Automated Solutions Corp. v. Paragon Data Systems, Inc. , 756 F.3d 504 ( 2014 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 14a0132p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Plaintiff-Appellant/Cross-Appellee, -
AUTOMATED SOLUTIONS CORPORATION,
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No. 13-3025/3058
v.
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Defendant-Appellee/Cross-Appellant. -
PARAGON DATA SYSTEMS, INC.,
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Appeal from the United States District Court
for the Northern District of Ohio at Cleveland.
No. 1:05-cv-01519—Lesley Brooks Wells, District Judge.
Argued: May 9, 2014
Decided and Filed: June 25, 2014
Before: COLE and SUTTON, Circuit Judges; CLELAND, District Judge.*
_________________
COUNSEL
ARGUED: Drew A. Carson, Cleveland, Ohio, for Appellant/Cross-Appellee. Richard
S. Mitchell, ROETZEL & ANDRESS, LPA, Cleveland, Ohio, for Appellee/Cross-
Appellant ON BRIEF: Drew A. Carson, Cleveland, Ohio, Patrick J. Milligan, Steven
J. Forbes, NORCHI FORBES LLC, Cleveland, Ohio, for Appellant/Cross-Appellee.
Richard S. Mitchell, Christine M. Garritano, ROETZEL & ANDRESS, LPA, Cleveland,
Ohio, for Appellee/Cross-Appellant.
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OPINION
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CLELAND, District Judge. On June 21, 2001, Automated Solutions Corporation
(“ASC”) and Paragon Data Systems, Inc. (“Paragon”) entered into a contract to develop
*
The Honorable Robert H. Cleland, United States District Judge for the Eastern District of
Michigan, sitting by designation.
1
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and support computer software for the Chicago Tribune. This software, called the
“Single Copy Distribution System” (“SCDS”) would allow the Chicago Tribune to
manage and track newspaper deliveries and subscriptions. Unfortunately, tensions
emerged between the two companies and Paragon terminated the contract on September
16, 2003. ASC sued Paragon in Ohio state court, and after a bench trial, the state court
found in ASC’s favor and declared that ASC was the sole owner of the SCDS. Soon
after the state court issued its judgment, ASC filed the instant action alleging, inter alia,
that Paragon had infringed on its copyright and trademark in the SCDS. After
approximately eight years of litigation, the district court granted summary judgment to
Paragon on all of ASC’s claims. For the following reasons, we AFFIRM.
I. BACKGROUND
A. The Development of the SCDS
ASC is an Ohio corporation engaged in the business of developing custom
software; Paragon is primarily engaged in providing hardware, equipment, and
maintenance support services for the automatic data collection industry. In 1999,
Paragon became aware of a business opportunity with the Chicago Tribune (“the
Tribune”). Paragon approached ASC and proposed submitting a bid to the Tribune for
custom software, hardware, and pre-packaged software components. On June 21, 2001,
ASC and Paragon entered into a Software Development and Ownership Agreement
(“SDO Agreement”). Pursuant to the SDO Agreement, ASC and Paragon agreed to
jointly develop, own, market, and license software for use by the Tribune and other
newspaper companies. The parties soon developed a software tracking system called the
“Single Copy Distribution System.” The SCDS utilized “C++” programming language
and allowed the Tribune to track newspaper subscriptions through the use of a handheld
device that communicated with a remote server. In August 2001, the parties licensed the
SCDS to the Tribune.
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B. The State Court Litigation
The business relationship between ASC and Paragon soured. After an agreement
via letter failed to resolve billing disputes between ASC and Paragon, on September 16,
2003, Paragon sent a letter to ASC terminating the SDO Agreement. Seven days later,
ASC sought a declaratory judgment in the Cuyahoga County Court of Common Pleas
that ASC had no further obligations to Paragon and that ASC was the sole owner of
SCDS. On February 2, 2005, following a bench trial, the state court held that the SDO
Agreement permitted Paragon to market the SCDS to third parties without ASC’s written
consent, but that it could not actually sell the SCDS to third parties unless ASC
consented to the sale. However, the state court concluded that Paragon waived its rights
to the SCDS when it decided to terminate the SDO Agreement instead of seeking legal
remedies under the SDO Agreement. This meant that Paragon’s legal rights to any
modifications of the SCDS expired on September 16, 2003. On July 6, 2006, the Court
of Appeals of Ohio affirmed. Automated Solutions Corp. v. Paragon Data Sys., Inc.,
856 N.E.2d 1008 (Ohio Ct. App. 2006).
While the state court litigation was pending, Paragon continued its efforts to use
the SCDS. An affidavit submitted by Giles Manias, an officer and shareholder of
Paragon, explains that Paragon was under a continued contractual obligation to provide
the SCDS to the Tribune, along with technical support for the program. Manias
identifies a former Paragon employee, Brent Anderson, as the individual responsible for
translating the SCDS code that ASC provided. Manias states that Anderson spent a
significant amount of time attempting to make the SCDS code usable. In order to
facilitate his work, Paragon bought Anderson a “Sun Server,” which is an external
Oracle database server. The Sun Server was necessary to performing work on the SCDS
because it utilized an external server as part of its method for keeping track of data.
