Scr-Tech LLC v. Evonik Energy Servs. LLC

SCR-Tech LLC v. Evonik Energy Servs. LLC, 

.


STATE OF NORTH CAROLINA                   IN THE GENERAL COURT OF JUSTICE
                                              SUPERIOR COURT DIVISION
COUNTY OF MECKLENBURG                               08 CVS 16632

SCR-TECH LLC,                )
                             )
            Plaintiff,       )
                             )
      v.                     )
                             )
EVONIK ENERGY SERVICES LLC, )
EVONIK ENERGY SERVICES                                     ORDER
                             )
GMBH, EVONIK STEAG GMBH,     )
HANS-ULRICH HARTENSTEIN, and )
BRIGITTE HARTENSTEIN,        )
                             )
            Defendants.      )
                             )

      {1}    THIS MATTER is before the Court on a number of discovery matters.
There is a separate pending motion for summary judgment which the Court will
address in a separate order.

      King & Spalding LLP by Timothy G. Barber, Natasha H. Moffitt, Antonio E.
      Lewis, David Glen Guidry, John W. Harbin, and Mary Katherine Bates for
      Plaintiff SCR-Tech, LLC.

      Troutman Sanders LLP by Samuel T. Reaves and Hamilton Martens Ballou
      & Carroll, LLC by Beverly A. Carroll for Defendants Steag Energy Services,
      LLC, Hans-Ulrich Hartenstein, and Brigitte Hartenstein.

      Bryan Cave, LLP by Mark Vasco, Benjamin F. Sidbury, and Christina
      Davidson Trimmer and Alston & Bird, LLP by M. Scott Stevens for
      Defendants Steag Energy Services GmbH and Steag GmbH.

Gale, Chief Judge.

      {2}    The Court does not here repeat the underlying facts of the several
claims in the action which are fully detailed in the Court’s July 22, 2011, Order and
Opinion on Defendants’ Joint Motion for Summary Judgment on the Non-Existence
of Trade Secrets or Confidential Information. The Court will state additional facts
or procedural history related to or necessary for decision of each discrete discovery
matter discussed below.

   1. Defendants’ Renewed Motion to Preclude Evidence of Alleged Confidential
      Information, and to Strike Plaintiffs’ Third Supplemental Response to Steag
      Interrogatory 1

      {3}    Essentially, Defendants seek to preclude Plaintiff from pursuing
claims for misappropriation of confidential information of which Plaintiff was aware
when filing the action but which it chose not to disclose in an early interrogatory.
Instead, Defendants ask the Court to restrict the claim to only that
misappropriation of which Plaintiff could not have been aware without the benefit
of discovery. Defendant STEAG Energy Services, LLC (“Steag”) served its
interrogatory number 1, asking Plaintiff to identify trade secrets and confidential or
propriety information it contended had been misappropriated. Plaintiff’s response
described the information broadly. Defendants challenged the adequacy of the
disclosures. The Court ordered that Plaintiff must detail its trade secrets more
specifically before moving forward with discovery. SCR-Tech LLC v. Evonik Energy
Servs. LLC, Order, 08 CVS 16632 [Mecklenburg] (N.C. Super. Ct. May 19, 2009).
Plaintiff limited its supplemental response to trade secrets and contends that it
reached agreement with Defendants to revise interrogatory number 1 to be limited
to trade secrets.
      {4}    Later, Defendants filed their Joint Motion to Preclude Evidence of
Alleged Confidential Information Stricken from Plaintiff’s Discovery Response
(“Motion to Preclude”), contending that Plaintiff should be barred from
supplementing any response to interrogatory number 1 and then pursuing claims
regarding alleged misuse of confidential information. On March 19, 2013, the Court
ruled that Plaintiff was entitled to discovery before it would be required to file a
final supplement to its interrogatory response. At the same time, the Court noted
that this case is unusual because Plaintiff had the benefit of significant forensic
examination in advance of filing its claims.
      {5}    Plaintiff then filed its Third Supplemental Response to Interrogatory
Number 1. Defendants responded by letter, renewing their Motion to Preclude,
which had been filed on July 17, 2013. That motion seeks to strike portions of the
response and to preclude evidence of confidential information of which Plaintiff
knew when filing its claims without the need for discovery. Alternatively,
Defendants ask the Court to order Plaintiff to state with greater specificity the
confidential information it claims was misappropriated.
      {6}    The Court has carefully considered the parties’ submissions and
arguments, and the authorities cited. Having done so, it concludes that Defendants’
Motion to Preclude should be DENIED at this time, without prejudice to
consideration by later motion at the close of discovery whether Plaintiff is able to
delineate its claim with sufficient specificity to withstand summary judgment.

