Business Court Turfs a Long-Running Document Production Dispute

In a dispute among the members of a dissolved soccer gear company, the Business Court flashed a “red card” on litigants who professed full compliance with discovery requests but missed that goal by at least several hundred documents. Kixsports, LLC v. Ryan Munn, et al., 2019 NCBC 61, 2019 WL 4766249 (N.C. Super. Ct. Sept. 30, 2019) considered the aftermath of a forensic inspection of electronic devices that unearthed a significant tranche of unproduced documents, and evidence that suggested intentional deletion of responsive materials. See Order and Opinion.

The Business Court inherited a Superior Court ruling (made before a joint Rule 2.1 and 2.2 designation) that had required a forensic analysis of devices based on that court’s finding it was “extremely difficult to believe” that two Kixsports principals, Casey Carr and Stephen Pye, had communicated as little as they professed about the subject matter of the lawsuit. Id. ¶ 6. The court had established a fee allocation arrangement under which the forensic work’s costs would be borne by Kixsports, Carr and Pye if the inquiry uncovered relevant documents or evidence of intentional deletion of such materials. Id.

Takeaways:

• In evaluating the reasonableness of expert fees arising from a forensic investigation, the Court found that the results actually obtained from the analysis were a relevant factor.
• The Court found that technical compliance with a discovery order did not shield litigants from the imposition of sanctions under Rule 37.

A forensic expert’s findings enabled the Business Court to make short work of a determination about which parties should bear the costs of the device inspections. As the Court put it:

“the inspection hit pay dirt.”

Id. ¶ 32.

The defendants moved for discovery sanctions and claimed the inspection unearthed 535 relevant documents, and attached more than 50 to their supporting papers. Id. ¶ 16. In opposition, Carr and Pye contended that the retrieved documents were “a far cry from relevant,” though softened that pitch at hearing “and conceded that some of the documents were minimally relevant, though not significant or important.” Id. ¶ 17.

The Business Court did not weigh in on just how extensive the pool of relevant documents was, but concluded that “many of the communications recovered through the forensic examination are plainly relevant.” Id. ¶ 18. That was enough, under the terms of the initial order, because cost shifting was required if the forensic work turned up communications simply “relevant to the subject matter of this proceeding.” Id. ¶ 20. At a minimum, the Business Court found the identified documents were relevant to the defendants’ fraud and misrepresentation claims, and company valuation issues. Id. ¶¶ 18-19.

The Court also considered the record of unearthed documents and the forensic expert’s findings and concluded that “[t]he evidence here is consistent with intentional deletion.” Id. ¶ 26. The Court noted that a spoliation finding was buttressed by evidence the mobile device backup files on some inspected devices had more likely than not been deleted, and because the targeted devices inexplicably did not contain any of nearly 300 text messages that one of the defendants showed he had exchanged with Carr and Pye. Id. ¶¶ 23-26.

Judge Conrad rejected an argument that forensic investigation fees of approximately $51,000 were excessive, concluding that they were “fair and reasonable” from at least two perspectives: (i) “when compared with the results achieved by [the] inspection,” and (ii) in consideration of the imaging, searching and records management undertaken related to retrieval of 100,000 documents. ¶¶ 32-35.

The Court declined to find Kixsports, Carr and Pye in contempt, noting no “willful noncompliance” with the court order mandating the forensic inspection. Id. ¶ 36. However, the Court found compliance with the discovery order did not shield the non-producing parties from sanctions under Rule 37. In particular, the Court found that Carr and Pye had made false representations to the court in opposing the original motion to compel. Id. ¶¶ 39-41. Moreover, Pye’s representation that he did not “send many emails or text messages,” balanced against the forensic retrieval of 30,000 texts from his devices, resonated with the Court. Id. The Court imposed sanctions of a spoliation jury instruction, additional discovery to redress lost evidence, and attorneys’ fees and costs connected with defendants’ motion.

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