MasterObjects, Inc. v. Amazon.com, Inc.

6 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

10 MASTEROBJECTS, INC., 11 Plaintiff, No. C 20-08103 WHA 12 v.

13 AMAZON.COM, INC, SPECIAL MASTER’S ORDER AND REPORT 14 Defendant.

17 Amazon sought leave to file a motion, pursuant to Fed. R. Civ. P. 37 and 45, for 18 sanctions against MasterObjects, up to and including termination sanctions, for 19 misrepresentation, violation of the discovery order and “potential spoliation of documents.”

20 (Dkt. No. 244.) On February 8, 2012, the District Court referred the dispute to the undersigned 21 “to determine the extent to which the parties faithfully complied with the pertinent discovery 22 orders and whether any spoliation has occurred.” (Dkt. No. 256.)

24 Pursuant to that order, I permitted full briefing and held an extensive hearing on March 9, 25 2022. As a result of that briefing and hearing, and as I analyze the arguments, I have four 26 matters before me: 1) a Rule 37 motion alleging violations of a Discovery Order I issued on 27 December 3, 2021 (Dkt. No. 190); 2) a motion alleging potential spoliation; 3) evidentiary Motions to Seal supported, in at least one instance, by the appearance of a third party. In this Order and Report, I do the following: 4 1) Rule on the Rule 37 motion for violation of my order and sanctions. As I 5 understand the parties’ previous stipulation and the Court’s subsequent Order, 6 this is a “discovery motion” that I have jurisdiction to decide, without the right 7 to appeal. This motion should have been filed before me in the first instance.

9 2) Issue a report on my findings of fact regarding the allegations of spoliation.

10 While this is also a Rule 37 motion, see infra., I have been asked expressly to 11 report, not to rule.

13 3) Rule on the evidentiary objections. Obviously, in order to decide a motion and 14 issue a report, it was necessary to determine what, if any, evidence was 15 admissible, and 17 4) Abstain from ruling on the Motions to Seal. I do this for two reasons. First, 18 there are similar motions pending before the District Court and there is a 19 strong interest in consistent rulings. Second, I have no stipulation or referral 20 that would allow me to adjudicate the interests of parties other than the 21 plaintiff and defendant.

23 Finally, I note that at the hearing both parties stated that they had no objection to 24 proceeding as I have just described. Tr. 8:2-5. In addition, Amazon confirmed that it is not 25 pursuing, at this time, an independent motion seeking sanctions for alleged misrepresentations 26 during the discovery process. Tr. 10:17-11:2.

1 MOTION RE ALLEGED VIOLATION OF DISCOVERY ORDER 3 On December 3, 2021, I issued an order granting an Amazon motion to compel. I ordered MasterObjects to produce documents from related litigation in response to certain Amazon Requests for Production. I noted that “related litigation tends to be highly relevant to issues of validity, infringement and damages in patent litigation.” I ordered production to take place no later than COB on December 15, 2021. [At the hearing on that motion, I had indicated my likely ruling and had encouraged MasterObjects to begin the production process.]

10 From the record, it appears that MasterObjects has produced all of the documents 11 responsive to my order, under its control, from litigation in which counsel in this case, Hosie 12 Rice, was counsel of record. However, MasterObjects concedes that the production that was 13 not completed by the deadline set by my Order. MasterObjects never sought to extend the 14 production deadline, it simply failed to comply with it. No excuse for the late production was 15 offered in sworn declarations. The explanations offered for the first time at the hearing were 16 not compelling. Thus, I have concluded that MasterObjects has violated the Discovery Order 17 by its late production. However, given the continuance of the trial date, Amazon has suffered 18 no prejudice by the late production.

20 The more serious issue concerns responsive documents in the custody and control of 21 MasterObjects that still have not been produced. In its moving papers, Amazon lists 15 specific 22 related litigations. King Decl., Par. 3 (Dkt. No. 269-1.) These matters include two IPR 23 proceedings before the PTAB and one IPR appeal before the Federal Circuit. The IPR 24 proceedings and appeal involve the ‘024 patent, a patent in suit in this case, and the ‘073 patent 25 a patent and grandparent of two other patents in suit in this case. By any reasonable definition, 26 these matters are “related litigation,” subject to my Discovery Order. Amazon expressly calls 27 out the failure to produce documents in the possession of MasterObjects’ IPR counsel as a 2 In its opposition, MasterObjects simply ignores these matters. They are not mentioned anywhere in its brief (which refers to ten previous litigations rather than 15), see MasterObjects Responsive Brief at 1:3-8, or in any of its supporting declarations. At the hearing, when pressed, MasterObjects conceded that it had made no effort to produce documents held by its IPR counsel, Carr & Ferrell LLP, arguing that this was justified by protective orders and the prosecution bar. Eventually, however, counsel was forced to concede that the document requests and my Order were directed to MasterObjects itself, not to Hosie Rice, and that the documents were responsive and under the control of the client. At that point, 10 MasterObjects argued, for the first time, that Amazon’s original discovery motion did not seek 11 documents from the IPR proceedings. As noted, however, the Discovery Order referred 12 broadly to all related litigations. Moreover, having failed to raise its new argument in any 13 pleading at any time, MasterObjects has waived it.