Software code for the SCDS was not written on the Sun Server, but the Sun Server was
necessary for Anderson’s work in attempting to make the “server side” of the SCDS
code workable. No other Paragon employee had the knowledge necessary to operate the
Sun Server. Despite his efforts, Anderson was unable to make the SCDS code work, and
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 4
Paragon terminated his employment in March 2004. Manias also states that by 2004, the
handheld devices that the SCDS was originally designed to work on had become
obsolete. In order to continue marketing the SCDS, Paragon created a simulation of the
SCDS which it used on new handheld devices at a 2004 newspaper trade show.
However, this simulation was not functional software; it was purely designed for
demonstration purposes. After the state court ruled that Paragon had no rights in the
SCDS system, Paragon discarded the Sun Server.
C. Paragon Develops DRACI
In April 2004, Paragon contacted the Cleveland Plain Dealer, another newspaper,
and offered to sell it hardware and software for its newspaper delivery system. The Plain
Dealer purchased handheld devices from Paragon in May 2004, but originally intended
to develop its own software program to run on these devices. However, time constraints
intervened, and the Plain Dealer contacted Paragon in late 2004 to discuss the possibility
of Paragon developing software for the handheld devices. The Plain Dealer submitted
screen shots of how it wanted the program to look, and Paragon informed the Plain
Dealer that it would be creating the program from scratch.
Paragon assigned programmer Brian Atkin to work on the software, which was
dubbed “DRACI.”1 DRACI did not utilize a server, and Atkin states via affidavit that
he wrote the code “from scratch.” In line with the Plain Dealer’s specifications, Atkin
wrote DRACI utilizing “VB.Net” programming language. Atkin also states that he was
the only person at Paragon to write any code used in DRACI, and that he did not work
with Anderson, who had already been terminated by Paragon by the time Atkin created
DRACI. According to Atkin, “DRACI is not a complicated piece of software” and he
composed it “primarily in [his] head.” It took less than a month for Atkin to write and
deliver DRACI to the Plain Dealer.
1
The parties do not explain whether “DRACI” is an acronym, and if so, what it stands for.
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 5
D. The Federal Litigation
ASC acquired a federal copyright registration in the SCDS code on February 25,
2005. On April 26, 2005, ASC filed a second suit against Paragon in state court.
Paragon removed the matter to federal court, and ASC filed an amended complaint
alleging copyright infringement, trademark infringement, breach of contract, conversion,
tortious interference with a business relationship, unjust enrichment, and unfair
competition on the basis of Paragon’s alleged copying of the SCDS software to use in
its DRACI software. After numerous discovery disputes, the district court noted that
“Paragon appears to have failed in its duty to preserve information because of pending
or reasonably anticipated litigation.” Because Paragon had not produced documentary
evidence of its DRACI code development to ASC, the court ordered Paragon to submit
to a forensic expert investigation of its computer systems for evidence that Paragon
copied the SCDS software when it created DRACI. The court allowed ASC to choose
whether it wanted this forensic examination to take place, as well as the forensic
examiner it wished to use, but ordered that ASC would pay for any forensic examination
it chose to conduct.
ASC decided to proceed with the forensic examination and selected Visual
Evidence/E-Discovery LLC (“Visual Evidence”) as its forensic examiner. Visual
Evidence interviewed Paragon representatives, determined relevant sources of
electronically stored information, and analyzed the forensic images it obtained from
Paragon’s email server and Atkin’s hard drive. Visual Evidence concluded that its
ability to obtain potentially relevant evidence was inhibited for three reasons:
(1) Atkin’s former personal computer’s hard drive failed, and files were
not transferred to his current personal computer (both of which were used
for his work with Paragon).
(2) Anderson’s personal computer (again, used for work with Paragon)
was not maintained or archived after his departure.
(3) Paragon used a faulty back-up tape which did not accurately record
information.
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Visual Evidence further noted that “considering that Paragon is an information
technology based company, it is arresting that they operated without a fully functional
back-up system from 2003 through 2006 when the new system was employed.” It is not
apparent from the report that Visual Evidence discovered any evidence supporting
ASC’s claim that Paragon derived DRACI from the SCDS.
Paragon disputed the completeness of Visual Evidence’s report. Specifically, via
affidavit, Manias states that Anderson and Atkin’s failed hard drives may still be in
Paragon’s possession as Paragon maintains a set of “dead drives” that failed in the
ordinary course of business. However, because it does not track the serial numbers of
each of its employees’ hard drives, Paragon is unable to determine whether Anderson
and Atkin’s hard drives are among its collection of “dead drives.” Nevertheless, Manias
further states that he informed Visual Evidence of these hard drives, and Visual
Evidence chose not to examine the drives or note their existence in its report.
As part of the forensic computer examination, both Visual Evidence and
Paragon’s own e-discovery consultant, Vestige Ltd., conducted electronic searches
designed to filter out attorney-client privileged files. Unfortunately, both Visual
Evidence and Vestige missed two emails between Paragon and its attorneys. ASC filed
these emails with the court for in camera review and asked for case-terminating
sanctions based on their content. Paragon moved to strike the emails, noting that they
were subject to a claw-back agreement between the parties, were disclosed inadvertently,
and that Paragon had promptly asserted attorney-client privilege over the emails,
demanding their return. The district court granted Paragon’s motion to strike, noting that
Paragon’s disclosure of the emails appeared inadvertent and that Paragon had taken
reasonable steps to prevent the disclosure of privileged material during a “voluminous
document production.”
