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Cardinal v. Lupo

United States District Court, N.D. California

September 17, 2019

CHRISTOPHER CARDINAL, et al., Plaintiffs,
v.
JOHN LUPO, et al., Defendants.

          ORDER REGARDING MOTION FOR SANCTIONS AND MOTIONS FOR SUMMARY JUDGMENT Re: Dkt. Nos. 81, 84, 89, 91, 96, 116

          JOSEPH C. SPERO CHIEF MAGISTRATE JUDGE

         I. INTRODUCTION

         This case concerns Defendant John Lupo's sale of a residential kitchen remodeling company, Kitchen Experts of California, Inc. (“Kitchen Experts”), to Plaintiff Christopher Cardinal. Kitchen Experts and a second company that Cardinal later purchased, American Appliance Outlet, LLC (“AAO”), are also plaintiffs. Lupo's wife Andreana Michael, his employees Moheba D'Anna and Bryce Phelton, and his new companies Kitchen Fantastic, Inc. and Appliance Fantastic, Inc. are also defendants. Defendants now move for summary judgment and Plaintiffs move for discovery sanctions. The Court held a hearing on September 6, 2019. For the reasons discussed below, the motions are GRANTED in part and DENIED in part.[1]

         II. BACKGROUND[2]

         In March of 2017, Lupo contacted Cardinal with an offer to sell Kitchen Experts-a kitchen remodeling business-to him for $1 million, purportedly because Lupo was moving out of state. Cardinal contends that he agreed to the deal based on Lupo's representations about the company, and based on an opportunity conduct due diligence, which Lupo hindered by limiting Cardinal's access to documents, ostensibly to avoid employees leaving the company if they learned a sale was likely. Due diligence was limited to Cardinal's review of certain binders that Lupo provided. The agreed upon price subsequently increased to $1.5 million, and the stock purchase agreement that the parties signed in May of 2017 called for a price of $2 million. Cardinal claims that, following closing of the deal, he learned that many of Lupo's representations were false, and that Kitchen Experts had significant undisclosed debts, paid many of its employees outside of formal payroll to avoid pay deductions, and lacked basic financial records, among other issues that were not disclosed before the sale. Later in 2017, rather than move out of state and enter a different line of work, Lupo founded a new kitchen remodeling service, Kitchen Fantastic, which competed with Kitchen Experts. Certain Kitchen Experts employees, including Defendant Phelton and foreman Luis Daza, ended up leaving Kitchen Experts to work fort Kitchen Fantastic.

         In September of 2017, Cardinal purchased another business, Plaintiff AAO, from non-parties Tristan Odell and Mariam Helmandy. Cardinal states that Defendant D'Anna, an AAO employee, encouraged him to falsify documents in an effort to maintain a relationship with Riggs Distributing, Inc., an important supplier. AAO fired D'Anna on October 16, 2017. D'Anna continued to use a Yahoo email account that had at times been used as AAO's general office email address for several days after she was fired, until AAO changed the password and security settings. The parties dispute whether AAO or D'Anna owned that email address. At some point after she was fired by AAO, D'Anna began working for Defendant Appliance Fantastic, another new company founded by Lupo that competed with AAO.

         Cardinal eventually consolidated both Kitchen Experts and AAO under a holding company called Good Development, and soon thereafter transferred all of his stock in Good Development to his business partner James Franchini, in exchange for Franchini assuming the companies' debts to Cardinal of more than $2 million.

