DIANE J. HUMETEWA, District Judge.
This matter is before the Court on several Motions. Defendant Accurate Chemical Acquisition Incorporated ("ACS") filed a Motion to Set Aside the Default (Doc. 230). Plaintiffs filed a Response and ACS filed a Reply (Docs. 245 and 250). Plaintiffs filed a Motion for Additional Sanctions (Doc. 225). Defendants ACS and Troy Clawson, and Intervenors
Relevant to the issues here, the Court found the following in its Order on the Motion for Sanctions. (Doc. 222). In early June 2015, Clawson left Swisher to join ACS as its senior business development executive. (Doc. 92 at 12-13). Shortly after Clawson joined ACS, ACS President, Bradley Zall ("Zall"), issued Clawson a letter warning that he was prohibited from using Swisher's confidential information and soliciting Swisher's customers. Clawson signed this letter. (Doc. 92 at 14-15). As the senior business development executive for ACS, Clawson's main objective was to develop business for ACS. (Doc. 92 at 16). In light of that role, Zall asked Clawson to prepare a plan to develop ACS's business, which Clawson did. (Id.)
Early in this case, Plaintiffs sought a preliminary injunction to enjoin Defendants Clawson and ACS from soliciting any Swisher employee for two years and from using or disclosing any information Clawson had gathered, prepared, or assembled while employed by Swisher. (Doc. 21). Defendants objected, stating that the application for preliminary injunction was an extraordinary request that was completely without merit.
On or about April 26, 2016, Defendants produced a copy of a June 11, 2015 email from Clawson to Zall, along with printouts of two documents which were attached to Clawson's email: (1) the "Accurate Northern Arizona Plan.docx," and (2) the "Accurate Phoenix Arizona Plan.docx." (Doc. 50). The Plans showed that Clawson's Affidavit, in which he stated that he had not "identified any Swisher customers that ACS should go after" was patently false. (Id.) In fact, Defendant Clawson emailed Zall detailed lists of "customers that we need to concentrate on," identifying approximately 129 Swisher customers, customer account values, who to contact to solicit the customers, customer buying history, the identities of Swisher employees who managed the customer relationships, and additional confidential information. (Id.) Notwithstanding the production of the Northern Arizona Plan and the Phoenix Plan, Defendants stated that "[a]lthough Clawson's email to Zall stated that he would `work on Southern Arizona tomorrow,' Clawson
On April 27, 2016, about eight months after Clawson executed the original Affidavit, Clawson filed a "Notice of Errata,"
(Doc. 42-1, ¶17). Notably, the "corrected" Affidavit omitted the statement "nor have I identified any Swisher customers that ACS should go after." (Id.) Exactly one week later, Mr. O'Loughlin and the Quarles & Brady law firm, previously attorneys for ACS, moved to withdraw from the case. (Doc. 43). The Court granted that Motion, and David Barton and Katya Lancero of BurnsBarton became counsel of record for Defendants ACS as well as Clawson.
On June 2, 2016, Plaintiffs filed their first Motion for Sanctions. (Doc. 48). The Motion alleged that the July 31, 2015, Affidavit filed with the Court and signed by Clawson was false in a substantial manner. The Motion alleged that Defendants committed a fraud on the Court by filing a perjured Affidavit, and that Defendants attempted to cover up their fraud by filing a revised Affidavit as a "Notice of Errata." (Id.) Moreover, Plaintiffs alleged that Defendants attempted to shield the new information from the Court by failing to disclose that the original Affidavit was being replaced by one that was substantially different. (Id.) Plaintiffs' Motion sought a negative inference jury instruction regarding the alleged perjury and an order precluding Defendants from arguing that they did not make use of Swisher's confidential client information. (Id.)
On March 9, 2017, Plaintiffs filed a Second Motion for Sanctions and Default Judgment against Defendants. (Doc. 103) ("Second Motion"). In the Second Motion, Plaintiffs requested both sanctions and default.
Plaintiffs argued that "[t]his additional perjury was only discovered through expensive and time-consuming electronic discovery because Defendants deleted and spoliated the electronic document which proves their sworn prevarication." (Doc. 103). Plaintiffs sought entry of default in the Second Motion, as a sanction for the "repeated lies and fraud on the Court." (Id. at 1-2).