   2. Defendants’ Motion for Sanctions for Spoliation of Evidence and Violation of
      Rule 26(g)

      {7}    Defendants seek sanctions against Plaintiff based on (1) spoliation of
data used to prepare a pre-litigation forensic report and (2) SCR-Tech’s improper
interrogatory response that the author of the forensic report could not be identified,
when, in fact, Plaintiff’s counsel had earlier identified that company, as indicated by
his notes. Defendants ask that the sanctions include (1) precluding SCR-Tech from
discovery relating to any alleged wrongdoing by Defendants before December 15,
2005, a date after the forensic report had been prepared and on which SCR-Tech
and the Hartensteins entered a settlement agreement; (2) an adverse inference
that, when the Hartensteins were terminated from SCR-Tech on March 18, 2005,
the date of the report, no SCR-Tech confidential or trade secret information had
been removed from and was not returned to SCR-Tech; (3) an adverse inference that
any documents or materials created or modified before March 18, 2005, that have
now been lost would have been favorable to Defendants; (4) dismissal of all of SCR-
Tech’s claims premised on misappropriation of confidential, proprietary, and trade
secret information; and (5) an evidentiary limitation precluding SCR-Tech from
introducing into evidence or otherwise relying on the forensic report, any e-mails
between CompuServe representatives and the Hartensteins, or any efforts to delete
or destroy such e-mails (although Defendants have also indicated that they may use
the report in their defense). (Defs.’ Resp. SCR-Tech’s Post-Hr’g Br. Concerning
Defs.’ Mot. Sanctions Relating to SCR-Tech’s Spoliation Evidence and Violation of
Rule 26(g) (“Defs. Post-Hr’g Br.”) 17; Mem. Supp. Defs.’ Mot. Sanctions Relating to
SCR-Tech’s Spoliation Evidence and Violation of Rule 26(g) (“Defs. Supp. Br. Rule
26(g) Sanctions”) 18.)

