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LF Centennial Limited v. Z-Line Designs, Inc.

United States District Court, S.D. California

May 31, 2017

LF CENTENNIAL LIMITED, a British Virgin Islands corporation, Plaintiff,
v.
Z-LINE DESIGNS, INC., a Nevada corporation; and DOES 1-100, inclusive, Defendant.

          ORDER DETERMINING JOINT MOTION FOR DETERMINATION OF DISCOVERY DISPUTE NO. 3 AND GRANTING LFCL'S MOTION TO COMPEL AND FOR SANCTIONS [DKT. NOS. 68, 70].

          Hon. Nita L. Stormes United States Magistrate Judge

         This is an action for breach of a Licensing Agreement that resulted from patent litigation between the predecessor of plaintiff LF Centennial, LTD (LFCL) and defendant Z-Line Designs. In the Licensing Agreement LFCL__ LFCL believes that not all royalties are being paid and is now suing for breach of contract and an accounting. By way of this motion LFCL seeks to (1) compel Z-Line to produce a Rule 30(b)(6) witness for deposition who is sufficiently educated and knowledgeable regarding the noticed topics to provide proper testimony; and (2) attorney's fees and costs for the deposition. For the following reasons, the court GRANTS LFCL's motion to compel and for sanctions.

         Relevant Background.

         On March 15, 2017 LFCL conducted two Rule 30(b)(6) depositions. It deposed Z-Line's CFO Marcie Martinez on six deposition topics related to the Licensed Products and payment of royalties. It also deposed Z-Line's president James Sexton regarding the purported oral agreement between Mr. Sexton and Ken Whalen, the late president of Whalen Furniture Manufacturing, Inc. (WFM), the predecessor of LFCL, where they allegedly agreed to __ LFCL complains that neither deponent prepared for the depositions, including by reviewing any documents. Further, as explained below, LFCL could not question Ms. Martinez about outstanding documents because they had not yet been produced.[1]

         As to Ms. Martinez, she did not appear to know which of Z-Line's products were covered under the License Agreement. Dalton Decl. Ex. 5, Martinez Depo., 12:5-15:18. She testified that even though she is the one who decides whether to include certain products in the report, she could not explain why certain products were included on the spreadsheet documenting royalty payments. Id. at 38: 1-13; 15:16-16:11; 37: 7-25; 39:5-40:7; 40:25-42:23. As for Mr. Sexton's deposition, he testified that he did not know when the oral agreement was made, who else knew about it and whether it was ever discussed with other employees. Dalton Decl. Ex. 6, Sexton Depo., 19:2-19; 20:19-25; 30:11-18; 35:9-37:9.

         Meanwhile, on March 17, 2017 the parties filed Joint Discovery Motion No. 2. Dkt. No. 56. That dispute involved a motion to compel where LFCL sought financial information necessary to determine whether Z-Line paid sufficient royalties under the Licensing Agreement. Specifically, LFCL served Requests for Production (RFPs) that asked for all documents regarding licensed products that reflect sales (No. 1), revenue (No. 2), allowances and credits (No. 3), tax and shipping charges or returns (No. 4), net sales amount (No. 5), and communications pertaining to those categories of documents (Nos. 6-10). In response, Z-Line produced a 5800 spreadsheet that refers to all of its products without identifying the licensed products subject to the Licensing Agreement. It did not produce any source documents such as purchase orders, invoices or other documents relevant to sales, revenues or the net sales amounts for the licensed products.

         Z-Line generally argued that it could not produce the source documents themselves because they sold hundreds of products in large volumes and it would be burdensome to produce the invoices. Jt. Disc. Mtn. No. 2 (Dkt. No. 56), p.13. But they did not provide any specifics as to burden. Instead, they focused their opposition on these points: (1) the joint motion was filed late; (2) the spreadsheet was sufficiently responsive to allow LFCL to conduct an audit; and (3) LFCL could have authenticated the spreadsheet during the CFO's deposition. Id., pp.11-17.

         The court granted LFCL's motion to compel because it found that Z-Line failed to carry its burden to show why the court should deny discovery of the highly relevant information. The court ordered Z-Line to fully respond to RFP Nos. 1-10 by April 28, 2017. Z-Line did not file a motion for reconsideration or Rule 72 objections with the District Judge in response to the court's order. And it did not produce the court-ordered discovery.

