Osi Rest. Partners, LLC v. Oscoda Plastics, Inc.

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA18-841
Filed: 16 July 2019
Wake County, No. 13 CVS 9159
OSI RESTAURANT PARTNERS, LLC f/k/a OSI RESTAURANT PARTNERS, INC.
and OUTBACK STEAKHOUSE, INC.; BONEFISH GRILL, LLC f/k/a BONEFISH
GRILL, INC.; CARRABBA’S ITALIAN GRILL, LLC f/k/a CARRABBA’S ITALIAN
GRILL, INC.; CHEESEBURGER IN PARADISE, LLC; OS SOUTHERN, LLC f/k/a
OS SOUTHERN, INC.; OSI/FLEMING’S, LLC f/k/a OUTBACK/FLEMING’S, LLC;
and OUTBACK STEAKHOUSE OF FLORIDA, LLC f/k/a OUTBACK STEAKHOUSE
OF FLORIDA, INC., Plaintiffs,
v.
OSCODA PLASTICS, INC. and ALLIED COMPANIES, LLC f/k/a THE ALLIED
COMPANIES INTERNATIONAL, LLC and its successors in interest and/or related
entities ALLIED INDUSTRIES INTERNATIONAL, INC.; ALLIED FLOORING
PRODUCTS, INC.; ECO-GRIP CENTRAL, LLC; ECO-GRIP EAST, LLC; ECO-GRIP
FLOORING, LLC; ECO-GRIP FLOORING GULF COAST, LLC; and ECO-GRIP
GREAT LAKES, LLC, Defendants.
Appeal by defendant Oscoda Plastics, Inc. from order entered 10 April 2018 by
Judge Robert H. Hobgood in Wake County Superior Court. Heard in the Court of
Appeals 27 March 2019.
Young Moore and Henderson, P.A., by Christopher A. Page and Jonathan L.
Crook, for plaintiffs-appellees.
Parker Poe Adams & Bernstein LLP, by Kevin L. Chignell and Collier R. Marsh,
for defendant-appellant Oscoda Plastics, Inc.
ZACHARY, Judge.
OSI REST. PARTNERS, LLC V. OSCODA PLASTICS, INC.
Opinion of the Court
Defendant Oscoda Plastics, Inc.1 appeals from the portion of the trial court’s
order imposing discovery sanctions in the form of striking its answer to Plaintiffs’
claims for negligence, breach of implied warranty, and breach of express warranty.
Because Defendant was not given notice that sanctions might be imposed, we reverse
that portion of the trial court’s order.
Background
Plaintiffs are several restaurants operated under the parent company OSI
Restaurant Partners, LLC (collectively, “Plaintiffs”). Defendant is a manufacturer of
commercial flooring products, which Plaintiffs purchased and installed in 130 of their
restaurants across the United States. Plaintiffs initiated the instant action against
Defendant on 5 July 2013, alleging that the flooring they purchased from Defendant
had “completely failed at numerous restaurants, requiring complete replacement of
the flooring products at numerous of the Plaintiffs’ locations,” as well as “costly
repairs.” Specifically, Plaintiffs alleged that the problems included “seam separation,
seam distortion, bubbling under the flooring, flooring detachment from the substrate,
and water ponding beneath the flooring.” In their complaint, Plaintiffs asserted
claims for negligence, breach of implied warranty, breach of express warranty, strict
liability, negligent misrepresentation, and breach of consumer protection acts.
1 The other defendants are not party to the instant appeal.
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Opinion of the Court
Through discovery, Plaintiffs sought to learn the extent of Defendant’s
knowledge of the alleged defects in its flooring. Plaintiffs requested that Defendant
produce, inter alia, all documents that referred or related to (1) “the design, testing,
or manufacture of” its flooring, (2) “any issues with or complaints about” the flooring,
and (3) “any attempt to repair or otherwise correct the issues with or complaints
about” the flooring. Following Plaintiffs’ first motion to compel, Defendant indicated
that it had certain “backup tapes” that might potentially contain responsive emails
and documents.
On 4 September 2015, the trial court ordered Defendant to produce “all
responsive, non-privileged documents contained on the backup tapes for the time
period from 2006 through 2009.” On 9 October 2015, Defendant filed a motion for
reconsideration, contending that it had “obtained new information . . . that indicates
that recovery of the backup tapes will be far more expensive and time consuming . . .
than [Defendant] initially expected.” However, after two orders extending
Defendant’s deadline to produce the backup tapes, Defendant returned to court, this
time representing that it was unable to access the documents due to the fact that the
backup tapes were encrypted.
