Discovery Sanctions Ordered because of the Plaintiff’s False Statements
In Kwan Software Engineering, Inc., et al. v. Thomas Hennings, , No. H042715 (Ct. App. Dec. 2, 2020), the Court of Appeal partially overturned a trial court’s denial of sanctions for misuse of the discovery process. The Court found that the trial court abused its discretion when it declined to award sanctions after finding that plaintiffs had made false statements during discovery and to the court.
Facts of the Case
The discovery dispute arose from a hard-fought unfair competition dispute. Kwan Software Engineering d.b.a. Veripic, Inc. (Veripic) and its president/CEO John Kwan sued competitor Foray Technologies and its president Thomas Hennings for various tort claims. Among other things, the complaint alleged that defendants sent a letter implying that plaintiffs had registered the domain name “foray.ca” to direct user traffic from foray.ca to Veripic’s website. Foray then filed a cross-complaint alleging more tort claims against Veripic and Kwan. Pre-trial litigation and discovery stretched out for five years.
Kwan responded to discovery requests by suggesting that he and Veripic had not intentionally set up foray.ca to redirect traffic to Veripic’s website. Kwan also denied that he had done so intentionally during his deposition as a Veripic corporate representative. More than a year later, the president of Veripic’s internet service provider produced documents at his deposition that directly contradicted what Kwan had said under penalty of perjury. These emails included one from Kwan to the president of the ISP directing him to “obtain certain domains including foray.ca and to ‘point them to VeriPic.com.’” Other emails (previously not produced) implied that plaintiffs’ lawyers had “instructed the destruction or alteration of evidence related to the ongoing litigation.”
After defendants’ counsel inquired why the emails had not previously been produced, plaintiffs dismissed eight of the 13 causes of action against defendants. Defendants filed a motion requesting terminating and monetary sanctions against Kwan and Veripic based on their litigation misconduct (Code Civ.
Proc. (“CCP”) §§ 128.7, 2023.030). They claimed that plaintiffs had hidden and destroyed evidence, submitted false declarations, and pursued claims without merit.
The trial court held a hearing on the motion for sanctions. Kwan testified but asserted the Fifth Amendment privilege against self-incrimination throughout his testimony. Plaintiffs’ counsel also testified. Rather than issue an order on the sanctions request, the trial court issued an order to show cause (OSC) requesting that plaintiffs and counsel show cause as to why sanctions should not be brought against them for various violations of the California Civil Discovery Act and other laws.
At the hearing on the OSC, the trial court was disinclined to grant defendants’ sanctions request, characterizing it as “[t]hey want all their money back”. Instead it asked defendants to brief the legal issues described in the OSC. Defendants accordingly filed a second motion for sanctions (CCP §§ 2023.010, 2023.030). The trial court declined to award sanctions for this second motion either, instead dismissing plaintiffs’ remaining claims with prejudice and ordering plaintiffs to pay back some attorneys’ fees and costs incurred by defendants as a form of restitution. The court’s decision to deny sanctions against plaintiffs’ counsel was based on due process grounds due to Kwan’s assertion of the Fifth Amendment privilege. It did, however, conclude that Kwan and Veripic both made false statements in declarations and pleadings. Defendants appealed the trial court’s final order on this matter.
Discovery Sanctions Warranted Against Plaintiffs for Extensive Misconduct
Defendants made two arguments on appeal: (1) the trial court abused its discretion in not awarding sanctions against plaintiffs for abuse of the discovery process (CCP § 2023.030), and (2) the trial court erred in not awarding sanctions against plaintiffs’ counsel for advising plaintiffs to abuse the discovery process.
CCP § 2023.030 provides that the court may award monetary sanctions for misuse of the discovery process, and “the court shall impose that sanction unless it finds that the one subject to the sanction acted with substantial justification or that other circumstances make the imposition of the sanction unjust.” In other words, the court must award sanctions for a misuse of the discovery process absent a finding of substantial justification or unjustness. Misuses of the discovery process include “evasive response[s] to discovery” (CCP § 2023.010, subd. (f)), “providing false discovery responses”, and “spoliation of evidence.” (Department of Forestry & Fire Protection v. Howell (2017) 18 Cal.App.5th 154, 191.)
Here, the Court of Appeal’s opinion notes that the trial court’s order denying sanctions
specifically found that Kwan and Veripic engaged in abuse of the discovery process, implying that they did not have substantial justification for the discovery responses. Critically, the court concludes that imposing sanctions against plaintiffs would not be unjust. While the trial court did express concern about punishing plaintiffs, they clearly violated the Discovery Act. Further, while the trial court did award some other sanctions (dismissing claims without prejudice and ordering payment of restitution to defendants), these were not the monetary sanctions as permitted by the Discovery Act and were not framed as such.
Finally, although defendants’ motion did not specify an exact amount of sanctions, this was not enough for the trial court to decide not to award any sanctions at all. As a result, the opinion concludes, the trial court abused its discretion.
In addition, the Court found that there is no substantial evidence supporting the assertion that plaintiffs’ counsel advised plaintiffs to abuse the discovery process, and thus counsel should not have sanctions imposed against them. The Court of Appeal rejected the trial court’s reasoning that assertion of the Fifth Amendment privilege caused due process concerns. Rather, it decided that plaintiffs’ counsel made affirmative statements that they had not instructed plaintiffs to abuse the discovery process, and there was no substantial evidence to the contrary.
When a party to litigation makes demonstrably false statements in discovery, as Kwan and Veripic did here, the court must impose monetary sanctions unless there is substantial justification or imposing them would be unjust. Trial courts have been reluctant to take strong positions on discovery abuses which has effectively rewarded bad conduct by parties and attorneys. The Kwan case should be cited whenever there is discovery abuse and sanctions are warranted.