            a. Factual Background

      {8}     SCR-Tech’s parent, Catalytica Energy Services, Inc. (“Catalytica”),
retained Forentech, LLC (“Forentech”) to do a forensic examination of computer
files maintained by SCR-Tech or the Hartensteins, who were then SCR-Tech’s
principal officers. (Pl.’s Supplemental Resp. STEAG Energy Services, LLC’s
Interrog. No. 35). On February 28, 2005, Robert Zack, Catalytica’s CEO and an
officer of SCR-Tech, supervised Forentech. Zack and Forentech’s representative
went on-site at SCR-Tech’s North Carolina office and made full images of SCR-
Tech’s servers and the Hartensteins’ laptop computers. Forentech issued an
interim report on March 18, 2005 (“the Report”); Zack terminated the Hartensteins’
employment the same day.
      {9}     Forentech submitted the Report to Catalytica through Zack. Zack was
at that time an SCR-Tech manager and officer. He apparently granted consent on
SCR-Tech’s behalf, allowing Forentech access to SCR-Tech’s data. There is no
direct evidence that the Report was furnished to SCR-Tech in any other way.
      {10}    Forentech furnished certain data along with its Report, including
some, but not all, e-mails, from the Hartensteins’ accounts with CompuServe.
Forentech did not, however, provide Catalytica with the bit-by-bit images it made of
the servers and laptops. These images were retained by Forentech and ultimately
discarded on an uncertain date.
      {11}   SCR-Tech and the Hartensteins engaged in substantial negotiations
between their termination on March 18, 2005, and the date of a Settlement
Agreement they executed on December 15, 2005. During this period, SCR-Tech’s
counsel informed the Hartensteins that SCR-Tech was considering pursuing claims
for violations of fiduciary duties and misappropriation of protected information,
based on, in significant part, findings referenced in the forensic examination.
Although SCR-Tech made repeated references to the Report, it did not identify
Forentech as the company that had undertaken the examination. The
correspondence did not indicate that SCR-Tech had not itself arranged for the
Report or that it had not reviewed the Report although referring to its conclusions
in its correspondence.
      {12}   There is no evidence that either Catalytica or SCR-Tech ever advised
Forentech to preserve either the Report or any of the underlying information that
Forentech obtained during the course of its work prior to December 15, 2005.
Plaintiff instituted the present lawsuit on July 30, 2008. SCR-Tech has indicated
that it did not undertake document preservation efforts before that date. There is
no evidence of any communication between SCR-Tech and Forentech between 2008
and 2010.
      {13}   Plaintiff claims that it had no reason to anticipate litigation with the
Defendants between December 15, 2005, and shortly before instituting the present
litigation, and, therefore, had no duty to seek to preserve documents, particularly
the Report or its underlying data, considering that Plaintiff indicates that it has
never possessed the Report. Defendants challenge Plaintiff’s assertion regarding
the date on which it anticipated litigation after December 15, 2005, relying in part
on Plaintiff’s withholding of documents dated during November 2006, stating that
they are protected as work product prepared in anticipation of litigation.
      {14}   During the course of discovery, Defendants have diligently attempted
to obtain the Report and discover its author, including requesting this information
from Plaintiff. Up until 2013, Plaintiff indicated that it could not identify the
author and could not produce the Report. At a 2012 status conference, in discussion
regarding whether Plaintiff had a basis to assert misappropriation of confidential
information, SCR’s counsel advised the Court that SCR-Tech “d[id] not have the
forensic examination.” (Status Conference Tr. 38:6–:14, Nov. 2, 2012; Pl.’s
Supplemental Resp. STEAG Energy Servs., LLC’s Interrog. No. 35.) As late as
March 2013, SCR’s in-house counsel Joe Cogdell represented that SCR-Tech had
“no knowledge of the name or address of the forensic firm or its specialist.” (Pl.’s
Resps. Def. Steag Energy Services, LLC’s Third Set Interrogs. Reqs. Produc. Docs.
(“Pl. Resps. Def. Steag Third Set Interrogs.”) No. 35.)
      {15}   SCR-Tech contends that it never saw the Report until around June
2013, when it was produced in discovery as a result of a subpoena to former officers
of Catalytica. There is no direct evidence to the contrary. SCR-Tech asserts that it
first learned of Forentech’s identity in 2010, as reflected in notes made by Cogdell,
indicating that he called Forentech and spoke with a Forenetech employee who had
not been involved in the investigation or preparing the Report. Forentech’s
principal, Mark Cardwell, prepared the Report and was away at the time of
Cogdell’s call. Cogdell indicates that he was satisfied after his call that Forentech
had no relevant information, did not pursue the matter further, and forgot
Forentech’s identity until he later reviewed the notes of his telephone call. (Cogdell
Aff. ¶ 11.) He did not remember Forentech’s identity when SCR-Tech filed its
March 2013 discovery response. He recalled the identity three months later when
reviewing his prior notes, and SCR-Tech filed a supplemental discovery response
identifying Forentech. SCR-Tech indicates that its counsel made inquiry of
Catalytica’s former officers in 2012 and 2013, including Zack, and were advised that
these officers could not remember the name of the firm that did the forensic
examination. (Lewis Aff. ¶¶ 5–6).
      {16}   Zack testified that he, too, forgot Forentech’s identity until he was
reminded of it in preparation for his deposition in this litigation in 2013.
      {17}   While Cogdell indicates that he concluded that Forentech had no
relevant information as a result of the 2010 call so that the matter need not be
further pursued, there is no indication that he made any effort to speak with
Cardwell or that he asked for any written confirmation that Forentech did not have
the Report or any underlying data. SCR-Tech did not write Forentech in 2010 or
thereafter to request that it preserve any documentation that might still exist.
       {18}    Defendants issued a subpoena to Forentech. Forentech produced the
Report and approximately 3,500 underlying documents that Forentech had
retained. However, Forentech no longer has a portion of the Hartenstein’s
CompuServe email accounts, nor the bit-by-bit images it had obtained. (Cardwell
Dep. 42:3–44:24.) Cardwell testified that Forentech destroyed the data sometime
after the investigation concluded. (Cardwell Dep. 69:16–70:13.) Cardwell could not,
however, recall when the documents were destroyed or whether he consulted with
Catalytica before destroying them; but, he stated that he generally retains hard
drives for years and consults the client before destroying them. (Cardwell Dep.
199:4–:16.)
       {19}    Cardwell confirmed that no one at SCR-Tech or Catalytica ever asked
Forentech to preserve the materials following the investigation. (Cardwell Dep.
78:7–:19.)
       {20}    In addition to the 2005 correspondence noted earlier, Plaintiff
subsequently made clear that it considers the Report to be relevant.
       {21}    The Amended Complaint refers to the investigation. In early 2012,
SCR-Tech again referenced the forensic examination to support its allegations that
“documents containing SCR-Tech’s confidential, proprietary and trade secret
information were either removed from, or not returned to, SCR-Tech’s premises by
the Hartensteins at the time their employment was terminated.” (Pl. SCR-Tech
LLC’s Supplemental Resps. Hans-Ulrich Hartenstien [sic] and Brigitte
Hartenstein’s Interrogs. Nos. 4, 5, 6, 8 and 13 (“Pl. Supplemental Interrogs. Resps.”)
No. 4; Compl. ¶ 33; Am. Compl. ¶ 33.)1