         Plaintiffs' complaint includes the following claims: (1) fraudulent misrepresentation, asserted by Cardinal against Lupo, Compl. ¶¶ 50-57; (2) negligent misrepresentation, between the same parties, id. ¶¶ 58-59; (3) aiding and abetting fraud, asserted by Cardinal against Michael, id. ¶¶ 60-64; (4) breach of contract, asserted by Kitchen Experts against Lupo, id. ¶¶ 65-69; (5) breach of contract, asserted by Cardinal against Lupo, id. ¶¶ 70-73; (6) breach of the duty of good faith and fair dealing, asserted by Kitchen Experts against Lupo, id. ¶¶ 74-77; (7) “Trade Libel/Commercial Disparagement, ” asserted by Kitchen Experts and AAO against Lupo, Kitchen Fantastic, and D'Anna, id. ¶¶ 78-85; (8) intentional interference with contractual relations, asserted by Kitchen Experts against Lupo and D'Anna, id. ¶¶ 86-97; (9) intentional interference with prospective economic relations, asserted by Kitchen Experts against Lupo, id. ¶¶ 92-97; (10) breach of the duty of loyalty, asserted by Kitchen Experts against Phelton, id. ¶¶ 98-102; (11) inducing a breach of the duty of loyalty, asserted by Kitchen Experts against Lupo and Kitchen Fantastic, id. ¶¶ 103-06; (12) conversion, asserted by Kitchen Experts against Lupo and Kitchen Fantastic, id. ¶¶ 107-12; (13) violation of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030(a)(2)(C), asserted by Kitchen Experts against Lupo and Kitchen Fantastic, id. ¶¶ 113-19; (14) violation of the Stored Communications Act (“SCA”), 18 U.S.C. § 2701, asserted by AAO against Lupo, Appliance Fantastic, and D'Anna, Compl. ¶¶ 120-26; and (15) unlawful, unfair, and fraudulent competition in violation of California's unfair competition law (the “UCL”), Cal. Bus. & Prof. Code § 17200, asserted by Kitchen Experts and AAO against Kitchen Fantastic and Appliance Fantastic, Compl. ¶¶ 127-29.

         III. SUBJECT MATTER JURISDICTION

         Although the parties have not raised any question of the Court's subject matter jurisdiction, the Court is required to consider that issue sua sponte and dismiss any claims that fall outside its jurisdiction. The CFAA and SCA claims arise under federal law, and thus fall within federal question jurisdiction under 28 U.S.C. § 1331. The only potential basis for jurisdiction over the other thirteen claims, all of which arise under California state law, is supplemental jurisdiction pursuant to 28 U.S.C. § 1367. That statute authorizes district courts to hear “claims that are so related to claims in the action within [the Court's] original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.” 28 U.S.C. § 1367(a). In determining whether claims are sufficiently related to meet that test, courts look to whether they share a “‘common nucleus of operative fact.'” See Mendoza v. Zirkle Fruit Co., 301 F.3d 1163, 1173-74 (9th Cir. 2002) (quoting United Mine Workers of Am. v. Gibbs, 383 U.S. 715, 725 (1966)). The inclusion of additional plaintiffs in such claims-here, Cardinal, who does not assert either the SCA claim or the CFAA claim-does necessarily preclude supplemental jurisdiction. See generally Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546 (2005) (holding that, where at least one plaintiff in a class action meets the amount-in-controversy requirement of 28 U.S.C. § 1332, a court may exercise supplemental jurisdiction over the claims of class members who do not meet that requirement).

         Although not all of the claims here rest on the same specific facts, all arise from the same course of dealing between Lupo and Cardinal during the sale of Kitchen Experts and their subsequent competition. The Court concludes that the claims are part of the same constitutional case and that Plaintiffs' state law claims fall within the Court's supplemental jurisdiction.

         IV.MOTION FOR SANCTIONS

         A. Legal Standard

         “Federal courts have the authority to sanction litigants for discovery abuses both under the Federal Rules of Civil Procedure and pursuant to the court's inherent power to prevent abuse of the judicial process.” Network Appliance, Inc. v. Bluearc Corp., No. C 03-5665 MHP, 2005 WL 1513099, at *2 (N.D. Cal. June 27, 2005) (citing Chambers v. NASCO, Inc., 501 U.S. 32, 45-46 (1991); In re Yagman, 796 F.2d 1165, 1187 (9th Cir. 1986)). Rule 16(f) of the Federal Rules of Civil Procedure allows a court to order sanctions where a party or its attorney fails to obey a pretrial order. Rule 37(b)(2)(A) specifically addresses sanctions that may be imposed on a party that has failed to comply with a discovery order, including striking pleadings in whole or in part, dismissal, entry of default judgment, contempt of court, and, as Plaintiffs seek here, an order “directing that the matters embraced in the order or other designated facts be taken as established for purposes of the action, as the prevailing party claims.” See Fed. R. Civ. P. 37(b)(2)(A)(i).

