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Civil Practice — Discovery – Sanctions – Intellectual Property – Trademark – Ownership

Beach Mart, Inc. v. L&L Wings, Inc. (Lawyers Weekly No. 14-02-0950, 34 pp.) (James Fox, Sr. J.) 2:11-cv-00044; E.D.N.C.

Holding: Where defendant was negligent in maintaining and searching for important documents, and where defendant’s founder gave untruthful answers about such documents at his deposition, thereby forestalling discovery of documents that completely changed this litigation, defendant is subject to sanctions under Fed. R. Civ. P. 37 and this court’s inherent authority.

First, plaintiff is awarded costs and attorney’s fees incurred in connection with its efforts to discover the undisclosed documents. Second, with respect to plaintiff’s use of the Wings and Super Wings trademarks, defendant is precluded from (a) asserting trademark infringement and unfair competition claims against plaintiff and (b) seeking any form of equitable relief from plaintiff. The court limits this sanction to those stores already operated by plaintiff.

This case was primarily about breach of contract and trademark infringement. Late-discovered documents call into question whether defendant actually owns the trademark at issue.

Via objection, defendant sought to limit the scope of its founder’s Fed. R. Civ. P. 30(b)(6) deposition to agreements between the parties. However, if a corporation objects to a Rule 30(b)(6) notice, the corporation must seek a protective order and demonstrate to the court that the notice is objectionable. If the corporation makes no such showing, the corporation must produce a witness prepared to testify to the subject matter described in the notice. The corporation cannot make its objections and then provide a witness who will testify only within the scope of the corporation’s objections.

In any event, defendant’s objections were waived when its founder began to testify about defendant’s agreements with third parties.

The court rejects the founder’s claim that he had forgotten about an agreement with third party Tim Anglim because it occurred around 20 years before his deposition. The founder testified about an agreement with Anglim that was executed only two years after the allegedly forgotten Anglim agreement – the one that referred to documents that called into question defendant’s ownership of the trademark at issue.

Defendant violated Rules 26 and 37 by failing to identify and disclose several documents that were in the possession of either defendant or its attorneys.

Defendant’s documents custodian conducted several records searches. During her third search, she spoke to a handyman, who happened to know of a box stored in a sub-basement along with discarded furniture. The handyman directed the documents custodian to a box that contained the documents that called into question defendant’s ownership of the trademark.

Despite defendant’s claims not to have known of that box, the documents contained therein were in defendant’s actual possession. At the very least, defendant was negligent in failing to find and disclose those documents.

Under Rule 37(c)(1), sanctions may be imposed even for negligent failures to provide discovery. The party facing sanctions bears the burden of establishing justifiability or harmlessness.

Defendant has not shown that its discovery violation was harmless. The newly discovered documents did more than simply disrupt trial. Instead, the court had to reset the entire case in light of plaintiff’s amended complaint, which contained wholly different claims and defenses.

Defendant has also failed to show justification.

The misplacement of the box of licensing agreements was negligent.

Even though Rule 26(a) does not require disclosure of documents or witnesses that a party does not intend to use to support its claims or defenses, under subdivision (e), defendant had a duty to timely supplement or correct its responses to plaintiff’s requests for production. Because defendant had knowledge and possession of the undisclosed documents, it had a duty to initially disclose or later supplement its discovery responses. It failed to fulfill that duty.

While it is true that plaintiff never moved to compel discovery, sanctions for a violation of Rule 26(e) may be imposed under the court’s inherent power even though no order compelling discovery was violated.

The court finds that defendant acted in bad faith, manifested in its founder’s false testimony during his deposition.

Both parties and their attorneys have engaged in inappropriate gamesmanship during this litigation. Defendant’s gamesmanship is unacceptable. The court reminds the lawyers for both parties that this court has inherent authority to sanction them individually, as officers of the court, in the event of misconduct.

Plaintiff has experienced substantial prejudice due to defendant’s violations; moreover, the court must impose sanctions that will deter present and future parties from acting similarly.

Accordingly, plaintiff is awarded costs and attorney’s fees incurred in connection with its efforts to discover the undisclosed documents. Defendant is also precluded from asserting trademark infringement and unfair competition claims against plaintiff and from seeking equitable relief against plaintiff with respect to plaintiff’s use of the Wings and Super Wings trademarks at its current stores.


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