1  The parties have filed all materials in support of their arguments under seal, even though they
also contain information that has been included in public filings. The Court has been careful to
guard against public disclosure, at least at this time, of underlying technologies that may be subject
to trade secrets claims. The Court does not believe that the information noted in this Order, which
       {22}    Defendants assert that they have been prejudiced by the destruction of
this evidence because the Report itself indicates that a review of underlying data
affirms the absence of direct evidence of their misappropriation of any information.
Plaintiff counters that any potential prejudice that might have existed had the
Report not been uncovered has now been avoided due to the Report’s production,
and further that the lost data would more likely be prejudicial to Defendants and
would show a pattern of covering-up. (Pl.’s Br. Opp’n Defs.’ Mot. Sanctions (“Pl.
Opp’n Br. Sanctions”) 3; Report 4.)
       {23}    Based on these facts, Defendants contend that Plaintiff is guilty of
both spoliation of evidence and violating Rule 26(g).

           b. Legal Principles

                    i. Spoliation

       {24}    Spoliation is “the destruction or material alteration of evidence or . . .
the failure to preserve property for another’s use as evidence in pending or
reasonably foreseeable litigation.” EEOC v. Womble Carlyle Sandridge & Rice, LLP,
No. 1:13-CV-46, 

, at *6 (M.D.N.C. Jan. 6, 2014) (quoting
Silvestri v. Gen. Motors Corp., 

 (4th Cir. 2001)). Where an
individual “by his own tortious act withholds evidence by which the nature of his
case would be manifested, every presumption to his disadvantage will be adopted.”
McClain v. Taco Bell Corp., 

, 

 (2000)
(quoting Yarborough v. Hughes, 

, 

 (1905)).
However, such a tortious act need not necessarily be demonstrated. “Although
destruction of evidence in bad faith ‘or in anticipation of trial may strengthen the
spoliation inference, such a showing is not essential to permitting the [adverse]
inference.’” McClain, 

, 

 (quoting R.I. Hosp.
Trust Nat’l Bank v. E. Gen. Contractors, Inc., 

 (R.I. 1996)).



the Court has reviewed as a part of its decision making, is of such a nature or requires the Court to
redact or otherwise protect its Order.
       {25}    To establish a prima facie case of spoliation, a party must show that
the spoliator (1) intentionally destroyed or failed to preserve (2) potentially relevant
materials (3) while aware of the possibility of future litigation. Arndt v. First Union
Nat’l Bank, 

, 528 

 (2005); Praxair, Inc. v.
Airgas, Inc., 

, at *57 (N.C. Super. Ct. Aug. 14, 2000). The
Court does not believe there has been a showing of intentional destruction, but that
potential relevance of the lost data is clearly established. So the issue turns on
whether SCR-Tech negligently failed in a duty to preserve the data at a time when
it was aware of the possibility of future litigation for which the data was potentially
relevant.

                   ii. Rule 26(g)

       {26}    Rule 26(g) provides that an attorney’s signature on a discovery
response
       constitutes a certification that the attorney . . . has read the . . .
       response . . . and that to the best of the knowledge, information, and
       belief of that attorney . . . formed after a reasonable inquiry it is: (1)
       consistent with the rules and warranted by existing law or a good faith
       argument for the extension, modification, or reversal of existing law;
       (2) not interposed for any improper purpose, such as to harass or cause
       unnecessary delay or needless increase in the cost of litigation; and (3)
       not unreasonable or unduly burdensome or expensive, given the needs
       of the case, the discovery already had in the case, the amount in
       controversy, and the importance of the issues at stake in the
       litigation.2
N.C. R. Civ. P. 26(g). If an attorney makes a certification in violation of Rule 26(g),
“the court . . . shall impose upon the person who made the certification, the party on
whose behalf the request, response, or objection is made, or both, an appropriate
sanction, which may include an order to pay the amount of the reasonable expenses
incurred because of the violation, including a reasonable attorney’s fee.” 

