Kixsports, LLC v. Munn, 2019 NCBC 61.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION MECKLENBURG COUNTY 17 CVS 16373
KIXSPORTS, LLC,
Plaintiff,
v.
RYAN MUNN; TYLER VAUGHAN; RENEGADE GK; BIG DREAMZ, LLC; AND MIRO GROUP, LLC,
Defendants and Third-Party Plaintiffs, ORDER AND OPINION ON DEFENDANTS’ MOTION FOR v. ORDER TO SHOW CAUSE FOR CASEY CARR; and STEPHEN PYE, CONTEMPT OF COURT AND FOR DISCOVERY SANCTIONS Third-Party Defendants.
RYAN MUNN; and TYLER VAUGHAN, derivatively on behalf of KIXSPORTS, LLC,
Derivative Plaintiffs,
v. CASEY CARR; and STEPHEN PYE,
Derivative Defendants.
1. This Opinion aims to bring to a close a discovery dispute that began a year
and a half ago. In early 2018, Kixsports, LLC and its principals, Casey Carr and
Stephen Pye, were ordered to produce their electronic devices for inspection by a
forensic expert and to bear the cost of the expert’s fees if the inspection revealed
relevant evidence or the intentional deletion of evidence. The inspection process limped along while the parties haggled over how to review more than 100,000
documents retrieved by the forensic expert. Out of those negotiations (and with some
prodding from the Court) came a partial production in February 2019. The five
defendants—Ryan Munn, Tyler Vaughan, Renegade GK, Big Dreamz, LLC, and Miro
Group, LLC (“Defendants”)—now contend that the forensic expert retrieved highly
relevant evidence and also detected intentional deletion of evidence by Carr and Pye.
Defendants move to recover the forensic expert’s fees and further argue that
Kixsports, Carr, and Pye should be held in contempt and sanctioned for discovery
abuses. (ECF No. 138.) Having considered all relevant matters, the Court GRANTS
in part and DENIES in part the motion.
Nelson Mullins Riley & Scarborough LLP, by Ariel E. Harris, Evan M. Sauda, and Fred M. Wood, Jr., for Plaintiff Kixsports, LLC and Third- Party Defendants Casey Carr and Stephen Pye.
Parker Poe Adams & Bernstein, LLP, by A. Todd Sprinkle and Eric A. Frick, for Defendants/Third-Party Plaintiffs Ryan Munn, Tyler Vaughan, Renegade GK, Big Dreamz, LLC, and Miro Group, LLC.
Conrad, Judge.
I. BACKGROUND
2. This case started as an action by Kixsports against two of its former
members, Vaughan and Munn. Kixsports, now dissolved, was in the business of
making and selling soccer gear and related products. It alleges that Vaughan and
Munn secretly developed a new goalie glove and then began selling it through a
competing business, giving rise to claims for breach of fiduciary duty, breach of
contract, misappropriation of trade secrets, and others. Twice amended, the complaint also includes related claims against Vaughan and Munn’s new businesses,
Big Dreamz and Miro Group.
3. These allegations prompted an energetic response from Vaughan and Munn.
Along with a handful of contract-related counterclaims against Kixsports, Vaughan
and Munn assert nearly a dozen third-party and derivative claims against Carr and
Pye, the two managing members of Kixsports. Among other things, it is alleged that
Carr and Pye looted Kixsports and put the company at risk through false tax
reporting based on inaccurate valuations. Munn also alleges that Carr and Pye
fraudulently induced him to invest in Kixsports by misrepresenting or concealing
aspects of its financial and business affairs.
4. Discovery proved to be contentious. In March 2018, Defendants moved to
compel complete responses to their discovery requests. (ECF No. 32.) Most relevant
here is Defendants’ request for production number 4, which sought copies of
communications related to the subject matter of the case. Defendants asserted that
Kixsports had produced “limited emails involving Ryan Munn in late 2016” but no
other communications. (ECF No. 32.)
5. Kixsports, Carr, and Pye opposed the motion to compel on the ground that
there were no other responsive documents to produce. In an affidavit, Pye testified
that
I generally am not very proficient with technology, and do not send many emails or text messages. I know that I have exchanged some text messages regarding this litigation with Ryan Munn and Casey Carr. Every text message I am able to locate on my cell phone has been produced, as well as any emails I have located that are responsive to the discovery requests. (Pye Aff. ¶ 11, ECF No. 91.) He went on to state that “it would be impossible for me
to comply with” an order compelling production of additional communications
because “I have turned over any emails, text messages and other written
communications I have been able to locate . . . .” (Pye Aff. ¶ 17.) Carr testified that
he, too, had produced every responsive text message and e-mail he had been able to
locate and that it would therefore be impossible to comply with an order compelling
further production. (See Carr Aff. ¶¶ 10, 16, ECF No. 92.) These sworn statements
have never been modified or retracted.