Evidentiary hearings were conducted on Plaintiffs' Second Motion for Sanctions on March 2, March 15, and March 22, 2018. Over the course of the three days of hearings, the Court heard testimony from Attorney Katya Lancero, Defendant Troy Clawson, Mr. Mark Cardwell, and Attorney David Barton. (Docs. 168, 180 and 191). Notably, ACS President Zall did not appear at the hearings. The Court issued its preliminary ruling granting Plaintiffs' Motion at the March 22 hearing, and a written Order (the "Order") followed on October 15, 2018. (Doc. 222). The Court held that Defendants used Plaintiffs' confidential and proprietary information to solicit ACS customers, that Defendants engaged in the spoliation of evidence and attempted to cover up that spoliation, and that Plaintiffs were prejudiced by Defendants' actions. (Id. at 20-23). The Court also found that ACS's and Clawson's Counsel, Mr. Barton and Ms. Lancero, were not credible and lacked candor to the Court in their testimony regarding their roles in the conduct of their clients. (Id. at 20-23). Consequently, the Court struck Defendants' Answers (Docs. 22 and 23) and entered default against Defendants. (Doc. 222).
The Court granted Mr. Barton's and Ms. Lancero's Motion to Withdraw as Counsel for Defendants ACS and Clawson and Ordered those Defendants to retain new counsel. (Doc. 192). Following the Court's Order, Ralph Harris and Andrew Abraham of Burch & Cracchiolo PA appeared on behalf of Defendant ACS. (Doc. 205). Attorneys William Klain, George King, and David Turnbull of Lang & Klain PC appeared on behalf of Defendants Troy and Teri Clawson. (Doc. 204). The Court also granted an Amended Motion to Intervene filed on behalf of Mr. Barton, Ms. Lancero, and BurnsBarton. (Doc. 237). The Intervenors are represented by Geoffrey Sturr and Jeffrey Molinar of Osborn Maledon.
Defendant ACS asks the Court to set aside the Default entered against it arguing, for the first time, that all the fault lies with its former senior business development executive, Clawson. ACS states that "At this time, [ACS] requests the Court consider the conduct of Defendant [ACS] separately from that of Defendant Clawson." (Doc. 230 at 2) (emphasis added). ACS argues that it was not the culpable party, that it cannot be held liable for the acts of its senior business development executive or its former attorneys, and that default is not an appropriate remedy for spoliation of evidence. (Doc. 230). Notably, although represented, Defendant Clawson did not file a motion to set aside the default or a motion to reconsider the Court's Order and the time to do so has expired.
As analyzed at length in the Court's prior Order, "[t]he inherent powers of federal courts are those which are necessary to the exercise of all others," including "the well-acknowledged inherent power . . . to levy sanctions in response to abusive litigation practices." Roadway Express, Inc. v. Piper, 447 U.S. 752, 764-65 (1980). In this circuit, "courts have inherent power to dismiss an action when a party has willfully deceived the court and engaged in conduct utterly inconsistent with the orderly administration of justice." Wyle v. R.J. Reynolds Industries, Inc., 709 F.2d 585, 589 (9th Cir. 1983). This includes situations where evidence is spoliated.
Where default has been entered, the Federal Rules provide that a "court may set aside an entry of default for good cause . . . ." Fed. R. Civ. Pro. 55(c). To determine "good cause," a court must "consider[ ] three factors: (1) whether [the party seeking to set aside the default] engaged in culpable conduct that led to the default; (2) whether [it] had [no] meritorious defense; or (3) whether reopening the default judgment would prejudice" the other party. See Franchise Holding, LLC v. Huntington Restaurants Group, Inc., 375 F.3d 922, 925-26 (9th Cir. 2004). This standard, which is the same as is used to determine whether a default judgment should be set aside under Rule 60(b), is disjunctive, such that a finding that any one of these factors is true is reason for the court to refuse to set aside the default. See id. On appeal of a court's order entering default, the standard "is not whether . . . the Court of Appeals, would as an original matter have dismissed the action; it is whether the District Court abused its discretion in so doing." National Hockey League v. Metro Hockey Club, 427 U.S. 639, 642 (1976).
