Commercial Litigation and Arbitration

Sanctions — Dismissal or Default under Rule 37 — Bad Faith Required — Tenth Circuit’s 3-Part Test — Pro Se Defaulted — Sanction Must Be Just and Related to Claim at Issue (Good Quote)

Klein-Becker USA, LLC v. Englert, 2013 U.S. App. LEXIS 6191 (10th Cir. Mar. 27, 2013):

Klein-Becker USA and Klein-Becker IP Holdings (collectively "Klein-Becker") sued Patrick Englert and Mr. Finest, Inc., for trademark infringement, copyright infringement, false advertising, and unfair competition under the Lanham Act; false advertising under the Utah Truth in Advertising Act; unfair competition under the Utah Unfair Practices Act; fraud; civil conspiracy; and intentional interference with existing and prospective business relations. Mr. Englert was sanctioned several times for failing to comply with court orders and discovery schedules.1 The third and final sanction resulted in the entry of default judgment for Klein-Becker on all remaining claims. A bench trial determined damages.***

A. Rule 37 Sanctions

Based on Mr. Englert's discovery abuses, the district court decided that Klein-Becker was entitled to judgment on all claims against Mr. Englert/Mr. Finest, Inc. Under Rule 37(b)(2)(A)(vi) of the Federal Rules of Civil Procedure, a district court may issue sanctions, including "default judgment against the disobedient party" when a party disobeys a discovery order. Id.

Default judgment is generally considered a harsh sanction that should be used only when a party's noncompliance is due to "willfulness, bad faith, or any fault of the [disobedient party]" and not when a party is unable to comply with a discovery order. Nat'l Hockey League v. Metro. Hockey Club, Inc., 427 U.S. 639, 640, 96 S. Ct. 2778, 49 L. Ed. 2d 747 (1976) (quoting Societe Internationale v. Rogers, 357 U.S. 197, 212, 78 S. Ct. 1087, 2 L. Ed. 2d 1255 (1958)); see also In re Standard Metals Corp., 817 F.2d 625, 628-29 (10th Cir. 1987) ("We have defined a willful failure as 'any intentional failure as distinguished from involuntary noncompliance. No wrongful intent need be shown.'" (quoting Patterson v. C.I.T. Corp., 352 F.2d 333, 336 (10th Cir.1965))).

Mr. Englert argues that the court's imposition of default judgment was unnecessarily harsh because he was a pro se litigant, attempted to comply with the discovery orders, and was not on notice that the district court might sanction him with a default judgment.

We review discovery sanctions for abuse of discretion. See United States v. Brown, 592 F.3d 1088, 1090 (10th Cir. 2009). Sanctions must be "just" and related to the claim "at issue in the order to provide discovery." Ehrenhaus v. Reynolds, 965 F.2d 916, 920 (10th Cir. 1992). To determine if a sanction such as dismissal or default judgment is appropriate, courts should consider "(1) the degree of actual prejudice to the defendant; (2) the amount of interference with the judicial process; . . . (3) the culpability of the litigant." Id. at 921 (quotations omitted).

The default judgment was entered after three motions for discovery sanctions. On October 28, 2006, in response to Klein-Becker's motion for expedited discovery, the magistrate judge ordered Mr. Englert to file a written response to Klein-Becker's interrogatories and produce any relevant documents by December 2006. He did not do so. On February 9, 2007, Klein-Becker filed its first motion for sanctions against Mr. Englert for failing to comply with the discovery order or, alternatively, a motion to compel his discovery responses. The magistrate judge took Klein-Becker's motion for sanctions under advisement and, on February 12, 2007, ordered that the parties meet and arrange completion of discovery.

On February 23, 2007, the magistrate judge held a hearing on Klein-Becker's first motion for sanctions. The judge determined that Mr. Englert had failed to respond to his discovery orders until February 13, 2007, and that the responses were deficient. He ordered Mr. Englert to submit revised responses by March 2, 2007, and warned Mr. Englert that the court "has the power under Rule 37, its inherent power and 28 U.S.C. § 1927 to impose sanctions . . . which may include striking defenses, recommending that the district judge enter summary judgment, recommending that the district judge impose a preliminary injunction, recommending that facts be found as uncontroverted, and awarding expenses and attorneys fees." Memorandum Decision and Order Granting Motion to Compel (Feb. 28, 2007).

Mr. Englert continued to fall short of meeting his discovery obligations. On March 21, 2007, Klein-Becker filed a second (and renewed) motion for sanctions. On June 13, 2007, the magistrate judge ordered Mr. Englert to either appoint counsel or appear pro se and to appoint counsel for Mr. Finest, Inc., by June 30, 2007. On June 20, 2007, the magistrate judge granted Klein-Becker's motion for sanctions based on Mr. Englert's continued noncompliance. He ordered Mr. Englert to pay Klein-Becker's expenses related to its motions to compel and motions for sanctions. He also ordered Mr. Englert to provide a privilege log and offer Klein-Becker 10 dates on which he could be available for deposition by June 30, 2007. The magistrate judge reminded Mr. Englert that Rule 37 gives the court the power to issue sanctions, including entry of default judgment, and warned that he would "not hesitate to impose more severe sanctions including recommending terminating sanctions be applied by the district judge" if Mr. Englert did not comply with these orders. Memorandum Decision and Order Granting in Part Renewed Motion for Sanctions and Motion for Sanctions (June 20, 2007). Mr. Englert failed to appoint counsel, appear pro se, or provide a privilege log by June 30, 2007.

Finally, on July 16, 2007, Klein-Becker filed a third motion for sanctions. After August 6, 2007, motions were no longer referred to the magistrate judge and were addressed by the district court. On March 27, 2008, the district court granted Klein-Becker's third motion for sanctions. Although Mr. Englert contended that he could not provide a privilege log because Klein-Becker seized the underlying documents from him pursuant to a seizure order on March 1, 2007, many of those documents were returned, and the court determined that Mr. Englert did not even attempt to list which documents were privileged.

Applying the factors from Ehrenhaus, the district court found that warnings from the magistrate judge placed Mr. Englert on notice that he would be culpable for any future violations and that Mr. Englert's actions prejudiced Klein-Becker and interfered with the judicial process. In light of these factors, the court determined that sanctions were appropriate and entered default judgment for Klein-Becker and against Mr. Englert and Mr. Finest Supplements, Inc., on all remaining claims in the case.

We have reviewed the record and can find no fault in the court's analysis. The court did not abuse its discretion by entering default judgment. We affirm the district court's Rule 37 decision.

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