Based on Visual Evidence’s report, ASC moved for sanctions and an award of
attorneys’ fees, arguing that Paragon had deliberately destroyed evidence relevant to the
case. Paragon, in turn, moved for summary judgment, arguing that ASC had not
submitted any evidence that Paragon had copied the SCDS or that DRACI was
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 7
substantially similar or derived from the SCDS. The district court referred both motions
to a magistrate judge.
The magistrate judge issued two separate report and recommendations, (“R&Rs”)
advising that the district court grant ASC’s motion for sanctions in part, and that it
further grant Paragon’s motion for summary judgment in part.
Addressing ASC’s motion for sanctions, the magistrate judge found that Paragon
failed to institute any systematic document retention policy, and further failed to institute
a litigation hold after it was first sued by ASC. This failure resulted in the disposal of
the Sun Server, Atkin and Anderson’s failed hard drives, and a belatedly-disclosed work
report for Anderson’s activity at Paragon, all of which would have been subject to
Paragon’s duty to preserve evidence. However, based on the affidavits Paragon
submitted, the magistrate judge recommended finding that Paragon was at most
negligent, and that it had not acted with any degree of willful or malicious behavior.
Regarding the Sun Server, the magistrate judge reasoned that ASC was unable to
contradict Paragon’s assertions that it did not use the Sun Server in the development of
DRACI, therefore rendering its absence irrelevant. And although ASC argued that it
should have received the Anderson work reports earlier in the litigation, the magistrate
judge noted that ASC had since received the reports, and they did not appear to be
relevant. Lastly, as to the Anderson and Atkin hard drives, the magistrate judge
concluded that although the Anderson hard drive appeared irrelevant, Atkin was
undisputedly the author of the DRACI software and “the precise circumstances of
DRACI’s creation are very much relevant to ASC’s infringement claim.” Because of
Paragon’s negligence in maintaining Atkin’s hard drive, the magistrate judge
recommended that the district court consider instructing a jury that it may “infer, after
considering all the evidence, that the Atkin hard drive contained evidence showing that
Paragon’s DRACI code was derived from ASC’s SCDS code.” In taking this “middle
ground,” the magistrate reasoned that although it did not condone Paragon’s negligence,
any adverse inference sanction should be considered at trial, rather than imposing such
a sanction at the summary judgment stage.
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 8
Turning to Paragon’s motion for partial summary judgment, the magistrate judge
recommended granting summary judgment to Paragon on ASC’s copyright infringement
claim because ASC had not identified what portions of the SCDS software were
protectable under the Copyright Act. Instead, ASC had extensively argued that there
was evidence that Paragon either directly copied the SCDS software or that it had access
to the software and that substantial similarity resulted, thereby raising the reasonable
inference that copying had occurred. But in not identifying which portions of the SCDS
software were subject to copyright protection, ASC had “thus failed to provide any basis
by which a jury could determine that Paragon infringed on anything.” The magistrate
judge recommended that Paragon’s motion for summary judgment as to ASC’s other
claims be denied.
The district court adopted the magistrate judge’s R&Rs in part, and dismissed
ASC’s remaining claims. The court characterized ASC’s argument that it was not
properly put on notice as to its burden of proof for its copyright infringement claim as
“utterly confounding and specious.” The court further noted that ASC’s expert
testimony was “replete with insufficient conclusory statements” and failed to “identify
those elements comprising the unique protectable expression of [the] SCDS.” For these
reasons, the court concluded that the factual basis for the copyright claim was
insufficient to submit to a jury.
Turning to ASC’s remaining claims, the court reasoned that because the
gravamen of ASC’s claims was that the DRACI software infringed upon the SCDS
software, ASC’s remaining claims were contingent upon its infringement claim and
should also be dismissed. To the extent the court interpreted ASC’s claims as arising out
of Paragon’s use of the SCDS, the court held that these claims could have been raised
in the state court proceeding and thus res judicata barred them. Lastly, the court noted
the magistrate judge’s recommendation that it consider an adverse inference instruction
in favor of ASC, but concluded that sanctions were moot given its dismissal of the
remainder of ASC’s claims.
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 9
II. ANALYSIS
A. Discovery Disputes
“A federal court’s inherent powers include broad discretion to craft proper
sanctions for spoliated evidence.” Adkins v. Wolever, 554 F.3d 650, 651 (6th Cir. 2009)
(en banc) (hereinafter, “Adkins I”). We review a district court’s decision whether to
impose sanctions for abuse of discretion. Jones v. Ill. Cent. R.R. Co., 617 F.3d 843, 850
(6th Cir. 2010). “A court abuses its discretion when it commits a clear error of
judgment, such as applying the incorrect legal standard, misapplying the correct legal
standard, or relying upon clearly erroneous findings of fact.” Id. (citation omitted). The
severity of a sanction often depends on the party’s fault. Adkins I, 554 F.3d at 652–53.
However, “the fact-intensive inquiry into a party’s degree of fault is for a district court”
to determine, and we recognize that district courts enjoy relatively broad discretion in
this area. Id. at 653. District courts may “impose many different kinds of sanctions for
spoliated evidence, including dismissing a case, granting summary judgment, or
instructing a jury that it may infer a fact based on lost or destroyed evidence.” Id.
[A] party seeking an adverse inference instruction based on the
destruction of evidence must establish (1) that the party having control
over the evidence had an obligation to preserve it at the time it was
destroyed; (2) that the records were destroyed with culpable state of
mind; and (3) that the destroyed evidence was relevant to the party’s
claim or defense such that a reasonable trier of fact could find that it
would support that claim or defense.
