TO:           Rosalie Rubin, Partner

                  Dubin, Rubin, Cuban, Steuben & Moskowitz, P.C.

 

FROM:     Jason O. Braiman, Junior Associate

 

RE:           U3 v. NAC Records Inc., Motion to Dismiss for Discovery Violations

 

DATE:      November 22, 2005

Statement of Facts:

      We represent NAC Records, Inc., one of the leading record companies in the world.  In September 2004, rock band U3, a former client of NAC, sued the record company in the United States District Court for the Northern District of California for breach of contract, claiming that the record company had neglected to pay them $2.2 million in owed royalties.  Now, fourteen months later, NAC seeks a dismissal of the action under Fed. R. Civ. P. 37(b)(2)(C), on the grounds that U3 has persistently abused and violated the discovery process.

      Approximately one year ago, the parties agreed to a Discovery Deadline of February 1, 2005. However, on January 15, NAC received notice that U3’s counsel, Jack Bauer, had withdrawn from the case to enter military service.  The plaintiffs did not hire new counsel until  January 28, a Friday, four days before the Discovery Deadline, on which new counsel Marcie Jackson requested an extension.  We agreed to a two-month extension, to May 1.

      On  February 2, we served U3 with interrogatories and document requests, due February 20.  The next day, we served the band with four Notices of Deposition, scheduled for April 1-4. By February 20 we had received only fifteen documents, of which we expected over one hundred, and only a portion of the interrogatories, many of which were incomplete.  Ms. Jackson requested an additional extension.  Again, we agreed, but this time allowed only two weeks.  We received no additional documents or interrogatories by the second deadline of March 5. 

      On March 30, Ms. Jackson made a third extension request, this time for the forthcoming depositions, so that her clients could play a fundraiser for Oprah’s Angel Network.  Again we gave them two weeks.  Then, the night before the depositions were scheduled to begin, Ms. Jackson left a voicemail claiming the band members had missed a flight and would be unable to attend, and requesting a fourth extension.  This time we did not return her call.

      On April 15, we filed an emergency motion requesting that the court order the plaintiffs to comply with Discovery Deadlines, and impose sanctions upon them for their failure to do so.  Following a hearing on April 20, Judge Carpio issued a First Discovery Order which set a third Discovery Deadline (July 30) and deposition dates (week of July 11), ordering the plaintiffs to comply.  The judge denied sanctions in the actual court order, though he did verbally warn plaintiffs’ counsel that he would sanction her clients if they did not comply. 

      Ms. Jackson made her fifth extension request on July 10, claiming that her clients had all been in a motor vehicle accident and would once again be unable to attend the forthcoming depositions.  We declined her request and sent a letter the next day to Judge Carpio, requesting a dismissal of the action and/or sanctions against the plaintiffs.  In an order dated 7 November, Judge Carpio denied both requests.  To date we have taken no depositions and received no further documents or interrogatories.  We now look to the United States Court of Appeals for the Ninth Circuit to dismiss the case on the grounds of discovery misconduct.   

Question Presented:

      Will the U.S. Court of Appeals for the Ninth Circuit overrule the district court and dismiss U3’s action against NAC Records, Inc., under Fed. R. Civ. P. 37(b)(2)(C), on the grounds that plaintiffs have not complied with discovery, when:

      (1.) the plaintiffs have failed to produce documents or interrogatories and neglected to attend depositions, extending the proceedings by several months;

      (2.) the district court declined to dismiss the action, or to impose lesser sanctions upon the plaintiffs for their conduct; and

      (3.) the district court did not warn the plaintiffs that their action would be dismissed if they continued their non-compliance?

Brief Conclusion:

      The court of appeals is unlikely to dismiss the action.  The district court has declined, on two separate occasions, to either impose lesser sanctions or warn the plaintiffs that continued non-compliance would result in dismissal.  The court of appeals tends to defer in such matters to the judgment of the district court, which is rarely overruled, and there is no precedent for overruling a non-dismissal. The plaintiffs’ conduct is insufficient to warrant dismissal without first imposing lesser sanctions and an explicit warning of dismissal.