On 16 March 2016, the trial court entered an order (the “Spoliation Order”),
concluding that Defendant had “intentionally encrypted emails and . . . intentionally
failed to retain the electronic ability to retrieve the subject emails, with knowledge of
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Opinion of the Court
their relevance and materiality for this case,” and that Defendant had “suppressed
its knowledge of this encryption for several months prior to it being revealed for the
first time by forensic experts.” The trial court ordered that Defendant be sanctioned
with a “spoliation instruction to the jury unless, not less than 120 days prior to the
trial, [Defendant] provide[d] Plaintiffs the subject emails in an unencrypted form.”
Shortly thereafter, Defendant represented that it had discovered a means by
which it could gain access to the documents on its backup tapes, and on 14 October
2016, Defendant produced more than 5,000 pages of those documents. When
Plaintiffs reviewed the documents, they discovered a potential reference to the
existence of flooring testing data. Plaintiffs requested that Defendant further
supplement its document production to include those related materials, and after
Plaintiffs filed a second motion to compel, Defendant produced additional documents.
Defendant also indicated that it did not possess any additional responsive documents
requested by Plaintiffs, but that such documents were in the possession of its sister
company, Duro-Last. The trial court thus ordered Defendant to “use reasonable
efforts to encourage the voluntary production of the Duro-Last Documents by Duro-
Last.”
Duro-Last produced 1,054 pages of documents on 13 July 2017. At that point,
Defendant maintained that the terms of the Spoliation Order had been “fully
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Opinion of the Court
satisfied,” and on 13 November 2017, Defendant filed a motion to set aside the
spoliation instruction.
According to Plaintiffs, however, the documents that they received from Duro-
Last contained several highly relevant emails that would have been stored on
Defendant’s backup tapes, but nevertheless were not included within the 5,000 pages
of documents that Defendant produced from the tapes. In particular, Plaintiffs
emphasized an email sent from Defendant’s technical sales manager to a Duro-Last
representative, in which the manager stated, “we have been doing some testing on
our vinyl flooring . . . . The biggest problem we have with material in the field is
shrinking.” According to Plaintiffs, this “smoking gun” email
was on the backup tapes, it is not privileged, it is relevant,
it contains search terms [Defendant] apparently applied in
[its] review, and it was sent from the only employee who
supplied information for [Defendant’s] responses to
Plaintiffs’ first set of interrogatories, in which [Defendant]
flatly denied any defects with its product.
Plaintiffs subsequently filed a motion to amend their complaint in order to
allege “newly discovered facts related to [Defendant’s] knowledge of defects in the
[flooring] and [Defendant’s] contemporaneous misrepresentations and fraudulent
concealment of the same,” and to “assert claims for fraudulent concealment and
punitive damages against [Defendant] based on th[is] newly discovered evidence.”
Defendant consented to Plaintiffs’ motion to amend their complaint.
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OSI REST. PARTNERS, LLC V. OSCODA PLASTICS, INC.
Opinion of the Court
On 14 December 2017, Defendant’s motion to set aside the spoliation
instruction came on for hearing before the Honorable Robert H. Hobgood. Plaintiffs
argued that the spoliation instruction was justified based upon Defendant’s conduct
throughout discovery. Furthermore, pointing to the newly discovered “smoking gun”
emails, Plaintiffs argued that the Spoliation Order “not only shouldn’t be lifted, [but]
it should be modified to make it more severe.” Plaintiffs suggested that the trial court
order Defendant to produce all of its remaining backup tapes within 30 days, and if
Defendant did not comply, Plaintiffs asked that the court “consider the sanction of a
default judgment against [Defendant], and we will try the case on damages.”
Apparently surprised by Plaintiffs’ stance, Defendant noted that Plaintiffs’
argument was “not a response to our argument” regarding the spoliation instruction,
but was instead “related to [the allegations in their] motion to amend.” Defendant
maintained that it had consented to Plaintiffs’ motion to amend “because we
understood that today was not the time to argue that.” Defendant also pointed out
that there was not a pending motion to compel, but nevertheless attempted to defend
against Plaintiffs’ suggestion that additional sanctions were warranted.
On 10 April 2018, the trial court denied Defendant’s motion to set aside the
spoliation instruction due to Defendant’s failure to comply with the Spoliation Order.
Specifically, the trial court found that Defendant “ha[d] not satisfied the
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Opinion of the Court
requirement . . . that it produce to Plaintiffs the subject emails from 2006 to 2009 on
the backup tapes.” In addition, the trial court found that Defendant’s
repeated sworn representations in its pleadings and
interrogatory responses that it never believed [its flooring]
product to be defective in any way have been shown to be
false or misleading by the documents Duro-Last produced
from the backup tapes. The Court finds it significant that
perhaps the most critical email Duro-Last produced was
sent by [Defendant’s technical sales manager], who was
also the only witness [Defendant] identified as providing
responses to Plaintiffs’ interrogatories, in which
[Defendant] flatly denied there being any defect in [its
flooring] at any time.