Beaven v. U.S. Dep’t of Justice, 622 F.3d 540, 553 (6th Cir. 2010) (citation omitted).
“The test prescribed in Beaven is conjunctive; thus, so long as the district court did not
err in determining that [a party] had not satisfied at least one of the prongs, its
determination that a spoliation sanction was not warranted should not be upset.” Adkins
v. Wolever, 692 F.3d 499, 504 (6th Cir. 2012) (hereinafter, “Adkins II”). “Whether an
adverse inference is permissive or mandatory is determined on a case-by-case basis,
corresponding in part to the sanctioned party’s degree of fault.” Flagg v. City of Detroit,
715 F.3d 165, 178 (6th Cir. 2013).
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On appeal, ASC raises a host of arguments that the district court abused its
discretion by denying ASC’s motion for sanctions against Paragon. Specifically, ASC
asserts that on the basis of Paragon’s alleged violations, the district court should have
terminated the case, entered judgment in ASC’s favor, sanctioned Paragon’s attorneys,
and awarded ASC attorneys’ fees. Each of ASC’s discovery arguments is addressed in
turn.
1. Anderson’s Hard Drive and the Sun Server
Regarding both Anderson’s hard drive and the Sun Server, the magistrate judge
concluded, and the district court agreed, that Paragon had a duty to preserve these pieces
of evidence, and that it was negligent in failing to do so. Nevertheless, the magistrate
judge and the district court found that ASC had not met its burden in showing that the
Sun Server and Anderson’s hard drive contained evidence relevant to this litigation.
ASC disputes the district court’s finding that the Sun Server and hard drive did not
contain relevant evidence, and argues that it made a “compelling showing” that
information relevant to its claims would have been found in the Anderson hard drive and
the Sun Server, had Paragon not discarded them.
In this context, “relevant” means: “something more than sufficiently probative
to satisfy Rule 401 of the Federal Rules of Evidence. Rather, the party seeking an
adverse inference must adduce sufficient evidence from which a reasonable trier of fact
could infer that the destroyed [or unavailable] evidence would have been of the nature
alleged by the party affected by its destruction.” One Beacon Ins. Co. v. Broad. Dev.
Group, Inc., 147 F. App’x 535, 541 (6th Cir. 2005) (quoting Residential Funding Corp.
v. DeGeorge Fin. Corp., 306 F.3d 99, 108–09 (2d Cir. 2002)) (brackets in original,
internal quotation marks omitted).2 “A party seeking an adverse inference may rely on
circumstantial evidence to suggest the contents of destroyed evidence.” Beaven,
622 F.3d at 555 (citation and brackets omitted).
2
We note that a new version of Fed. R. Civ. P. 37(e), which would require a higher burden of
proof for an adverse inference instruction, is under consideration by the relevant Rules Committees.
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 11
ASC does not cite any evidence that suggests that either Anderson or the Sun
Server that he worked on were used to develop the DRACI software. ASC repeats its
assertions (and the magistrate judge agreed) that Paragon was under a duty to preserve
the hard drive and the Sun Server and that Paragon was negligent in failing to preserve
both pieces of equipment. However, whether Paragon was negligent in failing to
preserve the Sun Server and hard drive does not advance a showing of relevance, which
is a necessary finding for the district court to impose sanctions. To the extent that ASC
cites a transcript of an interview that its investigator held with Anderson as support for
its argument that Paragon used the SCDS as a model for DRACI, we note that the
interview appears to have been highly suggestive, and in any event, Anderson’s
statements during the interview are unsworn, and thus of limited reliability.3 The district
court did not clearly err in determining that a reasonable trier of fact could not find that
the missing Anderson hard drive and Sun Server would support ASC’s claims.
2. Paragon’s Back-up Tapes
ASC argues that the magistrate judge improperly concluded that Paragon’s back-
up tapes were not subject to Paragon’s duty to preserve evidence. ASC asserts that a
back-up system used by Paragon from 2003–2005 should have been preserved and
produced in the course of the instant litigation. According to Manias, Paragon used an
“I-Omega” back-up system to insure that its electronically stored information would be
recoverable in the event of a problem with its main storage system. However, as part of
this system, the back-up tapes were overwritten daily. At some point, the system failed,
and Paragon discarded the back-up tapes because the information on the tapes was not
retrievable.
The magistrate judge rejected ASC’s assertion that the back-up tapes should have
been subject to Paragon’s duty to preserve. The magistrate judge reasoned that in
Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003),4 the court noted that
3
It does not appear that either party ever deposed Anderson.
4
See n. 1.
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 12
a “litigation hold does not apply to inaccessible backup tapes (e.g., those typically
maintained solely for the purpose of disaster recovery), which may continue to be
recycled on the schedule set forth in the company’s policy.” Id. at 218; see also Forest
Labs., Inc. v. Caraco Pharm. Labs., LTD, No. 06-CV-13143, 2009 WL 998402, at *4
(E.D. Mich. April 14, 2009) (concluding that where defendants had offered no evidence
that the tapes in question were maintained for any purpose other than disaster recovery,
the tapes were not subject to the duty to preserve); The Sedona Principles, Second
Edition: Best Practices, Recommendations & Principles for Addressing Electronic
Document Production at 35–36 (The Sedona Conference Working Group Series, 2007)
available at https://thesedonaconference.org/download-pub/81 (“Absent specific
circumstances, preservation obligations should not extend to disaster recovery backup
tapes created in the ordinary course of business.”). The magistrate judge criticized
Paragon for not having a systematic document retention policy in place, but nevertheless
concluded that because the only evidence in the record suggested that the back-up tapes
were rewritten daily and used only for disaster recovery, they were not subject to
Paragon’s duty to preserve.
