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EPAC Technologies, Inc. v. Harpercollins Christian Publishing, Inc.

United States District Court, M.D. Tennessee, Nashville Division

March 29, 2018

EPAC TECHNOLOGIES, INC., Plaintiff/Counter-Defendant,
v.
HARPERCOLLINS CHRISTIAN PUBLISHING, INC., f/k/a THOMAS NELSON, INC., Defendant/Counter-Plaintiff.

          Waverly D. Crenshaw, Jr. Chief Judge.

          MEMORANDUM AND ORDER

          ALISTAIR E. NEWBERN UNITED STATES MAGISTRATE JUDGE.

         What began three years ago as an effort to expedite discovery of electronically stored information (ESI) in this breach-of-contract action by appointing a special master has turned into a quagmire of adversarialism, spanning hundreds of pages of briefing that have passed through the dockets of six district judges and two magistrate judges. Now pending are the objections of Plaintiff EPAC Technologies, Inc. (EPAC) and Defendant Thomas Nelson, Inc. (Thomas Nelson) to the report and recommendation of Special Master Craig Ball, to which responses in opposition, replies, and sur-replies have been filed. (Doc. Nos. 226, 235, 241, 263, 265, 281, 285, 297.) The parties have requested the Court's in camera review of the materials upon which the Special Master's report relies. (Doc. Nos. 320, 321, 350, 351, 352.) The Magistrate Judge has made that review and, for the reasons that follow, ADOPTS IN PART AND REJECTS IN PART the Special Master's report. To the extent that the parties' objections are inconsistent with the findings and conclusions herein, the objections are OVERRULED.

         The essential findings and conclusions made herein are summarized as follows:

1. Federal Rule of Civil Procedure 37(e) as amended on December 1, 2015 applies in this action.
2. Amended Rule 37(e) applies to sanctions for the loss of ESI in this case, but not the loss of physical evidence.
3. The Special Master was authorized to recommend sanctions for the loss of physical evidence and ESI.
4. Thomas Nelson's duty to preserve evidence arose no later than April 18, 2011, and continues to date without interruption.
5. Thomas Nelson's duty to preserve includes the ESI and physical evidence considered by the Special Master.
6. Thomas Nelson had control over EPAC2-printed books and book samples (collectively, “the books”) when its duty to preserve arose.
7. Thomas Nelson negligently disposed of the books after its preservation duty was in place.
8. The books are relevant to claims and defenses in this lawsuit and EPAC is prejudiced by their loss.
9. To remedy the prejudice to EPAC from the loss of the books, the Court orders the curative measure of a jury instruction that Thomas Nelson had a duty to preserve evidence relevant to this litigation, including the books; that it breached that duty by failing to preserve the books; and that the jury may infer that, if available, the books would support EPAC's claims and be adverse to Thomas Nelson.
10. Thomas Nelson did not make reasonable efforts to preserve ESI, including warehouse data[1] and e-mails.
11. Warehouse data showing the transactional history of EPAC-printed books were lost due to Thomas Nelson's negligence and cannot be fully replaced through additional discovery.
12. EPAC is prejudiced by the loss of the warehouse data.
13. To remedy the prejudice to EPAC from the loss of the warehouse data, and subject to revision in light of further proof, the Court orders the curative measure of a jury instruction that Thomas Nelson had a duty to preserve its warehouse data as of April 18, 2011, and that such data, now lost, would have shown whether EPAC-printed books were sold or returned, the quantity and timeliness of EPAC's order fulfillment, and from what EPAC facility the books were shipped. Thomas Nelson is also precluded from offering evidence regarding any customer complaints about EPAC books.
14. Thomas Nelson negligently allowed relevant e-mails that it had a duty to preserve to be purged from its Postini e-mail archive.
15. E-mails purged because of Thomas Nelson's negligence have effectively been replaced or restored through additional discovery.
16. EPAC suffered prejudice because of Thomas Nelson's delay in producing relevant emails.
17. To remedy the prejudice caused by that delay, EPAC may re-depose witnesses on issues reasonably related to e-mails belatedly produced by Thomas Nelson at Thomas Nelson's expense, excluding attorney's fees.
18. Thomas Nelson shall bear 75% of the Special Master's fees and costs. EPAC shall bear the remaining 25%.
19. Thomas Nelson shall pay 50% of EPAC's reasonable costs and attorneys' fees incurred during the Special Master proceedings.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         This lawsuit arises out of a contract dispute between EPAC Technologies, Inc. (EPAC), a printing company, and Thomas Nelson, Inc. (Thomas Nelson), a publisher of religious-themed books and other literature. (Doc. No. 168, PageID# 2433, ¶ 1.) EPAC claims that Thomas Nelson entered into a multi-year contract with it in bad faith, then fabricated reasons to terminate that contract after negotiating a better deal with another printer, Lightning Source Inc. (LSI). (Id. at PageID# 2433-34, ¶¶ 1-3.) According to EPAC, Thomas Nelson's agreement with LSI was reached after Thomas Nelson gave LSI EPAC's confidential pricing information to incentivize a better deal. (Id. at PageID# 2434 ¶ 4.) EPAC claims that the resulting termination of the parties' contract cost it over $25 million in damages. (Id. at PageID# 2435, ¶ 5.)

