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Loop AI Labs, Inc. v. Gatti

United States District Court, N.D. California

March 9, 2017

LOOP AI LABS INC, Plaintiff,
ANNA GATTI, et al., Defendants.


          HAYWOOD S. GILLIAM, JR. United States District Judge

         Under Federal Rule of Civil Procedure 37(b) and the Court's inherent authority, the Court issues terminating sanctions dismissing Plaintiff Loop AI Labs Inc.'s action with prejudice. The Court previously issued an order to show cause why terminating sanctions should not issue, Dkt. No. 894, to which Plaintiff responded, Dkt. No. 922. For the reasons discussed below, the Court concludes that Plaintiff's obstructionist discovery conduct, flagrant disregard for the Court's authority, and inability to meet its most basic professional obligations warrant no lesser sanction.

         I. BACKGROUND

         Plaintiff initiated this action in February 2015. Dkt. No. 1. The operative complaint alleges eighteen causes of action including civil conspiracy, fraud, breach of contract, theft of corporate opportunity, misappropriation of trade secrets, and conversion against Defendants Anna Gatti; Almaviva S.p.A, Almawave S.r.l., Almawave USA Inc. (collectively, “Almawave”); IQSystem, Inc. (“IQS, Inc.”), and IQSystem LLC (“IQS LLC”). See Dkt. No. 210 (“SAC”). Plaintiff alleges that Defendant Gatti, its now-former CEO, conspired with Defendants to misappropriate Plaintiff's trade secrets and generally sabotage its business prospects. According to Plaintiff, while Gatti pretended to work full time for Loop AI, she was simultaneously providing advisory services for multiple competing startups and took a concurrent CEO position with Defendant Almawave. SAC ¶ 116. Plaintiff contends that Almaviva intended to use Gatti's assistance to buy Loop AI for a “bargain price” or to hire away its key employees and obtain access to its proprietary technology and trade secrets. SAC ¶ 21. Plaintiff alleges that Gatti's scheme involved sabotaging Plaintiff's access to funding, sharing Plaintiff's proprietary information with the other Defendants, and using Plaintiff's time, property, and other resources to conduct business on behalf of Almawave. SAC ¶¶ 22-23, 29.

         From the beginning, this case has been marked by a level of dysfunction and inability to work together that is unprecedented in the Court's experience. See, e.g., Dkt. Nos. 96 & 98 (parties filed separate case management statements in contravention of Local Rule 16-9); Dkt. No. 101 (inability to conduct Rule 26(f) Meet and Confer); Dkt. No. 157 at 47-57 (Plaintiff's counsel blocked emails from Defendants, choosing to accept only faxes, letters, and phone calls from opposing counsel, because receiving emails from Defendants was too “intrusive”); Dkt. No. 288 (Defendants requested a discovery referee because Plaintiff allegedly “refuses to discuss any items beyond Loop's own agenda” during meet-and-confer meetings). Magistrate Judge Donna M. Ryu attempted to “impose a workable structure on the parties' discovery dispute resolution process, ” Dkt. No. 271 at 2, and the docket highlights the Court's many, many attempts to advance this litigation in a productive way.[1] Over the course of the last two years, the Court has tried numerous approaches, such as ordering court-supervised discovery management conferences, Dkt. No. 136 at 2; ordering the parties to audio record meet and confer sessions, Dkt. No. 156 at 2; instituting standing meetings each week to encourage substantive and meaningful meet-and-confer sessions, Dkt. No. 271 at 2; and eventually requiring the parties to provide dial-in information and agendas for the weekly meet-and-confer teleconferences, so that the Court could monitor the parties' conduct by joining the calls, Dkt. No. 415 at 2.

         As described more fully below, Plaintiff's insubordination, through its counsel Valeria C. Healy, was and continues to be particularly egregious, posing a significant obstacle to the progress of this case. The Court has given Plaintiff many chances to litigate in a professional and productive manner, and has been consistently confronted with counsel's utter disregard for the Court's authority and her persistent refusal to comply with the Court's orders and the Federal Rules. The following section details the key discovery orders serving as the basis of this order.

