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Inc. v. Southern Illinois Storm Shelters, Inc.

United States District Court, S.D. Illinois

March 6, 2017

4SEMO.COM, INC., Plaintiff,
v.
SOUTHERN ILLINOIS STORM SHELTERS, INC., INGOLDSBY EXCAVATING, INC., and BOB INGOLDSBY, d/b/a BOB INGOLDSBY EXCAVATING, Defendants.

          MEMORANDUM AND ORDER

          David R. Herndon United States District Court

         Pending before the Court is a Report and Recommendation (“the Report”) issued by Magistrate Judge Stephen Williams on February 10, 2017 (Doc. 222). The Report recommends that the Court grant in part and deny in part 4SEMO.com, Inc.'s motion for judgment without trial as sanction for spoliation of evidence (Doc. 192).[1] Specifically, the Report recommends that the Court impose a lesser sanction of prohibiting defendants from opposing plaintiff's evidence relating to its damages for infringement.[2] Here, both parties filed objections to the Report (Docs. 227 & 228). Based on the pleadings and the applicable law, the Court adopts the Report and grants in part and denies in part the motion for judgment without a trial.

         The Court's review of the Report is governed by 28 U.S.C. § 636(b)(1), which provides in part:

A judge of the court shall make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made. A judge of the court may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge. The judge may also receive further evidence or recommit the matter to the magistrate judge with instructions.

Fed. R. Civ. P. 72(b) also directs that the Court must only make a de novo determination of those portions of the report and recommendation to which specific written objection has been made. Johnson v. Zema Sys. Corp., 170 F.3d 734, 739 (7th Cir. 1999). Whether to impose sanctions is a dispositive matter, necessitating de novo review. See Retired Chi. Police Ass'n v. City of Chi., 76 F.3d 856, 869 (7th Cir. 1996) (explaining that “a request for sanctions, regardless of when made, is a dispositive matter”). If no objection or only a partial objection is made, the Court reviews those unobjected portions for clear error. Id. In addition, failure to file objections with the district court “waives appellate review of both factual and legal questions.” Id. Under the clear error standard, the Court can only overturn a Magistrate Judge's ruling if the Court is left with “the definite and firm conviction that a mistake has been made.” Weeks v. Samsung Heavy Indus. Co., Ltd., 126 F.3d 926, 943 (7th Cir. 1997).

         Specifically, Magistrate Judge Williams found:

After careful review of the record, the undersigned finds that Defendants have engaged in sanctionable conduct. The evidence indicates that Defendants failed to preserve any underlying source documentation after October 2014. In fact, it is clear that they continued to engage in the same course of the conduct that they had engaged in prior to the October 2014 hearing. In doing so, the Defendants directly violated an order of the Court, and Defendants' assertion that the Court's October 2014 Order referred only to bank records is disingenuous. The record, highlighted above through the October 2014 transcript, as well as, letters drafted by Defendants' own counsel, indicate that in addition to bank records, the documents that the Court ordered Defendants to produce included purchase orders, emails, and texts from dealers. The Court also specifically advised Defendants of their ongoing duty to supplement after the initial production of documents responsive to the Court's order.
Further, the undersigned does not find credible Robert Ingoldsby's testimony regarding the number of written purchase orders SISS receives. His self-serving testimony that 70% of dealer orders were placed over the phone is belied by the discussion at the October 2014 conference, as well as, the letters from Defendants' counsel representing that “orders' were “discarded” and that “SISS discards all source documents (e.g. purchase orders, invoices, etc.)”. Moreover, Mr. Fielak testified that he always provided written orders one way or another. Mr. Ingoldsby's testimony, however, that Mr. Fielak was the only dealer who sent written purchase orders is simply too convenient and coincidental to be believable, not to mention that it is contradicted by the October 2014 conference and related correspondence.
Accordingly, the undersigned acknowledges that the Defendants reasonably concluded that they were not required to change their practice in this regard to begin saving hard copies of Quickbooks invoices since the invoices were contained in the computer file in the same form in which they were sent out. Nonetheless, it is also clear, however, that Defendants were ordered to discontinue the process of destroying the documents relating to written purchase orders for storm shelters. The undersigned finds Defendants' arguments that they concluded that the only records being destroyed, and the ones referred to in the Court's October 2014 order, were bank records, to be disingenuous and a deliberate attempt to obscure what is an otherwise clear record on this point. This clear record indicates that Defendants continued to destroy underlying documents relating to purchase orders even after being
(1) ordered by the Court in October 2014 to produce these documents; (2) reminded by the Court of Defendants' ongoing duty to supplement these documents; and (3) being instructed by their own counsel to stop destroying these documents. It is clear the defendants recklessly and in bad faith violated a discovery order of the Court, and as such sanctions are appropriate under Rule 37(b).
Though the Defendants acted in bad faith, the undersigned is of the view that a sanction of a default judgment would be disproportionate to the circumstances surrounding the violation. … Here, the prejudice issue weighs against the harsh sanction of a default judgment. First, Defendants' offensive conduct affects only evidence relating to Plaintiff's damages. Defendants' acknowledgment that they continue to use the mark renders this evidence irrelevant to liability. In destroying written source documents, Defendants destroyed evidence as to Plaintiff's damages, and this conduct largely does not affect Plaintiff's liability case. … In addition, the prejudice to plaintiffs' damages case is low. Plaintiff has plenty of evidence as to the amounts of its damages from the Quickbooks files. Though Plaintiff has suffered some prejudice in that it has not been provided the underlying hard copies that went into those digital files, it is not as if Plaintiff has no evidence it can present whatsoever. Though Plaintiff stated that the reason it wanted the source documents was due to its concern that the Quickbooks data had been altered, when given a mirror image of the Quickbooks data, Plaintiff, incredibly, did not have its expert perform an audit of the data to determine whether it had been altered. At this point, the fact that Plaintiff does not know whether the Quickbooks data was altered, is largely Plaintiff's own fault.
It is important to note that Plaintiff never brought any issues concerning the lack of production of source documents to the attention of the Court until it filed the motion at bar on the eve of trial. The undersigned understands that Defendants continually assured Plaintiff that they would provide the discovery, and that the duty was on Defendants to follow the Court's Order and the federal rules and produce the discovery ordered. Plaintiff, however, did not bring this issue to the Court's attention until very late in the ballgame, and should have done so much sooner that when it did. … For these reasons, the undersigned finds that, although Defendants' actions were reckless and in bad faith, to sanction them with a default judgment would be a stretch too far and would provide Plaintiff an underserved windfall. … In making this recommendation, the undersigned is cognizant that he must consider whether lesser sanctions are sufficient, and is aware that Defendants take the position that they essentially have no issue with the sanction recommended today. Defendants assert that they will have to declare bankruptcy regardless of the damages amount. … Nonetheless, the sanction of default is too disproportionate to the circumstances surrounding the ...

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