 The


2
 Notably, Federal Rule 26(g) varies from North Carolina’s rule. The federal rule includes a provision
that an attorney’s signature on an interrogatory response constitutes an attestation of mandatory
disclosures are complete and correct at the time they are made. North Carolina does not require
these mandatory disclosures and the state Rule 26(g) does not include such a provision.
issue turns on whether SCR-Tech made its March 2013 certification for the purpose
of creating unreasonable delay, burden, or expense.

          c. Analysis

                 i. Spoliation

      {27}   The Court first addresses Plaintiff’s argument that no spoliation
occurred because Plaintiff never had possession of the Forentech materials.
Spoliation need not rest on actual possession. The North Carolina Court of Appeals
has held that a litigant is responsible for producing, and inferentially preserving,
documents if the party has “actual possession, custody or control of the materials or
has the legal right to obtain the documents on demand.” Pugh v. Pugh, 

, 

 (1994) (quoting Resolution Trust Corp. v.
Deloitte & Touche, 

 (D. Colo. 1992)); see also Victor Stanley, Inc.
v. Creative Pipe Inc.¸ 

 (D. Md. 2010) (ruling documents under
the control of the litigant if it has the authority and practical ability to obtain the
documents from a non-party).
      {28}   The Court concludes that, at least at some points in time, SCR-Tech
had the practical ability to obtain and had de facto control over the forensic
examination and Report, whether or not it actually took possession of it. Within
three days of the Hartensteins’ termination, SCR-Tech’s counsel wrote a demand
letter for the return of information, citing that SCR-Tech had commenced a forensic
examination upon which it made certain conclusions. (Defs. Supp. Br. Rule 26(g)
Sanctions Ex. 8.) The correspondence made no reference to Catalytica or that SCR-
Tech had not itself undertaken the investigation or read the Report. The letter
clearly suggests to the contrary. Had a demand been made for the Report’s
production, the Court concludes that SCR-Tech could have caused it to be produced.
      {29}   Further, SCR-Tech had the practical ability to obtain the evidence
because the underlying evidence belonged to SCR-Tech, was taken from its
premises, and could have only been accessed through permission granted by SCR-
Tech or someone with authority to issue permission on its behalf. (Cardwell Dep.
78:7–:19.) Zack granted that permission on SCR-Tech’s behalf and controlled that
access to SCR-Tech’s premises at a time when he was both Catalytica’s CEO and an
officer and manager of SCR-Tech. See Jay Grp., Ltd. v. Glasgow, 

, 

 (N.C. App. 2000) (noting that an agent’s knowledge is
chargeable to his principal).
      {30}   There is authority that, having clearly asserted the relevance of the
Report, SCR-Tech had the duty to advise the Hartensteins of the evidence at least
up until December 15, 2005, in a manner that would allow them to seek its
protection if SCR-Tech were not making efforts itself to provide for such protection.
City Grill Hospitality Grp., Inc. v. Nationwide Mut. Ins. Co., No. 5:12-CV-610-F.

, at *11 (E.D.N.C. Apr. 14, 2014).
      {31}   This leads to the inquiry of whether SCR-Tech had any anticipation of
litigation after December 15, 2005, adequate to trigger a duty to preserve. Plaintiff
contends it had no such anticipation until close to the date of the filing of this
litigation in 2008, whereas Defendants contend that SCR-Tech had anticipated
litigation in November 2006. The significance is that it is less likely, based on
Cardwell’s testimony, that Forentech would have discarded any materials by
November 2006. Moreover, it is unclear whether Forentech had already discarded
any data when Cogdell called Forentech in 2010.
      {32}   The Court does not believe that Plaintiff should be able to take unfair
advantage of this absence of proof when the following is evident: (1) in 2005,
Plaintiff clearly asserted the relevance of the Report to potential litigation, but did
not ask either Catalytica or Forentech to preserve the evidence from the
examination; (2) although the Amended Complaint asserts the relevance of the
information, Cogdell did not contact Forentech until 2010, two years after initiating
this lawsuit; (3) in 2010, when Cogdell was admittedly aware of Forentech’s
identity, he did not seek to speak with Mark Cardwell who had supervised the
investigation, request or instruct Forentech to maintain such records as it may have
had at that time, or ask for written confirmation that it no longer had such
information; (4) it would be atypical for Forentech to discard underlying data absent
a client request to the contrary; and (5) SCR-Tech continued to consider the forensic
investigation and its results to be particularly relevant and material throughout
this period.
      {33}     The Court does not need to make an express finding that SCR-Tech
contemplated the present litigation as early as November 2006, although the Court
believes that Defendants put forward a formidable argument to that effect. (Defs.
Supp. Br. Rule 26(g) Sanctions Ex. 11; Defs. Post-Hr’g Br. Ex. 4.); see also Sanofi-
Aventis DeutschlandGmbH v. Glenmark Pharms., Inc., 

 (Fed.
Cir. 2014) (determining the litigation was “‘reasonably foreseeable’ to [the alleged
spoliator] no later than the date asserted for ‘work product’ in its privilege log”).
      {34}     Based on this combination of circumstances, the Court concludes that
Defendants are entitled to the inference that the evidence regarding Forentech’s
investigation was lost or discarded during a period when Plaintiff had a duty to
preserve the evidence but negligently failed to carry out that duty. The Court finds
that the facts Defendants have presented are adequate to trigger Plaintiff’s
responsibility to “rebut[] and explain[] the evidence adduced against [SCR-Tech]”
with a “fair, frank and satisfactory explanation.” McLain, 137 N.C. App. at 186–87,

 (internal quotations and citations omitted). The Court need not
find that the spoliation was intentional to impose this burden. 

