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Global Material Technologies, Inc. v. Dazheng Metal Fibre Co. Ltd.

United States District Court, N.D. Illinois, Eastern Division

September 13, 2016

Global Material Technologies, Inc., Plaintiff,
v.
DAZHENG METAL FIBRE CO. LTD., DAZHENG METAL FIBRE CO. LTD. d/b/a ChuanGuPing a/k/a TRU GROUP, and DONG JUE MIN, Defendants.

          MEMORANDUM OPINION AND ORDER

          Manish S. Shah United States District Judge

         For 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.

         I. Legal Standard

         The 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).[1] 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)).

         II. Background

         1. GMT's Suits Against DNZ

         GMT is 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.

         The latter was ultimately transferred to the Northern District of Illinois. Before the transfer, however, the Chinese trial court entered judgment in the lawsuit there.[2] 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 calculation.

         Back in 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 [208].[3] Discovery thus proceeded on that claim.[4]

         2. GMT's Motions to Compel and for Default

         In 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. [173]. 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.

         Judge 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. [190]. 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, [197] 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.

         As for 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.

         Beginning 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.

         Judge Kim ordered that the flash drive be imaged by a discovery vendor and, once imaged, searched for additional responsive information. [199]. 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 [201] at 3; [206] at 4.

         Based 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. [299]. Defendants opposed the motion and filed their own motion for summary judgment. [367].

         III. Analysis

         A. GMT's Motion for Default Judgment

         Default 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.

         1. Destruction or Loss of Electronic Information

         a. DNZ's Computers

         GMT 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 [197] 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, [245] 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 ...


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