         A district court has inherent authority to impose sanctions for spoliation of evidence. Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006); Glover v. BIC Corp., 6 F.3d 1318, 1329 (9th Cir. 1993). The majority of courts use a three-part test to determine whether spoliation occurred, consisting of the following elements: “‘(1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a “culpable state of mind;” and (3) that the evidence was “relevant” to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.'” Apple Inc. v. Samsung Elecs. Co., 881 F.Supp.2d 1132, 1138 (N.D. Cal. 2012) (quoting Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 215 (S.D.N.Y. 2003)) (footnotes omitted). If spoliation is found, courts often consider three factors to determine whether and what type of sanctions to issue: “(1) the degree of fault of the party who altered or destroyed the evidence; (2) the degree of prejudice suffered by the opposing party; and (3) whether there is a lesser sanction that will avoid substantial unfairness to the opposing party.” Nursing Home Pension Fund v. Oracle Corp., 254 F.R.D. 559, 563 (N.D. Cal. 2008) (quoting Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76, 79 (3d Cir. 1994)).

         In this Court, “[a]ny motion for sanctions, regardless of the sources of authority invoked, . . . must be made as soon as practicable after the filing party learns of the circumstances that it alleges make the motion appropriate.” Civ. L.R. 7-8.

         B. The Court's Previous Orders

         Although Plaintiffs' briefs regarding sanctions include references to Defendants' purported violation of other “discovery obligations, ” the focus of the motion is whether Defendants complied with two previous court orders. See, e.g., Sanctions Mot. (dkt. 116) at 9-10 (“Here, Defendants violated the Court's orders found at Docket Nos. 66 and 69. . . . Accordingly, Plaintiffs are entitled to sanctions under Rules 37 and 16.”); id. at 12 (identifying “Defendants' refusal to comply with the Court's order” as the basis for sanctions under the Court's inherent authority). With the exception of a brief discussion of the Court's inherent authority to sanction spoliation of evidence, see Id. at 13-14, Plaintiffs do not discuss in any detail other obligations that Defendants violated, and do not address authority or legal standards for sanctions related to such obligations. The Court therefore also focuses on those previous orders, as well as spoliation, in considering Plaintiffs' motion.

         In the weeks leading up to January 18, 2019, counsel for the parties had a series of conferences with one another and with the Court regarding discovery disputes, during which defense counsel was at times unable to obtain compliance from his clients and the Court at times admonished defense counsel for failure to comply with Court orders and discovery obligations. On January 18, 2019, the parties submitted a stipulation prepared during a conference that the Court required them to hold in person at the courthouse in an effort to resolve their discovery disputes. The Court adopted that stipulation as an order (the “January 2019 order”) on January 22, 2019, and filed that order on January 23, 2019. See Jan. 2019 Order (dkt. 66). As is relevant to the current dispute, the January 2019 order required Defendants to take the following actions no later than January 23, 2019 (with respect to Lupo's obligations) and January 25, 2019 (with respect to the other Defendants' obligations):

Defendant John Lupo to confirm completion of search for documents and records related to Plaintiff Kitchen Experts of California, Inc.'s corporate books and records, including without limitation tax returns and files provided by RKO Tax & Investments, Inc.
Defendant John Lupo to provide update to Plaintiffs regarding his efforts and ability to access his Comcast email account and the Bank of America account.
Defendant John Lupo to provide update to Plaintiffs regarding the status of prior mobile devices and tablets, including dates each device was last used by him and/or transferred to a third party.
Defendant Bryce Phelton to provide update to Plaintiffs regarding the status and location of all prior mobile devices, tablets, and computers, including dates each device was last used by him and/or transferred to a third party.
Defendants Kitchen Fantastic, Inc. and Legacy Appliance (fka Appliance Fantastic, Inc.) to confirm the existence, identity and amount of certain corporate books and records, which the parties understand to mean any balance statements, profit and loss statements, gross sales and receipts, employment agreements, subcontractor agreements, payroll records, payments to any employees outside of payroll, lease agreements, vendor contracts, utility statements, bank statements, and tax returns to facilitate a further meet and confer between lead trial counsel to identify with particularity which, if any, documents to be included in a further production of documents to be made no later than January 31, 2019.
Defendant Andreana Michael to serve verified amended responses to Plaintiff Christopher Cardinal's Request for Production, Set One, including a statement compliant with Civil Standing Order for Magistrate Judge Joseph C. Spero, ¶¶ 10, 11.
Defendant Moheba D'Anna to serve verified amended responses to Plaintiff Christopher Cardinal's Request for Production, Set One, including a statement compliant with Civil Standing Order for Magistrate Judge Joseph C. Spero, ¶¶ 10, 11.

