United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
S. Shah United States District Judge
years, Global Material Technologies maintained a close
business relationship with Dazheng M Fibre Co. (DNZ), a
Chinese company. The relationship eventually disintegrated,
however, and in 2011 GMT sued DNZ in both the United States
and China. The Chinese court entered judgment before the
domestic case was transferred to this district, and several
of GMT's claims were dismissed at the pleadings stage.
But its trade-secrets claim remained, and the parties engaged
in discovery on that issue. Citing repeated abuses of the
discovery process by defendants (which include DNZ's
general manager, Dong Jue Min, and its wholly-owned
subsidiary, Tru Group), GMT moved for a default judgment.
Defendants opposed the motion, and filed their own motion for
summary judgment. For the reasons discussed below, GMT's
motion for default is granted, and defendants' motion for
summary judgment is denied as moot.
district court may sanction a party that has failed to take
reasonable steps to preserve electronically stored
information if that information should have been preserved
during the litigation, but it has been lost and cannot be
restored or replaced through additional discovery.
Fed.R.Civ.P. 37(e). If another party was prejudiced by the
loss of the information, the court may order measures
necessary (but no greater than necessary) to cure the
prejudice. Fed.R.Civ.P. 37(e)(1). Alternatively, if the court
finds that the party that lost the information did so
intentionally in order to deprive the other party of the
information's use, the court may: presume that the
information was unfavorable to the first party; instruct the
jury that it may (or must) presume that the information was
unfavorable to the first party; or dismiss the action or
enter a default judgment. Fed.R.Civ.P.
37(e)(2). Default judgment is an appropriate
sanction where: (1) there is “a clear record of delay
or contumacious conduct”; (2) less drastic sanctions
have proven ineffective; or (3) a party has demonstrated
willfulness, bad faith, or fault. Domanus v.
Lewicki, 742 F.3d 290, 301 (7th Cir. 2014) (quoting
Maynard v. Nygren, 332 F.3d 462, 467 (7th Cir.
2003); In re Thomas Consol. Indus., Inc., 456 F.3d
719, 724 (7th Cir. 2006)).
GMT's Suits Against DNZ
an American company that manufactures and sells metallic-wool
products, including steel fibers. In February 2011, GMT sued
DNZ-a Chinese company with whom GMT had contracted for the
supply of such fibers-in both the United States Court for the
Middle District of Tennessee and the Zhuhai People's
Court of Guangdong Province, China. In the Chinese action,
GMT alleged that DNZ had breached the parties' supply
agreement by shipping to GMT (or to GMT's customers)
rusted product, product that did not otherwise comply with
GMT's purchase orders, and product that GMT had never
ordered. GMT included similar allegations in the United
States litigation, but added claims concerning the purported
use of GMT's confidential information. According to GMT,
it had shared with DNZ the former's pricing strategies,
confidential customer list, and internal operating
procedures-but with the clear understanding that DNZ would
not disclose this information to third parties or use it to
GMT's disadvantage. GMT believed that DNZ had violated
this understanding, and had created in secret a subsidiary,
Tru Group, through which DNZ had attempted to take over
GMT's customer base. GMT named Tru Group and DNZ's
general manager, Dong Jue Min, as additional defendants to
the United States action.
latter was ultimately transferred to the Northern District of
Illinois. Before the transfer, however, the Chinese trial
court entered judgment in the lawsuit there. The Chinese trial
court concluded that GMT had failed to prove there were any
quality issues with DNZ's shipments, and that DNZ also
was not liable for shipping product that did not adhere to
GMT's orders. DNZ had agreed to the return of certain
goods, though, and so was obligated to refund the cost of
those goods. But DNZ's obligations would be offset-and
then some-by GMT's own obligations. The trial court
agreed with DNZ that the American company owed some $1
million in outstanding balances in related costs. The Chinese
court of appeals affirmed in large part the lower court's
judgment, making only small adjustments to the damages
the United States, DNZ sought to enforce the Chinese judgment
and preclude GMT (under principles of res judicata)
from pursuing its claims in the Northern District of
Illinois. That motion was granted as to the recognition and
enforcement of the judgment rendered by the Chinese
intermediate court, and granted as to preclusion of GMT's
contract-based claims, but denied as to GMT's
trade-secrets claim. See . Discovery thus
proceeded on that claim.
GMT's Motions to Compel and for Default
October 2014, GMT filed with Magistrate Judge Kim a motion to
compel the production of materials concerning a Hong Kong
company named Seamarky Industrial, Ltd. . GMT believed
that DNZ had established Seamarky on the sly-much as GMT
believed DNZ had secretly created Tru Group-for the purpose
of taking over GMT's customers without its knowledge. In
response to GMT's discovery requests, however, defendants
denied any connection with Seamarky, and, accordingly, having
any documents concerning that company. Id. at 1-2,
5-6. GMT was skeptical of these answers, because it had
obtained through subpoenas to some of its former customers:
(1) documents linking Seamarky to Alex Chan, a DNZ sales
director; and (2) records tying Seamarky to Delano Mok, a
person previously identified by defendants as a Tru Group
employee. See Id. at 7-8. GMT also believed that
defendants had produced an implausibly small number of
documents, and questioned whether defendants had conducted a
proper search for electronically stored information. See
Id. at 12-13.