ASC argues that the magistrate judge did not properly apply Zubulake’s
reasoning because once Anderson and Atkin’s hard drives failed, the back-up tapes
became the only way to access Anderson and Atkin’s information, and thus should have
been preserved. See Zubulake, 220 F.R.D. at 218. However, this argument does not
address the unrebutted facts that the back-up tapes were re-written daily and only used
for disaster recovery.5 Further, the only evidence before the magistrate judge suggested
that the back-up tapes failed and were effectively useless as a disaster recovery system.
Although ASC asserts that once Anderson and Atkin’s hard drives failed, Paragon
should have immediately preserved the back-up tapes, there is no indication as to when
the hard drives failed in relation to when the back-up tapes ceased working properly.
5
We note ASC’s expert’s declaration takes issue with Paragon’s representation that its back-up
tapes failed and were discarded. However, although ASC’s expert reiterated that Paragon’s document
retention policy was extremely poor and expressed skepticism that Paragon does not have more
information that it has not disclosed, he did not advance any evidence suggesting that Paragon’s back-up
tapes were used as an archive in the normal course of business, thus bringing them within the normal ambit
of Paragon’s duty to preserve.
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 13
Even assuming that Paragon had retained the back-up tapes, it is not at all clear that
useful evidence would have been gleaned from the tapes, or that any data would have
been recoverable. Based on the evidence before it, we conclude that the district court
did not abuse its broad discretion in adopting the R&R’s conclusion that the back-up
tapes were not subject to Paragon’s duty to preserve evidence.
3. Paragon’s Culpability
ASC asserts that the magistrate judge wrongly found that Paragon’s failure to
preserve evidentiary items was “at most” negligent, rather than willful or grossly
negligent. “The ultimate determination of culpability is within the district court’s
discretion so long as it is not a clearly erroneous interpretation of the facts. . . . Even
if we were to disagree with the district court’s ultimate conclusion on culpability, it does
not necessarily follow that the district court’s determination should be upset.” Adkins
II, 692 F.3d at 505–06.
ASC cites Pension Committee of University of Montreal Pension Plan v. Banc
of America Securities, 685 F. Supp. 2d 456 (S.D.N.Y. 2010). In Pension Committee, the
court stated that in the context of discovery misconduct: “Conduct is either acceptable
or unacceptable. Once it is unacceptable the only question is how bad is the conduct.”
Id. at 463. The Pension Committee court placed great emphasis on Zubulake’s effect on
electronic discovery standards:
A failure to preserve evidence resulting in the loss or destruction of
relevant information is surely negligent, and, depending on the
circumstances, may be grossly negligent or willful. For example, the
intentional destruction of relevant records, either paper or electronic,
after the duty to preserve has attached, is willful. Possibly after October,
2003, when Zubulake IV was issued, and definitely after July, 2004,
when the final relevant Zubulake opinion was issued, the failure to issue
a written litigation hold constitutes gross negligence because that failure
is likely to result in the destruction of relevant information.
Id. at 465 (footnotes omitted) (emphasis in original). The Pension Committee court
further stated that: “Relevance and prejudice may be presumed when the spoliating
party acted in bad faith or in a grossly negligence manner.” Id. at 467. ASC cites
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 14
Pension Committee’s language to argue that the magistrate judge misapplied the relevant
law, and thus abused his discretion, by concluding that despite Paragon’s lack of any
systematic document retention system, its conduct was merely negligent, rather than
willful or grossly negligent. ASC therefore argues that the relevance of Paragon’s
spoliated evidence is therefore presumed, making it a further abuse of discretion for the
district court to deny severe sanctions for Paragon’s conduct.
There is reason to doubt Pension Committee’s persuasive effect. To begin with,
the Second Circuit directly criticized Pension Committee’s broad language: “We reject
the notion that a failure to institute a ‘litigation hold’ constitutes gross negligence per
se.” Chin v. Port Auth. of N.Y & N.J., 685 F.3d 135, 162 (2d Cir. 2012). The Second
Circuit reasoned instead that “the better approach is to consider [the failure to adopt
good preservation practices] as one factor in the determination of whether discovery
sanctions should issue[,]” and that a finding of gross negligence does not mandate an
adverse inference instruction. Id. (quotation marks omitted). Rather, “[the Second
Circuit has] repeatedly held that a case-by-case approach to the failure to produce
relevant evidence, at the discretion of the district court, is appropriate.” Id. (quotation
marks omitted).
This case-by-case approach is the law in our circuit as well. We recognize that
district courts are best positioned to adjudicate discovery disputes, as they have the most
contact with the parties, the personalities, and the litigation. We have previously
characterized the inquiry into a party’s degree of fault as “fact-intensive” and within the
“broad discretion” of the district courts. Adkins, 554 F.3d at 653. Additionally, we have
declined to impose bright-line rules, leaving it instead to a case-by-case determination
whether sanctions are necessary, and if so, what form they must take. See Flagg,
715 F.3d at 178. Thus, the appropriate inquiry on appeal is whether the district court
committed a “clear error of judgment,” not a de novo fact-based determination of which
party was more at fault. Jones, 617 F.3d at 850. Our review of the record in this case
demonstrates that there was ample support for the district court’s determination that
Paragon was at most negligent.