         A. Improper Conduct in Depositions of Three Key Witnesses

         As early as December 2015, Judge Ryu gave specific warnings with respect to the issue of privilege during depositions: “there can be no instructions to not answer except for privilege. . . . And it has to be clearly privilege. Because if it's not, again there will be sanctions.” Dkt. No. 335 at 46.

         On January 25, 2016, Almawave first deposed Plaintiff's co-founder and CEO Gianmauro Calafiore. Dkt. No. 884 at 1 (“Order 884”). After reviewing the deposition transcript, Judge Ryu issued an order regarding Healy's conduct during the deposition. Dkt. No. 436 (“Order 436”).

[The deposition transcript] is replete with examples of inappropriate behavior by Plaintiff's counsel, Valeria Calafiore Healy. Ms. Healy made speaking objections, instructed the deponent not to answer questions for reasons other than the invocation of privilege, and repeatedly objected without stating a basis for the objection. The deponent, Gianmauro Calafiore, was often argumentative and uncooperative in providing testimony, thereby delaying the deposition process. Ms. Healy and Mr. Calafiore's obstructionist conduct repeatedly stymied Alma[w]ave USA's attempts to obtain discovery through this key deposition.

Id. at 1. Judge Ryu sanctioned the Plaintiff, ordering five additional hours of deposition and requiring Plaintiff to bear the cost. Id. The order again provided specific instructions:

In the future, Ms. Healy, and indeed, all attorneys defending depositions in this litigation (1) shall state the basis for an objection, and no more (e.g., “relevance, ” “compound, ” “asked and answered”); (2) shall not engage in speaking objections or otherwise attempt to coach deponents; and (3) shall not direct a deponent to refuse to answer a question unless the question seeks privileged information.

Id. at 2. Judge Ryu further warned that “[g]iven Ms. Healy's repeated inappropriate conduct in her defense of the Calafiore deposition, any further breach” would result in sanctions. Id.

         On August 25, 2016, Judge Ryu issued an order regarding Healy's continued conduct during the deposition of Calafiore, as well as Loop AI's other executives Bart Peintner and Patrick Ehlen. Dkt. No. 884. Leading up to this order, Judge Ryu had already twice directed Plaintiff to produce Peintner and Ehlen for depositions as they “appeared to be percipient witnesses.” See Dkt. No. 465 (March 10, 2016); Dkt. No. 526 (March 25, 2016). Judge Ryu's March 25 order included specific dates, ordering that Ehlen and Peintner appear on March 29 and March 30, and that Calafiore and any of Plaintiff's 30(b)(6) witnesses appear either on March 31 or April 1. Dkt. No. 526. This Court denied Plaintiff's motion for relief from Judge Ryu's nondispositive order regarding the deposition dates. Dkt. No. 533. Plaintiff nonetheless failed to follow Judge Ryu's orders. See Dkt. No. 555 (Almawave's letter brief indicating that “Loop and its witnesses refused to appear for deposition as ordered”). On April 4, 2016, Judge Ryu again ordered Plaintiff to make witnesses Calafiore, Ehlen, and Plaintiff's corporate representative available. Dkt. No. 564.