6. In an order dated April 25, 2018, the Honorable Hugh B. Lewis granted
Defendants’ motion to compel. Judge Lewis reasoned that it was “extremely difficult
to believe that Mr. Pye and Mr. Carr would operate a business valued between $1
million and $2.5 million without communicating with each other.” (ECF No. 40 at 2
[“April 2018 Order”].) He ordered a forensic examination of the electronic devices of
Kixsports, Carr, and Pye to identify any communications between Carr and Pye (and
third-parties) “related to the subject matter of this proceeding and responsive to
Request for Production No. 4.” (April 2018 Order at 2–3.) Allocation of the forensic
expert’s fees would depend on what the inspection revealed:
[i]f no communications between Casey Carr and Stephen Pye, or between Casey Carr and/or Stephen Pye and third parties, related to the subject matter of this proceeding are found, Defendants will bear the cost of the forensic expert fees. However if communications between Casey Carr and Stephen Pye are discovered, or there is evidence of intentional deletion of such communications when Casey Carr or Stephen Pye were aware of circumstances that were likely to give rise to future litigation, consistent with North Carolina principles on destruction of evidence, Kixsports, LLC, Casey Carr, and Stephen Pye shall bear the cost of the forensic expert fees. (April 2018 Order at 3.)
7. In short order, Defendants retained Clark Walton of Reliance Forensics,
LLC (“Reliance”) as a forensic expert. The parties then stipulated to a Confidentiality
Agreement and Protective Order, along with a separate Computer Protocol, to govern
the inspection. (See Protective Order, ECF No. 42; Protective Order Ex. A, ECF No.
42 [“Computer Protocol”].) Reliance was tasked with creating images of the relevant
devices in a searchable format, using a set of search terms provided by counsel to
identify potentially responsive documents, and performing a second search to screen
the documents for potentially privileged material to be reviewed by counsel for
Kixsports, Carr, and Pye. (Computer Protocol ¶¶ 1, 6, 7.) Reliance was also
authorized to retrieve content associated with various software applications, such as
WhatsApp, Slack, Gmail, and similar applications. (Computer Protocol ¶ 5.) The
parties seem to have contemplated at the time that Reliance would review the results
of the search for relevance and produce any relevant, non-privileged documents to
counsel for both sides. (Computer Protocol ¶¶ 8, 12.)
8. Cooperation soon gave way to conflict. In June 2018, Defendants moved for
sanctions, citing essentially three grounds. (ECF No. 44.) The first was that counsel
at the time for Kixsports, Carr, and Pye had repeatedly refused Walton’s requests for
login credentials for some of the software applications. (See Reply Br. Ex. 1, ECF No.
144.1; 1st Walton Aff. ¶¶ 18–22, 25, ECF No. 45.) Second, Kixsports’s counsel had
received from Reliance a set of potentially privileged documents but failed to provide
a privilege log to Defendants’ counsel. (ECF No. 44 at 4–5.) And third, Defendants submitted an affidavit from Walton opining that Carr and Pye had deleted relevant
evidence. (1st Walton Aff. ¶ 6.)
9. This motion never received a hearing. While it was pending, Kixsports,
Carr, and Pye retained new counsel, and the parties jointly moved to designate the
case as exceptional under Rules 2.1 and 2.2 of the General Rules of Practice for the
Superior and District Courts of North Carolina. (ECF Nos. 1, 96.) After designation
and assignment in August 2018, this Court entered an order directing that the
General Rules of Practice and Procedure for the North Carolina Business Court would
apply going forward. (ECF No. 2.) The Court also entered a case management order,
which adopted the parties’ proposed schedule for completing fact discovery by March
15, 2019. (ECF No. 98; see also ECF No. 122.) Around the same time, Defendants
withdrew their sanctions motion, stating that “they ha[d] not received the full results
of the forensic examination being conducted by” Reliance and reserving their right to
refile it later. (ECF No. 97.)
10. Once the sanctions motion was withdrawn, the parties worked out some of
the initial issues, including access to necessary login credentials. Reliance completed
the imaging process and identified over 100,000 potentially relevant documents using
the search terms provided by counsel. Although the Computer Protocol stated that
Reliance should go on to review these search hits for relevance, Reliance reported
that it was not capable of doing so. (See Opp’n Defs.’ Mot. Extension Ex. A, ECF No.
