The opinion of the court was delivered by: David O. Carter United States District Judge
ORDER ADOPTING AMENDED REPORT AND RECOMMENDATION OF MAGISTRATE JUDGE
Before the Court is the Amended Report and Recommendation of Magistrate Judge ("Report"), which was filed on October 8, 2010, and the objections thereto. The Report calls for the granting of plaintiff the Sunrider Corporation and plaintiff Sunrider Taiwan, Inc.'s motion for terminating sanctions, and further calls for the striking of defendant and counter-claimant Shun Sheng Chen, a.k.a. Sam Chen ("Chen")'sanswer and an entry of default judgment against him. After reviewing the record in this action, the Report, and the objecting and replying papers, the Court concurs with and ADOPTS the findings of fact, conclusions of law, and recommendations contained in the Report after having made a de novo determination of the portions to which objections were directed.
This case arises out of Sunrider, Sunrider Taiwan, and Sunrider Manufacturing (collectively "Plaintiffs")' allegations of copyright infringements by Chen and a former Sunrider employee, Steve Lee ("Lee") who allegedly established Bountiful Healthcare Technology Corporation ("BHTC"). The Report argues that Chen's responses throughout the discovery process merit the granting of terminating sanctions. The Report describes in excruciatingly careful detail all of the instances and examples of Chen's perjury, defiance of court orders, and incomplete discovery responses. After reviewing the record carefully, the Court agrees with the Magistrate Judge's findings of fact and does not find the need to repeat its findings in great detail. Thus, the Court summarizes the major factual findings here, but concurs with the Magistrate Judge's more detailed descriptions, particularly in regards to the discrepancies between Chen's various statements. The Court therefore limits its factual background section to responding to Defendants' objections and to summarizing the most critical factual findings.
Plaintiffs' filed their Fourth Amended Complaint on November 24, 2008 and served their first discovery request on Defendants on February 26, 2009. In his April 2009 responses, Chen objected to many of these requests, as he claimed that he did not have possession or control of BHTC documents. On May 11 2009, Chen agreed in a supplemental response to produce all documents "constituting, reflecting or relating to any agreements, whether written or otherwise" between Chen and BHTC. Report, 5. During a deposition on that same day, Chen testified that neither he nor his family members had ever had any ownership interest in BHTC and denied having any role in creating BHTC. Report, 6.
Following meet and confer discussions, on September 4, 2009 Plaintiffs filed a motion to compel the production of more documents, alleging that Chen actually retained an ownership interest in BHTC as an alter ego. Plaintiffs also requested monetary sanctions, pointing to evidence that Chen had publicly and privately represented BHTC as an executive officer or board member. See Report, 6. Under penalty of perjury, Chen declared that he was not and never had been a shareholder of BHTC and had never had any beneficial ownership interests in BHTC, and insisted that the documents requested belonged solely to BHTC. Wilks. Decl. II ¶¶ 8-9. As it was later shown once Plaintiffs received copies of documents obtained by its Taiwan counsel from the Taipei government, at the time of the filing of the lawsuit, Chen and his wife owned a 70% ownership interest in BHTC, and Chen's sister-in-law, Fang Chi Wu, aka "Annie Wu," retained a shareholder interest as well. Furthermore, the number of shares owed by Chen and his wife declined significantly just one week after the filing of the lawsuit, and just as the number of shares of Annie Wu increased. See Report, 8-9.
A. The January 25, 2010 Order
On January 25, 2010, after denying Plaintiff's request for sanctions against Chen, the Magistrate Judge ordered Chen to serve supplemental responses providing information known by him or available to him. Nonetheless, the Court found that Plaintiffs' evidence of Chen's perjury was insufficient to outweigh his testimony. Report, 8. The Order was specific in the requested documents, but on February 5, 2010, Chen responded by insisting that the relevant documents were in BHTC's possession and would not be provided to Chen following his resignation. See Wilks Decl. II ¶ 13.Plaintiffs moved for reconsideration of the January Order in April 2010 and requested an additional deposition of Chen as well as monetary and issue preclusion sanctions, and a striking of Chen's answer. On April 20, 2010, Chen declared that he did not know how or why the shareholder rosters had been prepared and offered that BHTC had listed him and his wife as shareholders out of gratitude, but insisted that they had never accepted any offer to be shareholders. Wilks Decl. I, Ex. B, ¶¶ 1-5.