         Order 884 is based on Judge Ryu's review of the deposition transcripts of these witnesses. Judge Ryu found that “[i]n direct contravention of the court's February 29, 2016 order, Healy instructed witnesses to refuse to answer questions on grounds other than privilege.” Order 884 at 4 (noting, for example, that Healy “instructed Plaintiff's 30(b)(6) designee (Calafiore) not to answer certain questions, unilaterally deciding that the questions were outside the scope of the noticed Rule 30(b)(6) topics”); id. at 5 (“[W]hen Almawave asked Ehlen, ‘Can you tell us how your particular algorithms work?', Healy instructed him not to answer on the basis of relevance, again unilaterally taking the topic off the table.”).[2] Judge Ryu cited Healy's “numerous improper speaking objections, in direct contravention of this court's order that counsel confine objections to a statement of their basis, (e.g., ‘compound, ' or ‘asked and answered'), and not engage in speaking objections or otherwise attempt to coach the witness.” Id. at 5. Order 884 found “Healy's coaching was so effective that the witnesses occasionally repeated her objections, sometimes verbatim, to the examining attorney, ” and that “[o]n other occasions, Healy actually attempted to answer the question for the witness.” Id. at 6-7.[3] Order 884 held that Healy improperly asserted attorney-client privilege to prevent witnesses from answering, noting that Healy “inexplicably refused to allow the witnesses to respond to questions about their own discussions with other Loop employees or third parties, ” and “refused to allow Plaintiff's witnesses to answer questions about their document collection and production in this litigation” on the basis of attorney-client privilege. Id. at 7-8. Judge Ryu concluded that Healy's conduct, “including instructions not to answer questions and speaking objections and coaching, was both improper and in direct violation of the court's February 29, 2016 order regarding the conduct of depositions” and “[a]ccordingly, it is sanctionable.” Id. at 9. Judge Ryu deferred to this Court as to what sanction should be imposed. Id.

         B. Refusal to Properly Respond to Key Interrogatories

         On multiple occasions Judge Ryu ordered Plaintiff to amend its responses to four key interrogatories. With respect to Interrogatory No. 8, Almawave sought the factual bases for certain allegations in the SAC, including Almaviva's intent to buy Loop for a bargain price or to hire away Loop's key employees and thereby acquire access to Loop's proprietary technology. Dkt. No. 428-1. Judge Ryu first ordered Plaintiff on March 2, 2016 to submit an amended response by March 9, 2016. Dkt. No. 438 (“Order 438”).[4] After receiving notice from Almawave that Plaintiff had not complied, Judge Ryu issued a second order on March 22, 2016, again directing Plaintiff to amend its response. Dkt. No. 508.

         With respect to Interrogatory Nos. 3, 5, and 7, Judge Ryu held that they permissibly sought the factual bases for Loop's allegations, and she ordered Plaintiff to serve amended responses by March 15, 2016. Dkt. No. 465 (“Order 465”). On March 24, 2016, Almawave notified Judge Ryu that Plaintiff had failed to comply with both Order 438 and Order 465. Dkt. No. 523. Following submission of Almawave's brief and Plaintiff's opposition, Judge Ryu issued an order on May 3, 2016, finding that Plaintiff's responses to the four interrogatories were “plainly and grossly deficient.” Dkt. No. 640 (“Order 640”).

For each response, Plaintiff responded by directing Almawave to “all productions by all parties and non-parties in this case, and any further materials has [sic] may be obtained through discovery or otherwise.” This is improper. An answer to an interrogatory “should be complete in itself.” In response to nos. 3, 7, and 8, Plaintiff also listed thousands of bates numbers with no explanation. This is an improper use of Rule 33(d); a responding party “may not abuse the option . . . by directing the propounding party to a mass [o]f undifferentiated records.” Plaintiff also included nearly 100 pages of allegations that appear to be cut and pasted from Plaintiff's second amended complaint. This too, is insufficient. . . .
Plaintiff's response to no. 5, which sought the bases for Plaintiff's claimed damages, is also non-responsive. It simply lists the categories of damages Plaintiff seeks; it does not answer the question of how Plaintiff values its business, technology, trade secrets, patents, or confidential information. None of the responses were verified, violating Rule 33. . . .

Id. at 3 (citations omitted) (first ellipsis in original). Judge Ryu concluded that Plaintiff's responses to the interrogatories “are not substantially justified, and are subject to sanctions.” Id. at 4. Judge Ryu again ordered Plaintiff to provide amended responses:

Given that discovery has now closed, Plaintiff shall supplement its responses to interrogatory nos. 3, 5, 7, and 8 within seven days of the date of this order. Plaintiff's responses may not include allegations pasted from the operative complaint, and Plaintiff must provide full, complete answers for each interrogatory which are verified under penalty of perjury.


