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Flextronics International, USA, Inc. v. Sparkling Drink Systems Innovation Center Ltd.

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

February 9, 2017

FLEXTRONICS INTERNATIONAL, USA, INC., Plaintiff/Counter-Defendant,


          Gary Feinerman Judge

         Flextronics International USA, Inc. brought this suit against Aaron Serge Bueno and two companies he founded, Sparkling Drink Systems Innovation Center Ltd. (“SDS-IC”) and Sparkling Drink Systems Innovation Center HK Ltd. (“SDS-HK”) (together, “SDS”), alleging breach of contract, fraud, and other state law claims in connection with a manufacturing agreement. Doc. 19. After the court denied in large part Defendants' motion to dismiss, Docs. 49-50 (reported at 186 F.Supp.3d 852 (N.D. Ill. 2016)), they answered and SDS-HK counterclaimed for more than $280 million, Doc. 52.

         Now before the court is Flextronics's motion for sanctions under Federal Rule of Civil Procedure 37 and the court's inherent power. Doc. 54. The motion asserts that Defendants fabricated an email that purported to alter the terms of the parties' contractual relationship and then attempted to use that email in this litigation. In addition to receiving the parties' extensive briefs, the court conducted a three-day evidentiary hearing. Docs. 135-137. Having carefully considered all of the pertinent materials, the court grants the motion in part and, as a sanction, dismisses with prejudice SDS-HK's counterclaim.


         A. The Parties' Business Dealings

         According to the operative complaint, SDS reached out to Flextronics in 2014 to engage it to manufacture disposable plastic pods for use in SDS's at-home beverage systems. Doc. 19 at ¶¶ 4-5. After a few months of discussions, Flextronics sent SDS a proposal setting forth the prices and quantities of the pods it would produce. Doc. 94 at 11. Thomas Schwab, SDS's CEO, agreed to the proposal on August 1, 2014 during a telephone call with Flextronics employee Rick Shaffer. Doc. 52 at 33; Doc. 94 at 11, 37; Doc. 94-3 at 3. (The record is unclear as to whether Schwab was CEO of only SDS-HK or of both SDS-HK and SDS-IC, but because only SDS-HK is being sanctioned, the point is immaterial for present purposes.)

         According to Flextronics, the parties later decided to formalize their agreement in a written contract called the Interim Agreement. Doc. 19 at ¶ 7. Flextronics emailed SDS a draft version of the Interim Agreement on September 25, 2014 and solicited SDS's input. Doc. 94-3 at 35. SDS discussed the draft internally and made changes. Id. at 44, 48-51. After additional negotiations, Schwab emailed Flextronics on November 19, 2014 to ask it to “please issue this agreement … officially from your side, with signature etc., and send to us for agreement and counter-signature, ” id. at 54; the email referred to a version of the agreement that previously had been attached in the same email chain, Doc. 55-1 at 66-71. Flextronics replied on November 21, attaching what it termed “the finalized and signed contract as you requested” and asking for SDS's countersignature. Doc. 94-3 at 58.

         It is clear from the parties' correspondence that SDS did not send Flextronics a countersigned agreement in 2014. On December 1, 2014, Flextronics sent a list of “open items” to SDS, including a request that SDS “sign off” on the Interim Agreement. Doc. 55-1 at 144-47. On December 15, Flextronics sent SDS an email bearing the subject line “Interim Agreement, ” stating that the “SDS countersigned document has not been returned to Flex, ” and reattaching the version that Flextronics had sent SDS on November 21. Id. at 158-64. On December 17, an SDS employee asked Flextronics to “adjust the agreement to reflect [the] correct pricing and I will get it signed.” Id. at 166. (Later that day, the same SDS employee asked Schwab whether he should “sign or put it off.” Joint Exh. 22. Schwab responded that “[a]s long as nothing else is signed the Interim Agreement applies.” Ibid.). On December 19, Flextronics sent Schwab an updated “open items” list, whose second-highest priority was for “SDS to sign off” on the agreement. Doc. 55-1 at 150, 156. At no point did Schwab or anyone else at SDS say that SDS had already sent back to Flextronics a signed version of the Interim Agreement.