Id. The order also required counsel for both parties to meet and confer on January 28, 2019 regarding a supplemental document production, and required Defendants to complete that document production no later than January 31, 2019. Id.

         The parties appeared for a case management conference on February 7, 2019, at which time the Court ordered, in relevant part, as follows:

1. With respect to all documents sent to Defendant Lupo or to any of his companies by accountant Robert Olson, Defendants shall turn those documents over to defense counsel who shall review them and produce responsive document [sic] on or before 2/15/19.
2. With respect to document relating to Kitchen Fantastic and to Appliance Fantastic, on or before 2/15/19 defendants shall produce all of the following documents for the period from the sale transaction at issue in this case to present:
a. All records relating to any and all compensation paid to any employee, officer or independent contractor;
b. All marketing and advertising documents and documents relating to marketing and advertising expenses;
c. All leases;
d. All monthly banking records;
e. All documents reflecting gross receipts;
f. All documents relating to any loans.
3. After production of the documents above, Plaintiff shall take the deposition of Mr. Lupo. If further documentation is produced after the deposition, the court will consider ordering the [sic] Mr. Lupo's deposition be reconvened.
4. On or before 2/15/19, the parties shall meet and confer and resolve all issues regarding any forensic examination of cell phones, tablets and computers, and any documents requested from plaintiff from defendants [sic]. Any remining issues will be addressed at the next CMC [i.e., case management conference].

Feb. 7, 2019 Civil Minute Order (“Feb. 2019 Order, ” dkt. 69). At the next case management conference on February 15, 2019, the parties acknowledged that discussions regarding electronic discovery were continuing but expressed no concerns about their ability to resolve the remaining issues, except that they might need to extend the deadline to complete depositions. See dkt. 72 (minutes, reflecting no discovery issues).

         C. Sanctions Requested

         1. Order Excluding Diligence Materials

         The first sanction that Plaintiffs request is an order excluding Defendants from introducing any evidence of the documents that Lupo made available for Cardinal to review in binders during a meeting at Lupo's attorney's office as part of Cardinal's due diligence investigation before purchasing Kitchen Experts. Sanctions Mot. at 15-16. Cardinal was not permitted to keep copies of those documents, and they were not produced in discovery. According to Lupo's June 26, 2019 deposition testimony, Lupo did not take them with him after the meeting and never saw them again. Crawford Decl. re Sanctions (dkt. 116-1) Ex. 11 (Lupo Dep.) at 255:18-25, 257:3-9. Plaintiffs argue that such documents are crucial to rebut Defendants' contention that Cardinal should have been aware of any payroll or accounting irregularities at Kitchen Experts as a result of the due diligence process, and specifically as a result of Bank of the West and American Express account statements included in the diligence materials. Plaintiffs reasonably contend that bank records procured later are not a substitute for the actual collection of documents provided for Cardinal's diligence review, because such records do not necessarily reflect what was available for Cardinal to review before closing the deal.

         Plaintiffs' motion cites no authority requiring Lupo to have preserved or produced in litigation the binders made available during Cardinal's due diligence review. Sanctions Mot. at 15-16. Plaintiffs' reply brief suggests that Lupo's failure to produce those documents either constitutes or evinces a violation of the January 2019 order that Lupo “confirm completion of search for documents and records related to Plaintiff Kitchen Experts of California, Inc.'s corporate books and records.” Jan. 2019 Order at 1; see Reply re Sanctions (dkt. 119) at 8.

