#CaseoftheWeek Episode 81: When Repeated Violations of Court Orders Result in Default Judgment

Episode 81 is an analysis of United States District Judge Mark L. Wolf’s decision on Red Wolf Energy Trading, LLC v. BIA Capital Mgmt., LLC, 2022 WL 4112081 (D. Mass. 2022). The decision is from September 8, 2022, and we look at how the repeated failure to produce and violations of multiple court orders led to the entry of a default judgement as a sanction. 

Keep reading or watch the video to understand the eDiscovery issues.

Good morning, and welcome to Episode 81 of our Case of the Week series published in partnership with ACEDS. My name is Kelly Twigger. I am the CEO and Founder of eDiscovery Assistant and the principal at ESI Attorneys. I’m happy to be here with you this morning. Thanks so much for joining me.

Let’s jump into this week’s decision from the case titled Red Wolf Energy Trading, LLC vs. BIA Capital Management, LLC.

Now, this case is a prime example of how a failure to understand searching, collecting and producing data from specific sources of ESI in a comprehensive and timely manner can result in a default judgment under Rule 37(b)(2).

I’ve talked about this many times on the Case of the Week, and I’m going to continue to talk about it. That going to the court when you’re not getting what you need in discovery is the key to getting sanctions under Rule 37(b). This case is a great example of that, and we’re going to walk through some specific facts.

Now, one of the reactions that I have a lot of times when I talk to clients or just generally folks about cases like the decision we’re going to discuss today is that there was a lot of bad conduct and we’re never going to engage in that kind of conduct. So that’s not going to be an issue for us. This is not a decision that we need to take into account.

Well, I want you to listen carefully to the facts of this case, because while there could have been dishonest and bad conduct here, it’s never really a sure thing. And you’re not really sure what’s happening here or whether there was just a lack of knowledge of how to deal with data from Slack and G Suite. What’s going to be really important is that you have that perfunctory knowledge.

Okay, as always, we’ve tagged this decision with the issues from our eDiscovery system database. Those issues this week include search terms, Cloud computing, Slack, sanctions, default judgment, and failure to produce.

Background

This case is about a misappropriation of trade secrets. The issue is whether the defendants stole confidential information from the plaintiffs regarding their proprietary trading algorithm.

Rather than develop their own platform, in effect, the plaintiff alleges that one of the defendants, who is a former employee of the plaintiff, worked in concert with the other defendants to steal information about the plaintiff’s platform and use it to build defendant’s own platform. The defendants here are BIA Capital Management, a former employee of plaintiff and some other individuals.

Now, one of the keys that the Court does note here is that when the complaint was originally filed, the plaintiff brought a motion for preliminary injunction. The Court denied that motion for a preliminary injunction based on affidavits that were submitted by two of the defendants, who were also the employees who engaged in the conspiracy, as we’ll find out later in discovery.

But what’s key is that the judge said, I’m going to deny this motion for a preliminary injunction, but it is not a future indicator of the likelihood of success on the merits of this case. And he noted, “that evidence developed in discovery would be important to the ultimate determination of the merit of plaintiff’s claims for money damages and injunctive relief.”

Okay. Let’s look at the timeline in discovery. As we’ve talked about on Case of the Week, the timeline is always critical. And I’ve tried to summarize it down for you here.

This decision from the judge is long, but it is definitely worth a read. It’s well-articulated and laid out for you to understand the underlying facts that bring the judge to his analysis and eventually ensure a default judgment for plaintiffs.

Discovery was originally set to cut off on December 31st, 2019. In October 2019, plaintiff requested data from Slack covering the relevant communications. The defendant subsequently produced documents in response to those October 2019 requests. The Court then extended the discovery cut off by mutual agreement the parties on an additional ten months to October 30th, 2020.

Red Wolf then moved to compel the production of additional documents from the October 2019 requests. While that motion to compel was pending, the defendants filed a motion for summary judgment, claiming that plaintiffs had no evidence of any trade secrets or misappropriation. The plaintiffs subsequently asked the court to allow it to continue to conduct discovery and to hold consideration on that motion for summary judgment.

On April 1st, 2021, the Court denied the motion for summary judgment and granted the motion to compel. At that time, he made specific instructions to the parties that the defendants were to produce all of the G Suite documents and communications with the two custodians that submitted the affidavits on the preliminary injunction response. He also required the defendants to supplement their responses under Rule 26(e) and file an affidavit stating their compliance with Rule 26.

At that time, the Court also warned the defendants that they could be sanctioned if they did not produce all of the required documents. That warning is really key, so focus on that. That order also included the production of Slack messages that were specifically requested in the October 2019 requests for production.