134.1.) That led to a new dispute. In short, both sides agreed that someone must review the documents for relevance, but neither side wished to bear the expense of
reviewing such a huge volume of material.
11. Defendants brought the dispute to the Court’s attention through a
pre-motion submission under Business Court Rule 10.9. At a hearing on January 17,
2019, the Court urged the parties to identify the documents most likely to be relevant
and to negotiate terms for reviewing that smaller, more manageable subset. The
Court also directed the parties to provide weekly status updates. Over the following
weeks, the parties reported that a first set of documents was produced on February
27, with two additional productions being made in the week following the March 15
close of discovery. When Kixsports, Carr, and Pye refused to produce additional
documents, Defendants moved to reopen the period for fact discovery. (ECF No. 130.)
The Court denied that motion as untimely. (ECF No. 135.)
12. In June 2019, Defendants renewed their request for discovery sanctions and
for an order holding Kixsports, Carr, and Pye in contempt. (ECF No. 138.) They
contend that Reliance’s forensic inspection revealed hundreds of relevant documents
and evidence that Carr and Pye deleted relevant communications, all of which
supports their recovery of the forensic expert fees under Judge Lewis’s order along
with additional sanctions. Kixsports, Carr, and Pye respond that they have complied
with the order and that the forensic inspection turned up nothing of importance. The
motion has been fully briefed, and the Court held a hearing on August 7, 2019, at
which all parties were represented by counsel. The motion is ripe for determination. II. ANALYSIS
13. There are, in general, two related issues here. One is whether Kixsports,
Carr, and Pye should bear the cost of Reliance’s expert fees. That issue is controlled
by Judge Lewis’s order. The second issue is whether the discovery conduct of
Kixsports, Carr, and Pye as a whole—including conduct related to the forensic
examination—merits sanctions under Rule 37 of the North Carolina Rules of Civil
Procedure and this Court’s inherent authority.
A. Forensic Expert Fees
14. This Court is not free to revisit Judge Lewis’s ruling (and no party has asked
it to do so). It bears noting, though, that his order finds support in governing rules
and case law. Certainly, courts approach forensic imaging with a measure of caution
because of its intrusive nature. But “[f]orensic examinations . . . may be warranted
when there exists some factual basis to conclude that the responding party has not
met its duties in the production of discoverable information.” Crosmun v. Trs. of
Fayetteville Tech. Cmty. Coll., 2019 N.C. App. LEXIS 658, at *21–22 (N.C. Ct. App.
Aug. 6, 2019).
15. That is exactly what Judge Lewis concluded here. When Defendants moved
to obtain communications relevant to the disputed issues, Carr and Pye testified that
they rarely communicated with each other through electronic means and therefore
had none to produce. (See Carr Aff. ¶¶ 10, 11, 16; Pye Aff. ¶¶ 11, 12, 17.) Judge Lewis
found it “extremely difficult to believe” that the principals of an internet-based
business possibly valued at $2.5 million had not used modern technology to communicate with each other. (April 2018 Order at 2.) On that basis, he ordered a
forensic analysis of Kixsports, Carr, and Pye’s electronic devices, with the caveat that
Defendants would pay the forensic expert’s fees if what Carr and Pye said turned out
to be true. On the other hand, if the expert found relevant communications between
Carr and Pye or “evidence of intentional deletion of such communications” at a time
when litigation was likely, then the expert’s fees would be borne by Kixsports, Carr,
and Pye. (April 2018 Order at 3.)
16. Defendants contend that Judge Lewis’s skepticism has been validated. They
claim to have found 535 relevant documents through the forensic examination, more
than 50 of which are attached as exhibits to their motion. (See Br. in Supp. 10, ECF
No. 141; see also Sprinkle Aff. Exs. 5–63, ECF Nos. 139.5–139.63.) They also claim
to have found evidence that Carr and Pye intentionally deleted relevant
communications, relying on several affidavits from Walton, the forensic expert, in
support. (See Br. in Supp. 5–8.) Either ground, Defendants contend, supports the
reimbursement of more than $50,000 in forensic expert fees under Judge Lewis’s
order.
17. Kixsports, Carr, and Pye deny this. In their opposition brief, they argue
that the disputed documents “are a far cry from relevant.” (Opp’n 11, ECF No. 142;
see also Opp’n 7, 12, 16, 20–21.) At the hearing, though, their counsel retreated from
that position and conceded that some of the documents were minimally relevant,
though not significant or important. Kixsports, Carr, and Pye also argue that Reliance did not find evidence of intentional deletion of communications. (See Opp’n
6, 20.)