         The only evidence regarding the fate of the diligence binders is: (1) Cardinal's declaration that he was not permitted to keep them; and (2) Lupo's testimony that he did not take them with him and does not know what happened to them. There is no evidence that the binders currently exist or that they existed at the time this lawsuit was filed. Other than a letter that defense counsel sent to Plaintiffs' counsel confirming that the search required by the January order had been completed-which, as Plaintiffs correctly note, is inadmissible hearsay for the truth of the matter asserted-there is no evidence regarding what, if any, search Lupo conducted for Kitchen Expert's corporate records. Nor is there any indication that Plaintiffs specifically requested these binders, as opposed to more general requests for production of, for example, “[a]ll documents and communications regarding or relating to . . . the sale of Kitchen Experts.” See Crawford Reply Decl. re Sanctions (dkt. 119-1) Ex. 32 (Request No. 6).

         Plaintiffs have not shown that Defendants violated a court order with respect to this issue. The January 2019 order narrowly required Lupo to certify that he completed a search for documents. Lupo provided a letter to that effect, and despite Plaintiffs having subsequently taken Lupo's deposition, Plaintiffs identify no evidence that the search was inadequate. The Court did not order Lupo to produce the particular documents at issue. Plaintiffs therefore have not demonstrated that they are entitled to sanctions for violation of a court order under Rules 16 or 37.

         Plaintiffs also have not met the test for spoliation sanctions. The first element of that test is that the party to be sanctioned must have had a legal duty to preserve the documents at issue. See Apple, 881 F.Supp.2d at 1138. Plaintiffs have not argued or shown that Lupo had any duty to preserve the diligence binders at the time of the sale. In the absence of such a showing, or any evidence that the documents survived beyond that point and were destroyed during the pendency of this case, Plaintiffs cannot establish spoliation. The request for an order precluding evidence of the diligence materials is DENIED, and witnesses for any party may testify regarding their recollections of what documents were included in the binders made available for Cardinal's review.

         2. Jury Instruction that Lupo Solicited Daza

         Plaintiffs seek an instruction that Lupo solicited foreman Luis Daza to work for Kitchen Fantastic while Daza was still employed by Kitchen Experts, in violation of a non-solicitation provision of the purchase agreement. Sanctions Mot. at 16-18. According to Plaintiffs, this sanction is warranted because Defendants have not produced all communications with Daza or records of payments to Daza and refused to provide their electronic devices for forensic review. Id.

         Lupo testified at his deposition that Daza worked for him and for Kitchen Fantastic, with Lupo initially paying Daza personally (for work on “[k]itchens”) before “he came to work for the company.” Crawford Decl. re Sanctions Ex. 11 (Lupo Dep.) at 313:10-11, 327:23-328:13. Lupo suggested that, by the time of his deposition, he had come to know that Daza was still employed by Kitchen Experts when he began working for Lupo and Kitchen Fantastic, but testified that his understanding differed at the time of the events in question, because Daza told Lupo that he had quit his job with Kitchen Experts. Id. at 313:15-314:22. In an October 16, 2017 text message, Daza informed Lupo that he had given his two weeks' notice resigning from Kitchen Experts, and that “Friday”-presumably October 13, 2017-was his last day. Id. at 324:9-17; Pohls Decl. re Sanctions (dkt. 118-3) Ex. 16. Lupo testified that Daza had told him the same thing verbally before then. Crawford Decl. re Sanctions Ex. 11 (Lupo Dep.) at 324:9-24. There is some indication that Lupo and Phelton had reached out to Daza regarding Kitchen Fantastic in September of 2017, before Daza sent Lupo the text message regarding his resignation. Id. (Lupo Dep.) at 318:12-320:6.

         The Court has serious concerns about Lupo's compliance with his discovery obligations regarding financial records. The absence of records of payment to Daza and others for work performed less than six months before Plaintiffs filed this action is unusual, and Lupo's vague and evasive answers at his deposition regarding his efforts to locate and produce such records do not inspire confidence. See Id. (Lupo Dep.) at 305:2-12.[3] Nevertheless, Plaintiffs have identified no evidence that any records of payment to workers that the Court ordered produced in fact existed at the time of the Court's orders. Absent such evidence, Plaintiffs have not shown that Defendants violated the orders in that respect. Nor have Plaintiffs identified evidence that such records existed at a time when Defendants had a duty to preserve them, as would be required for sanctions based on spoliation. The Court therefore declines to impose a jury instruction as a sanction for Defendants' failure to produce payment records. Plaintiffs may, however, question Lupo and others about the lack of such records at trial, and the jury may draw inferences from their absence as it sees fit.

