$5M Sanctions Upheld for Counterfeit Headphones

A $5 million sanction by any measure is a stiff penalty.

But a $5 million discovery sanction is about as stiff as they get. The last time somebody abused a discovery that costly, it was when Rose threw the diamonds into the ocean in Titanic.

Mixed metaphors aside, this epic sanction could well sink the defendant in Klipsch Group, Inc. v. ePRO E-Commerce Limited. After all, that was pretty much the point.

"Persistent Discovery Misconduct"

Klipsch sued ePRO E-Commerce for trademark violations, alleging the company sold counterfeit versions of its headphones. During the litigation, a federal judge concluded that the defendant engaged in "persistent discovery misconduct." The abuse included:

• failure to timely disclose documents;
• restricting a discovery vendor's access to electronic data;
• failure to impose adequate litigation holds

As a result, the custodians of electronic data deleted thousands of documents and information. "Significant quantities" could not be recovered.

The plaintiff asked the court for a $2.7 million sanction to compensate its corrective discovery efforts, and requested a $2.3 million bond to preserve its ability to recover damages at the end of the case.

The judge granted the motion, and the defendant appealed. The U.S. Second Circuit Court of Appeals affirmed.

Cost of Discovery

The defendant argued that the $5 million sanction was overly punitive, primarily because they exceeded the value of the case. The plaintiff, in a cross-appeal, said the trial judge should have inferred the defendant destroyed data by not keeping backup copies.

The Second Circuit affirmed the trial court's rulings, including the discovery sanctions. The court emphasized that discovery sanctions should be the same as the unnecessary expense of discovery.

"A monetary sanction in the amount of the cost of discovery efforts that appeared to be reasonable to undertake ex ante does not become impermissibly punitive simply because those efforts did not ultimately uncover more significant spoliation and fraud, or increase the likely damages in the underlying case," the appeals court said.

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