         The dispute extends back to 2008, when Thomas Nelson and EPAC began discussions regarding EPAC's printing services. (Id. at PageID# 2436-2437, ¶¶ 11-12.) Thomas Nelson hoped to expand its operations and reduce its need for warehouse space by printing smaller batches of its titles as they were ordered; EPAC had recently developed print-on-demand technology that seemed to fit the bill. EPAC and Thomas Nelson entered into non-disclosure agreements and continued discussions through 2010. (Id. at PageID# 2436-2438, ¶¶ 12-17.) In these confidential negotiations, EPAC disclosed the operations of its print facilities, EPAC1 and EPAC2, and its intent to expand its EPAC2 print-on-demand operations to a new site in Fairfield, Ohio, closer to Thomas Nelson's Tennessee headquarters, to meet Thomas Nelson's high-volume demands. (Id. at PageID# 2438-2439, ¶ 18.)

         The parties entered into a Master Services Agreement (MSA) effective August 1, 2010. (Id. at PageID# 2439, ¶ 20.) The MSA was for an initial five-year term that would automatically renew unless either party opted out. (Id. at PageID# 2439, ¶ 21.) EPAC alleges that, at the same time, Thomas Nelson was also negotiating with LSI and that Thomas Nelson continued negotiating with LSI after EPAC began increasing its operations to fulfill the terms of the MSA. (Id. at PageID# 2443-2445, ¶¶ 38-45.) EPAC also alleges that Thomas Nelson improperly supplied information about the MSA and EPAC's pricing to LSI. (Id. at PageID# 2442-2443, ¶¶ 29-36.)

         EPAC alleges that it successfully met all of its obligations under the MSA. (Id. at PageID# 2445-2446, ¶¶ 46-48.) However, on February 3, 2011, Thomas Nelson issued a 60-day cure notice identifying numerous ways in which EPAC was allegedly failing to meet the MSA's requirements. (Id. at PageID# 2446-2447, ¶¶ 49-50.) EPAC terms the concerns raised in the cure notice “bogus and pretextual” and claims that Thomas Nelson's staff thought highly of EPAC's product and its performance. (Id. at PageID# 2447-2448, ¶¶ 50-52.) Nonetheless, EPAC assumed additional costs to address the identified shortcomings and states that, as of March 21, 2011, Thomas Nelson's staff and EPAC agreed that all had been cured. (Id. at PageID# 2448-2449, ¶¶ 54-56.) EPAC delivered a formal notice of remedy and cure to Thomas Nelson on March 31, 2011. (Id. at PageID# 2449, ¶ 58.) On April 6, 2011, Thomas Nelson responded that deficiencies remained and terminated the MSA. (Id. at PageID# 2449-2450, ¶¶ 59-60.)

         EPAC filed the complaint in this action on May 8, 2012 (Doc. No. 1), and amended the complaint on August 3, 2015 (Doc. No. 168). In its amended complaint, EPAC alleged breach of contract, breach of the implied covenant of good faith and fair dealing, unfair competition under the California Business and Professions Code, promissory fraud, fraud based on concealment, unfair and deceptive acts or practices under the Tennessee Consumer Protection Act, and negligence per se. (Id. at PageID# 2453-2463, ¶¶ 74-134.) On Thomas Nelson's motion, the Court dismissed EPAC's claims for unfair competition under California law, violation of the Tennessee Consumer Protection Act, and breach of the implied covenant of good faith and fair dealing. (Doc. No. 196.)