Discussion:

Rule 37 of the Federal Rules of Civil Procedure permits the district court, in its discretion, to dismiss an action or issue a default judgment against a party who fails to comply with an order compelling discovery.  Fed. R. Civ. P. 37 (b)(2)(C); e.g., Computer Task Group, Inc. v. Brotby, 364 F.3d 1112, 1115 (9th Cir. 2004); Fair Hous. of Marin v. Combs, 285 F.3d 899, 905 (9th Cir. 2002); In re Exxon Valdez, 102 F.3d 429, 432 (9th Cir. 1996).  The courts consider dismissal to be a harsh sanction, to be used only in extreme circumstances where the violation is due to willfulness, bad faith, or the fault of the party.  E.g.,  Jackson v. Microsoft Corp., 78 Fed. Appx. 588, 589 (9th Cir. 2003);  Payne v. Exxon Corp., 121 F.3d 503, 507 (9th Cir. 1997);  Valley Eng’rs v. Electric Eng’g Co., 158 F.3d 1051, 1053 (9th Cir. 1997).  The court of appeals has generally deferred to the discretion of the district courts in matters concerning dismissal for discovery misconduct. E.g., Computer Task Group, 364 F.3d at 1115; Payne, 121 F.3d at 507; Anheuser-Busch, Inc. v. Natural Beverage Distribs., 69 F.3d 337, 348 (9th Cir. 1995).

In considering the propriety of a dismissal sanction, the court will apply a five-factor test:

(1.)  the public’s interest in expeditious resolution of litigation;

(2.)  the court’s need to manage its dockets;

(3.)  the risk of prejudice to the party seeking sanctions;

(4.)  the public policy favoring disposition of cases on their merits;

(5.)  the availability of less drastic sanctions.

E.g., Patgalunan v. Galaza, 291 F.3d 639, 642 (9th Cir. 2003);  In re Hurt, No. 98-16455, 2000 U.S. App. LEXIS 1861, at *7 (9th Cir. Feb. 8, 2000);  Diamond Benefits Life Ins. Co. v. Dreyfuss, No. 96-55488, 1997 U.S. App. LEXIS 18236, at *10 (9th Cir. July 18, 1997).  As factors #1 and #2 tend to favor dismissal, and factor #4 generally weighs against it, the key factors in determining whether dismissal is appropriate are #3 (prejudice) and #5 (lesser sanctions).  E.g., Computer Task Group, 364 F.3d at 1115; Stars’ Desert Inn Hotel & Country Club v. Hwang, 105 F.3d 521, 524 (9th Cir. 1997);  Peek v. Golden Nugget Hotel & Casino, No. 93-17005, 1995 U.S. App. LEXIS 12322, at *6 (9th Cir. May 19, 1995).  

In order to show prejudice (factor #3), a party must establish that its opponent’s actions impaired its ability to proceed to trial or to adequately build its case, or hindered the court’s ability to decide the matter fairly and justly.  E.g., In re George, No. 97-56626, 1999 U.S. App. LEXIS 10918, at *6 (9th Cir. May 24, 1999);  Valley Eng’rs, 158 F.3d at 1057; Peek, 1995 U.S. App. LEXIS 12322, at *6.  In deciding whether the district court adequately considered lesser sanctions (factor #5), the court must determine whether the district court: (1.) explicitly discussed the alternative of lesser sanctions and explained why it would be inappropriate; (2.) implemented lesser sanctions before ordering the case dismissed; and (3.) warned the offending party of the possibility of dismissal.  E.g., Computer Task Group, 364 F.3d at 1116; Anheuser-Busch, 69 F.3d at 352.  The court may consider dismissal without lesser sanctions if it determines that they would be ineffectual, if it anticipates continued willfully deceptive or bad-faith conduct, or if the party fails to show that its non-compliance was beyond its control.  E.g., Jackson, 78 Fed. Appx. at *3; Fair Hous., 285 F.3d at 905; Denouden v. University of Washington, No. 98-35025, 1998 U.S. App. LEXIS 17542, at *2 (9th Cir. July 28, 1998).