15 This clear violation and failure to produce documents causes me to question the scope of 16 MasterObjects entire search for responsive documents. In its opposition brief, MasterObjects 17 states that it has spent “hundreds of hours looking for responsive documents.” Hosie Decl., Par.

18 2. (Dkt. No. 277-1.) In context, however, this appears to refer exclusively to searches of the 19 Hosie Rice files. There is no sworn declaration of any search of files maintained by 20 MasterObjects itself. And obviously, if MasterObjects has not searched entire files, whether its 21 own or of counsel, the search has failed to look for the universe of documents responsive to 22 any document request. The failure is not limited to the documents called out in the Discovery 23 Order.

25 For the reasons set out above, Amazon’s Motion for Sanctions under Rule 37 is 26 GRANTED. I find that MasterObjects has violated the December 3, 2021 Discovery Order by 27 1) failing to produce responsive documents covered by the Order and 2) by failing to make search of its own files AND all documents in its custody and control, including, but not limited to, the files of Carr & Ferrell LLP, and to produce all documents responsive to every Amazon document request, as required by Rule 26(e)(1), Fed. R. Civ. P. Production shall take place no later than COB on Friday, April 8, 2022. If any document is withheld from that production, a privilege log describing the document and the claim for privilege shall be served on the same day.

8 SANCTIONS 10 Under Rule 37(a)(5)(A), if the court grants a motion to compel it must require the losing 11 party to pay the prevailing party’s attorney fees unless the losing party’s position was 12 “substantially justified.” Under Rule 37(b)(2)(A), when a party has failed to obey a Discovery 13 Order, the court may issue additional sanctions, up to and including termination sanctions.

14 Here, MasterObjects did not present ANY defense for the failure to produce, much less one 15 that is substantially justified. Frankly, the complete failure of MasterObjects to respond to, 16 much less to defend, its failure to produce IPR documents is striking. Thus, I feel compelled by 17 Rule 37 to award attorney’s fees to Amazon.

19 Having said this, I note that Amazon has a corresponding problem. As I will explain in a 20 moment, Amazon has now, on two occasions before me, taken relatively routine discovery 21 disputes and attempted to re-package and escalate them into accusations of serious ethical 22 breaches by opposing counsel. [I am aware that there are two similar motions pending before 23 the District Court, one filed by each side. I have reviewed neither of those motion in detail and 24 express no view about either of them.] In each case before me, these serious accusations have 25 proven to lack any factual basis. In each case, rather than withdraw the accusation in the 26 absence of evidence, Amazon has chosen to double down by making novel legal arguments 27 that are thin to say the least. The effect of these motions has been to create or elevate personal by awarding fees. This is a particularly cogent factor here, because two motions are intertwined and have been briefed and argued together.

4 After due consideration, pursuant to Rule 37(a)(5)(A), MASTEROBJECTS is ORDERED to PAY Amazon its fees in bringing the current motion, up to a total of $15,000.00, on or before April 8, 2022. If the parties cannot agree on the precise amount, they may each submit a two-page letter to me on that date and I will specify the award.

9 A closing note, the District Court may conclude that this order is, in fact, appealable and 10 that I do not have jurisdiction to award sanctions. If I have exceeded my jurisdiction, I offer 11 my reasoning to the Court as a recommendation.

13 REPORT ON ALLEGATIONS OF SPOLIATION 15 EVIDENTIARY OBJECTIONS 17 Much of the factual history relevant to the motion is set out in sworn declarations filed by 18 MasterObjects. Amazon has objected to key statements in these declarations on grounds of 19 improper lay opinion, lack of foundation and hearsay. (Dkt. No. 286-2.) MasterObjects has 20 filed no written opposition. I have considered these objections. They are OVERRULED. I find 21 no opinion in plaintiff’s declarations, much less expert opinion. The declarations contain 22 factual accounts of historical events, in each case supported by an adequate foundation that 23 shows how each declarant became aware of the facts. The declarations are not hearsay. They 24 are offered to prove the state of mind and lack of improper intent of the Hosie Rice firm and to 25 disprove prejudice to Amazon. Amazon concedes that state of mind, intent and prejudice are 26 key areas of inquiry in a case of alleged spoliation. Tr. 16:9-18:8.