         Thomas Nelson counterclaims that EPAC breached the MSA and committed fraudulent and negligent misrepresentation in the MSA negotiations. (Doc. No. 199, PageID# 3014-15, ¶¶ 24-40.) Thomas Nelson alleges that EPAC overstated its printing capabilities, did not have the necessary resources to meet Thomas Nelson's order demands, and was not capable of producing books that met Thomas Nelson's minimum quality standards. (Id. at PageID# 3010-11, ¶¶ 8, 12.) Thomas Nelson claims that the Fairfield, Ohio plant the parties had agreed would fill Thomas Nelson's orders was not operational by the time the MSA went into effect, that the Fairfield plant never met Thomas Nelson's volume needs and quality standards, and that Thomas Nelson faced higher shipping costs because EPAC shipped products from its New Jersey facility to Thomas Nelson's Tennessee headquarters instead. (Id. at PageID# 3012, ¶¶ 16-17.) According to Thomas Nelson, EPAC was unable to fill Thomas Nelson's orders in the last five months of 2010 and early 2011, forcing Thomas Nelson to obtain product from other printers. (Id. at PageID# 3013 ¶ 20.) Thomas Nelson states that it worked with EPAC throughout the cure period, but that EPAC was never able to meet its essential obligations under the MSA. (Id. at PageID# 2538, ¶¶ 22-23.)

         The parties' discovery issues began early in the litigation. EPAC filed its first motion to compel on December 6, 2012 (Doc. No. 16), seeking, in part, all of Thomas Nelson's internal communications about EPAC, communications with EPAC, and communications with third parties about EPAC and its performance (Doc. No. 17, PageID# 110-13). Magistrate Judge Bryant found that Thomas Nelson had already agreed to provide much of what EPAC sought to discover, but ordered Thomas Nelson to “produce all documents, records or other information relating to communications about EPAC's performance under the agreement, including but not limited to complaints about or deficiencies in EPAC's performance and any other information supporting or relating to Nelson's decision to terminate the Agreement, ” all nonprivileged communications between it and HarperCollins regarding this lawsuit or EPAC's claims, and any complaints it received from customers regarding EPAC's books. (Doc. No. 36, PageID# 289-91.) Magistrate Judge Bryant termed EPAC's motion to compel production from Thomas Nelson regarding its evidence preservation and maintenance of relevant documents and electronic files “premature, ” finding that there was nothing to suggest “that responsive information that once existed is no longer available.” (Id. at PageID# 293.) If that were to change, EPAC could pursue targeted discovery on the issue. (Id.)

         On December 18, 2013, EPAC notified Thomas Nelson by letter that it found the supplemental production made in response to Magistrate Judge Bryant's order deficient. (Doc. No. 68-2.) EPAC stated that Thomas Nelson had not produced responsive internal e-mails or communications regarding its contract with EPAC and argued that “[i]t is not possible that Thomas Nelson does not have responsive internal e-mails and other communications concerning the Agreement.” (Id. at PageID# 546.) EPAC stated that Thomas Nelson also had not produced relevant external communications or any complaints regarding EPAC-printed books. (Id. at PageID# 547-48.) EPAC also noted that it had produced 18, 360 pages of e-mail communications between it and Thomas Nelson, while Thomas Nelson “produced one-tenth of this volume of to/from e-mail.” (Id. at PageID# 549.) EPAC argued that this discrepancy indicated responsive email had been lost and that internal communications, “as to which Thomas Nelson has produced very few documents, ” were also no longer available. (Id.) EPAC also noted that, “[e]ven as to the very few e-mails produced, Thomas Nelson produced versions of such e-mails that were not original to the e-mail sender/recipient, but rather were forwarded, suggesting that Thomas Nelson has not preserved and maintained (much less produced) information relevant to this litigation and responsive to EPAC's discovery requests.” (Id.) Thomas Nelson's response to this letter apparently did not satisfy EPAC's concerns.