ACS now argues, for the first time, that its former business executive and its former attorneys were responsible for the spoliation of evidence and the willful deception of the Court, and that Zall had no knowledge of the misconduct. (Doc. 230).
As an initial matter, ACS proposes that "the Court re-open the testimony regarding the motions for sanctions and permit [ACS] to make Bradley Zall available to testify — something he was always ready, but not asked, to do." (Doc. 230 at 2). The Court finds this statement to be disingenuous in light of the proceedings in this case.
The Court finds that ACS had notice of all hearings and an oppourtunity to be heard, and indeed that ACS was present during the entirety of the motion hearing, through its business executive and its counsel. Notably, ACS was represented by BurnsBarton throughout all of the relevant events, only being forced to seek new counsel when the Court granted BurnsBarton's Motion to Withdraw after the March 2018 hearings. Only now, after the Court entered Default against all Defendants, does ACS decide to agree strongly with Plaintiffs' initial allegations, but place all of the blame on their business executive and on their former counsel. The Court is not persuaded.
ACS next argues that the Court should set aside the default against it. A "court may set aside an entry of default for good cause . . . ." Fed. R. Civ. Pro. 55(c). The Court will examine the good cause factors in turn, keeping in mind that if any factor is met, default will not be set aside. See Franchise Holding II, 375 F.3d at 925-26.
ACS first argues that it was not the culpable party and therefore the default must be set aside. Plaintiffs argue that ACS is responsible for the conduct of its business development executive, Clawson, and its former attorneys.
In general, a corporation acts through its officers, agents or employees and is liable for the actions of such persons acting within the scope of their agency. S.E.C. v. Jenkins, 718 F.Supp.2d 1070, 1075 (D. Ariz. 2010).
ACS argues that there is no evidence of how it "had supposedly deleted or spoliated any documents." (Doc. 250 at 3). ACS's argument misses the mark. ACS, a corporation, did not delete any documents, and nor could it. A corporation, however, acts through its officers, agents, and employees. In this case, ACS acted through its business executive, Clawson.
Moreover, Clawson testified at his deposition that he mistakenly solicited a Swisher customer while making "cold calls." (Doc. 245-1 at 27-28). However, during the discovery process it was revealed that Clawson had developed a custom 15-page PowerPoint presentation for this customer, therefore indicating that Clawson's actions with that customer were intentional. (Doc. 59). Zall was present at Clawson's deposition when these false statements were made, therefore, he was aware of Clawson's solicitation of Swisher customers. (Doc. 245-1 at 26).
The Court finds that the conduct at issue, the use of confidential Swisher information to create plans to develop ACS's business, was precisely the work that Clawson "was hired to perform" and that was "commonly done by the employee." Engler, 280 P.3d at 602 (internal citations omitted). Moreover, Clawson's actions in not only creating the plan, but also in deleting the plan and attempting to cover it up, furthered ACS's purposes and was for the benefit of ACS. Additionally, although Clawson was at home, the Court finds that he was acting during his "working hours" when he engaged in the conduct at issue, based on Zall's instruction to stay home and work on a business plan. (Doc. 186 at 26). ACS thus exerted control over its business executive, Clawson.
Alternatively, ACS argues that it should somehow be rewarded as the entity that "located and produced" the July 11, 2015 email which led to the discovery of the deleted Southern Arizona Plan. (Doc. 250 at 3). What ACS does not acknowledge is that the email in question was sent from Clawson to Zall, wherein Clawson told Zall that he would start working on a plan for Southern Arizona tomorrow. Subsequently, Clawson, through his attorneys at BurnsBarton, submitted a false affidavit to the Court regarding the contents described in that email. Moreover, ACS decided to merge legal representation with its business executive, and also became represented by BurnsBarton. ACS may be claiming at this late stage that Zall did not know Clawson was lying; however, that does not absolve ACS of its business executive's actions.
Therefore, the Court finds that all four factors strongly support a finding that ACS maintained control over Clawson when he created and subsequently spoliated evidence, and that Clawson was acting on behalf of and for the benefit of ACS.