         The Court also has concerns regarding the scope of Defendants' production of text messages and other communications. Defendants' produced electronic communications solely in the form of screenshot images, without any associated metadata, and in some cases without indication of the date and time that messages were sent or received. See Crawford Decl. re Sanctions ¶ 24. Lupo-who filed his answer (dkt. 14) to Plaintiffs' complaint on February 9, 2018, while represented by counsel-has been unable to locate emails in his personal Comcast account predating March 14, 2018, ostensibly as a result of the account having been “hacked” by an unknown person. Lupo Decl. re Sanctions (dkt. 118-2) ¶ 5; Opp'n to Sanctions Mot. (dkt. 118) at 2 n.1; Crawford Decl. re Sanctions Ex. 13 (Jan. 23, 2019 letter from defense counsel). Certain messages sent between defendants were only located by one of the parties to the message, and were not included in the other party's production. See, e.g., Sanctions Mot. at 19; Crawford Decl. re Sanctions Ex. 5 (D'Anna Dep.) at 281:25-282:12; Crawford Decl. re D'Anna & Appliance MSJs (dkt. 104) ¶ 9 (collectively indicating that D'Anna produced only one page of text messages between her and Lupo, which Lupo produced seventy-two pages of messages between D'Anna and Lupo, an assertion not disputed in Defendants' opposition to the motion for sanctions). Under these circumstances, Plaintiffs' concerns about Defendants' production of electronic communications are reasonable.[4]

         That being said, the Court is not persuaded that a jury instruction is an appropriate sanction. There is no evidence that Defendants in fact withheld any communications regarding Daza's employment, or that they failed to preserve any such communications at a time when they had a duty to do so. Plaintiffs have a strong argument that Defendants failed to comply with the Court's February 2019 order that the parties “meet and confer and resolve all issues regarding the forensic examination of cell phones, tablets and computers, and any documents requested from plaintiff from defendants [sic].” See Feb. 2019 Order ¶ 4. After the parties had begun to negotiate regarding this issue, Plaintiffs' counsel sent defense counsel a proposal for forensic examination on March 5, 2019, but Defendants never responded to that proposal and never made their devices available for review. Crawford Decl. ¶ 22. But Plaintiffs waited to raise the issue of that noncompliance until the present motion filed August 9, 2019-more than five months after the proposal to which Defendants failed to respond, two months after the repeatedly extended deadline to complete non-expert depositions, and days after briefing concluded on Defendants' motions for summary judgment. This despite the Court's February 7, 2019 order that any issues the parties could not resolve regarding forensic examination should be raised at the subsequence case management conference on February 15, 2019. Plaintiffs offer no explanation for this delay.

         This Court's local rules require that any motion for sanctions “must be made as soon as practicable after the filing party learns of the circumstances that it alleges make the motion appropriate.” Civ. L.R. 7-8(c). The circumstances here illustrate one reason for that rule. If Plaintiffs had raised the breakdown in communication regarding forensic examination earlier, the Court would likely have ordered Defendants to respond to Plaintiffs' proposal, or ordered Defendants to submit to a reasonable examination of their devices, likely combined with an order that Defendants pay Plaintiffs' attorneys' fees for the arduous process. The same is true of Defendants' failure to produce electronic communications in a form that preserved relevant metadata. Instead, the parties represented to the Court at the February 15, 2019 case management conference that they were on a path towards resolving any remaining issues with electronic discovery. No party raised any such issue in the months since then until the briefing on the present motions. At this point, an order requiring forensic examination of devices would be tantamount to reopening discovery after the briefing on summary judgment has closed and with little time remaining before trial. The Court declines to do so.

         Because Plaintiffs have not shown a likelihood that communications wrongfully withheld from production (to the extent any communications have been) would support the factual assertion of their proposed jury instruction, and because Plaintiffs' own delay in raising the issue has precluded the possibility of lesser, more appropriate sanctions, the motion for a jury instruction regarding Lupo's solicitation of Daza to work for Kitchen Fantastic while he was employed by Kitchen Experts is DENIED. If Plaintiffs wish to question Defendants at trial about gaps in their production of documents, they may do so.