Defense counsel then produced additional documents and filed an affidavit stating that they had complied, which including reviewing additional Slack messages.

The plaintiffs then took depositions based on those productions and the affidavit of completeness and compliance. Fast forward to August 17th, 2021—just a few months after the Court’s initial order—the plaintiff comes back to the court and says that the deposition testimony and record showed that the defendant still had not produced all of the relevant Slack channels.

For those of you who are not familiar with Slack, there are two ways to communicate in the platform. You can either use direct messages, which is a one-to-one communication. I can communicate with you directly in a direct message or in a channel where multiple people can be invited to that channel and can view and share content. Plaintiff argued that evidence showed there were additional channels not produced that had relevant content.

The Court held a hearing on the motion to compel and ordered the defendants again to supplement as necessary and to file another affidavit showing compliance as of August 31, 2021.

Now, the court recounts that the defendants did not conduct any additional searches into Slack or G Suite following that August 31, 2021, order. But on September 7th, 2021, they did file an affidavit that they had fully complied with the court’s order.

Plaintiff again moved to compel the production of Slack data. The defendants opposed, arguing that they were only required to produce Slack messages that hit on agreed upon search terms. They filed another affidavit in response to this motion to compel, stating that there’s no easy way to search Slack messages and described the process by which the defendant had hired a consultant to write a program to search and produce Slack messages in a readable format.

So not relying on any standard eDiscovery tool that already exists in the space, which I know already did in 2019, defendants instead decided to hire a contractor to build their own program to search Slack. The process that the defendants followed identified search term hits and then pulled five messages before and five messages after the hit to provide context or the entire thread.

Now, the consultant that they hired lived in Kazakhstan, had no experience with Slack and was compensated for his work with equity in the defendant’s company instead of cash. The defendants, following this process, only produced messages with five messages before it and five messages after and did not produce any entire threads based on responsive search terms.

Fast forward to November 29th, 2021, where the motion to compel is still pending. Defendants filed a fourth affidavit stating that additional responsive documents were discovered when finding documents for their expert witness. At that time, the defendants found 47 additional documents from Google Vault that were images of the plaintiff’s system and an Excel file that is an export of data from plaintiff’s software that was created by one of the defendants who filed an affidavit opposing the preliminary injunction motion.

These documents even included a PowerPoint using the screenshots from the plaintiff’s system and a graph of results of tests done that plaintiff contended the defendant used to refine its algorithm. Basically, significant evidence of the misappropriation of trade secrets. Smoking guns.

The defendant claimed at that time that they failed to search Google Vault when searching Google Drive, and that’s why the documents were not produced previously. There you have an initial failure of not understanding the way that G Suite works and not searching all of the relevant areas of G Suite. You can liken this to a failure to capture sent items in email from years and years ago.

Plaintiff then moved for sanctions and a second motion to compel. And the Court granted the motion to compel and ordered the defendants to produce all Slack messages subject to attorneys’ eyes-only under the protective order agreed upon by the parties. The Court said that there was, at this point, no limit on search terms but did refuse to grant sanctions because it said that the parties did not have a meeting of the minds on what was to be produced.

The Court also noted that it gave the defendant the “benefit of great doubt” on the second motion to compel and again warned that it may be subject to sanctions if it continued to fail to produce documents.

Now, on the motion for sanctions, which was the initial motion for sanctions, the Court found that the defendant violated the April 1st order, ordered sanctions in the form of costs, and also allowed the plaintiffs to reopen depositions to be able to re-depose witnesses based on the new documents that had been received.

April 2022, defendants produced all Slack communications, and the plaintiff found messages that had search terms that were not previously produced. Remember that the defendants had originally relied on search terms as a reason for why they were producing limited slack messages. Now it becomes apparent that they had in fact not produced all of the search term hits from Slack.

At a deposition following that production, a witness said that mistakes were made by the contractor from Kazakhstan who wrote the program to search Slack. Also, the witness stated that they went with that contractor because they could not afford to hire a “top tier firm” to do the search, and that he had tried and could not find any outside vendors to do the work. That last fact was shown to be false, and, in fact, outside counsel had identified vendors early on that the client did not want to use.

Now, plaintiffs then moved for a second motion for sanctions on June 8, 2022, and that’s the decision before the court now. That motion for sanctions was based on the April production that revealed hundreds of new Slack messages that contained the search terms applied by defendants, including plaintiff’s name.

Essentially, the defendants hadn’t even searched for Red Wolf or for RW, which was the shorthand that the former employee had used to refer to Red Wolf in discussing the data that had been acquired from the plaintiff’s platform.

On this motion for sanctions, the plaintiffs sought default judgment on all counts, and the Court set a hearing for August 10th, 2022, with the trial set to begin the very next day on August 11th.

