Spoliation — Bad Faith Still Required for Spoliation of Tangible Evidence (3d Cir.) — Destruction of Evidence during Pendency of Case without Reference to Case and for Purpose of Avoiding Storage Costs Doesn’t Evidence Bad Faith or ≠ Spoliation

Orologio of Short Hills Inc. v. Swatch Grp. (U.S.) Inc., 2016 U.S. App. LEXIS 11611 (3d Cir. June 24, 2016):

Appellants Orologio of Short Hills and Orologio International Ltd. (collectively, "Orologio") seek reversal of the District Court's order (1) granting summary judgment to Appellee Swatch Group on Orologio's claims under the New Jersey Franchise Practices Act (FPA), N.J. Stat. Ann. § 56:10-1 to-15, and § 2(d), (e) of the Robinson-Patman Act (RPA), 15 U.S.C. § 13(d), (e), (2) denying Orologio's motion for partial summary judgment on its RPA claims, and (3) denying Orologio's "Motion for an order striking [*2]  [Swatch's] answer in part and impos[e] other sanctions based upon [Swatch's alleged] spoliation of evidence." We conclude that the District Court properly granted summary judgment on the FPA claim, erred in granting summary judgment on the RPA claims, and did not abuse its discretion in denying the motion to strike and for sanctions. We will thus affirm in part and reverse in part, remanding the case for proceedings consistent with this opinion.

I. Background1

1   Because we write primarily for the parties, we provide background only as relevant to the issues on appeal.

Orologio operates a business in The Mall at Short Hills in Millburn, New Jersey, selling high-end watches of various brands. Since 1994 this top-notch watch shop was an authorized dealer of Swatch's premier "Omega" brand of watches, famed, among other things, for their use by the fictional international super-spy James Bond. While there was no formal, written contract between Orologio and Swatch,2 the two had, by all accounts, what appeared to be a durable business relationship in which Orologio purchased Omega watches for resale, was permitted to display Swatch's trademarks, and benefited from advertising assistance from Swatch. This [*3]  relationship hummed along until 2011, when Swatch terminated its relationship with Orologio because Swatch planned to open its own company store in The Mall at Short Hills. In its Complaint, Orologio avers that, at the time of the termination, Omega sales accounted for roughly 25% of Orologio's total revenue. Nonetheless, after losing its status as an Omega dealer, Orologio's business increased until at least 2014.

2   Indeed, according to Swatch, it has no formal contract or license agreement with any of its authorized retailers, relying instead on various voluntary programs and internal, year-to-year agreements setting forth certain standards that must be met to continue receiving Swatch's merchandise for resale. Swatch avers that either party may end the buyer-seller relationship at any time.

Swatch provides a number of promotional benefits to retailers that sell its products, four of which are particularly relevant to this case. First, under the Partner Plan, a voluntary program between Swatch and a given Omega dealer, retailers earn from Swatch a monetary credit if they achieve a previously-set minimum retail sales threshold, and that size of the credit increases with the amount of [*4]  sales once the threshold is passed. Orologio received credits under the Partner Plan in 2004 and 2005, but it failed to reach the threshold necessary to earn credits in subsequent years. Second, retailers may apply for co-op support, through which Swatch provides funds to select retailers to help defray the costs of specific, additional advertising (though some degree of cost sharing between the retailer and Swatch is expected). Orologio's president has stated that the shop has received co-op support "over [its] more than 20-year relationship" with Swatch, with the most recent successful application providing funds in 2006. Third, Swatch at times would invest in "tagging," which amounts to advertisements (e.g., billboards, television commercials, and magazine ads) funded entirely by Swatch that feature the name of a specific retailer. Fourth, Swatch has offered "slotting fees" to at least one Omega retailer, whereby Swatch pays a premium in order to ensure Omega watches are displayed in an especially advantageous spot in a given store.

In 2007, things changed. Under new management, Swatch imposed new restrictions and requirements on authorized Omega dealers, compliance with which was [*5]  required in order to retain their buyer-seller relationship with Swatch's Omega line. The most dramatic change was a requirement that any authorized retailer maintain at least sixty-five timepieces in its inventory at any given time. Despite the increase in financial investment this uptick in inventory would require, Orologio wanted to preserve its access to Omega products and thus agreed to make the change.3 Orologio also claims the Partner Plans fundamentally changed in January 2008, shifting the rewards available to retailers who reached agreed-upon thresholds from monetary credits on future inventory purchases to funds for promotional and advertising support--i.e., co-op funds. According to Orologio's president and the owner of another specialty watch shop, Swatch represented the newly formulated Partner Plan as the exclusive means of accessing co-op funding, thus eliminating the separate application process. Swatch disputes this characterization, insisting that meeting the targets under the Partner Plan to trigger credits was not required for receipt of co-op funds.

3   The record is far from clear as to whether this new sixty-five piece requirement was associated with a change in the [*6]  Partner Plan or with a so-called Selective Distribution Program. Compare App. 8, 1122 (indicating that the Partner Plans imposed the new requirement), with App. 573 (indicating the "Selective Distribution Program" imposed the requirement). For purposes of this case, only the fact that Orologio took on this new responsibility is relevant.

Orologio discovered that some of its competitors were, in fact, receiving co-op funds even without participating in the new Partner Plan and insists that these co-op decisions were not only done behind Orologio's back but were also doled out at Swatch's whim without any objective standards guiding which retailers received co-op funds. Meanwhile, Orologio also discovered that some of its competitors had benefited from tagged ads and slotting fees--benefits Orologio insists were not offered to it at any time and were not based on any objective criteria.