1 FACTUAL BACKGROUND 3 Sometime prior 2010, Hosie Rice digitized all of its files. (Hosie Decl., Par. 2) (Dkt. No. 277-1.) In 2011, the firm moved to the TransAmerica building, a secure location. (Carroll Decl., Par. 2.) (Dkt. No 277-11.) Since 2008, the firm has contracted with Northwest, a computer consulting firm based in San Francisco. (Shaw Decl., Par. 4.) (Dkt. No. 277-7.)

7 Northwest maintains the firm’s servers, computers and anti-virus protection. (Bogert Decl., Par. 2.) (Dkt. No. 277-12.) On or about December 9, 2020, despite using state-of-the-art cybersecurity protections, the firm was attacked by hackers. (Bogert , Par. 4.) The hack 10 rendered all the files/mailboxes inaccessible without a recovery key set by the attackers.

11 (Bogert, Par. 7.) The hackers demanded a ransom before unlocking the encrypted data. (Hosie, 12 Par. 11.) Hosie Rice has contacted the FBI and its own insurer. Both the FBI and the insurer 13 advised them not to pay the ransom. (Shaw, Par. 11-12.) Hosie Rice has not paid the ransom.

14 Amazon has not offered to pay the ransom. The firm and its consultants have spent hundred of 15 hours attempting to restore the data on its servers with some success. (Shaw, Par. 13.)

16 Everything prior to the final months of 2016 has been lost. (Id.) 18 From time to time, Spenser Hosie would request hard copies of electronically stored data.

19 Since 2010, he (or his legal assistants) have printed tens of thousands of pages of documents 20 for witness files, topic files, pleading binders, etc. (Carroll, Par. 3). All printed documents were 21 duplicates of electronically stored material. (Carroll, Par. 4.) When cases resolved, the hard 22 copy files were purged. (Id.) Some litigation was subject to protective orders that required the 23 Hosie firm to delete the confidential or highly confidential information of other parties. (Id.) If 24 the protective order permitted the Hosie firm to maintain an archival copy of confidential 25 information, that copy was maintained electronically on the firm’s servers. (Hosie, Par.6).

27 During this litigation, Hosie has written that his firm had no duty to retain archival copies resolution,” (King Decl., Exh. 37), and “we purge produced docs after the cases settle.” (King Decl., Exh. 42).

4 FINDINGS OF FACT 6 PHYSICAL DOCUMENTS 8 “Spoliation refers to the destruction or material alteration of evidence or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable 10 litigation.” Micron Technology, Inc. v. Rambus, Inc., 645 F.3d 1311, 1320 (Fed. Cir. 2011), 11 quoting Silvestri v. General Motors Corp., 271 F.3d 583, 590 (4th Cir. 2001). The Ninth Circuit 12 applies a three-part test which requires a party seeking sanctions for spoliation to establish “1) 13 that the party having control over the evidence had an obligation to preserve it at the time it 14 was destroyed; 2) that the records were destroyed ‘with a culpable state of mind’; and 3) that 15 the evidence was ‘relevant’ to the party’s claim or defense such that a reasonable trier of fact 16 could find that it would support that claim or defense.” Apple Inc v. Samsung Electronics Co. 17 Ltd., 888 F. Supp. 976, 989-90 (N.D. Cal. 2012) (Koh, D.J.), quoting Residential Funding 18 Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 107 (2d. Cir. 2002.)

20 The parties agree that MasterObjects duty to preserve documents arose in 2011.

22 The evidence in this record is that all physical documents in the possession of Hosie 23 Rice, and particularly, any hard copy that was destroyed, “pruned,” or “purged” was a copy of 24 a document that was stored electronically on a Hosie Rice server. There is no evidence, in this 25 record, of any physical document, other than a copy of an electronically stored document, 26 having been destroyed. The spoliation doctrine does not require a party to maintain identical 27 copies. Reinsdorf v Skechers USA, 296 F.R.D. 604, 628 ( C.D. Cal. 2013).