         Legal Standards for Discovery.

         Parties can obtain discovery of non-privileged information so long as it

is relevant to any party's claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.

Fed. R. Civ. P. 26(b)(1). Discoverable information need not be admissible. Id. Once the propounding party establishes that the request seeks relevant information, “[t]he party who resists discovery has the burden to show discovery should not be allowed, and has the burden of clarifying, explaining, and supporting its objections.” Superior Commc'ns v. Earhugger, Inc., 257 F.R.D. 215, 217 (C.D.Cal.2009); see Blankenship v. Hearst Corp., 519 F.2d 418, 429 (9th Cir.1975) (requiring defendants “to carry heavy burden of showing why discovery was denied”).

         A responding party has a duty to prepare for a Rule 30(b)(6) deposition:

When a party receives a Rule 30(b)(6) deposition notice, it must designate a knowledgeable person to fully prepare and “unevasively answer questions about the designated subject matter.” Bd. of Trs. of the Leland Stanford Junior Univ. v. Tyco Int'l Ltd., 253 F.R.D. 524, 526 (C.D. Cal. 2008) (internal quotations omitted). “[B]ecause Rule 30(b)(6) explicitly requires a company to have persons testify on its behalf as to all matters reasonably available to it, . . . the Rule ‘implicitly requires persons to review all matters known or reasonably available to [the corporation] in preparation for the [Rule] 30(b)(6) deposition.'” Id. The deponent need not have personal knowledge of the designated subject matter. Id.

F.C.C. v. Mizuho Medy Co., Ltd., 257 F.R.D. 679, 681 (S.D. Cal. 2009) (Stormes, J.) (emphasis in original).

         Discussion.

         1. Additional Deposition Regarding Royalty Payments.

         Ms. Martinez was designated to testify as to these topics on behalf of Z-Line as its person most knowledgeable:

1. Z-Line Designs' sales of the “Licensed Products” (as that term is defined in the July 26, 2013 Settlement and License Agreement (“the Agreement”)) in the United States from July 26, 2013 to the present.
2. Z-Line Designs' revenues from sale of the “Licensed Products…”
3. The royalties paid by Z-Line Designs to LF Centennial Limited and Whalen Furniture Manufacturing, Inc. relating to Z-Line's sales of the “Licensed Products…”
4. Z-Line Designs' “allowances and credits” (as discussed in paragraph 3.1 of the Agreement) relating to Z-Line's sale of the “Licensed Products…”
5. Z-Line Designs' “tax or shipping charges or returns” (as discussed in paragraph 3.1 of the Agreement) relating to Z-Line's sale of the “Licensed Products…”
6. Z-Line Designs' “net sales amount” (as discussed in paragraph 3.1 of the Agreement) relating to Z-Line's sale of the “Licensed Products…”

Dalton Decl., Ex. 2.

         LFCL argues that Ms. Martinez's failure to prepare for the deposition compels a further deposition where she is adequately prepared to testify on behalf of the company. Z-Line argues that it was LFCL who was not prepared to ask questions it needed to prosecute this case. Z-Line also complains that its CFO-who testified that she created the spreadsheet that details the royalty payments-should not have been expected to testify as to what is a “Licensed Product” because the deposition notice did not list that as a topic.

         According to case law in this circuit interpreting Rule 30(b)(6), LFCL is entitled to the corporation's knowledge from the corporation's person most knowledgeable as to the noticed topic. See, e.g., Louisiana Pacific Corp. v. Money Market 1 Institutional Investment Dealer, 285 F.R.D. 481, 485-486 (N.D. Cal. 2012) (stating “The corporation has a duty to educate its witnesses so they are prepared to fully answer the questions posed at the deposition”) (citation omitted). “The designee's role is to provide the entity's interpretation of events and documents.” Id. at 486 (citation omitted). As to scope, “the ‘reasonable particularity' requirement of Rule 30(b)(6) cannot be used to limit what is asked of the designated witness at a deposition.” Id. (citation and quotations omitted).

         Rather, the “notice establishes the minimum about which the witness must be prepared to testify, not the ...


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