, 

. The Court finds that Plaintiff has failed to adequately rebut that the
evidence was spoliated.
      {35}     The Court must then address what sanctions are appropriate and are
in the proper proportion both to the absence of intentional wrong doing and to the
prejudice that Defendants can demonstrate flows from the loss of evidence. When
fashioning sanctions for spoliation, the Court considers the prejudice caused to the
moving party. Clark v. Alan Vester Auto Grp., Inc., 

, at *27
(N.C. Super. Ct. July 17, 2009). To date, North Carolina courts have been
constrained in the scope of sanctions they have imposed for spoliation. “[T]he
principle of spoliation of evidence as applied in North Carolina has evidentiary
consequences and has not been relied upon as a basis for [other] sanctions in the
absence of other statutory or rule violations authorizing the imposition of
sanctions.” Holloway v. Tyson Foods, Inc., 

, 543–44, 

 (2008). The only additional rule violation at issue here is Rule 26(g),
discussed below.
      {36}   The Court agrees that some potential prejudice has been avoided by
the Report’s production, along with substantial supporting data, consisting of
approximately 3,500 documents. The Report contains certain findings that
Defendants have indicated that they seek to use, asking that their ability to do so
not be precluded by any sanction the Court orders. (Defs. Supp. Br. Rule 26(g)
Sanctions 17, 20.)
      {37}   The Court believes, however, that this production does not eliminate
all potential prejudice represented by Defendants’ inability to have equal access to
the same body of data to allow their own examination and expert report. After full
and deliberate consideration, the Court concludes that Defendants have not
demonstrated adequate prejudice to warrant the extreme sanctions of striking
claims for the Hartensteins’ misappropriation of confidential information or
restricting any proof of acts taken before December 15, 2005, that might be relevant
to improper disclosure and misappropriation after that date.
      {38}   The Court concludes that the appropriate sanction is a permissive, but
not mandatory, adverse inference. While the Court defers settling the precise
language of a jury instruction until a later date, the Court will deliver an
instruction reflecting a finding that Plaintiff negligently failed to preserve certain
evidence from the Forentech investigation, and the jury will be allowed, but not
required, to infer that the evidence that has not been preserved would have been
favorable to Defendants in rebutting the contention that the Hartenstein’s removed
“documents containing SCR-Tech’s confidential, proprietary and trade secret
information” from SCR-Tech computers. (Compl. ¶ 33; Am. Compl. ¶ 33.)
                ii.   Alleged Violation of Rule 26(g)

      {39}   The Court concludes that Plaintiff did not intentionally include a
misrepresentation in its March 2013 interrogatory response. However, there is
substantial evidence that Plaintiff did not make a “reasonable inquiry” before
making that response. The Court further concludes that Plaintiff did not interpose
its response for an improper purpose or to impose on Defendants an unreasonable
or undue burden. See N.C. R. Civ. P. 26(g). Upon discovering the error, Plaintiff
made prompt effort to revise its response. While the Court believes that there may
not have been a full, reasonable inquiry, the wording of Rule 26(g) does not compel a
sanction for that failure unless accompanied by one of the other requisite findings:
interposing the response for an improper purpose or creating unreasonable delay or
expense. In any event, the Court concludes, in its discretion, that should a sanction
be required, the permissive adverse inference it has described is adequate. N.C. R.
Civ. P. 37(a)(2)–(3) (providing that an incomplete interrogatory response justifies an
order compelling a complete response, not sanctions).
      {40}   Accordingly, Defendants’ request for sanctions pursuant to Rule 26(g)
is DENIED.

