Business Court Sanctions Party for Discovery Misconduct and Awards Forensic Examination

It started out like a typical Business Court case:  a company filed suit against its former employees (and their new company) and asserted claims for things like breach of contract and misappropriation of trade secrets.  The plaintiff also filed motions for a temporary restraining order and a preliminary injunction, and it sought expedited discovery to support the claims for injunctive relief.

But from there, the case of Red Valve, Inc. v. Titan Valve, Inc. took some interesting twists and turns.

For example, before the defendants even filed an answer, the court entered two different orders requiring the production of certain documents.  The court first entered a temporary restraining order ex parte, which required the defendants to return the plaintiff’s confidential and proprietary information.  Second, the court allowed some expedited discovery and required the defendants to produce all materials containing the plaintiff’s trade secrets, all marketing and/or promotional materials related to the new company’s products, all photographs or renderings of the new company’s products, and all documents describing efforts to create the new company.

The defendants produced some files in response to the orders but did not produce all responsive documents.  Months later, the plaintiff moved for sanctions for the non-compliance.  Chief Judge Bledsoe granted the motion in part and, in doing so, provided several important reminders:

1)            Remember that one judge is assigned to the case

Unlike the majority of civil cases assigned to superior court judges in North Carolina, a Business Court case is typically assigned to one judge for the entirety of the proceedings.  That unique facet of Business Court cases should demand an extra-special duty of care when it comes to judges’ orders.

In Red Valve, the court’s temporary restraining order required the production of documents describing the defendants’ efforts to “create” the new company.  The parties disputed what the term “create” meant—but it was Judge Bledsoe’s order that went back to him for interpretation.  Not surprisingly, he concluded that the defendants’ “restrictive interpretation” was “unreasonable and inconsistent” with his order.

2)            Prejudice and bad faith may be relevant to the sanctions analysis

Rule 37(b)(2) of the North Carolina Rules of Civil Procedure allows a court to impose sanctions when a party “fails to obey an order to provide or permit discovery.” As the court noted in Red Valve, neither the plain language of Rule 37 nor appellate court decisions require a showing of willfulness or bad faith before imposing such sanctions.  However, the Business Court has specifically said that willfulness, bad faith, and prejudice to another party are relevant in its analysis.  Attorneys should be prepared to argue those things whenever dealing with a motion for sanctions.

3)           Even when sanctions are appropriate, there is still a preference for resolving cases on their merits

In addition to other sanctions, the plaintiff sought to preclude the defendants from defending against the plaintiff’s claims.  The court rejected that request. Although that is a possible sanction under Rule 37, Judge Bledsoe explained that it “is a severe sanction which should only be imposed where the trial court has considered less severe sanctions and found them to be inappropriate.”  Here, the delay caused by the discovery misconduct could be ameliorated by an amended case management order.

But that is not to say that the defendants escaped unscathed . . .

4)            Forensic examinations of electronic devices are the exception, not the rule

The plaintiff also sought a forensic examination of the defendants’ electronic devices as a sanction for the discovery misconduct. Normally, a party is obligated to conduct a search of its own electronic devices and then produce documents that are in its possession, custody, or control. But sometimes a court can sanction a party with a more thorough examination conducted by forensic experts. This examination involves creating a mirror image of the device and therefore allows the experts (and perhaps the opposing party) to access all information on the device—including deleted information.

Given the breadth of this type of examination, courts do not impose such a sanction as a matter of course. Indeed, the Red Valve court reminded practitioners that “mere skepticism that an opposing party has not produced all relevant information is not sufficient to warrant drastic electronic discovery measures.”  Nevertheless, Judge Bledsoe granted the plaintiff’s request based on the specific circumstances before him—including a) the devices contained information related to the heart of the dispute, b) it appeared that the defendants had not produced all information from those devices, and c) the plaintiff offered evidence tending to show that the defendants had manipulated and/or destroyed evidence.

This is a burgeoning area of North Carolina law, as evidenced by the court’s reliance on federal district court decisions.  Currently there are no state appellate opinions addressing the propriety of such a sanction.