         Notwithstanding Order 640, Plaintiff refused to amend its responses. See Dkt. No. 679 (Almawave's discovery letter brief indicating that Plaintiff has not complied with Order 640); see also Dkt. No. 691 (Almawave's motion for leave to file a motion for terminating sanctions regarding Plaintiff's alleged refusal to comply with Order 640); Dkt. No. 686 at 4-5 (Plaintiff's motion for relief maintaining that it “properly responded to the Interrogatories and cannot be compelled to change the factual basis of [sic] supporting its complaint, which is what the interrogatories are directed to”).

         On July 21, 2016, Judge Ryu ordered Plaintiff to file a statement indicating whether it had served supplemental and/or amended responses to each of the interrogatories at issue. Dkt. No. 850. Judge Ryu ordered Plaintiff to submit a copy of the supplemental and/or amended responses that it had served along with a proof of service. Id. Plaintiff's response confirmed that Plaintiff had refused to amend the interrogatories. See Dkt. No. 856 (“[A]fter considering the requirements of Order 640 and reviewing the responses already provided by Loop AI, Loop AI did not possess any further information that was responsive to those interrogatories and did not have any further information to provide as a supplement to the Interrogatories identified.”).

         C. Failure to Properly and Timely Respond to Requests for Production

         On May 3, 2016, Judge Ryu also admonished Plaintiff because its responses to several RFPs failed to comply with Federal Rule of Civil Procedure 34(b)(2). Order 640 at 5-6 (“Plaintiff's responses render it impossible to determine the extent of Plaintiff's production and whether Plaintiff has withheld documents responsive to any portions of the RFPs.”). Judge Ryu ordered Plaintiff to amend its responses to comply with Rule 34(b)(2) by May 10, 2016. Id. at 6. Almawave filed a discovery letter brief on May 13, 2016 indicating that Plaintiff had not complied with Judge Ryu's order to respond to the RFPs. Dkt. No. 679. Plaintiff's motion for relief from Judge Ryu's order confirmed Plaintiff's refusal to comply with the court's order. See Dkt. No. 686 at 5 (insisting that “Loop AI served appropriate discovery responses in compliance with the Federal Rules of Civil Procedure, ” and that it “cannot be required to amend discovery responses served almost a year ago to comply with a new rule”). The Court denied Plaintiff's motion for relief on May 24, 2016. Dkt. No. 702. On July 21, 2016, Judge Ryu ordered Plaintiff to file a statement by July 26, 2016 that specified whether Plaintiff had served the RFPs by the court's May 10 deadline. In its late-filed response, Plaintiff further confirmed its noncompliance: although the deadline for production was May 10, 2016, Plaintiff stated that it began to produce on May 11, 2016. See Dkt. No. 856 at 1 & n.1 (filed July 27, 2016). Moreover, Plaintiff's production extended far past the May 10 deadline, continuing through early June. Dkt. No. 807 at 3-4.[5]

         D. Refusal to Produce Adequate Privilege Log

         On March 8, 2016, Almawave filed a discovery letter brief regarding Plaintiff's failure to provide a privilege log. Dkt. No. 451. Almawave argued:

Loop's responses to Almawave's First Set of Requests for Production of Documents were due and served on August 3, 2015. Loop's privilege log is now more than seven months overdue, nearly one month overdue from when Almawave raised the issue in writing via its agenda and over 14 days overdue from when Almawave expressly wrote demanding that Loop produce its privilege log.

Id. In response, Judge Ryu referred the parties to her January 27, 2016 Notice of Amended Discovery Procedures, which provided that “[i]f a party withholds responsive information by claiming that it is privileged or otherwise protected from discovery, that party shall produce a privilege log as quickly as possible, but no later than fourteen days after its disclosures or discovery responses are due, unless the parties stipulate to or the court sets another date.” Dkt. No. 456 (citing Dkt. No. 401 at 4). Judge Ryu ordered Plaintiff to produce the privilege log no later than March 16, 2016. Dkt. No. 456.