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 15
The magistrate judge first noted an affidavit from Manias, who attested that
Paragon never intentionally withheld or destroyed evidence, and at all times complied
in good faith with its discovery obligations. Manias also stated that Paragon is a small
company with only eleven employees. Additionally, Paragon submitted affidavits from
many of its prior attorneys in both the state and federal ligation, all attesting that they
were not aware of any evidence withholding, and that they believed Paragon’s discovery
responses were truthful and accurate when they were made. Despite ASC’s attempts to
cast doubt on the notion that Paragon and its counsel acted in good faith, it did not
submit any evidence suggesting that Paragon willfully withheld evidentiary material.
This is not to say that we applaud Paragon’s conduct in this litigation. As ASC
repeatedly points out in its brief, Paragon is an information-technology company, and
thus could be expected to have a better-than-average understanding of electronic
discovery and the necessity for functioning back-up tapes and the preservation of data.
Paragon’s behavior was negligent; but we are unwilling to say that the district court
abused its discretion in determining that it was not grossly so. Instead, after considering
all of the evidence before it, the district court determined that severe sanctions were
improper. Given the support found in the record for this determination, the district court
did not commit a clear error of judgment, and thus, did not abuse its discretion in finding
that Paragon was negligent.
4. Paragon’s Privileged Material
ASC argues that the district court improperly struck two email exhibits as
protected by attorney-client privilege. “We review the decision to grant or deny a
motion to strike for an abuse of discretion, and decisions that are reasonable, that is, not
arbitrary, will not be overturned.” Dassault Systemes, SA v. Childress, 663 F.3d 832,
846 (6th Cir. 2011) (citation omitted). However, “whether the attorney-client privilege
applies is a mixed question of law and fact, subject to de novo review.” Reg’l Airport
Auth. of Louisville v. LFG, LLC, 460 F.3d 697, 712 (6th Cir. 2006) (citation omitted).
“The purpose of attorney-client privilege is to ensure free and open
communications between a client and his attorney.” In re Grand Jury Subpoenas,
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 16
454 F.3d 511, 519 (6th Cir. 2006). The privilege “may be overridden . . . by the so-
called crime-fraud exception, encompassing advice given with respect to ongoing or
future wrongdoing.” Id. at 520. When a party asserts that the crime-fraud exception
applies, district courts may conduct an in camera inspection of the allegedly privileged
documents.
Before engaging in in camera review to determine the applicability of the
crime-fraud exception, the judge should require a showing of a factual
basis adequate to support a good faith belief by a reasonable person that
in camera review of the materials may reveal evidence to establish the
claim that the crime-fraud exception applies.
Once that showing is made, the decision whether to engage in in camera
review rests in the sound discretion of the district court. The court
should make that decision in light of the facts and circumstances of the
particular case, including, among other things, the volume of materials
the district court has been asked to review, the relative importance to the
case of the alleged privileged information, and the likelihood that the
evidence produced through in camera review, together with other
available evidence then before the court, will establish that the crime-
fraud exception does apply.
United States v. Zolin, 491 U.S. 554, 572 (1989) (citations and quotation marks omitted).
ASC asserts that two emails between Paragon and its counsel demonstrate that
Paragon had an intent to obstruct justice throughout the discovery process. Paragon
argues that the emails are presented without their full context, that its officers’ words
“merely represent the ongoing frustration of Paragon at ASC’s continued attempt to gain
access to information that is entirely irrelevant to this matter,” and that, in any event, the
emails were privileged communications and subject to a claw-back agreement between
the parties.
After reviewing the emails at issue, the district court concluded that ASC had not
shown that there was a good faith basis to believe that an in camera review of the emails
or other inadvertantly produced documents would show that the crime-fraud exception
should apply. On appeal, ASC argues that the emails are prima facie evidence of the
applicability of the crime-fraud exception. We disagree.
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 17
The district court considered the history of litigation between the parties, as well
as the content of the emails themselves. Instead of being the smoking gun that ASC
believes the emails to be, it appears that they reflect Paragon’s frustration with the length
of the litigation, as well as with the ongoing discovery disputes. The emails ASC cites
do not discuss violating a current order, nor do they seek advice regarding future illegal
conduct. Rather, they appear to discuss the ongoing discovery litigation process, a
subject undoubtedly within the purview of the attorney-client relationship. Further, there
is no indication that Paragon’s counsel responded to these emails with legal advice
concerning how to circumvent Paragon’s discovery obligations. Because the district
court’s decision to deny ASC’s request for an in camera review and strike the emails
from the record was reasonable, and not arbitrary, we affirm.6
B. Summary Judgment
ASC also challenges the district court’s grant of summary judgment to Paragon
on all of ASC’s claims. “We review a district court’s decision granting summary
judgment de novo.” Vance v. Wade, 546 F.3d 774, 781 (6th Cir. 2008) (citation
omitted).
1. Copyright Infringement
In order to establish copyright infringement, ASC must prove two elements:
“(1) ownership of a valid copyright, and (2) copying of constituent elements of the work
that are original.” Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., Inc., 499 U.S. 340, 361
(1991). Paragon challenged the second element of this test, specifically whether there
is a substantial similarity between the protectable elements of the SCDS and DRACI.