1 ELECTRONIC DATA 3 Spoliation of electronically stored information is governed by Rule 37(e), Fed. R. Civ. P..

4 [Amazon did not cite Rule 37 in its opening brief.] This rule requires that electronic information have been lost, that it have been lost because a party failed to take reasonable steps to preserve it, and that there has been prejudice to the moving party. The rule provides for additional remedies if the accused party “acted with the intent to deprive another party of the information’s use in the litigation.” I find that no element of this test has been shown by evidence in the record.

11 At the most technical level, there is no evidence that any electronically stored 12 information has been “lost.” The evidence is that the data still exists on the hard drives. While 13 access has been blocked, it appears that the data still exists and can be accessed if a key is 14 provided or a technological work-around is discovered in the future.

16 Even if a denial of access is construed to be a “loss,” there is no evidence in this record 17 that the loss occurred because Hosie Rice failed to take reasonable steps to preserve it. On the 18 contrary, the uncontradicted evidence is that Hosie Rice protected its servers to the best level 19 achievable at the time and employed knowledgeable consultants to assist in that effort. This 20 makes complete sense since the servers contained valuable information in addition to the 21 electronic documents at issue in this motion. Failure to take reasonable steps to preserve is a 22 critical, basic element of what Amazon was required in order to prove spoliation. Even had I 23 granted Amazon’s evidentiary objections, Amazon has failed to advance any affirmative 24 evidence of its own to support its claim.

26 There is no evidence in this record of prejudice to Amazon.

1 As an initial matter, Amazon takes the position that the issue of prejudice was not before me and that Amazon had the right to reserve its showing of prejudice until a subsequent proceeding before the District Court. Tr. 18:14-21:4. Given the wording of Rule 37, I find that position untenable.

6 On the issue of prejudice, Amazon cites my previous statement that evidence of prior litigation is “extremely relevant,” but takes my statement out of context. Relevant for the purpose of permitting discovery is not the same as showing that a particular document would have been relevant to the issues that are germane to a particular case. Much information has 10 been produced pursuant to my Order. There is no evidence that any of it has been particularly 11 useful. There is no evidence that any of the documents will ever see the light of day in this 12 case. They do not appear to have been used in the claim construction pleadings. Rather than 13 affirmative evidence of prejudice, Amazon falls back on the “we can’t know what we don’t 14 know” argument. Amazon, and this Court, will never know for certain if any of the blocked 15 information would have been important in this case. But that argument cannot survive the 16 adoption of Rule 37(e). The rule requires affirmative proof of prejudice in the specific 17 destruction at issue. If Amazon’s argument were valid, prejudice would exist every time a 18 document was lost.

20 Lastly, there is no evidence that Hosie Rice acted with an intent to deprive Amazon of 21 evidence. Hosie Rice is the victim of a crime perpetrated on it by a hostile actor entirely 22 unrelated to this litigation, not a spoliator.

24 Faced with this total and utter failure of proof, Amazon has not withdrawn its accusation.

25 Instead, it seeks to create a new kind of spoliation, a duty to ransom information stolen by 26 another. Amazon argues that Hosie Rice “lost” its data base not because it was hacked but 27 because it refused to pay the ransom. Even if this argument could be twisted to fit the language advice, even if one presumes (without any evidence) that paying a ransom in bitcoin to an unknown hacker would have succeeded, there is no logic or beneficial public policy in compelling a crime victim to pay ransom to a criminal in order to avoid being labeled a spoliator. Amazon cites Williams v Ross, 167 Cal. App. 4th 1215 (C.A. 2d 2008) in support of its position. The case is inapposite. It involves a legal malpractice case between one Williams and his former attorneys. Exercising his right under California law, Williams demanded the return of his case file from the attorneys he intended to sue. He reviewed the file to copy documents favorable to his case before putting the entire file in storage. He then failed to pay storage fees, ignored several warnings and sat by while the storage company disposed of the 10 files. In that case, of course, the loss of the documents was directly caused by Williams. He 11 entered into the storage contract, broke it after collecting his own favorable evidence and failed 12 to take reasonable steps to preserve the documents. Here, to repeat, the Hosie Rice firm has 13 been the victim of a crime. If the data has been lost, it has been lost despite best efforts to 14 preserve it.

16 Throughout Amazon’s papers, the spoliation accusation is stated conditionally. “If Hosie 17 Rice committed spoliation, he should be sanctioned.” When the time came to prove the 18 condition, however, Amazon came up empty.

21 IT IS SO ORDERED.

23 Dated: 03/13/2022.

25 /s/ Harold McElhinny Harold J. McElhinny 26 SPECIAL MASTER