The Fashion Exchange LLC v. Hybrid Promotions, LLC

Background

The Fashion Exchange LLC challenged Magistrate Judge Ona T. Wang’s orders concerning discovery and sanctions. It objected to the denial of requests to take another deposition of Jarrod Dogan and to reopen discovery to depose Brad Shapiro and Gavin Dogan. Fashion Exchange also objected, along with its counsel Scott Zarin, to sanctions imposed after Fashion Exchange failed to properly produce financial records and records concerning royalties from Fame Fashion. Defendants separately objected to the magistrate judge’s refusal to impose more severe sanctions.

Discovery Rulings

Applying Federal Rule of Civil Procedure 72(a), which permits a district judge to change a magistrate judge’s non-dispositive order only if it is clearly erroneous or contrary to law, Judge Sidney H. Stein denied Fashion Exchange’s objections. He held that Judge Wang properly treated Fashion Exchange’s detailed January 2019 letter as a formal motion to compel depositions. Fashion Exchange had not shown that the defendants’ designated witnesses were unprepared or had testified inadequately.

The court also upheld the denial of Fashion Exchange’s request to reopen discovery to depose Brad Shapiro and Gavin Dogan. The requested depositions concerned willfulness, which Fashion Exchange said was important to its damages case, but the court found that the request sought the same relief previously denied for the same reasons. The court further upheld the denial of reconsideration concerning a second deposition of Jarrod Dogan because Fashion Exchange was attempting to present a new argument that it had not made in its original motion.

Sanctions Ruling

During discovery, Fashion Exchange did not properly respond to requests for financial statements and royalty records. It produced only a short summary, later said that relevant documents had been lost because of computer problems, and provided information that defendants said conflicted with its tax returns. Its witnesses testified that the company had maintained financial records and that a shared server had failed.

Judge Wang had granted in part and denied in part defendants’ sanctions motion under Federal Rule of Civil Procedure 37(e). She allowed defendants to present evidence at trial about the alleged loss of damages-related electronically stored information and awarded attorneys’ fees and costs for work caused by the discovery problems. She denied sanctions under Rule 37(e)(2), however, because the evidence did not sufficiently show that Fashion Exchange intentionally destroyed the documents to prevent defendants from using them. Judge Wang also imposed sanctions on Scott Zarin based on repeated misrepresentations about document production and, as the district court noted, relied additionally on 28 U.S.C. § 1927 concerning excessive costs.

District Court’s Analysis of the Sanctions Objections

Judge Sidney H. Stein denied Fashion Exchange’s and Zarin’s objections. He concluded that they had fair notice that Rule 37(e) sanctions were being considered and of the conduct supporting the sanctions. He also held that defendants had adequately shown that the financial documents existed and that defendants were prejudiced because they incurred expenses trying to obtain the missing information and pursuing the sanctions motion. The court rejected the argument that an attorney could not be sanctioned under Rule 37(e)(1), noting that Judge Wang also had authority under 28 U.S.C. § 1927 to hold Zarin responsible for excessive costs.

The court likewise denied defendants’ objections. It held that Judge Wang used a permissible standard when deciding whether Fashion Exchange intended to deprive defendants of the documents. Although Fashion Exchange had been grossly negligent and irresponsible in preserving and producing records, the district court agreed that the evidence did not require a finding of intentional destruction. The court therefore declined to impose an adverse inference instruction or prevent Fashion Exchange’s witnesses from testifying about lost profits or royalties.

Disposition

The court denied the parties’ objections and declined to modify or set aside Judge Wang’s November 15, 2019 discovery order and December 16, 2019 sanctions order.