ACS next argues that the default needs to be set aside, because default is not an appropriate sanction for the conduct here. ACS cites to a number of cases that, while in general relate to motions for setting aside the default, are distinguishable from the facts here. The cases cited by ACS establish that default would not be an appropriate sanction in most cases where a party has failed to follow discovery orders and deadlines. See Fjelstad v. Am. Honda Motor Co., 762 F.2d 1334, 1338 (9th Cir. 1985) (holding that the district court exceeded its authority in imposing sanction of default for "negligent failures to provide discovery"). However, the conduct here was far more egregious than a mere failure to comply with discovery deadlines. The Fjelstad decision went on to remark that "[d]ue process limits the imposition of the severe sanctions of dismissal or default to `extreme circumstances' in which `the deception relates to the matters in controversy' and prevents their imposition `merely for punishment of an infraction that did not threaten to interfere with the rightful decision of the case.'" Fjelstad, 762 F.2d at 1338 (citing Wyle, 709 F.2d at 589, 591). ACS also argues that "neither dismissal nor preclusion of evidence that is tantamount to dismissal may be imposed when the failure to comply with discovery orders is due to circumstances beyond the disobedient party's control." United States v. Sumitomo Marine & Fire Ins. Co., 617 F.2d 1365, 1369 (9th Cir. 1980). This case also dealt with a failure to follow discovery orders of the court, specifically the failure of the government to provide interrogatory responses. Id. Interestingly, the Ninth Circuit held that the court did not abuse its discretion in imposing "severe sanctions" on the government for non-compliance with discovery production, conduct far less severe than the conduct here. In sum, none of the cases cited by ACS involve spoliation of evidence that goes to the heart of a plaintiff's claims, as was the case here. The conduct committed by Defendants in this case forced the Court to conclude that the "pattern of deception and discovery abuse made it impossible" to conduct a trial "with any reasonable assurance that the truth would be available." See Valley Engineers Inc., 158 F.3d at 1057-5. If the bad acts committed in this case are not "extreme circumstances," the Court is unsure what would so qualify. The Court therefore finds, as it has previously, that default is an appropriate sanction for the egregious conduct that transpired here.
ACS next argues that the Court should not consider the conduct of its former attorneys. At this juncture, and with new attorneys, ACS argues that evidence was presented as to bad acts committed by its business executive "Clawson and the BurnsBarton attorneys," but "none proving any such acts by [ACS]." (Doc. 250 at 3). ACS fails to point out that "the BurnsBarton attorneys" were
The Ninth Circuit has upheld the dismissal of a case based solely on the conduct of a party's attorney. See Malone v. U.S. Postal Serv., 833 F.2d 128, 134 (9th Cir. 1987). In Malone, plaintiff's attorney failed to prepare for trial, resulting in the court declaring a mistrial. Prior to the re-trial, the court ordered plaintiff to submit specific information about the witnesses she would be presenting at trial, and plaintiff's attorney refused to comply. The court dismissed the case based on the attorney's failure to follow court orders. On appeal, plaintiff argued that "the district court's order of dismissal unfairly punishes her for the misdeeds of her attorney." Id. The Ninth Circuit rejected that argument, stating that "in light of the egregious nature of the malfeasance at issue here, we cannot conclude that the district court abused its discretion in declining to excuse Malone for the faults of her attorney." Id.; see also Chism v. Nat'l Heritage Life Ins. Co., 637 F.2d 1328, 1332 (9th Cir. 1981) ("district courts cannot function efficiently unless they can effectively require compliance with reasonable rules"); overruled on other grounds by Bryant v. Ford Motor Co., 832 F.2d 1080 (9th Cir. 1987). In a similar vein, the Supreme Court has held that:
Link v. Wabash R. Co., 370 U.S. 626, 633-34 (1962) (internal citations omitted).