         On March 18, 2016, Almawave filed an administrative motion for leave to file a unilateral discovery letter brief in which it asserted that Plaintiff had refused to comply with the court's order to produce a privilege log, seeking leave to move to compel Plaintiff's production of documents over its privilege claims based on waiver. Dkt. No. 498. Plaintiff did not timely oppose Almawave's administrative motion and did not refute Almawave's representations about its refusal to produce a privilege log. Dkt. No. 540 (“Order 540”). Accordingly on March 29, 2016, Judge Ryu ordered Plaintiff to show cause why it should not be sanctioned for failing to comply with Order 456 and why its failure to produce a privilege log should not be deemed a waiver of any asserted privileges. Id.

         Plaintiff's response to the order to show cause challenged the validity of Order 540, contending that Defendant's initial letter brief, Dkt. No. 451, should have been denied. Dkt. No 576. Plaintiff also argued that its conduct was “no different than what all the Defendants have done in this case, ” and that the “only difference is that Loop AI did not immediately run to the Court to seek sanctions.” Id. Finally, Plaintiff represented that it intended to comply with Order 456 by April 11, 2016, id., almost a month after the court's deadline.

         On April 28, 2016, Almawave filed a third motion related to Plaintiff's privilege log, seeking leave to file a unilateral brief regarding the sufficiency of Plaintiff's privilege log, Dkt. No. 630, which Plaintiff opposed, Dkt. No. 637. After reviewing Plaintiff's privilege log, Judge Ryu issued an order on May 13, 2016, concluding Plaintiff had waived the attorney-client privilege and work-product protection as to most documents withheld from production. Dkt. No. 680 (“Order 680”). Order 680 provided three bases for the waiver:

[First, ] Almawave was literally unable to assess or challenge Plaintiff's claimed privileges or protection because Plaintiff did not serve a privilege log until April 2016, approximately seven months after Plaintiff's initial production, and after fact discovery closed on March 29, 2016. Plaintiff's privilege log was thus grossly late. [Second, ] Plaintiff's service of its privilege log in April 2016 violated three separate court orders: the June 2015 Notice of Reference and Order re Discovery Procedures, (Docket No. 117); the court's January 2016 Notice of Amended Discovery Procedures; and the court's March 9, 2016 order to produce a privilege log by March 16, 2016. Finally, Plaintiff's privilege log is plainly deficient. It contains no information about the titles and descriptions of the withheld documents, nor does it identify the subject matters addressed in the documents. This is exactly the kind of information that would enable Almawave to assess whether the assertion of privilege or protection is justified. It is also the kind of information that is required by Rule 26(b)(5), as well as the court's standing orders.

Id. at 4-5. Judge Ryu concluded that Plaintiff must “produce the documents described above for which the court deems the attorney-client privilege and work product production waived within seven days of the date of this order, ” i.e., by May 20, 2016. Id. at 6 (emphasis omitted).

         Plaintiff sought reversal of Order 680 by this Court, Dkt. No. 700, which denied the request, Dkt. No. 712. Plaintiff then sought a writ of mandamus in the U.S. Court of Appeals for the Ninth Circuit. In re: Loop AI Labs, Inc., No. 16-cv-71736, Dkt. No. 1 (9th Cir. May 31, 2016). On the same day, Almawave filed an administrative motion regarding Plaintiff's failure to produce the documents consistent with Order 680, requesting either the issuance of an order to show cause why terminating sanctions should not be imposed for Plaintiff's failure to comply or leave to file a unilateral brief seeking such relief. Dkt. No. 715. On June 6, 2016, Plaintiff acknowledged that it had refused to comply with Order 680, but asked Judge Ryu to “grant it at least the ability to have its petition reviewed by the Ninth Circuit before entertaining any further motions” on Order 680. Dkt. No. 725. Accordingly, Judge Ryu directed Plaintiff to identify “authority for the position that petitioning for a writ of mandamus to a United States Court of Appeals has the effect of staying a party's duty to comply with the order that is the subject of the writ of mandamus.” Dkt. No. 777. Plaintiff's response indicated that it had no such authority. Dkt. No. 804. On July 11, 2016, Almawave filed an opposition to Plaintiff's response, in which it cited authority for the proposition that the filing of the mandamus petition did not impose such a stay. Dkt. No. 808. On December 21, 2016, the Ninth Circuit denied Plaintiff's petition for “the extraordinary remedy of mandamus.” See Dkt. No. 961 at 2. The Ninth Circuit held that Plaintiff's “general overbreadth objections . . . did not excuse [Plaintiff] from its obligation to provide a privilege log of documents responsive to proper, more narrow requests for production.” Id. at 1.