We use a two-part test for determining substantial similarity. First, we “identify
and eliminate those elements [of a work] that are unoriginal and therefore unprotected.”
Kohus v. Mariol, 328 F.3d 848, 853 (6th Cir. 2003). Next, we determine “whether the
6
We also note Paragon’s argument that the emails were subject to a claw-back agreement between
the parties. Although such agreements are generally enforceable, see Fed R. Evid. 502(e), no such
agreement between the parties has been submitted.
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 18
allegedly infringing work is substantially similar to protect[a]ble elements of the
original.” Id. at 856. “It is axiomatic . . . that mere abstract ideas are not protect[a]ble,
but the expression of an idea is.” Id. at 855. When the work at issue is functional, rather
than creative, “it is necessary to eliminate those elements dictated by efficiency.” Id. at
856.
“In ascertaining this elusive boundary line between idea and expression, between
process and non-functional expression, courts have looked to two other staples of
copyright law—the doctrines of merger and scenes a faire.” Lexmark Int’l, Inc. v. Static
Control Components, Inc., 387 F.3d 522, 535 (6th Cir. 2004) (citation omitted). Merger
refers to situations where “expression is essential to the statement of the idea” or “where
there is only one way or very few ways of expressing the idea.” Id. In these instances,
the idea and expression have merged, and copyright law provides no protection. In
contrast, scenes a faire describes instances “when external factors constrain the choice
of expressive vehicle,” thereby precluding protection. Id. “In the computer-software
context, the doctrine means that the elements of a program dictated by practical
realities—e.g., by hardware standards and mechanical specifications, software standards
and compatibility requirements, computer manufacturer design standards, target industry
practices, and standard computer programming practices—may not obtain protection.”
Id.
Addressing Paragon’s argument that it was entitled to summary judgment
because ASC could not prove substantial similarity, the magistrate judge relied on our
decision in R.C. Olmstead, Inc. v. CU Interface, LLC, 606 F.3d 262 (6th Cir. 2010). In
Olmstead, the plaintiff software and hardware company brought suit alleging copyright
infringement based on the defendant’s alleged copying of the plaintiff’s software. Id.
at 266–68. However, the district court granted summary judgment to the defendant, and
we affirmed, noting that “[the plaintiff] has not attempted to identify any original
elements of its software that [the defendant] copied.” Id. at 275. Because the plaintiff
did not identify those elements of its software that it claimed were original, and therefore
subject to copyright protection, “its substantial similarity analysis [did] not filter
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 19
elements that would be expected to be common to any . . . software, those dictated by
the particular business practices.” Id. Accordingly, we concluded that the plaintiff had
failed to create a triable issue of fact as to whether the defendant had copied original
elements of the plaintiff’s software. Id. at 276.
Following R.C. Olmstead, the magistrate judge observed that ASC had not “even
attempt[ed] to specify exactly what portions of the SCDS software are protectable,
original elements and which are unprotectable.” The magistrate judge further reasoned
that although “ASC has extensively argued its conclusion that Paragon’s software is
substantially similar to its SCDS code . . . it has offered no evidence . . . by which a jury
could arrive at that conclusion. Given that ASC had made no showing which elements
of the SCDS were subject to copyright protection, and therefore at issue in this lawsuit,
the magistrate judge noted that the court was “hamstrung” and unable to engage in the
necessary first step of the substantial similarity analysis.
ASC objected to the magistrate judge’s recommendation that the district court
grant Paragon summary judgment on ASC’s copyright claim, arguing (1) that Paragon
had not moved for summary judgment on the grounds that ASC had failed to show
which elements of the SCDS were original and protected, and (2) that ASC had
submitted enough evidence of the original, protectable elements of the SCDS to allow
a reasonable jury to find in its favor.
The district court rejected both arguments. First, it characterized ASC’s assertion
that it was not put on notice regarding the burden of proof for its copyright infringement
claim as “utterly confounding and specious.” Turning to ASC’s argument that it had
submitted sufficient evidence to create a genuine issue of material fact, the court noted
that ASC had never submitted any evidence identifying the unique protectable elements
of the SCDS, and that there was “insufficient evidence to generate even an implication
that DRACI [is] substantially similar to SCDS.”
On appeal, ASC again argues that it was not on notice that it needed to submit
evidence identifying the protectable portions of the SCDS software, that it submitted
sufficient evidence to justify submitting the matter to a jury, and that the district court’s
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 20
adoption of the magistrate judge’s recommendation that it consider an adverse jury
instruction at trial for the spoliated Atkin hard drive precluded summary judgment.
Paragon moved for summary judgment on the grounds that ASC “cannot
establish that there is substantial similarity between the DRACI software system and the
SCDS system.” It stated that it was focusing “solely on the issue of substantial
similarity” for its motion, and identified the Kohus test discussed above, which requires
a court to “identify and eliminate those elements [of a work] that are unoriginal and
therefore unprotected.” Kohus, 328 F.3d at 853. Paragon then identified eight reasons
why DRACI could not have been copied from the SCDS, and argued that for any of
these reasons, summary judgment was appropriate.