Here, the Court specifically found that the actions of ACS executive Clawson, and the misdeeds of ACS's attorneys, were done for the benefit of ACS and to the detriment of Plaintiffs. (Doc. 222 at 23) ("The Court finds that the briefing submitted and the testimony at the hearings are clear and convincing evidence that Ms. Lancero and Mr. Barton facilitated and continued to cover up Clawson's fraud and their own irresponsible conduct."). The Court also found fraudulent conduct to include false Affidavits submitted under oath, deletion of important evidence, and found that ACS's attorneys lacked candor to the Court. (Id.) Defendants' counsel also filed a Motion to prevent the forensic examiner's report (establishing that the Plan had been created and deleted from Clawson's computer) from being admitted into evidence because it was filed outside the fact discovery deadline. (Doc. 139). All of these actions were done on behalf of ACS and were committed by ACS's counsel and business executive. ACS chose to have BurnsBarton represent it along with its business executive, Clawson. (Doc. 43). Moreover, ACS chose to continue to have BurnsBarton represent it throughout these proceedings, even after the allegations of spoliation, false affidavits, and misconduct by Clawson came to light. Although not the sole reason for denying the motion to set aside the default, ACS's argument that its attorneys' conduct cannot be considered fails. See Link, 370 U.S. at 633-34 (In "our system of representative litigation . . . each party is deemed bound by the acts of his lawyer-agent").
ACS does not argue in its brief that the actions of Clawson and its attorneys — false affidavits submitted under oath, spoliation of critical evidence, and lack of candor to the Court — did not benefit ACS. The Court finds that Clawson's acts were done in furtherance of his position to develop business for ACS and within the scope of his employment. Moreover, the Court finds that the actions of ACS's attorneys were done for the benefit of ACS and with its knowledge. Clawson engaged in the spoliation of critical evidence that went to the heart of Plaintiffs' claims. Clawson's deliberate and willful actions, had they not been discovered, would have likely benefited ACS. All the while, ACS was represented together with its business executive, Clawson, presumably at the direction of its CEO, Zall. For all of these reasons, the Court finds that ACS, through its business executive Clawson, and its former attorneys, engaged in the culpable conduct that led to the entry of default.
Having determined that the first factor supports the entry of default, the Court will only briefly examine the other two factors. See Franchise Holding II, 375 F.3d at 925-26; see also Brandt v. Am. Bankers Ins. Co. of Fla., 653 F.3d 1108, 1112 (9th Cir. 2011) ("A district court may exercise its discretion to deny relief to a defaulting defendant based solely upon a finding of defendant's culpability.").
"A defendant seeking to vacate a default judgment must present specific facts that would constitute a defense. But the burden on a party seeking to vacate a default judgment is not extraordinarily heavy." United States v. Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1094 (9th Cir. 2010). All that is necessary to satisfy the "meritorious defense" requirement is to allege sufficient facts that, if true, would constitute a defense. "The question whether the factual allegation [i]s true" is not to be determined by the court when it decides the motion to set aside the default. Id. Rather, that question "would be the subject of the later litigation." Id.
Here, ACS Answered the Complaint and has defended throughout the case. (Docs. 22 and 23). The Court finds that the stricken Answer presented a meritorious defense, and this factor favors ACS.
"To be prejudicial, the setting aside of a judgment must result in greater harm than simply delaying resolution of the case." United States v. Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1095 (9th Cir. 2010). Plaintiffs do not argue that they would be prejudiced if the default against ACS was set aside. Therefore, the Court finds that Plaintiffs would be prejudiced only as to additional costs to conduct further proceedings and the delaying of the case. The Court finds this factor to be neutral.
There is ample evidence of bad faith and willful behavior from ACS's business executive, Clawson and its former attorneys. Indeed, ACS now recognizes Clawson's and BurnsBarton's bad actions, committed years ago, after strenuously defending and denying those actions previously. (Docs. 115, 168, 180, and 191). The Court previously concluded, as it reaffirms here, that the actions in this case amounted to "extreme circumstances" that warranted default being entered.
(Doc. 222 at 29). Considering that "courts have inherent power to dismiss an action when a party has willfully deceived the court and engaged in conduct utterly inconsistent with the orderly administration of justice," and finding such culpable conduct present here, the Court finds that ACS has not established good cause to set aside the default. Wyle v. R.J. Reynolds Industries, Inc., 709 F.2d 585, 589 (9th Cir. 1983). Therefore, ACS's Motion will be denied.
The Court allowed Plaintiffs to seek additional sanctions in the form of attorneys' fees and costs.