         On December 27, 2016, Plaintiff notified that Court that it had “now produced to Defendants all of the documents listed on its privilege log.” Dkt. No. 963. But this was over nine months after Judge Ryu first ordered Plaintiff to produce a proper privilege log, over seven months after Judge Ryu ordered Plaintiff to produce the documents listed in its “plainly deficient” log, and nearly nine months after the March 29, 2016 fact discovery deadline. Plaintiff thus acted in direct defiance of multiple orders.

         E. Trade Secrets Disclosure

         The eleventh cause of action alleges misappropriation of trade secrets against all Defendants. In accordance with California Code of Civil Procedure § 2019.210, Defendant IQS, Inc. requested that Plaintiff provide trade secret disclosure on multiple occasions. See, e.g., Dkt. Nos. 118, 232. After reviewing Plaintiff's disclosures, Judge Ryu concluded on December 21, 2015 that Plaintiff's “explanation of the trade secrets in its second amended complaint” did not satisfy § 2019.210's requirements. Dkt. No. 331 at 6-8 (“Order 331”) (“Plaintiff's ‘disclosure' through designation of certain paragraphs in pleadings and declarations is no substitute for specifically identifying and describing the actual claimed trade secrets in order to permit [Defendants] to ascertain at least the boundaries within which the secret[s] lie[].” (some internal quotation marks omitted)). Judge Ryu ordered Plaintiff “to file and serve a statement identifying the specific trade secrets at issue within 21 days of the date of this order.” Id. at 7. Judge Ryu warned that “Plaintiff's identification of trade secrets must be thorough and complete, ” and that “[a]ny future amendment to the disclosure will only be permitted upon a showing of good cause.” Id.

         After the court's deadline passed, Defendant IQS, Inc. moved to enforce Order 331, seeking to require Plaintiff to provide a thorough and complete identification of the trade secrets under § 2019.210. Dkt. No. 459. Defendant IQS, Inc. sought sanctions in the form of (1) preclusion of the introduction of evidence as to the claim and/or (2) the sanction of dismissal for failing to specify the trade secrets. Id. at 3. Defendant Almawave joined in Defendant IQS, Inc.'s motion to enforce Order 331. Dkt. No. 472.

         After reviewing Plaintiff's revised disclosures, Judge Ryu held that Plaintiff's trade secret disclosures fell “far short of the ‘reasonable particularity' standard, ” Dkt. No. 795 at 5 (“Order 795”), and that Plaintiff “failed to comply with [Order 331] to provide a ‘thorough and complete' identification of the trade secrets at issue in this litigation, ” id. at 12.

[T]he fact that Plaintiff publicly filed its trade secret disclosure belies the proposition that it contains information specific enough to be considered ‘confidential' trade secrets. . . Plaintiff's attempt to meet its disclosure obligation by pointing to allegations in its pleadings and other court filings was insufficient the first time, and is no more sufficient now. . . Plaintiff's technique of listing general concepts or categories of information is plainly insufficient; Defendants cannot fairly be expected to rebut Plaintiff's trade secrets claim without a reasonably concrete definition of the purported secrets. . . . Plaintiff's categorical descriptions render it impossible for Defendants to conduct public domain or other research to challenge the alleged secrecy of the information at issue.

Id. at 6-11.[6] Judge Ryu noted that Order 331 had “warned Plaintiff that ‘[a]ny future amendment to [its] disclosure [would] only be permitted upon a showing of good cause.'” Order 795 concluded that Plaintiff had “not sought leave to amend its trade secret disclosure” and its “failure to comply with the court's order [does not] constitute good cause to amend.” Id. at 12. Finding Plaintiff's disclosures inadequate, Judge Ryu deferred to this Court in determining the ...

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