   3. Plaintiff’s Request for Restoration of Backup Tapes and Cost Shifting

      {41}   The Steag Defendants have located a number of backup tapes that
have not been produced that Plaintiff contends may contain relevant information
for document custodians. The parties have exchanged several letters with the Court
through which the dispute has been significantly narrowed.
      {42}   Initially, Defendants contended that they should not be required to
search the universe of tapes at issue because of the extraordinary expense in doing
so―into the millions of dollars―and the expected utility in the effort, measured by
relevant nonduplicative evidence that the search might produce, was limited. In
part, Defendants argued that the files of at least three of the custodians in question
were likely produced in other ways. Plaintiff initially claimed that Defendants
exaggerated the costs that may be involved and further that they had no adequate
basis to assert that the search would uncover only duplicative information.
      {43}   The Court’s January 23, 2014, Order requested that the parties agree
on and undertake a sampling search at reduced expense in order to better predict
the utility of a full search or to suggest a more limited search, matched to
reasonably expected fruits of the search. The Court has now been advised that such
a sampling is not feasible, but that other modified procedures that substantially
reduce costs can be implemented. As a result, the Court has been provided a
significantly reduced cost estimate and a more confined search process to which the
parties have agreed. This dispute has then narrowed to whether the effort should
go forward, and if so, how the Court should allocate costs totaling $140,545,
representing the following:
                         $ 250.00 External Hard Drive
                       $ 2,400.00 Restore Six Exchange Server Tapes
                      $ 37,000.00 Extract Relevant Non-E-mail Data
                      $ 46,250.00 Extract Relevant E-mail Data
                      $ 18,000.00 Forensic Technical Time for Restoration
                       $ 6,000.00 Vender Travel Expenses
                       $ 2,700.00 OCR (making data searchable)
                      $ 27,945.00 Six Months Hosting

      {44}   Defendants do not seek to include attorneys’ fees associated with
reviewing materials for privilege and relevance. Defendants contend that Plaintiff
should be responsible for at least one-half of the above costs if not the entire cost.
Plaintiff counters that it should be required to pay only $11,000, which represents
over half of the costs fairly associated with actual data restoration. Defendants
contend that all the charges are fairly allocable to the cost of restoration of
inaccessible data. Each of the parties rely on the same authorities for their
arguments. See Zubulake v. UBS Warburg LLC, 

 (S.D.N.Y. July
24, 2003) (Zubulake III).
       {45}   In general, Rule 26 reflects a balance that the producing party should
generally bear the cost of review and production of electronic data once the data has
been converted to an accessible format; but, a court may shift to the requesting
party costs necessary to restore inaccessible data. In considering the propriety of
such cost shifting, the Court should be mindful of the proportionality of the cost of
the effort to the expected or actual utility of the discovery, measured, at least in
part, by whether the effort yields fruit. See The Sedona Conference, The Sedona
Conference Commentary on Proportionality in Electronic Discovery: A Project of the
Sedona Conference Working Group on Electronic Document Retention & Production
8 (Conor R. Crowley et al. eds., 2013). Here, the parties dispute both the costs to be
incurred and the expected utility of the effort.
       {46}   Courts have continued to struggle with fashioning objective rules to
apply when addressing whether to shift costs related to the restoration and search
of electronically stored information (“ESI”). As a general proposition, it is accepted
that
       cost-shifting should be considered only when electronic discovery
       imposes an ‘undue burden or expense’ on the responding party. The
       burden or expense of discovery is, in turn, ‘undue’ when it ‘outweighs
       its likely benefit, taking into account the needs of the case, the amount
       in controversy, the parties’ resources, the importance of the issues at
       stake in the litigation, and the importance of the proposed discovery in
       resolving the issues.
Zubulake v. UBS Warburg LLC, 

 (S.D.N.Y May 13, 2003)
(Zubulake I) (emphasis in original) (quoting Fed. R. Civ. P. 26). Whether production
is unduly burdensome turns on whether it is kept in an accessible format. 

Backup tapes are considered inaccessible because to restore them, “fragmented data
must be de-fragmented, and erased data must be reconstructed, all before the data
is usable.” 

.
       {47}   Federal courts have developed a greater number of guiding decisions
than have our North Carolina courts. Judge Tennille, former Chief Judge of the
North Carolina Business Court, in 2006 sought to fashion a workable rule. After
reviewing multiple approaches, he concluded that the following factors should be
considered when determining whether cost shifting is appropriate:
      (i) [whether] the discovery sought is unreasonably cumulative or
      duplicative; (ii) [whether] the party seeking discovery has had ample
      opportunity by discovery in the action to obtain the information
      sought; [and] (iii) [whether] the discovery is unduly burdensome or
      expensive, taking into account the needs of the case, the amount in
      controversy, limitations on the parties’ resources, and the importance
      of the issues at stake in the litigation.
Analog Devices, Inc. v. Michalski, 

