MasterObjects, Inc. v. Amazon.com, Inc.

Background

Amazon sought permission to seek sanctions under Federal Rules of Civil Procedure 37 and 45, including possible termination sanctions, based on alleged misrepresentations, violations of a discovery order, and potential destruction or loss of evidence. The District Court referred the dispute to Special Master Harold J. McElhinny to determine whether the parties had complied with discovery orders and whether spoliation had occurred.

The special master addressed four matters: Amazon’s Rule 37 motion alleging violation of a December 3, 2021 discovery order; Amazon’s allegations of spoliation; evidentiary objections; and motions to seal. The special master ruled on the discovery motion and evidentiary objections, issued findings of fact on spoliation for the District Court’s consideration, and declined to rule on the motions to seal because similar motions were pending before the District Court and the referral did not authorize adjudicating the interests of third parties. Amazon also stated that it was not pursuing, at that time, an independent sanctions motion based on alleged discovery misrepresentations.

Discovery-order violation and sanctions

The December 3, 2021 discovery order required MasterObjects to produce documents from related litigation by December 15, 2021. MasterObjects produced documents under its control from litigation in which its counsel, Hosie Rice, was counsel of record, but conceded that production was late. It did not seek an extension, and the special master found the explanations offered at the hearing unpersuasive. Because the trial date had been continued, however, Amazon suffered no prejudice from the delay.

The special master found a more serious violation involving documents from 15 related proceedings, including patent proceedings before the Patent Trial and Appeal Board and an appeal before the Federal Circuit. MasterObjects had not produced documents held by its patent counsel, Carr & Ferrell LLP. At the hearing, MasterObjects conceded that it had not tried to produce those documents and that the documents were responsive and under its control. The special master also found that MasterObjects had waived an argument that Amazon’s original discovery motion did not cover the patent proceedings because it had not raised that argument earlier.

The special master further questioned whether MasterObjects had searched its own files and all files within its custody and control. He found that MasterObjects’ claimed search effort appeared to refer only to Hosie Rice’s files and that no sworn declaration described a search of MasterObjects’ own files.

The special master granted Amazon’s Rule 37 sanctions motion. He found that MasterObjects violated the discovery order by failing to produce responsive documents and by failing to search its own files and all documents within its custody and control, including documents held by Carr & Ferrell LLP. He ordered production of all documents responsive to every Amazon document request by the close of business on April 8, 2022. Any withheld document had to be identified in a privilege log served the same day.

Under Rule 37, the special master ordered MasterObjects to pay Amazon the attorney fees incurred in bringing the motion, up to $15,000, by April 8, 2022. If the parties could not agree on the precise amount, each could submit a two-page letter and the special master would specify the award.

Spoliation findings

Spoliation means destroying or materially altering evidence, or failing to preserve property for use as evidence in pending or reasonably foreseeable litigation. For physical documents, the special master found that the hard-copy materials destroyed or purged by Hosie Rice were copies of documents stored electronically on the firm’s servers. He found no evidence that a physical document other than a copy of electronically stored material had been destroyed, and stated that spoliation law does not require identical copies to be preserved.

For electronically stored information, the special master applied Federal Rule of Civil Procedure 37(e), which requires proof that information was lost, that the loss resulted from failure to take reasonable preservation steps, and that the moving party suffered prejudice. Additional remedies require intent to deprive another party of the information’s use in the litigation. He found that Amazon had not shown any required element.

The evidence indicated that the data remained on Hosie Rice’s hard drives, although access was blocked by a cyberattack and the attackers demanded a ransom. Even if blocked access counted as loss, the special master found no evidence that Hosie Rice failed to take reasonable preservation steps. He found that the firm had protected its servers to the best level achievable at the time and used consultants to assist with security. He also found no evidence of prejudice to Amazon or an intent to deprive Amazon of evidence. The special master rejected Amazon’s argument that Hosie Rice’s refusal to pay ransom made the firm responsible for spoliation, describing the firm as the victim of a crime.

Evidentiary objections and disposition

The special master overruled Amazon’s objections to statements in MasterObjects’ declarations. He found that the declarations described historical events, had an adequate foundation, and were not hearsay because they were offered to show state of mind and lack of improper intent and to address prejudice.

The order therefore granted Amazon’s Rule 37 sanctions motion, ordered further production and a fee payment by MasterObjects, overruled Amazon’s evidentiary objections, and reported findings that Amazon had failed to prove spoliation. The special master abstained from ruling on the motions to seal. He also noted that the District Court might determine that the order was appealable and that he lacked authority to award sanctions, in which event his reasoning was offered as a recommendation.