         Business relations soured, and the risk of litigation was apparent to SDS by March 2015. On March 17, Schwab emailed Flextronics a PDF of what he called “a copy of the Interim Agreement signed back in November, ” which had “not agreed” in handwriting next to the agreement's $2 million limitation of liability provision. Id. at 89-96. The document was signed by Schwab as “CEO/Director” of SDS, and his signature was dated November 23, 2014. Id. at 94. Quentin Ducouret, SDS's CFO, was copied on the email. Id. at 89. On March 18, Schwab received an email from Bueno saying, “We need to really prepare ourselves suing them” and “[t]o me it is clear we need now to prepare a war with them. No matter what.” Id. at 60-61.

         The next day, March 19, Schwab wrote to Flextronics, “my assistant just pointed out to me that I did not send you the final, final version of the agreement [on March 17] … . Enclosed therefore the correct document.” Id. at 52. The attached document included not only the “not agreed” notation next to the limitation of liability provision, but also handwriting that crossed out the integration clause, which stated that the Interim Agreement constitutes “the entire agreement between the parties and supersede[s] prior discussions.” Id. at 55. Schwab's signature on the document was dated November 23, 2014. Id. at 56.

         Flextronics reacted to Schwab's emails with confusion and concern. Joint Exh. 46 at 1-2 (March 18 emails among Flextronics employees attempting to “figure out who received the signed copy back from them [in November 2014, as] nobody seems to have it, ” and treating Schwab's mark-ups as “obviously a serious problem”). On March 23, Flextronics employee Harjinder Bajwa replied to Schwab, copying Bueno, stating that Flextronics “definitively … did not receive any version of the Interim Agreement from SDS until last week, ” and asking SDS to forward any “electronic transmission [sent to Flextronics] in late November” that attached the marked-up version of the Interim Agreement. Id. at 98. After receiving Bajwa's email, Bueno instructed Schwab to “resend the one sent to Rick in November and tell them there is no agreement as changes were not accepted.” Joint Exh. 50 at 1.

         Schwab's next move is crucial for purposes of this sanctions motion. On March 24, 2015, Schwab sent Bajwa, copying Bueno and Ducouret, an email (“the March 24 email”) stating, “while I don't really understand why this still matters …, below the respective mail to [Flextronics employee] Rick [Shaffer] at the time.” Doc. 55-1 at 46. Below that text is what purports to be a forwarded email dated November 24, 2014 (“the November 24 email”) from Schwab to Shaffer and Ducouret. Ibid. The November 24 email states, “enclosed the signed agreement with some further amendments [from] our side. Let's discuss further, whenever necessary.” Ibid.

         The next day, March 25, Bueno emailed Schwab a to-do list. Item #3 reads: “Send email to Flex with ‘Proof we sent it already (and your cynical comments©).” Doc. 106-11 at 2. That item was marked as completed. Ibid.

         B. This Litigation

         Flextronics filed this suit on June 3, 2015. Doc. 1. As to the March 24 email and November 24 email, the operative complaint alleges:

SDS has also claimed that it emailed a signed copy of the Interim Agreement to Mr. Shaffer at Flextronics back on November 24, 2014. To attempt to provide evidence of this claim, SDS has forwarded to Flextronics what SDS asserts is an “email” from that date in which Mr. Schwab of SDS sent the “final, final” signed version of the Interim Agreement to Mr. Schaffer. … After a diligent search, Flextronics's technology department has been unable to locate this supposed “email” in Flextronics's email system.