1. Relevance of Retrieved Communications
18. After careful review, the Court concludes that many of the communications
recovered through the forensic examination are plainly relevant. Among the
documents are drafts of business plans, strategic plans, and financial projections for
Kixsports from the relevant time period. (See Sprinkle Aff. Exs. 21, 30, 32, 36, 37,
40.) At a minimum, these documents are relevant to Munn’s claims for fraud and the
representations that Carr and Pye either did or did not make in soliciting Munn’s
investment. By way of example, Munn alleges that Carr and Pye falsely represented
that Kixsports owns a patent covering a soccer ball known as KixFriction when, in
fact, Pye personally owns the patent. Some of the disputed documents tend to support
Munn’s allegation: Kixsports refers to “our Kixfriction patented soccer ball,” “[o]ur
unique proprietary KixFriction ball,” and “design and utility patents” held by the
company. (Sprinkle Aff. Exs. 21, 32, 36.)
19. There are also documents reflecting the investments made in Kixsports and
the value assigned by the company to each investor’s shares. (See Sprinkle Aff. Exs.
9, 19, 23, 27, 28, 38, 41, 42, 43.) Other communications between Carr and Pye appear
to discuss their motivations for seeking investors in Kixsports and their plans to use
funds given by others for their own personal expenses. (See Sprinkle Aff. Exs. 5, 7,
11, 12, 13, 14.) These documents are relevant to the fraud claims, the claims alleging
inaccurate valuations of Kixsports, or both. 20. Kixsports, Carr, and Pye contend that cost-shifting is not required because
these are not “important documents” and because other evidence, such as Munn’s
deposition testimony, weighs against Defendants’ claims. (Opp’n 10, 13–15.) But
Judge Lewis’s order is clear: Kixsports, Carr, and Pye must pay the forensic expert’s
fees if the forensic examination revealed communications “related to the subject
matter of this proceeding.” (April 2018 Order at 3.) Through the forensic
examination, Defendants have identified a substantial number of relevant
communications. That Kixsports, Carr, and Pye have responses or defenses to those
documents is beside the point. The condition in Judge Lewis’s order has been
satisfied. Thus, Kixsports, Carr, and Pye must bear the cost of Reliance’s fees.
2. Intentional Deletion of Evidence
21. Next, the Court considers evidence that Carr and Pye intentionally deleted
relevant communications. Judge Lewis’s order refers to “North Carolina principles
on destruction of evidence”—also known as spoliation—as the appropriate standard.
(April 2018 Order at 3.) Thus, Defendants must show that Kixsports, Carr, and Pye
“(1) intentionally destroyed or failed to preserve (2) potentially relevant materials
(3) while aware of the possibility of future litigation.” SCR-Tech LLC v. Evonik
Energy Servs. LLC, 2014 NCBC LEXIS 72, at *14 (N.C. Super. Ct. Dec. 31, 2014)
(citation omitted).
22. First, the evidence shows that Carr’s Mac computer contains folders
associated with the process of backing up a mobile device through Apple’s iTunes
software. (2d Walton Aff. ¶ 17, ECF No. 140.) Walton testified that the folders were first created in 2014 and would exist only if Carr had in fact backed up a mobile
device. (2d Walton Aff. ¶ 18.) Yet the folders were empty, containing no backup files.
(2d Walton Aff. ¶ 19.) As explained by Walton, the process for deleting a backup file
takes several steps, and “[t]he likelihood that someone unintentionally deleted such
an iTunes backup in this context is extremely slim.” (2d Walton Aff. ¶ 21 (emphasis
omitted).) In addition, the folder that should have contained the backup file was last
modified on October 5, 2017—nearly a month after Kixsports filed its complaint. (2d
Walton Aff. ¶ 19.)
23. All of this testimony is unrebutted. The opposition brief does not address it.
Carr did not submit an affidavit denying or explaining the deletion. And Kixsports,
Carr, and Pye did not retain an expert of their own to rebut or comment upon Walton’s
analysis. The Court concludes that it is more likely than not that Carr intentionally
deleted backup files for his mobile device during the pendency of this lawsuit.
24. Second, it is clear that Carr and Pye frequently sent and received text
messages, yet scores of these messages are missing. Munn provided to Reliance
copies of nearly 300 text messages that he exchanged with Carr and Pye during the
relevant time period, roughly between 2014 and 2017. None of these messages
appears on the devices that Carr and Pye gave to Reliance. (2d Walton Aff. ¶¶ 11,
15.) Indeed, their three smartphones contained no text messages at all from before
May 22, 2017. (See 2d Walton Aff. ¶ 15; 3d Walton Aff. ¶¶ 15, 21, ECF No. 145.) Of
the messages retrieved from Carr’s smartphone, some were exchanged with Pye after
that date. (See 2d Walton Aff. ¶ 9.) Pye’s two smartphones, on the other hand, did not contain any of these messages even though there were more than 23,000 other
text messages from 2017. (2d Walton Aff. ¶¶ 8, 10, 24.) Walton concludes that this
shows intentional deletion. (2d Walton Aff. ¶ 12.)