"A court may levy a sanction on the basis of its own inherent power `when a party has acted in bad faith, vexatiously, wantonly or, for oppressive reasons.'" E. & J. Gallo Winery v. Gibson, Dunn & Crutcher LLP, 432 F. App'x 657, 659 (9th Cir. 2011) (citing Chambers v. NASCO, Inc., 501 U.S. 32, 55 (1991)). When exercising its inherent powers to sanction a party, the court can impose a sanction that makes the other "party whole for expenses caused by his opponent's obstinacy." Chambers, 501 U.S. at 46 (quoting Hutto v. Finney, 437 U.S. 678, 691 (1978)). In Chambers, the court imposed sanctions consisting of nearly a million dollars in attorney's fees after finding that defendant misled the court, violated court orders, and engaged in dilatory tactics. Chambers, 501 U.S. at 35-40. The Supreme Court held that in light of the egregious conduct, it "was within the court's discretion to vindicate itself and compensate" the plaintiff. Id.; See also Miller v. City of Los Angeles, 661 F.3d 1024, 1037-38 (9th Cir. 2011). When considering the amount of the sanctions, "all similar incidents of a party's past misconduct in a case are under review in determining the propriety of sanctions." E. & J. Gallo Winery, 432 F. App'x at 659. Moreover, courts may impose sanctions jointly and severally against multiple parties for their conduct. See Hyde & Drath v. Baker, 24 F.3d 1162, 1172 (9th Cir. 1994), as amended (July 25, 1994).
Here, the Court has repeatedly stated that the sanctionable conduct went to the heart of the claims alleged in the Complaint. Moreover, the Court found, based on the testimony of the forensic expert, that Clawson spoliated critical evidence shortly after the Complaint in this matter was filed. (Doc. 222). The long journey of this case through the litigation process, continuing with three days of hearings on the motion for sanctions and the entry of default, and culminating with this Order, all stemmed from that initial act in the early stages of this case. Based on the entirety of the record, the Court finds it reasonable to award to Plaintiffs the fees and costs stemming from the conduct of Defendants and finds that that conduct began when Clawson spoliated the evidence, which the expert testified was on or after August 13, 2015. (Doc. 184 at 54).
Plaintiffs note that they have voluntarily reduced their attorneys' fees request by more than 20%, "omitting unnecessary, duplicative, or excessive time, and deleting time related to tasks that would have bene performed even in the absence of misconduct by Defendants and their former counsel." (Doc. 225 at 6). Moreover, Plaintiffs do not seek to be awarded fees for the initial investigation of the case or the preparation and filing of the Complaint, because the spoliation of evidence had not yet occurred. The Court has reviewed the voluminous itemized billing entries of Plaintiffs' Counsel in this matter, and finds the fees billed to be reasonable under these circumstances. (Doc. 225-2). Moreover, the Court finds the hourly rates charged by the attorneys
As to joint and several liability, the Court found that the BurnsBarton attorneys "facilitated and continued to cover up Clawson's fraud and their own irresponsible conduct." (Doc. 222 at 23). Although Lancero now asserts that she was inexperienced, nervous, and "had no procedurally proper forewarning when she took the stand," this does not excuse her conduct of engaging in semantics and being evasive on the witness stand.
Plaintiffs also seek to join parties to this matter, claiming that those parties are indispensable for purposes of awarding joint and several sanctions. (Doc. 243). Plaintiffs seek to join the "marital communities" of David Barton and Katya Lancero, arguing that "in the absence of such joinder, complete relief
Rule 19 requires joinder of additional parties if "in that person's absence, the court cannot accord complete relief among existing parties." Fed. R. Civ. P. 19(a)(1). The Court notes that David Barton and Katya Lancero are not Defendants to this action and never have been parties. Barton and Lancero have entered limited appearances as intervenors in order to respond to the motion seeking sanctions against them personally. (Doc. 234). The Court granted the Motion to Intervene for these limited purposes only. (Doc. 237).
The Court finds that Plaintiffs have not met their burden of establishing that the joinder of Mr. Barton's wife and the spouse of Ms. Lancero "if any" is necessary. Therefore, this Motion will be denied.
Accordingly,