Kim granted the motion to compel and ordered the defendants
to describe, first, the efforts they had made to date in
searching for responsive records, and, second, where those
records were being kept. . Defendants explained in a
March 2015 letter to Judge Kim that neither DNZ nor Tru Group
had operated an electronic data network, server, or other
storage system, and that neither had ever hosted a company
e-mail system. See March 10, 2015 Letter to Judge
Kim,  at 2-3. Instead, employees and “independent
sales representatives” were asked to register
individually for DNZ and Tru Group e-mail accounts with a
cloud-based e- mail provider in China. Id. at 2.
Defendants did not in general have access to those accounts;
however, following the production by GMT's third-party
customers of emails referring to Alex Chan and Delano Mok,
DNZ had obtained the log-in information for Chan's
account. Id. at 4. When DNZ accessed that account,
all of the e-mail folders were empty. Id. And Tru
Group was never given access to Mok's email account.
Id. Dong Jue Min had a Yahoo!-hosted e-mail account,
but those messages were likewise inaccessible because Yahoo!
had stopped providing e-mail service to China in August 2013,
and had at that time deleted all of its customers'
accounts. See Id. at 2.
other records, defendants stated that DNZ had issued some
computers, but only to a select number of employees working
in DNZ's “general office” and its warehouse
and finance departments. See Id. at 3. DNZ had not
issued computers to any independent sales representatives
(like Chan); and Tru Group had not issued any computers,
period. Id. at 2-3.
in March 2011, said defendants, they began to wind down their
business operations and, as part of that process, instructed
their employees to preserve in hard copy any electronic
information needed to comply with relevant record-keeping
obligations in China. Defendants said that some electronic
data were also transferred to a USB flash drive. Id.
at 3. According to defendants, after the
“relevant” information was printed or transferred
to the flash drive, DNZ liquidated all of its computers.
Id. In response to GMT's discovery requests
(propounded in November 2011), defendants claimed that they
had searched the flash drive and all physical records.
Id. at 4. The companies had also directed their
remaining employees to search their e-mail accounts for
responsive information, and had asked their former
independent sales agents to do the same. Id. To the
extent responsive records were found, said defendants, they
had saved them to the flash drive or printed and retained
hard copies. Id. at 4.
Kim ordered that the flash drive be imaged by a discovery
vendor and, once imaged, searched for additional responsive
information. . The drive was imaged and reviewed by
defendants, but in an April 2015 teleconference,
defendants' attorney told counsel for GMT that everything
on the drive had already been produced. See  at
3;  at 4.
on, among other things, the lost computers and missing e-mail
evidence, GMT moved for a default judgment under Rule 37(e)
of the Federal Rules of Civil Procedure. . Defendants
opposed the motion and filed their own motion for summary
GMT's Motion for Default Judgment
judgment may be awarded under Rule 37(e) only where a party
that lost or failed to preserve electronically stored
information did so intentionally in order to prevent an
opposing party from using that information in the litigation.
Fed.R.Civ.P. 37(e)(2). Negligent or even grossly negligent
conduct is insufficient to warrant such a severe sanction.
Advisory Committee Note to 2015 Amendment to Fed.R.Civ.P.
37(e). See also Domanus, 742 F.3d at 301
(willfulness or bad faith is required); Aura Lamp &
Lighting Inc. v. Int'l Trading Co., 325 F.3d 903,
909 (7th Cir. 2003) (citing In re Golant, 239 F.3d
931, 936 (7th Cir. 2001)) (same). GMT argues that default is
appropriate here because, among other reasons, defendants:
destroyed evidence (DNZ's computers) and refused to
search other sources of electronic information (Dong Jue
Min's e-mail account) until it was too late to do so;
lied to GMT and to the court about defendants' (lack of)
relationship with Seamarky in order to explain the absence of
records concerning that company; and otherwise obstructed
GMT's discovery of relevant information.
Destruction or Loss of Electronic Information
first points to the liquidation of DNZ's computers, which
defendants say were sold after the businesses started winding
down their operations in March 2011. That was the explanation
given to Judge Kim in March 2015, at any rate. See
 at 3; see also Id. at 1, 3 (stating that DNZ
stopped exporting manufactured products in March 2011, Tru
Group ceased all export sales six months later, and all
manufacturing operations ended in 2013). In September 2015,
however, Tru Group represented (again to Judge Kim) that both
companies were still doing some business and might later
resume full production. See Tru Group's
Opposition to GMT's Motion to Remove
“Attorneys' Eyes Only” Designations,  at
4-5; see also Id. at 5-9 (arguing against disclosure
of defendants' commercial information to GMT employees
because the parties were still competitors). Tru Group
insisted to Judge Kim that nothing in defendants' March
2015 letter had suggested that they ...