When moving for summary judgment, the movant has the initial burden of
showing the absence of a genuine dispute as to a material fact. Celotex Corp. v. Catrett,
477 U.S. 317, 323 (1986). The burden then shifts to the nonmovant, who must put forth
enough evidence to show that there exists “a genuine issue for trial.” Horton v. Potter,
369 F.3d 906, 909 (6th Cir. 2004) (citation omitted). The nonmovant “must do more
than simply show that there is some metaphysical doubt as to the material facts.”
Matsushita v. Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
Here, Paragon moved for summary judgment on the issue of substantial
similarity. At this point, it became ASC’s burden to advance enough evidence for a
reasonable juror to find in its favor. As noted above, the substantial similarity test has
two prongs: ASC chose not to address the first prong, and instead focused on the
second. The record demonstrates that Paragon’s motion for summary judgment put ASC
on notice that its ability to satisfy the substantial similarity test was at issue, and its
arguments to the contrary are without merit.7
7
In its appellate brief, ASC asserts that “[i]t is not disputable that Paragon did not move for
summary judgment . . . on grounds that [ASC] did not own a valid copyright in SCDS.” (Appellant Br.
at 56.) This is true; however, ASC conflates the issue of whether it owned a copyright in the SCDS with
whether it had identified which portions of the SCDS were subject to copyright protection, which is the
first step of the substantial similarity test.
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 21
Turning to whether ASC submitted sufficient evidence to show which portions
of the SCDS were original, and therefore subject to copyright, we also agree with the
district court that ASC did not meet its burden. ASC relies on the declaration of its
expert, Dr. Wolfgang Pelz, as identifying the unique portions of the SCDS software
code. Dr. Pelz is a professor emeritus of computer science at the University of Akron.
He states that he “distilled” the SCDS software to its “unique protectable expression,”
but does not elaborate which portions of data are unique, what makes them unique, or
why their particular form is not dictated by practical realities, see Lexmark, 387 F.3d at
535, and therefore not subject to copyright protection. The most detail that Dr. Pelz’s
declaration provides is in reference to data structures used in a Paragon “VB.net” file.
Dr. Pelz states that the “field names, field types, field lengths, and the order of the fields
within the data structures” within the VB.net file are similar to the SCDS code/software.
Again, it is not at all clear from Dr. Pelz’s declaration that these elements are subject to
copyright protection, how they are similar to the SCDS, or why they “go well beyond
what could be attributable to common usage, software/hardware requirements, or best
practices.” As we stated in R.C. Olmstead, “[e]xpert reports must include ‘how’ and
‘why’ the expert reached a particular result, not merely the expert’s conclusory
opinions.” R.C. Olmstead, 606 F.3d at 271 (citation omitted); Alexander v. CareSource,
576 F.3d 551, 560 (6th Cir. 2009) (“Conclusory statements unadorned with supporting
facts are insufficient to establish a factual dispute that will defeat summary judgment.”).
Dr. Pelz’s declaration includes no attempt at explaining this “how” and “why,” and
instead focuses solely on his legal conclusion that Paragon “infringed Automated’s
rights in and to the SCDS code/software.” Without more, this is not enough to create a
genuine issue of material fact as to whether Paragon copied original elements of ASC’s
software. See R.C. Olmstead, 606 F.3d at 275.
Lastly, ASC argues that, because the magistrate judge recommended that ASC
was entitled to an adverse inference instruction regarding Atkin’s spoliated hard drive,
this instruction alone creates an issue of material fact that precludes summary judgment.
The adverse inference instruction permits a finding that Paragon derived DRACI from
the SCDS (the second prong of substantial similarity). That finding would not help ASC
Nos. 13-3025/3058 Automated Solutions Corp. v. Paragon Data Sys. Page 22
here because ASC’s problem is that it cannot establish which, if any, elements of the
SCDS are subject to copyright protections (the first prong of substantial similarity). We
thus find no error in the district court’s reasoning that its grant of summary judgment in
favor of Paragon due to ASC’s inability to identify the protectable elements of the SCDS
made the adverse inference instruction irrelevant to the issue.8
2. ASC’s Remaining Claims
ASC also appeals the district court’s entry of summary judgment on the basis of
res judicata for its remaining claims alleging trademark infringement, tortious
interference with business relationships, unjust enrichment, and unfair competition.
ASC argues that because these claims focus on whether Paragon marketed, copied, or
monetized the SCDS after Paragon’s breach of the agreement, the claims survive
independently from ASC’s copyright claim.
ASC forfeited this argument. “Waiver is different than forfeiture. Whereas
forfeiture is the failure to make the timely assertion of a right, waiver is the intentional
relinquishment or abandonment of a known right.” United States v. Olano, 507 U.S.
725, 733 (1993) (internal quotation marks omitted). Despite filing an appellate brief
comprising over sixty pages, ASC devotes a single paragraph to its argument that res
judicata should not apply, leaving us to guess what it means, or why the district court’s
application of res judicata was erroneous. ASC cannot wait until the closing pages of
its brief to raise an argument in a single paragraph that we should reverse and preserve
the majority of its claims against Paragon.
III. CONCLUSION
For these reasons, we AFFIRM.
8
Because we affirm the district court’s grant of summary judgment to Paragon on ASC’s
copyright claim, we do not find it necessary to reach Paragon’s cross-appeal which argues that the district
court erred by adopting the magistrate judge’s recommendation that it consider imposing an adverse-
inference jury instruction for Atkin’s spoliated hard drive at trial.