25. Kixsports, Carr, and Pye respond that Walton failed to consider alternatives
to intentional deletion, such as software settings that automate deletion of text
messages. (Opp’n 6; see Opp’n Exs. D–F, ECF Nos. 143.4–143.6.) This is not
persuasive. Kixsports, Carr, and Pye offer no expert testimony to support their
position, and Walton submitted a supplemental affidavit showing that any deletions,
whether automated or manual, were far more likely to be intentional than
inadvertent. For one thing, the default setting for these devices is to retain text
messages forever. Automated deletion requires action by the user to alter the setting.
(3d Walton Aff. ¶ 13.) In addition, automated deletion works by scheduling the
deletion of all text messages over a certain age (one year, for example), not by
selecting and deleting messages with a specific user. (3d Walton Aff. ¶ 19.a.)
26. The evidence here is consistent with intentional deletion. Pye’s
smartphones contained thousands of messages from 2017 but none exchanged with
Carr, even though it is undisputed that such messages once existed. This cannot be
explained by a theory of automated deletion; it is strong evidence of selective deletion
of messages between Pye and Carr. Likewise, Pye and Carr altered their
smartphones’ default settings so that they would delete text messages more than one
year old. (See 3d Walton Aff. ¶¶ 15, 19.b.) These were intentional acts, resulting in the deletion of an unknown number of text messages sent and received before May
22, 2017.
27. Walton notes that the relevant devices do not record and store the exact
dates of these deletions. (3d Walton Aff. ¶ 17; see also 3d Walton Aff. ¶ 19.b.) Thus,
it is possible that Carr or Pye changed the default settings before litigation began.
Even so, that would not excuse their failure to preserve evidence after litigation
became likely. See Tumlin v. Tuggle Duggins P.A., 2018 NCBC LEXIS 51, at *33
(N.C. Super. Ct. May 22, 2018) (“The obligation to preserve evidence begins when ‘a
party is aware of circumstances that are likely to give rise to future litigation.’ ”
(quoting McLain v. Taco Bell Corp., 137 N.C. App. 179, 187, 527 S.E.2d 712, 718
(2000))). Carr and Pye either caused or allowed their smartphones to delete messages
after the complaint was filed (in September 2017), after Defendants requested the
communications (in November 2017), after Defendants filed their motion to compel
(in March 2018), and even after Judge Lewis issued his ruling (in April 2018). As to
Pye, the evidence is even more clear: a comparison with Carr’s device shows that Pye
deleted messages that were exchanged with Carr while the litigation was pending,
even as late as February 2018 when the discovery dispute was coming to the fore.
(See 2d Walton Aff. ¶ 12.)
28. Kixsports, Carr, and Pye’s other arguments are equally unpersuasive. They
argue that Walton’s opinions are outdated because his initial affidavit was signed in
May 2018 but “not updated” to take into account new facts after that date. (Opp’n 5–
6.) This is simply wrong. Walton expanded and reaffirmed his original conclusions based on the complete forensic examination. (See 2d Walton Aff. ¶ 6; 3d Walton Aff.
¶ 7.) All of Walton’s affidavits reach the same conclusion: Carr and Pye intentionally
deleted potentially relevant information.
29. Kixsports, Carr, and Pye also argue that “[t]he data complained of by
Defendants is not lost” because messages deleted from Pye’s devices were retrieved
from Carr’s. (Opp’n 6.) It is highly doubtful that Pye’s intentional deletion of text
messages should be excused on the ground that Defendants found some of those
messages elsewhere. See, e.g., Nursing Home Pension Fund v. Oracle Corp., 254
F.R.D. 559, 565 (N.D. Cal. 2008) (“[H]aving established with certainty that numerous
emails were not produced from Ellison’s email files—because the emails were
produced from other files or accounts—it is impossible to know whether additional
unproduced emails were also deleted or not turned over.”). Regardless, the relevant
messages from Carr’s device were confined to a few months in 2017. The forensic
examination revealed only one text message between Carr and Pye from November
2015 through April 2017, a key time period for purposes of this case. (See 2d Walton
Aff. ¶¶ 25, 26.) Given their typical communication patterns, it is likely that Carr and
Pye exchanged hundreds of messages during that timeframe. Obviously, this data
was lost.
