp. 2d at 990.
 
The Court finds that the cease-and-desist letters sent to Mr. Chang made litigation reasonably foreseeable and therefore triggered Defendants' duty to preserve the chat messages. In particular, the April 22, 2019 letter directly communicated Plaintiff's concern that “MODS has created, publicly displayed, and/or reproduced a significant number of works of art that are substantially similar to, or derivative of teamLab's original works ... and that MODS may be planning to exhibit the Infringing Works at its grand opening in May 2019 and thereafter.” (Plaintiff's Exhibit 7, Dkt. 131-8). The letter goes on to declare that “teamLab ... is entitled to enforce its copyrights in the United States,” and that if “MODS fail[s] to comply with the above requests[,] teamLAB will have no choice but to consider all available legal options to enforce its intellectual property rights ....” Id. This letter clearly identifies a potential copyright infringement claim against Defendants. From that point forward, Defendants had an obligation to preserve all relevant evidence for litigation.
 
Defendants attempt to argue that the letter was “vague” and failed to specify the exact exhibits that were allegedly infringed, but this argument lacks merit. The letter was sufficient to put Defendants on notice that they may be sued for copyright infringement in relation to the particular art exhibits they planned to display at the grand opening of their museum in May 2019. See e.g., Apple Inc., 888 F. Supp. 2d at 990 (finding that defendant's duty to preserve arose after plaintiff gave a presentation confronting defendant about the alleged patent infringement). A detailed analysis of each exhibit was not necessary to make litigation reasonably foreseeable to Defendants.
 
B. Whether Defendants Destroyed the Messages with a “Culpable State of Mind”
The parties next dispute whether Mr. Chang had a culpable state of mind when he allowed the Telegram messages to be destroyed after ceasing to use his account, and when he deleted the WeChat group conversation with Ms. Drobachevskaia. Defendants attempt to argue that Mr. Chang did not act culpably because his actions were not intended to prevent Plaintiff from obtaining the messages.
 
*4 Plaintiff, however, points out that parties are required to take “affirmative steps” to prevent the destruction of relevant evidence in the face of potential litigation. See Motion, at 12 (quoting Youngevity Int'l v. Smith, No. 16-cv-704-BTM (JLBx), 2020 WL 7048687, at *2 (S.D. Cal. July 28, 2020). Once Defendants' duty to preserve took effect in April 2019, Defendants were “required to suspend any existing policies related to deleting or destroying files and preserve all relevant documents related to the litigation.” Apple Inc., 888 F. Supp. 2d at 991. Additionally, Defendants' decision to wait until August 2019 to institute a litigation hold, despite receiving cease-and-desist letters many months earlier, indicates culpability. See Motion, at 12 (citing PersonalWeb Techs., LLC v. Google Inc., No. 13-cv-01317-EJ, 2014 WL 5422933, at *3 (N.D. Cal. Oct. 24, 2014).
 
The Court is persuaded that Defendants acted with a culpable state of mind in permitting the messages to be destroyed. With respect to the WeChat messages, there is little doubt that Mr. Chang had an obligation not to “dismantle” the WeChat group between Ms. Drobachevskaia and the China design team, which resulted in the loss of those messages. Although Mr. Chang did not affirmatively take steps to delete the Telegram messages, he should have taken action to preserve those messages upon becoming aware of the potential of this lawsuit in April 2019. Mr. Chang failed to take any reasonable steps to protect these messages and therefore acted culpably in their destruction. See Youngevity Int'l, 2020 WL 7048687, at *2 (“Even if the Court finds that the loss of text messages were due to ‘ordinary circumstances of cell phone usage,’ such losses do not justify the incomplete production of text messages because they could have been prevented with reasonable proactivity.”).
 
C. Whether the Messages Are Relevant to the Parties' Claims and Defenses
Finally, Plaintiff argues that the lost messages would have been relevant to this litigation because they contained material information about the creation of the MODS exhibits. Defendants claim that Plaintiff can only speculate about whether the messages contained relevant information.
 
The Court agrees with Plaintiff-- the WeChat and Telegram messages would be highly relevant to this litigation. Mr. Chang has admitted that the messages contained discussions about the creation and design of the allegedly infringing exhibits. See Motion, at 15 (citing Mr. Chang's deposition testimony). He has also admitted that Ms. Drobachevskaia sent images of other artworks as inspiration in creating the MODS exhibits. Id. at 15. While the Court can never be sure of what was lost, it seems highly likely that information tending to prove or disprove that Defendants infringed upon Plaintiff's art exhibits would have been found in the messages. This is not a case where Plaintiff is merely speculating about what the messages contained, absent any factual foundation. See Nida v. Allcom, No. 8-17-CV-02162-JLS (JDEx), 2020 WL 2405251, at *6 (C.D. Cal. Mar. 11, 2020) (denying spoliation sanction where there was no evidence of what documents were missing from a box that was thrown away, and Plaintiff's counsel did not ask defendant at the deposition what was in the box). Here, there is more than enough evidence to conclude that relevant evidence was destroyed, based upon Mr. Chang's own statements and the factual record.
 
III. CONCLUSION
The Court therefore GRANTS Plaintiff's Motion for Spoliation Sanctions. The Court will issue an adverse inference instruction as a sanction for Defendants' spoliation of the Telegram and WeChat messages. The Court will instruct the jury that it may infer that the contents of the deleted messages were unfavorable to Defendants, and will also permit Plaintiff to discuss Defendants' spoliation at trial.[3]
 
*5 IT IS SO ORDERED.

Footnotes
Here, Plaintiff has not identified a particular discovery order that has been violated; therefore, the Court's analysis is based on the inherent power to sanction. Unigard Sec. Ins. Co. v. Lakewood Eng'g & Mfg. Corp., 982 F.2d 363, 368 (9th Cir. 1992) (“Rule 37(b)(2)'s requirement that there be some form of court order that has been disobeyed has not been read out of existence; Rule 37(b)(2) has never been read to authorize sanctions for more general discovery abuse.”).
Defendants also argue that Federal Rule of Civil Procedure 37(e) imposes “ad-ditional requirements ... that must be met before an adverse inference or sanc-tions relating to lost electronically stored information can be awarded.” (Opp'n, at 5). Rule 37(e) provides, in relevant part, that a court may issue an adverse inference “only upon finding that the party acted with the intent to deprive another party of the information's use in the litigation.” Fed. R. Civ. P. 37(e); see also Opp'n, at 5. The Court agrees with Plaintiff, however, that Defendants do not rely on Rule 37(e) in their argument, and nor do they explain how this rule imposes any additional burden from the three-factor test, which already requires a showing that the records were destroyed with a “culpable mind.” See Reply, at 2. The three-factor test is sufficient for the Court's analysis.
Plaintiff also requests the Court require Defendants to pay Plaintiff's reasonable costs and attorneys' fees associated with this Motion. Plaintiff provides scant justification, other than citing to one other case in which monetary sanctions were awarded. The Court declines to impose a monetary sanction here.