Based upon its findings of misrepresentations and “other acts of misconduct,” the
trial court concluded that it would “impose additional sanctions against [Defendant]
pursuant to North Carolina Rules of Civil Procedure 37(b)(2) and its inherent
powers.” The trial court sanctioned Defendant by striking its answer and entering
default against it as to liability on Plaintiffs’ claims for negligence, breach of implied
warranty, and breach of express warranty. Defendant timely filed written notice of
appeal.
On appeal, Defendant argues that the trial court’s order striking its answer as
a discovery sanction violated Defendant’s due process rights, in that Defendant “was
not provided notice in advance of the 14 December 2017 hearing that sanctions would
be considered.” In the alternative, Defendant contends that the trial court abused its
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Opinion of the Court
discretion because (1) no discovery violation occurred, and (2) the order was
manifestly unsupported by reason.
Grounds for Appellate Review
Although the trial court’s order is interlocutory, Defendant maintains that it
has the right to an immediate appeal because the order affects a substantial right, in
that it sanctions Defendant in the form of striking its answer. Indeed, “[o]rders of this
type have been described as affecting a substantial right,” and are therefore
immediately appealable. Essex Grp. Inc. v. Express Wire Servs., 157 N.C. App. 360,
362, 578 S.E.2d 705, 707 (2003).
Discussion
Defendant first argues that the trial court violated its due process rights by
ordering discovery sanctions and striking Defendant’s answer, because Defendant
received “no notice that the trial court was considering sanctions and no notice of the
basis for the sanctions imposed.” We agree.
Rule 37 of the North Carolina Rules of Civil Procedure allows a trial court to
sanction a party for discovery violations. See N.C. Gen. Stat. § 1A-1, Rule 37(b) (2017).
However, “[n]otice and an opportunity to be heard prior to depriving a person of his
property are essential elements of due process of law which is guaranteed by the
Fourteenth Amendment of the United States Constitution,” and these protections
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Opinion of the Court
apply with equal force to a trial court’s authority to impose sanctions under Rule 37.
Griffin v. Griffin, 348 N.C. 278, 280, 500 S.E.2d 437, 438 (1998).
In order for a trial court to impose sanctions against a party, the Due Process
Clause requires that the party was first afforded the “right to notice both (1) of the
fact that sanctions may be imposed, and (2) the alleged grounds for the imposition of
sanctions.” Megremis v. Megremis, 179 N.C. App. 174, 179, 633 S.E.2d 117, 121
(2006). A party is entitled to notice whether sanctions are imposed under Rule 37, id.
at 178-79, 633 S.E.2d at 121, or under the trial court’s inherent disciplinary authority,
Williams v. Hinton, 127 N.C. App. 421, 426, 490 S.E.2d 239, 242 (1997) (“[T]he trial
courts have ample power to control the conduct of attorneys through either
the inherent power to discipline attorneys or by the use of contempt powers, or both,
after proper notice and opportunity to be heard.”). Clearly, “the complete absence of
notice of potential sanctions . . . is not adequate notice.” Green v. Green, 236 N.C. App.
526, 540, 763 S.E.2d 540, 550 (2014). “Our Court has held that a party sanctioned
under Rule 37 ha[s] [constitutionally adequate] notice of sanctions where the moving
party’s written discovery motion clearly indicate[s] the party [is] seeking sanctions
under Rule 37.” Megremis, 179 N.C. App. at 179, 633 S.E.2d at 121.
In the instant case, Plaintiffs did not file a written motion seeking discovery
sanctions against Defendant. At the time of the 14 December 2017 hearing, the only
motions pending were (1) Defendant’s motion to set aside the spoliation instruction,
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Opinion of the Court
and (2) Plaintiffs’ motion to amend their complaint. Because Defendant had already
consented to Plaintiffs’ motion to amend the complaint, the only matter left to be
resolved at the hearing was Defendant’s motion to set aside the spoliation instruction.
After Defendant presented its argument as to why it should be relieved of the
spoliation instruction, Plaintiffs responded that Defendant’s conduct “so far justifies
[the] spoliation order for trial in this case.” However, drawing upon largely the same
grounds alleged in their motion to amend, Plaintiffs further argued that the
Spoliation Order should “be modified to make it more severe.” Defendant protested,
noting that Plaintiffs’ argument was not responsive to Defendant’s, and explaining
that “we understood that today was not the time to argue that.” Nevertheless,
Defendant attempted to respond to Plaintiffs’ contention that the allegations set forth
in their motion to amend justified subjecting Defendant to further sanctions.
On appeal, Plaintiffs contend that the trial court’s decision to impose
additional sanctions following the 14 December 2017 hearing did not violate
Defendant’s due process rights, because the allegations in their motion to amend
sufficiently “laid out the factual basis for additional sanctions.” In other words,
because Defendant had been served with Plaintiffs’ motion to amend, and because
the allegations therein could also serve as the “factual basis for additional sanctions,”
Defendant was provided sufficient notice of both (1) the fact that sanctions might be
imposed, and (2) the grounds for such sanctions. Plaintiffs’ argument is misplaced.
