Remember your middle school teacher who would remove a grade letter for each day your paper was late? Maybe that teacher was inspired by the Federal Rules of Civil Procedure.
Energy Keepers, Inc v. Hyperblock LLC examines FRCP Rule 37(c)(1) and the timely disclosure of discovery under Rule 26.
Background of the Case
Energy Keepers, Incorporated (“EKI”) sued Hyperblock LLC, and other defendants, to recover damages from Defendants’ alleged breach of its electric power services contract with EKI. Additionally, EKI asserted that Project Spokane LLC and Sean Walsh were liable under a veil-piercing theory that they controlled Hyperblock LLC and abused the corporate form by diverting assets to Project Spokane LLC and directly to Sean Walsh.
The parties had a discovery deadline of December 4, 2020 within the schedule set by the Court. Before this deadline, Defendants produced 12,000 pages of electronic discovery, of which over 8,000 were documents that appeared to have originated from sources other than Mr. Walsh’s files.
“The ESI At Issue”
On January 4, 2021, after the discovery deadline, Defendants attempted to produce additional documents that were “recently discovered by Mr. Walsh.” All of these additional documents predate the close of discovery. These documents contradict the parties’ stipulated facts, where Walsh testified that he did not document $2 million-worth of transfers from himself to Hyperblock Inc., Hyperblock LLC’s parent company. EKI relied on this stipulation in its summary judgment motion to support its arguments that Walsh commingled funds with Hyperblock LLC.
EKI sought to strike these documents that were not timely disclosed under Federal Rule of Civil Procedure 37(c).
The Court's Analysis
Under Rule 37(c)(1), a party is barred from using information “to supply evidence on a motion, at a hearing, or at a trial” when such information was not disclosed in accordance with Rule 26(a) or (e). Rule 26(a)(1)(A)(ii) provides that a party must disclose all documents “that the disclosing party has in its possession, custody, or control and may use to support its claims or defenses, unless the use would be solely for impeachment.” Rule 26(e) requires that a party timely “supplement or correct” a Rule 26(a) disclosure if the party learns that its response was “incomplete or incorrect.”
The Court found that the Defendants’ late disclosure did not comply with Rule 26(e) as all of the documents predated the discovery deadline and should have been initially disclosed under Rule 26(a). As such, Defendants cannot use untimely supplementation under Rule 26(e) to provide information, reasoning, or opinions that should have been initially disclosed.
Defendants alternatively argued that their failure to disclose the supplemental documents was justified and harmless to avoid any sanctions under Rule 37(c)(1), which excuses late disclosure if it “was substantially justified and harmless.” To avoid the general rule of exclusion of late-disclosed materials, Defendants bear the burden of proving that the late disclosure was substantially justified and harmless. Goodman v. Staples The Office Superstore, LLC, 644 F.3d 817, 827 (9th Cir. 2011).
The Court considered the five factors laid out in Keener v. United States, 181 F.R.D. 639,641 (D. Mont. 1998) to determine whether the late disclosure was substantially justified or harmless:
- the public’s interest in expeditious resolution of litigation;
- docket management;
- the risks of prejudice to the non-disclosing party;
- public policy favors disposition of cases on their merits; and
- the availability of less drastic sanctions.
The Court found the first two factors weighed in favor of EKI. Requiring parties to comply with discovery rules and deadlines promotes the expeditious resolution of litigation and allows the Court to manage its docket. The Court noted that Defendants did not meet the Rule 16(b)(4) “good cause” requirements to amend the scheduling order given that most of the Defendants’ produced documents came from sources other than Walsh, undercutting Defendants’ argument that Walsh’s diligence supported a finding of good cause.
The third factor also weighs in favor of EKI which would be prejudiced because it relied heavily on the stipulated fact that Walsh did not document his $2 million loan to Hyperblock Inc.
The fourth factor however weighed in favor of Hyperblock LLC because the documents are relevant to the parties’ claims, and as such, the total exclusion of the documents would not be in line with public policy to dispose of cases on their merits. The court noted, however, that this sole factor does not excuse the Defendants’ failure to comply with their disclosure obligations.
As such, the Court determined that Defendants did not meet their burden to show that the late disclosure was either substantially justified or harmless, and as such, sanctions are appropriate. While sanctions may include total exclusion of documents, the fifth factor of Rule 37 requires the Court to consider the appropriateness of a less severe sanction. Because the documents were relevant to the parties’ claims, the court did not order that the documents be completely excluded. Alternatively, the Court ordered that the documents would not be considered for summary judgment; however, the documents could be considered at trial given that certain conditions could be met, including the opportunity for EKI to depose Walsh about the documents at EKI’s convenience and Defendants’ expense and adverse inference instructions about the documents would be given to the jury at trial.
What It Means / Why It Matters
Rule 26 requires parties to disclose all documents that the disclosing party has in its possession, custody, or control and may use to support its claims or defenses. Failure to timely disclose such documents under Rule 26 can bar a party from using such information as evidence on a motion, at a hearing, or at trial under Rule 37(c)(1). Therefore, it is important, as a disclosing party, to ensure that disclosures are complete. Failure to do so could result in sanctions, up to exclusion of late disclosures.
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