Doc. 19 at ¶¶ 80-81. On the day the complaint was filed, Flextronics sent SDS a letter formally terminating the Interim Agreement. Joint Exh. 55 at 1. Citing the November 24 email, SDS's response to the termination letter maintained that there was no Interim Agreement for Flextronics to terminate: “Before terminating something not existing, Flextronics should refer to the exchanges between Tomas Schwab and Rick Shaffer on November 24th 2014 and between Tomas Schwab and Harjinder Bajwa in the period March 19th 2015 to March 24th 2015.” Ibid.

         SDS produced a copy of the November 24 email in discovery, but only as it appeared within Schwab's March 24 email. Doc. 55-1 at 46. SDS notified Flextronics that it could not find the November 24 email in Schwab's or Ducouret's email accounts or otherwise locate the email in its native format. Id. at 224, 268. Flextronics's searches for the email on its own server turned up empty as well. Doc. 59.

         Flextronics then issued a request under Rule 36 for SDS to admit that the November 24 email was fabricated. Doc. 55-1 at 221. SDS responded with a denial on January 4, 2016. Id. at 221-22. SDS's counsel insisted that the email was authentic in communications with Flextronics's counsel on January 8, 2016, id. at 225 (“SDS responded to Mr. Shaffer's draft interim agreement in November 2014”), January 19, 2016, id. at 272 (“[H]ad Flextronics preserved and investigated its SMTP server logs, then these records would now show that Mr. Schwab sent, and Mr. Shaffer received, the November 2014 email.”), and January 26, 2016, id. at 227 (“[P]lease allow me to be clear: … Mr. Schwab did not fabricate any emails.”).

         On March 1, 2016, the parties agreed that Flextronics would not seek a forensic examination of Schwab's computers in exchange for Schwab's preparing a declaration and giving a limited deposition. Id. at 182-84. In his March 7 declaration and March 10 deposition, Schwab maintained that the November 24 email was legitimate and provided a detailed description of how he inserted the November 24 email into the March 24 email. Id. at 5, 102-07, 111-27. At the time he executed that declaration and gave that deposition, Schwab was SDS's CEO. Id. at 102, 110.

         By that point, Schwab's and SDS's explanations of how he created the emails had evolved considerably. Initially, SDS told Flextronics that the native version of the email sent on November 24 was lost when Schwab's laptop crashed in early 2015. Id. at 224, 268. According to this version, Schwab copied and pasted the November 24 email into the March 24 email from a “bounce-back” version of the November 24 email that he had attempted to forward to Flextronics employee Alexandra Hansen on November 25. Id. at 225, 267. SDS said that it could not find this bounce-back version (also called a “non-delivery report”) on Schwab's new laptop because the email server,, automatically deleted it from his junk mail folder. Id. at 268.

         SDS's story later changed from one in which the November 24 and 25 emails were lost due to a computer crash and automatic deletion by the email server to one in which Schwab deleted them intentionally. In his declaration and deposition, Schwab swore that he forwarded the bounce-back from his home computer to his new laptop, id. at 105, 115, but that there was no trace of the bounce-back or the forward of the bounce-back on either device because he had deleted them before the litigation began, id. at 107, 118-20. According to this version, Schwab deleted the November 24 email and the November 25 forward of the email “to keep [his] email folders clean.” Id. at 103, 123. Yet SDS produced an email with the text of the November 24 email that Schwab sent to himself on March 23, 2015. Doc. 94-3 at 104. Schwab explained that this March 23 email was a “‘test' email to verify that the November 24th Email looked the way it should” after he pasted it from the bounce-back message. Id. at 7.

         Flextronics retained Daniel Roffman of FTI Consulting “to provide forensic analysis and expert opinions” regarding the November 24 email's authenticity. Doc. 55-1 at 4. Roffman and his team “set up numerous testing machines and purchased an email account on the same server that Mr. Schwab used at the time he allegedly sent the Nov. 2014 email”; “contacted the technical support for Mr. Schwab's email provider and asked questions about their bounce back messages”; “examined ...

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