30. The Court therefore concludes that it is more likely than not that Carr and
Pye intentionally deleted or failed to preserve communications related to the subject
matter of this case. For this independent reason, Carr and Pye must bear the cost of
Reliance’s expert fees under the terms of Judge Lewis’s order. 3. Amount of Fees
31. The amount of recoverable fees is also disputed. Along with their motion,
Defendants submitted invoices from Reliance totaling approximately $60,000. (See
2d Walton Aff. Ex. C, ECF No. 140.3; 3d Walton Aff. Ex. A, ECF No. 145.1.) Kixsports,
Carr, and Pye object that Reliance’s fees are disproportionately high given the
number of relevant documents recovered and given certain actions by Defendants
that drove up the cost of the inspection. (See Opp’n 17–18, 20–21.)
32. Viewed in light of what the inspection revealed, the expert fees are not
unreasonably high. Put simply, the inspection hit pay dirt. Defendants identified a
substantial number of relevant communications even though they received and
reviewed only a fraction of the 100,000 documents retrieved by Reliance. Beyond
that, the inspection showed that Carr and Pye intentionally deleted or failed to
preserve other electronically stored information. It is impossible to know how many
communications were lost or what their import would have been, and Defendants
almost certainly would not have discovered these improper actions in the absence of
a forensic inspection. Reliance’s fees are not excessive when compared with the
results achieved by its inspection.
33. Nor are the fees excessive due to Defendants’ actions. Kixsports, Carr, and
Pye point to the parties’ early agreement to have Reliance review search hits for
relevance, which Reliance later reported that it was not equipped to do. (See Opp’n
17–18.) The opposition brief goes on to state without citation that “[a]ny expenses
associated with this mistake are the sole fault of Defendants,” who had hired Reliance. (Opp’n 18.) The Court is left to guess at what those expenses might be. In
the absence of further explanation, it seems more likely that calling off the relevance
review actually reduced Reliance’s fees.
34. Although Kixsports, Carr, and Pye offer no other specific objections (such as
to Reliance’s hourly rates or individual line items), the Court has reviewed Reliance’s
invoices. The vast majority of charges appear to be consistent with the work that
Reliance performed: imaging and searching seven electronic devices and then
managing more than 100,000 documents retrieved from those devices. (See Computer
Protocol Ex. 1; Sprinkle Aff. ¶ 14, ECF No. 139.) In addition, it appears that
Reliance’s work was hampered by resistance—including the refusal to provide login
credentials—from Kixsports, Carr, and Pye before they retained their current counsel
in July 2018. (See 2d Walton Aff. ¶ 28; 3d Walton Aff. ¶ 30; see also Reply Br. Ex. 1.)
In view of these considerations, Reliance’s charges for its forensic work appear to be
fair and reasonable.
35. There are, however, numerous charges related to Walton’s preparation of
affidavits in support of Defendants’ motions. (See 3d Walton Aff. Ex. A; 2d Walton
Aff. Ex. C.) These charges were not part of the forensic inspection, and the Court
does not believe they are fairly included within the scope of Judge Lewis’s order.
Accordingly, the Court reduces the amount of Reliance’s expert fees by $7,881.25.
Kixsports, Carr, and Pye shall pay the remainder, $51,707.10, in compliance with
Judge Lewis’s order. 36. Finally, the Court declines to hold Kixsports, Carr, and Pye in contempt for
their failure to pay these invoices to date. The record does not establish willful
noncompliance with Judge Lewis’s order, particularly given that the order does not
specify an amount owed or a deadline for payment. Under the terms of this Order,
Kixsports, Carr, and Pye are jointly and severally liable for the amount to be paid to
Reliance. Should they fail to comply, their failure may be punishable by contempt in
future proceedings.
B. Sanctions
37. Defendants also seek sanctions under Rule 37 and this Court’s inherent
authority. Defendants ask the Court to strike the pleadings of Kixsports, Carr, and
Pye and to enter a default judgment against them or, alternatively, to impose less
severe sanctions. (See Br. in Supp. 23, 25.) Kixsports, Carr, and Pye oppose any
sanctions largely on the ground that they complied with Judge Lewis’s order. (See
Opp’n 19–20.)
38. As this Court recently observed, Rule 37(b) “permits a court to order a
variety of sanctions against a party who fails to obey a court order regarding
discovery.” Red Valve, Inc. v. Titan Valve, Inc., 2019 NCBC LEXIS 57, at *40 (N.C.