Chen's counsel insists that he did not violate the January 25, 2010 Order because he served supplemental responses and "tried to obtain documents" from BHTC. However, in his later deposition, Chen admitted that he had agreed with BHTC's chairman's suggestion not to produce documents. See Wilks Decl., Ex E. at 456-460. Furthermore, Chen failed to comply with requirements for turning over "all unprivileged responsive documents in his possession, custody, or control" by February 5, 2010, and failed to respond to the January 25, 2010 Order to answer questions related to the potential spoliation of evidence.
B. The May 26, 2010 Order
On May 26, 2010, the Court granted Plaintiffs' requests for additional depositions of Chenand demanded that Chen supplement his responses, and granted Plaintiffs attorney fees. The Court explained that Chen's testimony appeared to have been untruthful, as it was disputed by the recently received records that revealed not only that he had been a majority shareholder of BHTC but that any shareholder had access to the records which he claimed he could not access . Order filed May 26, 2010 at 1. Indeed, later documents produced by the Taipei government revealed that Chen made "payments for shares" of $2,000,000 in New Taiwan dollars, and that he and his wife were not only shareholders but made cash deposits of millions of New Taiwan dollars. Wilks Decl. I, Ex. D at 58-85. Furthermore, the documents revealed that Chen and his wife abandoned their shareholder status within two weeks of Plaintiffs' suit and that Annie Wu had been a BHTC director and a shareholder at various points, and even served as a chairman in August 2008. See Wilks Decl. I, Ex. D at 101.
In granting sanctions, the Court emphasized that Chen's "rearranging" of his affairs in order to avoid having to produce documents was akin to spoliation of evidence. May 26, 2010 Order, Docket 152 at 2. The Court warned Chen that though it was denying Plaintiffs' request for harsher sanctions, any failure to comply with its order would result in further sanctions "potentially including a further monetary award, issue or evidence preclusion, or entry of judgment by default." Id. at 3.
As the Report details, however, Chen failed to comply with the May 26 Order, and instead provided an incomplete production of documents. Report, 33-35. Chen's counsel argues in its opposition to Plaintiff's Motion that Chen did not disobey the May 26, 2010 discovery Orderbecause Chen had submitted to deposition, supplemented his response, and with one exception, produced all the documents he had obtained from BHTC. The Court is skeptical of such defenses; as the Report and Plaintiffs note, Chen's supplemental responses contained a "surprisingly small" number of documents." Report, 33-34 (noting that Chen produced only 200 pages, 136 of which Chen knew Plaintiffs already possessed).The supplemented documents also neglected to include the "categories of responsive documents that one would fully expect to be maintained in the ordinary course of BHTC's business." Id. (including internal accounting #:7156 records, BHTC research documentation, records of BHTC's past and present distributors, etc.). Chen also produced additional filings that included a distributor list of 283 of Sunrider's distributors in Taiwan, without offering any sort of explanation for why Plaintiffs had previously only known about seventeen of those distributors. See Wilks Decl. II ¶¶ 9-10.
Perhaps most significantly, Annie Wu's supplementary declaration admitted that as discovery was pending in September 2009, BHTC destroyed documents. Wu Supplemental Decl. ¶ 4.Annie Wu testified that "non-essential documents were discarded if they were deemed to serve no purpose." Id. Chen's counsel later admitted that it was impossible to determine which documents had been destroyed.This constituted spoliation of evidence.
Defense counsel argues that there was no spoilation of evidence by Chen because of documents that BHTC discarded. It insists that there was no evidence that any of the discarded documents were relevant to any discovery requests, and, furthermore, that Chen could not be responsible for BHTC's acts. The Court rejects this argument. To start, it is ludicrous to suggest that discarding documents is permissible during the course of a discovery request simply because the plaintiff cannot show that the documents were relevant; that logic would allow the destruction of many highly relevant documents of which a plaintiff simply had not known by virtue of the discovery request not having been complied with yet. Moreover, it seems all but obvious that, as Plaintiffs' Response notes, the documents that BHTC destroyed must have included necessary records to aid the company it its tax returns, as well as other critical financial documentation. Id. In terms of whether Chen had the requisite culpability and control over the discarded documents, it is clear from Chen's former status as a majority ...