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Opinion of the Court
Our case law makes clear that parties have a due process right not only to
notice of “the alleged grounds for the imposition of sanctions,” but also “of the fact
that sanctions may be imposed.” Zaliagiris v. Zaliagiris, 164 N.C. App. 602, 609, 596
S.E.2d 285, 290 (2004), disc. review denied, 359 N.C. 643, 617 S.E.2d 662 (2005). In
the instant case, however, Plaintiffs “filed no written motion seeking sanctions,”
Green, 236 N.C. App. at 540, 763 S.E.2d at 549, nor was there a pending motion to
compel at the time of the 14 December 2017 hearing. While Plaintiffs’ motion to
amend the complaint contained allegations which, if true, might support the
imposition of additional sanctions against Defendant, wholly absent from Plaintiffs’
motion was any indication that those allegations were intended to serve as the basis
for additional sanctions. Cf. N.C. State Bar v. Barrett, 219 N.C. App. 481, 488, 724
S.E.2d 126, 131 (2012) (“The allegations in the complaint did not . . . clearly apprise
Defendant of the conduct which she would have to defend at the hearing.” (quotation
marks omitted)).
Moreover, the fact that Defendant attempted to defend against Plaintiffs’
request for additional sanctions at the hearing is not evidence that Defendant did, in
fact, receive proper notice. See Zaliagiris, 164 N.C. App. at 609, 596 S.E.2d at 290(“The fact that the party against whom sanctions are imposed took part in the hearing
and did the best [it] could do without knowing in advance the sanctions which might
be imposed does not show a proper notice was given.” (quotation marks omitted)).
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Opinion of the Court
Because the issue of sanctions was only “initially addressed at the hearing,” it cannot
be said that Defendant received proper notice and an opportunity to be heard, so as
to render the trial court’s order compliant with the demands of due process. Green,
236 N.C. App. at 540, 763 S.E.2d at 549.
The trial court exhibited abundant patience in this matter. Patience runs thin
when a party repeatedly delays compliance with discovery requests and court orders.
However, because Defendant received no notice whatsoever that it might be subject
to sanctions based upon the facts alleged in Plaintiffs’ motion to amend prior to the
14 December 2017 hearing, we must reverse the trial court’s order. See Megremis,
179 N.C. App. at 181, 633 S.E.2d at 122 (“[D]efendant in the present case did not have
notice in advance of the trial that sanctions might be imposed against her.
Consequently, we conclude the trial court violated defendant’s due process right to
proper notice.” (citation omitted)); see also Green, 236 N.C. App. at 540, 763 S.E.2d at
550 (“We can safely say that the complete absence of notice of potential
sanctions . . . is not adequate notice.”).
Finally, we note that Defendant’s due process argument is properly presented
for appellate review. Defendant was not deprived of its due process rights until the
point at which the trial court entered its order imposing additional unnoticed
sanctions, the order from which Defendant appeals. Nor did Defendant waive its right
to due process at the 14 December 2017 hearing, as Plaintiffs contend. “[W]aiver of
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Opinion of the Court
the right to due process must be made voluntarily, knowingly, and intelligently.”
Barrett, 219 N.C. App. at 488, 724 S.E.2d at 131. At the hearing, Plaintiffs requested
that the Spoliation Order “be modified to make [the sanction] more severe” and
proceeded to outline the grounds supporting such action. Defendant, seemingly
blindsided, protested that “we understood that today was not the time to argue that,”
and continued to assert the same throughout the remainder of the hearing.
Defendant’s statements demonstrate that it had not anticipated that it would be
required to expand the scope of its argument beyond the spoliation instruction to
include defenses to the imposition of additional sanctions. See id. (“Defendant stated
during the hearing that ‘my understanding is that the misrepresentation alleged in
the complaint was the only issue that required me to formulate a defense for today.’
This statement indicates Defendant believed she was facing only the allegation in the
complaint and was not prepared to defend any others; it does not suggest that she
was voluntarily, knowingly, and intelligently waiving her right to due process.”).
Accordingly, Defendant did not waive its right to due process, and appropriately
asserts the same in support of its contention that the trial court’s order imposing
additional sanctions must be reversed.
Conclusion
For the reasoning discussed herein, we reverse that portion of the trial court’s
order sanctioning Defendant by striking its answer to Plaintiffs’ claims for
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Opinion of the Court
negligence, breach of implied warranty, and breach of express warranty. Having so
concluded, we need not address Defendant’s remaining challenges to the trial court’s
order.
REVERSED IN PART.
Judges STROUD and INMAN concur.
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