Super. Ct. Sept. 3, 2019). In addition, “[t]rial courts retain the inherent authority ‘to
do all things that are reasonably necessary for the proper administration of justice.’ ”
Id. at *39 (quoting Beard v. N.C. State Bar, 320 N.C. 126, 129, 357 S.E.2d 694, 696
(1987)). Thus, trial courts have the inherent authority to impose sanctions on a party
for bad-faith conduct and “for discovery abuses beyond those enumerated in Rule 37.” Cloer v. Smith, 132 N.C. App. 569, 573, 512 S.E.2d 779, 782 (1999); see also Tumlin,
2018 NCBC LEXIS 51, at *29 (“A court may impose discovery sanctions even absent
an order pursuant to its inherent power to manage its own affairs.” (alteration,
citations, and quotation marks omitted)).
39. As noted, the evidence shows that Carr deleted one or more backup files
related to his mobile device; that Carr and Pye altered their mobile devices’ default
settings so as to delete text messages over one year old; and that Pye selectively
deleted text messages exchanged with Carr. Most alarming, though, is that Carr and
Pye allowed the automated deletion of text messages to continue well after Judge
Lewis ordered a forensic inspection. The deletion of evidence during the pendency of
litigation and the continuing failure to preserve evidence in the face of a court order
are sanctionable under Rule 37 and this Court’s inherent authority.
40. Furthermore, it is now clear that Carr and Pye made false representations
to Judge Lewis in an effort to convince him to deny Defendants’ motion to compel.
Both vowed that it would be “impossible” to comply with any order compelling the
production of the requested communications because they had already turned over
any e-mails, text messages, and other written communications that they had been
able to locate. (See Pye Aff. ¶¶ 11, 12, 17; Carr Aff. ¶¶ 10, 11, 16.) Pye went so far as
to testify that he was “not very proficient with technology” and therefore does not
“send many emails or text messages.” (Pye Aff. ¶ 11.) Yet Reliance retrieved more
than 30,000 text messages from Pye’s mobile devices. (2d Walton Aff. ¶ 24.) Pye also
possessed enough technological savvy to delete the most important text messages— those exchanged with Carr. And given the substantial number of relevant
communications revealed by the forensic inspection, the only reasonable conclusion
is that, contrary to their affidavits, Carr and Pye made inadequate efforts to locate
responsive communications, failed to preserve them, or refused to produce them.
Carr and Pye have never explained, corrected, or retracted their false, sworn
statements.
41. These false representations are sanctionable under the Court’s inherent
authority, even if not sanctionable as a violation of Judge Lewis’s order under Rule
37(b). The Court has a duty to protect the integrity of the legal process. That includes
taking steps to address false statements made to the Court, both to ensure that the
party making the false statement receives no advantage from it and to deter similar
conduct by other parties in the future. See, e.g., First Bank v. Hartford Underwriters
Ins. Co., 307 F.3d 501, 512 (6th Cir. 2002) (court’s inherent authority “derives from
its equitable power to control the litigants before it and to guarantee the integrity of
the court and its proceedings”); Goodvine v. Carr, 761 Fed. App’x 598, 599, 602 (7th
Cir. 2019) (affirming sanction of dismissal based on false affidavit); Oliver v. Gramley,
200 F.3d 465, 466 (7th Cir. 1999) (same).
42. The remaining question is what sanctions to impose. When choosing
appropriate sanctions, trial courts have broad discretion. See, e.g., Feeassco, LLC v.
The Steel Network, Inc., 826 S.E.2d 202, 210 (N.C. Ct. App. 2019). “The sanction
imposed should be proportionate to the gravity of the offense.” Montano v. City of Chicago, 535 F.3d 558, 563 (7th Cir. 2008); see also Few v. Hammack Enters., Inc.,
132 N.C. App. 291, 299, 511 S.E.2d 665, 671 (1999).
43. The Court concludes that it would not be appropriate to strike Kixsports,
Carr, and Pye’s pleadings. “Dismissals in general are viewed as the harshest of
remedies in a civil case and should not be imposed lightly.” Page v. Mandel, 154 N.C.
App. 94, 100, 571 S.E.2d 635, 639 (2002). Moreover, our appellate courts have
stressed that “the general purpose of the Rules [is] to encourage trial on the merits.”
Batlle v. Sabates, 198 N.C. App. 407, 419, 681 S.E.2d 788, 797 (2009) (citation and
quotation marks omitted). Given the totality of the circumstances, the Court
concludes that other, lesser sanctions are sufficient to address these abuses.