         On September 18, 2014, EPAC moved for expedited appointment of a special master. (Doc. No. 68.) As the basis for its motion, EPAC cited deposition testimony from Thomas Nelson employees regarding “the existence of e-mails and other communications, includ[ing] archived emails, that were not searched for or were not produced;” a “recent admission by Thomas Nelson that it destroyed or discarded [] more than 48, 000 allegedly defective books and samples it ordered from EPAC;” and production from LSI of relevant e-mails with Thomas Nelson that Thomas Nelson did not produce. (Id. at PageID# 534-535, ¶ 1.) EPAC sought a special master “to copy electronically stored information of Thomas Nelson, including backup tapes and/or archive records, to identify and produce documents responsive to EPAC's discovery requests, and to report on any spoliation of evidence by Thomas Nelson that may have occurred in this action beyond Thomas Nelson's admitted destruction or loss of books and samples.” (Id. at PageID# 534, ¶ 2.) EPAC identified Texas-based attorney Craig Ball as an experienced special master and offered to pay the cost of his appointment so that Thomas Nelson could “claim no prejudice from the relief EPAC seeks.” (Id. at PageID# 536, ¶ 4.) EPAC reserved the right to shift that cost to Thomas Nelson “if it is determined that there are appreciable omissions in Thomas Nelson's document production or spoliation of evidence beyond the admitted destruction of books and samples that has already occurred.” (Id. at PageID# 536, ¶ 3.)

         Thomas Nelson opposed a special master's appointment, arguing that it should have an opportunity to continue to supplement its production in light of the revealed deficiencies and that any discovery issues could be more expediently handled by the Court. (Doc. No. 88, PageID# 973, 975.) In response to EPAC's notice of the gaps in its production, Thomas Nelson hired an e-discovery vendor to review all e-mail repositories and agreed to produce all relevant information discovered. (Id. at PageID# 973.) Thomas Nelson also agreed that EPAC could redepose any witness for whom unproduced relevant e-mail was found. (Id.) If the Court appointed a special master, Thomas Nelson argued that it should be a local attorney instead of Ball. (Id. at PageID# 977.)

         Magistrate Judge Bryant held a hearing and ultimately determined that the “technical nature of the electronic discovery issues and the time constraints involved” indicated that appointment of a special master was appropriate. (Doc. No. 136, PageID# 2003.) The Court appointed Craig Ball as Special Master on November 18, 2014. (Id.)

         The Court ordered that:

• The Special Master's “primary duty” was “to investigate and advise the Court concerning the nature, extent and sufficiency of the identification, preservation, collection, search, processing and production by [Thomas Nelson] of potentially responsive and relevant information, particularly electronically stored information (“ESI”) as it relates to discovery in this cause;”
• The Special Master's investigation could “entail, among other things, inquiry concerning, and examination of, information systems, review of databases and email stores; forensic acquisition and examination of electronic storage media; data recovery; consultation with Thomas Nelson's current and former employees, counsel and contractors; and travel to Thomas Nelson's data centers and places of business;”
• The Special Master's duties included making a recommendation as to any appropriate sanctions;
• The Special Master was “granted the full rights, powers and duties afforded by Fed.R.Civ.P. 53(c) and may adopt such procedures as are not inconsistent with that rule or with this or other Orders of the Court”; and,
• The Court would decide de novo all objections to findings of fact or conclusions of law made by the Special Master.

(Id. at PageID# 2003-05.)

         In response to the Court's inquiry, the Special Master filed a status report on his progress on February 11, 2015. (Doc. No. 144.) The Special Master estimated that the earliest date by which he could complete his report was April 15, 2015, although he offered this date with “trepidation, ” noting that he would not receive necessary supplemental production from Thomas Nelson until April 7, 2015. (Id. at PageID# 2022.) On June 17, 2015, with no report yet produced, EPAC filed a motion to remove Ball and appoint a substitute special master, stating that it did not believe Ball could complete his duties in a reasonable time frame to maintain a 2016 trial date. (Doc. No. 155, PageID# 2068.) Thomas Nelson opposed the motion, stating that it was working productively with Ball. (Doc. No. 158, PageID# 2162.)