         3. Jury Instruction Regarding Brach of Duties to Kitchen Experts

         Plaintiffs seek a jury instruction related to their claims for breach of duties owed to Kitchen Experts, although the precise instruction they seek varies depending where one looks in their motion. The lists included in Plaintiffs' notice of motion and in their proposed order, as well as a heading in their memorandum of points and authorities, refer to a “[j]ury instruction that Phelton and Daza breached their fiduciary duties to Kitchen Experts.” See, e.g., Sanctions Mot. at 18. The body of their argument, however, “request[s] that the jury be instructed that Lupo and Kitchen Experts induced Daza and Phelton to breach their duties of loyalty to Kitchen Experts.” Id. at 19. The latter instruction is more consistent with Plaintiffs' characterization of their claims in their complaint and particularly in their opposition to Phelton's motion for summary judgment, where Plaintiffs emphasize that the claim is based on an employee's duty of loyalty rather than on a fiduciary duty. See, e.g., Opp'n to Phelton MSJ (dkt. 86) at 7; Compl. ¶¶ 98-106.

         Defendants represented to Plaintiffs that Phelton replaced his mobile phone in September or October of 2017 without retaining the previous phone, and replaced it again in September or October of 2018, again without retaining the previous phone. Crawford Decl. re Sanctions Ex. 13. Phelton states in his declaration that each time he replaced his phone, he understood that all of the data on the old phone was transferred to the new phone. Phelton Decl. re Sanctions (dkt. 118-1) ¶¶ 2, 5. In March of 2018, however, Phelton visited an Apple Store to complain about problems with his phone's navigation functions, and an Apple employee instructed him that it would be necessary to reset the phone to its factory settings. Id. ¶ 3(1).[5] Phelton states that he “took those steps the Apple representative identified for [him] to back-up all of the electronically stored information on [his] cell phone” before resetting the phone, but nevertheless discovered after the phone had been reset “that some of that electronically stored information-in particular, [his] phone call records and text messages-had not been backed-up and were no longer on [his] cell phone.” Id. ¶ 3(2). Phelton was served with the complaint in this action in January of 2018 (by substitute service on a person in charge at his place of business followed by mailing), first obtained counsel on April 19, 2018, and answered Plaintiffs' complaint on April 20, 2018. See dkts. 25, 32; Phelton Decl. re Sanctions ¶ 4.

         Plaintiffs have offered no argument or evidence showing that Phelton had a duty to preserve communications when he replaced his phone in 2017. The Court declines to impose any sanctions for that conduct.

         Phelton's conduct in resetting his phone in March of 2018, which in fact resulted in a loss of data, is a closer call. Phelton had at that time been served with Plaintiffs' complaint and does not claim to have been unaware of this action. Phelton therefore should have taken reasonable steps to preserve electronically stored information. See Fed. R. Civ. P. 37(e) (discussing the duty to “take reasonable steps to preserve” electronically stored information “in the anticipation or conduct of litigation”). On the other hand, Phelton was not represented by counsel at the time, and claims to have followed instructions from an Apple representative to back up his data before resetting the phone, even though those instructions proved ineffective. See Phelton Decl. re Sanctions ¶¶ 3(2), 4. With no evidence to contradict Phelton's explanation of what happened, the Court cannot say that his conduct-which, according to his declaration, he believed would be sufficient to preserve his data-was unreasonable for an unrepresented litigant.

         Phelton's replacement of his phone in the fall of 2018 also raises concerns. Phelton had been represented by counsel for several months by that time, and should have taken more rigorous steps to preserve his data than simply transferring it to a new phone and discarding the old one. Nevertheless, Plaintiffs have not shown prejudice as a result of the 2018 phone replacement. There is no indication that data was in fact lost in the process; Plaintiffs do not dispute that Phelton has access to communications dating back to March of 2018. While Phelton's conduct discarding a phone that he used might have affected the ability for a forensic examination to show past deletion or manipulation of data, no such examination occurred, due in part to Plaintiffs' own lack of diligence in pursuing the issue, as discussed above in the context of the previous jury instruction sought in Plaintiffs' motion. The hypothetical effect that Phelton's phone replacement might have had on a forensic examination that never occurred is not cognizable prejudice. The motion for this jury instruction is DENIED. Plaintiffs may question Phelton about the loss of his data at trial if they so choose.