In 2011, upon being dropped as an authorized Omega dealer, Orologio brought suit first in New Jersey state court, alleging that, under the FPA, N.J. Stat. Ann. § 56:10-4, it was a franchisee of Swatch and that Swatch's termination of their business relationship without cause thus violated New Jersey law, id. § 56:10-5. The state court denied [*7]  Orologio relief. Orologio filed its Complaint in federal court a few months later, seeking declaratory and injunctive relief for its FPA claim along with claims under § 2(d), (e) of the Robinson-Patman Act, 15 U.S.C. § 13(d), (e), and a state law claim for breach of the covenant of good faith and fair dealing. Orologio's RPA claims rest on the idea that Swatch failed to provide promotional benefits to all its authorized Omega dealers in a way that was "available on proportionally equal terms." 15 U.S.C. § 13(d). Orologio claims Swatch failed to meet that bar (1) by not providing notice that co-op funds were available outside the Partner Plan nor that tagging and slotting fees were on the table, and (2) by offering co-op support, tagging, and slotting fees in an ad hoc manner rather than through the use of objective criteria.

During the pendency of this litigation, Swatch authorized the destruction of hard-copy tapes containing the tagged television commercials it funded for other authorized Omega dealers. Based on the evidence in the record, the tapes were destroyed without reference to this litigation and for the sole reason that Swatch no longer wished to pay a storage company to house the tapes. Orologio points to the destruction [*8]  of these tapes as spoliation of evidence because Gregory Swift--the brand manager for Omega watches--was copied on the emails regarding their destruction, and he had been put on notice years earlier by Swatch's counsel not to allow the destruction of emails and "any other documents" relating to the Orologio litigation.

In early 2015, Orologio and Swatch filed cross motions for summary judgment, with Swatch seeking judgment on all counts and Orologio seeking judgment solely on its RPA claims. Orologio also moved to strike Swatch's Answer and impose other sanctions based on the alleged spoliation of evidence. The District Court found in favor of Swatch on all counts and entered a corresponding order. Orologio timely filed this appeal, seeking reversal of the District Court's grant of summary judgment on the FPA and RPA claims and reversal of the District Court's dismissal of the motion to strike and issue sanctions.4

4   The District Court opinion does not reference Orologio's breach of the covenant of good faith and fair dealing claim, but we assume that, in finding there was no FPA violation nor an RPA violation, the District Court intended either to grant summary judgment in Swatch's favor [*9]  on that claim as well or to dismiss it for lack of supplemental jurisdiction once the federal RPA claims were disposed of. In any event, Orologio does not raise this issue on appeal and it is thus waived for our purposes. See, e.g., United States v. Pelullo, 399 F.3d 197, 222 (3d Cir. 2005) ("It is well settled that an appellant's failure to identify or argue an issue in his opening brief constitutes waiver of that issue on appeal.").

***

C. Motion to Strike and for Sanctions due to Spoliation

We review the District Court's denial of Orologio's motion to strike Swatch's Answer and issue sanctions based on alleged spoliation of evidence for abuse of discretion, Bull, 665 F.3d at 73; Meditz, 658 F.3d at 367 n.1; Complaint of Consolidation Coal Co., 123 F.3d at 131, meaning we will only reverse if the District Court's decision was based "on an erroneous view of the law or on a clearly erroneous assessment of the evidence," Adams v. Ford Motor Co., 653 F.3d 299, 304 (3d Cir. 2011) (quoting Bowers v. Nat'l Collegiate Athletic Ass'n, 475 F.3d 524, 538 (3d Cir. 2007)).

Here, the relevant motion was based on alleged spoliation of evidence by Swatch concerning the destruction of tapes that contained tagged television commercials provided to certain Omega retailers. Spoliation of evidence requires "bad faith," not mere negligence, [*27]  Bull, 665 F.3d at 79 (requiring bad faith for spoliation and subsequent sanctions), and in denying Orologio's motion, the District Court relied in part on its finding "that Orologio has failed to show bad faith on Swatch's part," App. 11 n.5. Orologio insists there are no facts in the record to support the District Court's denial, and points us instead to a magistrate judge's stated belief that there was a prima facie case of spoliation here. But even in expressing her concern over the destruction of the tapes in the midst of litigation, the magistrate judge indicated she discerned no allegation by Orologio of a nefarious plot to destroy evidence. The District Court found that, inter alia, Orologio "failed to show bad faith on Swatch's part." App. 11 n.5. We conclude that the specific email exchanges in the record that reference destruction of the tapes amply support the District Court's determination that neither Omega's brand manager nor the employee who initiated destruction of the tapes acted in bad faith. The District Court therefore did not make a "clearly erroneous assessment of the evidence" related to the motivations behind the destruction of the tapes and did not abuse its discretion in denying [*28]  Orologio's motion based on the lack of a showing of bad faith on the part of Swatch.11

11   Because bad faith is a requirement for spoliation of evidence, and we find no abuse of discretion on that point, we need not address the District Court's additional reasoning for denying the motion, such as the alleged availability of other avenues to obtain information about the content of the tapes or Orologio's failure to show that Swatch attempted to obstruct Orologio. See App. 11 n.5.

IV. Conclusion

For the foregoing reasons, we will affirm the District Court's entry of summary judgment against Orologio's FPA claim and its denial of Orologio's motion to strike and for sanctions, but we will reverse the District Court's entry of summary judgment against Orologio's RPA claims. Rather than address Orologio's motion for partial summary judgment on its RPA claims, we will remand to the District Court for proceedings consistent with this opinion.

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