         On July 20, 2015, EPAC moved to stay the Special Master proceedings on grounds that they had “derailed.” (Doc. No. 163, PageID# 2331.) EPAC argued that “the proceedings are infected with a bias that has resulted from the current request for a substitute Special Master” and that communications had become “acrimonious and contentious, ” with impartiality “notably absent.” (Id.) Thomas Nelson opposed the motion, stating that “EPAC's request to replace the Special Master is premised on its dissatisfaction with the Special Master's determinations thus far, not his purported unavailability.” (Doc. No. 169, PageID# 2467.) Magistrate Judge Bryant ordered the Special Master to file an interim status report on his progress to assist in ruling on EPAC's motions. (Doc. No. 170.)

         The Special Master filed an interim report on August 20, 2015, stating that none of the assigned tasks had been completed. (Doc. No. 178, PageID# 2603.) The Special Master summarized his work up to that point, which included a site inspection of Thomas Nelson's headquarters during which he interviewed witnesses and counsel, collected electronic evidence for processing, and “forensically acquired, processed and examined the contents of electronic storage media.” (Id.) The Special Master described his continuing receipt of data from Thomas Nelson and his “shadowing” of its efforts to restore data lost from its e-mail archive. (Id. at PageID# 2606- 07.) The interim report also described an escalating conflict between the Special Master and EPAC regarding the Special Master's role and his work schedule, leading to EPAC's motion for his replacement. (Id. at PageID# 2608-11.) The Special Master estimated completing his report by November 2015. (Id. at PageID# 2613.) EPAC objected to the interim report, contesting the Special Master's description of his work and arguing that the report showed his bias against EPAC. (Doc. No. 182, PageID# 2640.)

         The Special Master filed his Report and Recommendation on January 29, 2016 (Doc. No. 226) and Magistrate Judge Bryant subsequently denied EPAC's June 2015 motion to replace Ball and its July 2015 motion to stay the Special Master proceedings. (Doc. No. 227.)

         The parties filed objections to the Special Master's Report, which are opposed and to which replies in support have been filed. (Doc. Nos. 235, 241, 263, 265, 281, 285, 297.) Magistrate Judge Bryant held oral argument on the parties' objections on July 13, 2016. (Doc No. 304.) After oral argument, the parties submitted additional briefing. (Doc. Nos. 307, 309, 313, 314, 318.) On EPAC's motion (Doc. No. 266), the Court directed the Special Master to file the materials on which his report relied for the Court's de novo review (Doc. Nos. 308, 320). The Court has reviewed these materials in camera.[2] (Doc. Nos. 321, 350, 351, 352.)

         II. THE SPECIAL MASTER'S REPORT AND RECOMMENDATION

         Applying Federal Rule of Civil Procedure 37(e) as amended on December 1, 2015, the Special Master found that Thomas Nelson had negligently or with “gross inattention” failed to preserve physical evidence and ESI relevant to this litigation. (Doc. No. 226, PageID# 3807.) The Special Master addressed three types of evidence that should have been, but were not, preserved: (1) the books, (2) data from Thomas Nelson's Red Prairie Warehouse Management System, and (3) e-mail retained in Thomas Nelson's Google Postini e-mail archive. (Id. at PageID# 3812-19.) The Special Master made the following findings and recommendations.

         A. The Special Master's Findings of Fact 1. Thomas Nelson's Duty to Preserve Evidence and Litigation Hold Implementation

         • Thomas Nelson's duty to preserve evidence began on April 18, 2011. (Id. at PageID# 3809.) The Special Master found that there were “multiple milestone events” that could have triggered Thomas Nelson's duty to preserve evidence. (Id.) However, he found that EPAC's April 12, 2011 preservation demand letter after termination of the MSA was an unequivocal statement that “the matter might be heading to court.” (Id. at PageID# 3810.) The Special Master afforded Thomas Nelson an additional six days from that date to implement the litigation hold. (Id.) The Special Master found Thomas Nelson's General Counsel Frank Wentworth's preservation instruction to George Gower, Thomas Nelson's Vice President of Inventory Management Production, on April 18, 2011, was “a compelling basis by which to conclude that Mr. Wentworth anticipated litigation and thus the need for preservation.” (Id.)