         4. Jury Instructions that D'Anna Was Appliance Fantastic's Agent

         Plaintiffs seek a jury instruction that D'Anna was acting as Appliance Fantastic's agent when she made purportedly defamatory statements to AAO's customers and vendors. Sanctions Mot. at 19-21. In light of the Court's holding below that Defendants are entitled to summary judgment on Plaintiffs' trade libel claims for reasons unrelated to agency, the jury instruction specifically requested is moot.

         Plaintiffs also request an instruction that D'Anna was acting as Appliance Fantastic's agent when she accessed an email account that Plaintiffs contend was owned by AAO, purportedly in violation of the Stored Communications Act. Id. at 21-22. Plaintiffs arguments for that instruction consist solely of identifying “significant direct and circumstantial evidence that D'Anna was acting pursuant to an agreement with Lupo for the benefit of Appliance Fantastic.” Id. at 22. The existence of evidence is not grounds for imposing a jury instruction as a discovery sanction. Nevertheless, because Plaintiffs' arguments in favor of the former proposed instruction regarding the trade libel claim, which is moot, could also be applied to the proposed instruction regarding the Stored Communication Act claim, which is not, the Court addresses those arguments.

         Plaintiffs seek this sanction based on D'Anna's failure to produce complete records of her communications-particularly with Lupo and with Riggs Distributing representative Bob Hostetler-as well as payment records that “tend to show when D'Anna became an agent of Appliance Fantastic.” Sanctions Mot. at 20-21.[6] Although the gaps in D'Anna's records raise concerns, Plaintiffs have not shown that the documents at issue existed at any time that D'Anna had a duty to preserve them. Plaintiffs also have not offered any explanation for bringing the present motion months after discovery closed, rather than “as soon as practicable” as required by Local Rule 7-8, which would have preserved the option of imposing lesser sanctions to explore whether any such documents still exist or could be recovered. The motion for these instructions is DENIED.

         5. Jury Instruction Regarding Unfair Competition

         Plaintiffs seek a jury instruction that Kitchen Fantastic and Appliance Fantastic engaged in unfair competition as a sanction for Defendants' failure to produce records of “off-payroll” payments that several witnesses testified occurred. Sanctions Mot. at 23-24. As Defendants correctly note, California's Unfair Competition Law generally provides only for equitable relief, and claims under that statute are generally tried to the court rather than to a jury. See, e.g., People v. Bhakta, 162 Cal.App.4th 973, 979 (2008) (citing Hodge v. Superior Court, 145 Cal.App.4th 278, 284 (2006)).[7] Plaintiffs do not address this issue in their reply.

         The Court construes the motion as asking the Court to accept as proven that Defendants paid workers off payroll to avoid otherwise mandatory deductions from the employees' paychecks. There is no real dispute that such payments occurred, including well into 2018, and that not all of the checks are accounted for in Defendants' document production. See, e.g., Crawford Dec. re Sanctions Ex. 2 (Ohelo Dep.) at 131:23-132:23 (testimony that Ashton Ohelo received payments from Lupo from when he started working for Kitchen Fantastic in late 2017 or early 2018 until he was added to formal payroll in August of 2018); id. Ex. 4 (Phelton Dep.) at 226:11-231:24 (describing checks received outside of the payroll system, including in late 2018); see also Id. Ex. 6 (D'Anna Dep.) at 304:6-309:12 (somewhat equivocal and contradictory testimony as to whether D'Anna received payment in 2018 other than formal payroll and commissions paid directly by vendors). Moreover, because at least some payments that are unaccounted for in Defendants' document production continued into 2018 after this action was filed and Defendants were represented by counsel, there is no question that Defendants were subject to a duty to preserve those records. Defendants either failed to do so or failed to produce them as required by the February 2019 order.

         The fact remains that Plaintiffs failed to bring this motion until well after discovery closed, violating Local Rule 7-8 and depriving the Court of the potential to order other forms of effective relief. Because the record appears to be clear that such payments occurred, [8] the need for an evidentiary sanction accepting that fact as proven might well be moot. For the moment, the Court DENIES Plaintiffs' motion for this sanction, without prejudice to Plaintiffs renewing the motion after trial if necessary.[9]

         6. ...


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