The court of appeals will likely find that the conditions for dismissal have not been satisfied.  Despite the plaintiffs’ record of delays, non-compliance and last-minute extension requests, Judge Carpio has twice declined to impose sanctions and has not warned the plaintiffs of possible dismissal.  In addition, the plaintiffs’ conduct, while certainly irritating, un-productive and probably not entirely honest, has not been sufficiently egregious or prejudicial to warrant a dismissal without the imposition of lesser sanctions.  Judge Carpio has clearly not determined that the plaintiffs’ conduct warrants dismissal.  In nearly every precedent case, the court of appeals has upheld the judgment of the district court. An exception is In re Hurt, in which the court overturned a dismissal because the district judge did not properly apply the five-factor test.  In re Hurt, 2000 U.S. App. LEXIS 1861, at *10.  There is no precedent wherein the Ninth Circuit Court of Appeals dismissed a case which the district court declined to dismiss.  However, we can apply the five-factor test here to determine if the case warrants dismissal, and if we might persuade the appeals court to set a new precedent.

The Five-Factor Test: Factors #1, #2 and #4.  The first and second factors, supporting the public interest in expeditious litigation and the court’s need to manage its docket, generally favor dismissal. The fourth, respecting the public policy in deciding cases on their merits, tends to weigh against dismissal.  E.g.,  Computer Task Group, 364 F.3d at 1115; Stars’ Desert Inn, 105 F.3d at 524.  It goes without saying that dismissal before trial would prevent the resolution of a case on its merits, although any “public interest” in the merits of a case like ours is likely minimal.  This case is unlikely to affect anyone outside the music industry, which represents a miniscule segment of the population even in California.  It is also fairly obvious that a dismissal would expedite litigation and abet the court’s management of its docket.  However, the court of appeals will likely see the district court as the best assessor of its own scheduling needs, and the judge apparently did not feel compelled to clear the matter from his calendar.  Therefore, even though the public-policy aspect weakens the fourth factor’s weight against dismissal, the second factor’s favoring dismissal out of concern for judicial management is weakened as well.  With factors #1, #2 and #4 effectively canceling each other out, we are left with factors #3 and #5, the possibility of prejudice and availability of lesser sanctions, respectively, as keys to the court’s determination.  

Factor #3: Prejudice.  To prove prejudice against the defendants, we would have to show that the plaintiffs’ conduct impaired our ability to defend our case, or obviated the chance for a fair trial and a just resolution.  In re George, 1999 U.S. App. LEXIS 10918, at *6; Valley Eng’rs, 158 F.3d at 1057; Peek, 1995 U.S. App. LEXIS 12322, at *6.  Failure to produce documents as ordered may constitute sufficient prejudice.  Payne, 121 F.3d at 508; Anheuser-Busch, 69 F.3d at 353.  However, in each of these cases, the court considered the withheld documents to be crucial to the defendants’ case.  The defendants could not proceed, nor have a chance to prevail, without them.  For example, in Valley Eng’rs, the court in upholding the dismissal described the document in question as a “smoking gun.”  Valley Eng’rs, 158 F.3d at 1054.  The material in Payne pertained to the plaintiffs’ personal injuries and was thus essential to the defense of such a lawsuit.  Payne, 121 F.3d at 503.  However, the court in In re Hurt, which overturned the dismissal, found that the records in question were “not central to the controversy, but of minimal apparent relevance.”  In re Hurt, 2000 U.S. App. LEXIS 1861, at *7.  

The Hurt analysis seems to apply here.  Our case is a breach of contract action, where the plaintiffs have accused our clients of withholding or neglecting to pay owed royalties.  The central issues will be whether the royalties were actually owed, and if so whether they were actually paid.  NAC’s own contractual and financial records should provide ample evidence to resolve those issues.  The plaintiffs bear the burden of proving an affirmative answer to the legal question and a negative answer to the factual one.  Our clients as a major record label have significant experience with royalties contracts and payments.  The plaintiffs’ recalcitrance thus tends to prejudice them, not the defendants.   