         • Wentworth's instruction to Gower was copied to Thomas Nelson's top management, including Executive Vice President and Chief Financial Officer Stuart Bitting, Vice President Tom Harris, and President and Chief Executive Officer Mark Schoenwald. (Id.) The Special Master found that, “although the legal hold directive of April 18, 2011, was solely targeted to George Gower, General Counsel Wentworth mistakenly believed that it also served as a legal hold directive to Messrs. Bitting, Harris and Schoenwald.” (Id. n.6.)

         • Wentworth was “obliged to inquire of the [information technology (IT)] staff what sources of data might bear on readily foreseeable claims and defenses, and what data and purge settings might apply. It behooved the legal staff to ascertain what potentially relevant data was slated for destruction and take reasonable steps to preserve it, most particularly if it might be the only readily accessible copy of such relevant information held by Thomas Nelson.” (Id. at PageID# 3811.) Wentworth “would be expected to know that putting a legal hold in place requires [] notifying the IT department.” (Id.) There was no timely notice given to the IT department by anyone at Thomas Nelson. (Id.) “Failing to notify IT was failing to act to preserve data[.]” (Id.) By not working with the IT department, Wentworth “didn't overlook the duty to preserve; instead, he failed to implement a preservation plan with a minimally sufficient scope.” (Id.)

         • Wentworth circulated a “broad and highly detailed legal hold directive” to Gower and other Thomas Nelson employees on January 20, 2012, after EPAC provided Thomas Nelson with a draft of the complaint that would initiate this action. (Id. at PageID# 3815.) That notice directed employees “to disable automatic deletion of e-mail, to cease rotation of backup tapes and to create mirror images of personal computers and laptops.” (Id. n.13.) The Special Master characterized this as “a boilerplate form deployed without guidance, follow up or expectation that those to whom it was directed would or could carry out the tasks required.” (Id.) He found that it was “ignored by all recipients.” (Id.)

         2. Retention of EPAC2 Book Samples

         • The Special Master found that, “[o]f tens of thousands of sample books supplied by EPAC to [Thomas Nelson] under the disputed arrangement, not a single instance of a misprinted or damaged book appears to have been retained.” (Id. at PageID# 3811-12.) All of the books “were lost, sold or discarded by [Thomas Nelson] during the pendency of a litigation preservation duty.” (Id. at PageID# 3812.)

         • However, “[t]here are records of e-mail exchanges and witness observations” by which the quality of the books might be established. (Id.)

         • The Special Master “saw no evidence that the disposition of the books was coupled with an intent to deprive EPAC of this evidence.” (Id.) Instead, the Special Master found that “[t]he greater weight of evidence obtained . . . points to the conclusion that tens of thousands of EPAC2 book samples were sold into the marketplace.” (Id.)

         • From the inference that all of the books were sold, the Special Master concludes “that all material defect issues affecting merchantability of the EPAC2 books had been resolved by the start of the cure period.” (Id. at PageID# 3813.)

         3. The Red Prairie Warehouse Management System

         • In 2010 and 2011, Thomas Nelson “employed a supply chain management system called Red Prairie to track the receipt and distribution of books in its warehouse.” (Id.) Red Prairie was managed by Thomas Nelson employee Marvin Maphet. (Id.)

         • Maphet confirmed that the Red Prairie system would have tracked information about each order Thomas Nelson placed, including its contents, the printer, and the disposition of any full carton of books delivered to Thomas Nelson's warehouse. (Id.)

         • The Special Master found that Red Prairie archive data from 2010 and 2011 no longer exists. (Id.) Data regarding incoming and outgoing shipments stayed active in the Red Prairie system for approximately two weeks. (Id. at PageID# 3814.) It was then copied to an archive. (Id.) The archive deleted transactional information after 365 days. (Id.) This purge process “had been running forever and never [was] turned off.” (Id.) Relevant Red Prairie data regarding orders placed before and during the cure period was “readily accessible until well past the April 2011 attachment of a preservation duty in this cause.” (Id.)

         • Maphet stated that he was not advised of a litigation hold on the Red Prairie data until “the first quarter of 2015.” (Id.) He did not preserve any data ...


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