, *20–21 (N.C. Super. Ct.
Nov. 2, 2006). While the law related to ESI has continued to develop, the Court
believes Judge Tennille’s decision serves as an appropriate guiding star.
      {48}   The difficulty here is applying those factors based on the competing
arguments. Appreciative of efforts to restrict the possible costs and burdens of the
search, the Court nevertheless concludes that it will be better equipped to
undertake a final analysis after the search, review, and production has been
completed and the extent of nonduplicative information that was uncovered can be
measured. It is not unfair that the requesting party should have to balance the
strength of its belief that the requested search will bear fruit against their
willingness to incur the costs of the effort if their belief proves to be wrong.
      {49}   Accordingly, the Court orders as follows: (1) if Plaintiff wishes for the
effort of reviewing the tapes to go forward, it shall be required to advance one-half
of the estimated costs of $140,545; (2) the Court will review a final cost allocation
upon presentation as to the utility of the search measured by the degree of non-
duplicative potentially relevant information produced as a result.

   4. Defendants’ Motion for Contempt and for Sanctions Pursuant to Rule 37(b)(2)

      {50}   The Court issued an Order on August 13, 2013, that recognized a joint
defense privilege for certain correspondences between Plaintiff and Ebinger and
distinguished communications coordinating litigation strategies of the two entities
from communications by which Ebinger assisted Plaintiff pursuant to a cooperation
agreement between them. The Order discussed the distinction between a privilege
based on common legal interests and the lack of privilege when based solely on joint
business interests.
      {51}   Defendants claim that Plaintiff has refused to produce documents that
cannot be privileged as defined in the Court’s August 13, 2013, Order. (Defs’ Mot.
Contempt and Sanctions Against SCR-Tech Under Rule 37(b)(2).) Plaintiff counters
that any documents it has withheld are privileged as measured by that Order.
      {52}   Having considered the submissions of the parties, the Court concludes
that it must review the documents in question in order to resolve the matter.
Plaintiff shall submit the 128 documents in dispute for the Court’s in camera
review, together with an adequate explanation of the basis on which Plaintiff claims
the documents are privileged.
      {53}   The Court understands that Plaintiff has otherwise agreed to prepare
a privilege log regarding documents that it has required to be returned pursuant to
the claw-back agreement between the parties, and that this agreement moots, at
least at this time, the Court’s need to further consider any contest as to privilege of
these documents.

   5. Defendants’ Request that Plaintiff Undertake a Renewed Search Pursuant to
      the Parties’ Make Available Agreement

      {54}   The parties agreed to a protocol for document production, referred to as
their “Make Available Agreement.” Paragraph 12 of that Agreement recites that
“[t]he documents initially being made available on the review platform by SCR-Tech
were collected on or about February 2009 and include documents in the custodians’
possession at that time. In addition, SCR-Tech will also make available on the
review platform responsive documents (1) created after the February 2009
collection, or (2) that were not included in the February 2009 collection.” (Letter
from Benjamin Sidbury, Counsel for Defs. Steag Energy Servs. GmbH and Steag
GmbH, to Hon. James L. Gale (July 15, 2014) Ex. A.)
      {55}   Defendants contend that Plaintiff has not done what it promised to do,
as evidenced by the number of documents produced by third parties that were not
but should have been included in Plaintiff’s production. Defendants contend that
the failure is sufficiently egregious to require that Defendants conduct a new
search, collection, and production for any documents created after February 2009.
      {56}   Plaintiff counters that there is no adequate justification for such an
extensive, supplemental search when more targeted efforts would suffice, and that
Defendants’ position is essentially that Plaintiff must start all over. Plaintiff has
agreed to do a comprehensive search and re-collection as to certain categories of
documents and has expressed a willingness to consider additional categories but
resists the breadth of further searching upon which Defendants insist.
      {57}   The Court is again not well-positioned to make a final determination
based on competing arguments at this stage. The Court orders as follows: First,
Defendants shall identify four specific subject areas for which they contend a search
and re-collection effort is warranted, including specific custodians they contend
should be included and the search terms which should be employed. Presumptively,
those search terms should be limited to those proposed in Exhibit H of Defendants’
July 15, 2014, letter to the Court. Second, the parties shall exhaust good faith
efforts to resolve differences between them as to the proposed search effort. Third,
assuming agreement, Plaintiff shall undertake the revised search and collection;
but, failing agreement, the Court will resolve or, if necessary, appoint one with
authority to resolve the outstanding disputes, after which Plaintiff will implement
the search and collection. Finally, to be measured by the results of this effort,
Defendants may request a further search and collection through demonstrating that
the search in these four areas documents suggests that there have been more
extensive failures to produce, justifying the cost of further efforts.

      {58}   As to these various matters, IT IS SO ORDERED, this the 31st day of
December, 2014.