44. First, at trial, the Court intends to advise the jury regarding Kixsports,
Carr, and Pye’s misconduct and to instruct the jury on spoliation of evidence. “The
spoliation doctrine recognizes that where a party fails to produce certain evidence
relevant to the litigation, the finder of fact may infer that the party destroyed the
evidence because the evidence was harmful to its case.” Outlaw v. Johnson, 190 N.C.
App. 233, 244, 660 S.E.2d 550, 559 (2008); see also Red Hill Hosiery Mill, Inc. v.
Magnetek, Inc., 138 N.C. App. 70, 78, 530 S.E.2d 321, 328 (2000); McLain, 137 N.C.
App. at 185, 527 S.E.2d at 717. In other words, the jury will be permitted, but not
required, to draw an adverse inference from the evidence that Kixsports, Carr, and
Pye either deleted or failed to preserve certain text messages and backup files for
mobile devices. See Arndt v. First Union Nat’l Bank, 170 N.C. App. 518, 526–27, 613
S.E.2d 274, 280–81 (2005). 45. Second, some additional discovery is needed to ameliorate the loss of
evidence. See Zimmerman v. Poly Prep Country Day Sch., 2011 U.S. Dist. LEXIS
40704, at *110–11 (E.D.N.Y. Apr. 13, 2011) (allowing additional deposition as
sanction); see also Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of
Am. Sec., LLC, 685 F. Supp. 2d 456, 470 (S.D.N.Y. 2010) (identifying “further
discovery” as potential sanction). Specifically, the Court will permit Defendants to
depose Carr and Pye. Defendants deserve an opportunity to ask Carr and Pye, at a
minimum, about the communications that have been disclosed, the communications
that were deleted, their efforts to preserve evidence, and the statements made in their
affidavits submitted in opposition to the motion to compel in March 2018.
46. Although Defendants have requested additional document discovery, the
Court declines that request. Defendants could have sought a timely extension of the
discovery period before it ended in March 2019. They did not, and when they later
sought to reopen the discovery period after it expired, the Court denied the request
due in part to their unexplained delay. (ECF No. 135.) Allowing additional document
discovery now would unnecessarily delay resolution of this matter. Allowing
Defendants to depose Carr and Pye, on the other hand, both serves to restore
Defendants to the position they would have been in absent the destruction of
electronically stored evidence and also allows the case to move forward without
unreasonable delay.
47. Third, monetary sanctions are in order. Defendants have incurred
substantial costs in pursuing this matter, necessitated by the false statements and other improper resistance of Carr and Pye (and, by extension, Kixsports). Monetary
sanctions are needed to compensate Defendants for their costs, including reasonable
attorneys’ fees, incurred in connection with filing this motion. See, e.g., Pension
Comm., 685 F. Supp. 2d at 471. To the extent Defendants seek additional costs of
discovery, the request is denied.
III. CONCLUSION
48. Accordingly, in the exercise of its discretion, the Court GRANTS the motion
in part and ORDERS as follows:
a. Under the terms of Judge Lewis’s order, Kixsports, Carr, and Pye shall
bear the cost of the forensic examination performed by Reliance. Within 30 days
of the entry of this Order, Kixsports, Carr, and Pye shall reimburse Defendants in
the amount of $51,707.10.
b. The Court DENIES the request to hold Kixsports, Carr, and Pye in
contempt.
c. The Court holds that Defendants shall be entitled to an adverse inference
jury instruction, to be addressed at trial.
d. The Court further ORDERS that Defendants may depose Carr and Pye
individually. These depositions, limited to seven hours each, shall take place
within 14 days of the entry of this Order. Counsel shall work together to identify
mutually agreeable dates and locations.
e. The Court ORDERS that Kixsports, Carr, and Pye shall pay the
reasonable costs and fees incurred by Defendants in pursuing this motion. These costs are set forth in “Group 5” of Exhibit 35 to the Supplemental Affidavit of A.
Todd Sprinkle. (ECF No. 149.1 at 14–18.) Within fourteen days of this Order,
Kixsports, Carr, and Pye may file their objections, if any, to the reasonableness of
these costs. This filing shall not exceed 1,500 words. Defendants may respond to
the objections no later than seven days after they are served with a similar word
limit. The Court invites the parties to stipulate to an appropriate amount and
jointly submit that amount to the Court for its approval.
49. Finally, the parties shall file all post-discovery dispositive motions on or
before November 12, 2019. Response and reply briefs shall be governed by Business
Court Rule 7.8.
SO ORDERED, this the 30th day of September, 2019.
/s/ Adam M. Conrad Adam M. Conrad Special Superior Court Judge for Complex Business Cases