Factor #5: Lesser Sanctions.  Perhaps most importantly, the district court must impose, or at least consider, lesser sanctions before dismissing an action due to discovery misconduct.  Computer Task Group, 364 F.3d at 1116; Stars’ Desert Inn, 105 F.3d at 524; Anheuser-Busch, 69 F.3d at 352.  In each of these cases the court of appeals, employing a three-point test, determined that the district court had properly considered and/or imposed lesser sanctions before dismissal.  However, the test is essentially moot here as the district judge did not dismiss the case.  Judge Carpio issued no sanctions and did not warn the defendants of a possible dismissal (points #2 and #3).  While he did informally warn plaintiffs’ counsel that he would impose sanctions for non-compliance, he did not specify what those sanctions would be, did not place the warning in his First Discovery Order of 20 April, and did not follow through on the warning.  The “discussion” of sanctions, therefore, cannot be considered “explicit,” as required by point #1.  The issue of lesser sanctions therefore fails, rather miserably at that, on all three points.

In order to win a dismissal, we would have to persuade the court of appeals that lesser sanctions and warnings would be ineffectual in compelling the plaintiffs to comply with discovery.  In Computer Task Group, 364 F.3d at 1112, the court upheld the dismissal upon the plaintiff’s clear record of contempt and non-compliance, holding that “additional lesser sanctions would be pointless.”  Id.  As no sanctions or formal warnings have actually been imposed upon U3, it is impossible to determine to a legal certainty whether such sanctions would or would not compel the plaintiffs’ compliance.  Given their wealth as successful recording artists, we could argue that monetary sanctions would have little effect.  Then again, the plaintiffs are seeking $2.2 million in royalties from our clients, so money is clearly a motivating factor.  The Jackson court felt that lesser sanctions, which had not yet been imposed, would be ineffective based upon the plaintiff’s persistent, blatant deception.  Jackson, 78 Fed. Appx. at 589.  In our case, the plaintiffs have essentially done and said nothing.  The court cannot find U3’s statements “deceptive” if no such statements exist.  We therefore cannot show with any certainty that lesser sanctions, and/or a warning of dismissal, would not compel the plaintiffs’ compliance.

Willfulness, bad faith, fault of the party.  In order to demonstrate willfulness or bad faith on the part of the plaintiffs, we need to show that the plaintiffs’ non-compliance was not beyond their control.  The plaintiff in Fair Hous., 285 F.3d at 905, failed to make such a showing, falsely claiming that the requested documents did not exist.  Id.  U3 has made no such claim.  In Jackson, 78 Fed. Appx. at 589, the plaintiff was “involved in theft, lied in his testimony, and was generally deceptive throughout the proceedings.”  Id.  Again, U3’s conduct thus far does not rise to that level.  While the appearance at Oprah’s fundraiser was certainly within the plaintiffs’ control, their commitment thereto was genuine and not deceptive.  The missing of the airline flight, if true and unintentional, was careless, but carelessness does not equal willfulness.  The automobile accident, if true, would have been outside the plaintiffs’ control.  We have no proof that the missed flight was unintentional, nor that the plaintiffs were actually involved in the alleged accident, but neither do we have any proof to the contrary.  That the plaintiffs asked for extensions on the day or the very eve of each deadline is certainly suspect, but suspicion is not proof, nor is it sufficient to warrant a dismissal without first imposing lesser sanctions.

In conclusion, the plaintiffs’ record of discovery misconduct is not sufficient to warrant a dismissal of the case.  The court of appeals might possibly remand to the district court with instructions to impose lesser sanctions and formally warn the plaintiffs of possible dismissal.  If the plaintiffs’ non-compliance continues, if the sanctions have no effect, or if we can demonstrate that their actions have been willful and in bad faith, we might secure a dismissal further down the road.  For now, lesser sanctions and a warning must be tried first.