The Fashion Exchange LLC v. Hybrid Promotions, LLC

Background

The Fashion Exchange LLC alleged that Hybrid Promotions, LLC, and several retailers infringed its “Hybrid & Company” trademark by marketing and selling clothing bearing the mark “Hybrid.” The complaint asserted copyright-infringement and unfair-competition claims and sought monetary damages and permanent injunctive relief.

Defendants moved for sanctions under Federal Rule of Civil Procedure 37(e), which governs the loss of electronically stored information that should have been preserved for litigation. They argued that The Fashion Exchange had failed to produce financial statements, sales records, royalty reports, and other materials relevant to its claim for actual damages. They sought terminating sanctions, exclusion of damages evidence, an inference that The Fashion Exchange suffered no damages, or monetary sanctions.

During discovery, The Fashion Exchange produced a short royalty summary but not the underlying records. Its counsel first said that the underlying financial documents would be produced, then said the company did not possess financial statements, and later attributed the loss of royalty-related documents to computer problems. A witness testified that a shared server had failed, or was “fried,” and that the company could not retrieve the documents. Other testimony indicated that The Fashion Exchange had created financial statements and that the royalty summary had been prepared using sales data before the server failure.

Rule 37(e) analysis

The court determined that the lost information should have been preserved because it was relevant to the damages claim. The court also found that The Fashion Exchange failed to take reasonable steps to preserve it and that tax returns or possible records from an accountant would not provide an adequate replacement for the lost royalty and financial data. The threshold requirements for sanctions under Rule 37(e) were therefore satisfied.

Under Rule 37(e)(2), severe sanctions such as dismissal, default judgment, or an adverse inference require clear and convincing evidence that the party acted with an intent to deprive the opposing party of the information’s use in the litigation. The court described the discovery conduct as seriously negligent or incompetent but found insufficient evidence that the server failure was deliberate or that The Fashion Exchange intentionally destroyed the information. The court also found that terminating sanctions and an adverse inference would be disproportionate because the missing records concerned the amount of damages, not liability, and other forms of relief might remain available.

Sanctions and other orders

Under Rule 37(e)(1), the court could impose measures no greater than necessary to cure prejudice caused by the lost information. The court declined to preclude The Fashion Exchange from presenting damages evidence. Defendants could challenge the royalty summary through cross-examination, credibility arguments, and evidence that the underlying records were missing. The court permitted Defendants to present evidence to the jury about the loss and potential relevance of the electronically stored information and about whether the financial documents ever existed. The district judge would determine the scope of that evidence if the case proceeded to trial.

The court imposed monetary sanctions on The Fashion Exchange and its counsel, Scott Zarin, jointly and severally. The sanctions covered Defendants’ fees and costs for preparing a September 27, 2018 letter; half of the fees and costs for attending the October 4 and November 29, 2018 discovery conferences; preparing for and conducting the January 29, 2019 deposition of Marc Hanono; and briefing the sanctions motion. The court found that counsel repeatedly misrepresented the status of document production and failed to take adequate steps to ensure preservation and accurate disclosure.

The court therefore granted in part and denied in part Defendants’ sanctions motion. It denied the requests for terminating sanctions, an adverse inference, and preclusion of damages evidence, while awarding the specified fees and costs and allowing evidence concerning the lost records. It also directed Defendants to file a version of the royalty spreadsheet with the monetary figures redacted and ordered the Clerk to close the sanctions-motion docket entry.