Now, at the sanctions hearing, plaintiff’s counsel said that they still did not have everything and asked the Court to order their service provider to be able to search the Slack archive and compare the results that they received to what had been produced by the defendant.

At that point, defense counsel agreed, and the Court agreed and ordered the plaintiff to provide a report of what had been produced in July, what had been produced in April, and then what had been produced back in 2019, so the Court can have a full picture of what the failure to produce looked like.

The trial was put off, which greatly angered the Court. On August 16th, five days later, the defendants produced five additional messages from Slack containing a search term that had not been produced previously.

The plaintiff hired a service provider to search the Slack archive and found 128 messages that contained a search term that had not been produced, including a smoking gun from days after the plaintiff filed a suit, in which two of the defendants discussed creating a new algorithm to hide the fact that the original algorithm was derived from Red Wolf’s intellectual property. That’s a pretty big smoking gun, folks.

The plaintiffs submitted an affidavit from their service provider that stated that defendants could have used a standard eDiscovery tool in 2019 at a cost of about $10,000 to search and produce Slack messages.

The affidavit also noted that Slack had a built-in search function that would allow a user to search channels and direct message conversations for certain search terms, and that while that function would not necessarily have enabled a user to export search results, it would have allowed a user to verify the accuracy of any production related to those search terms.

The plaintiffs also submitting a brief showing the prejudicial effect of the delayed disclosure that showed that the use of plaintiff’s platform to develop defendant’s algorithm was pervasive and that the defendants conspired to cover up the deception after the case was filed.

In response, the defendants filed an affidavit from their service provider who said that from 2017 to 2022, they were not able to search and produce Slack data themselves, but instead hired third party providers to do so.

The affidavit also noted that searching slack is not reliable, but interestingly did not comment on the program that was built by the contractor hired by the client or refute what was said by the plaintiff’s service provider. Okay. Those are the facts.

Analysis

Now, what does the Court dive into as far as analysis goes? Well, one of the things that the Court does is put together a very straightforward analysis based on the facts that I’ve already recounted for you and says that based on the totality of the circumstances and the prejudice of the plaintiff, that default judgment is justified and within the court’s discretion to order as a sanction for failure to obey discovery orders.

The judge notes that many of the representations by the named defendants in affidavits submitted to the court were not true and that the defendants repeatedly violated court orders.

Now the Court does discuss what the totality of the circumstances includes:

• The severity of the discovery violations,
• Legitimacy of the party’s excuse for failing to comply,
• Repetition of violations,
• Deliberateness of the misconduct,
• Mitigating excuses,
• Prejudice to the other party and to the operations of the court, and
• The adequacy of lesser sanctions.

The Court notes that it can impose a sanction of default without exhausting lesser sanctions if the relevant court orders are clear and the party has been properly warned of the risk of sanctions.

Think back to the facts that we articulated earlier. This Court warned these defendants over and over on these motions to compel and the first motion for sanctions that it would be facing sanctions if they continued to fail to comply with the Court’s orders.

The Court noted that the language of Rule 37(b)(2)(vi) provides for and puts a party on notice that default judgment can be ordered for disobeying discovery orders.

The Court notes that violations occurred. They were very serious. They resulted from the reckless disregard of obligations and that with regard to the Slack messages, there is, “reason to be concerned that the misconduct may have been deliberate.”

Now, this is a quote from the Court that I want you to focus on. There are a couple of quotes here at the end of the case that really make this decision one that needs to be considered broader then just the conduct that underlies this case.

And this is the first one from the Court:

Red Wolf has been seriously prejudiced by defendant’s misconduct. That misconduct has also seriously injured the Court’s ability to manage this case and others on its docket. As a practical matter, entering default judgments against plaintiffs is the only viable Rule 37(b)(2) sanction. In any event, as explained below, default judgments are justified and the Rule 37(b)(2) sanction most appropriate to do justice in this case, and to send a message to other litigants that it is perilous to repeatedly disobey court orders.

Emphasis Added.

The Court notes that the defendant provided changing and convincing explanations for why it did not hire an experienced vendor to search the Slack messages. Then the Court recounts what the changes in story were that the defendants laid out before the court. After review of those and looking at the affidavits submitted by the expert service providers, the Court found that the defendants could have engaged with a standard eDiscovery processing tool in 2019, and that is not refuted by the defendants. The totality of the circumstances, therefore, were enough to justify the entrance of a default judgment.

Now, this is where we come to the second quote that I mentioned to you that I think is a huge takeaway from this decision by the district judge:

The law is not a game. And as the Court told defendants, civil discovery is not a game of hide and seek. The decision in this case should encourage litigants to understand that it is risky business to recklessly or deliberately failed to produce documents and perilous to disobey court orders to review and, if necessary, supplement prior productions. It is in the interests of the administration of justice to default plaintiffs to send those messages.

And with that, the Court ordered the defendants to pay costs on the second motion for sanctions, as well as default judgment against the plaintiffs.

Takeaways

What are our takeaways from this case? That last quote that I gave you from the Court, that discovery is not a game of hide and seek is something that we have been needing to hear more of from judges.

Huge credit to this judge who, when you do a search on our eDiscovery system database, only has three decisions in there because as he notes in his decision here, he doesn’t have discovery disputes. He orders parties to engage, and they do it. And that’s what should have happened here.

All right. Next takeaway. We’ve talked about this multiple times on Case of the Week, you need to do the review analysis of documents that are produced to you immediately upon receiving them.

You need to do an analysis that allows you to notice those discrepancies and move quickly to meet and confer with opposing counsel. When you cannot move the meet and confer process meaningfully forward in timely manner, depending on your case, you need to go to the court.

Now, obviously the timing for how you do that and the strategy which you move forward is dependent on the timing of the case. But we are seeing more and more in these discussions that we have about Rule 37(b), that you have got to go to the court to get an order compelling production in order to be able to seek sanctions and avoid the intent requirement under Rule 37(e).

Now, I want to talk a little bit about the two sources of ESI that are at issue here, G Suite and Slack. Those are two sources of ESI that are becoming more and more common. And parties need to know how to handle data from these sources.

Now we are talking about facts back from 2019, and I’m hopeful that all of your knowledge about these sources and the way to be able to preserve, identify, collect and produce information from these sources is better than it was in 2019. But if it’s not, you need to get there. You need to identify tools that you can use to be able to properly collect from these data sources and be able to search and filter them effectively.

We’ve also talked about the fact that relying on the search capabilities of the sources of ESI you are collecting is often fraught. It is perilous to believe that you can necessarily use the same kind of searching capabilities in these random sources of ESI, whether that’s Slack or G Suite or Teams or anything else, and get the same kind of results you would get using searching in an eDiscovery platform.

Consider that when you’re collecting — what the scope of your collection is depends on what allows you to effectively search. Obviously, the scope of your collection is not the scope of your production but cutting corners like the defendants tried to do here will get you in a heap of trouble down the road.

This case has ended up costing defendants probably 20 to 30 times what it could have if they had done a proper collection from Slack and Google Suite and Google Vault at the outset of responding to these requests for production in 2019.

It’s clear from the facts here that defendants keep finding new messages and that the process for locating them was an issue. That happens. There’s no perfection that is required here. Judge Scheindlin said that way back in the Pension Committee case years and years and years ago.

In situations like this, when you are unsure of the process, be transparent with the other side. Work it out. Go to them and tell them what it is that you’re doing. And if they have objections to it, work with them to figure out a better process.

Now, if you’re hiding data, if that’s what happened here, obviously me advocating transparency and a better process and understanding the tools is going to fall on deaf ears. But if it’s not, if you’re legitimately trying to meet your obligations in discovery and you just don’t know how, be transparent with the other side. Dig deeper. Do some research.

I think here we had a failure to listen to counsel a number of other facts that are not well articulated in this decision that change that focus. But the takeaway from this case for you, practically speaking is, don’t make mistakes with platforms that you don’t know or understand how they work. Figure it out or find service providers who can help you and rely on them.

Now, when you find those service providers, take it as an opportunity for you to learn how these platforms work. You need to be able to ask strategic questions and understand how these platforms work so that you can piece together the information that you get in discovery better and be able to put that puzzle together for your client.

When you understand how these platforms work and you see disparate information in various channels on Slack or in direct messages, you can start to piece those together in a timeline. When you don’t understand how the platforms work, you’re missing out on a crucial ability to ask strategic questions for the betterment of your client’s case.

Since 2019 when Slack was first at issue in this case, Slack has developed additional features and functionality that do allow for exporting information on enterprise accounts. There are also tools out there that are available that specifically work with G suite, Google Vault, Slack to be able to export information.

Now you’re going to have to figure out formats because Slack formats sends things out on a JSON file, Google exports things in an MBOX file, and you need to figure out how to deal with those, or you need to have a service provider that has done it effectively and can do that for you.

Closing

All right. That’s our Case of the Week for this week. Thanks so much for joining me. We’ll be back again next week with another decision from our eDiscovery Assistant database.

If you’re interested in doing a free trial of our case law and resource database, you can sign up to get started. Thanks so much. Have a great rest of the week, and I’ll see you on our next episode.

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