PUBLISH UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT

________________ _________________ XYNGULAR, a Delaware corporation, Plaintiff Counter Defendant - Appellee,

v. MARC SCHENKEL, an individual, Defendant Counterclaimant Third- Party Plaintiff - Appellant,

v.

RUDY REVAK, an individual; MARY JULICH, an individual; STEVE KOLE, an individual; MARC WALKER, an individual; BRUCE JENSEN, an individual; DAN MURPHY, an individual; RUSSELL FLETCHER, an individual; JIM NORTHROP, an individual; ROBERT SPANGLER, an individual; SYMMETRY CORPORATION, a Delaware corporation; GLOBAL VENTURES MANAGEMENT SERVICES LLC, a Delaware limited liability company; ALYTIS, LLC; GLOBAL VENTURES PARTNERS, Third-Party Defendants - Appellees. No. 16-4193

________________ _________________ FILED United States Court of Appeals Tenth Circuit 

### May 15, 2018
Elisabeth A. Shumaker Clerk of Court2 Appeal from the United States District Court for the District of Utah (D.C. No. 2:12-C V-00876-RJS-PMW)

________________ _________________ Stephen Q. Wood (Mary Anne Q. Wood, w ith him on the briefs), Wood Balmforth LLC, Salt Lake City, Utah, for Defendant Counterc laimant Third-Party Plaintiff - Appellant. Mark F. James, Hatch, James & Dodge, P.C ., Salt Lake City, Utah (Mitchell A. Stephens and Justin L. James, Hatch, James & Dodge, P.C., Salt Lake City, Utah, with him on the brief for Plaintiff Counter Defendant-Appe llee, and Stephen E. W. Hale, Laura G. Kennedy, Matthew J. Ball, and Rita M. Co rnish, Parr Brown Gee & Loveless, P.C., Salt Lake City, Utah, with him on the briefs, for Third-Party Defenda nts - Appellees), for Plaintiff Counter Defendant-Appellee.

________________ _________________ Before BRISCOE , SEYMOUR , and LUCERO , Circuit Judges.

________________ _________________ LUCERO , Circuit Judge.

________________ _________________ Marc Schenkel appeals the dismissal by the district court of his claims against Xyngular Corporation and vari ous third parties as a sanc tion for abuse of what he claims was pre-litigation discovery. B ecause we have not previously decided whether pre-litigation conduct that did not gi ve rise to the substantive claims in a case is sanctionable by dismis sal of a party’s claims, the issue remains an open question in our circuit. We conclude that termination sa nctions are permissible when pre-litigation conduct is aimed at manipula ting the judicial pro cess and is unrelated to the conduct that gave rise to the substant ive claims in a case. Because the district3 court did not abuse its discretion in concl uding that these conditions were met in the present case, we exercise ju risdiction under 28 U.S.C. § 1291 1 and affirm.
I Xyngular Corporation, a marketing comp any, was formed in 2009. Schenkel worked at Xyngular from th e company’s inception, perform ing various services in exchange for an ownership interest. In 2010, the relationship between Schenkel and Xyngular’s directors soured . Schenkel believed the company was paying excessive amounts to Symmetry and Global Ventur es Management Services (“GVMS”), 2 two entities that were owned by the Xyngular di rectors and performed certain services for Xyngular. Believing that th ese activities amounted to ill egal self-dealing, Schenkel sent Xyngular a demand letter on September 1, 2011, in which he asked the Board of Directors to investigate. He also requested that the Board pursue claims against certain Xyngular employees for misapprop riation of corporate assets, corporate waste, self-dealing, and usurpation of corporate opportunities. Between mid-2010 and mid-2011, Schenkel asked Ian Swan, who was a Xyngular shareholder and IT consultant at GVMS, to gather documenta tion regarding the suspected self-dealing and the number of shares to which Schenk el was entitled. In October 2011, Swan began to provide Schenkel with the requested documents.

1 Pursuant to Rule 54(b), the dist rict court entered final judgment on Schenkel’s counterclaims and third-party claims, permitti ng Schenkel to appeal its interlocutory ruling and staying the rema ining proceedings pending this appeal. 2 GVMS has since changed its name to Altyis.4 On September 13, 2012, Xyngular file d suit against Schenkel, seeking a declaratory judgment that he was entitled to only two thousand shares and that his position as Master Distributor was termin ated along with any accompanying rights. Xyngular also alleged that Schenkel co mmitted corporate waste and misappropriated corporate resources. Sche nkel responded by asserting a number of counter-claims and third-party claims. He argued that he was entitled to 2,600 shares, a permanent seat on Xyngular’s Board of Directors, a nd a non-terminable position in Xyngular’s distribution chain. He also alleged that Xyngular’s di rectors had engaged in selfdealing, concealed the presence of lead in the company’s produc ts, and perpetuated sales tax fraud committed by Symmetry. Sc henkel attached several documents he received from Swan as exhibits to his or iginal answer, counter-c laim, and third-party complaint. Schenkel subsequently s ought a temporary restra ining order (“TRO”) to restore his ownership interest , restore his seat on the Board of Directors, and prevent the Xyngular directors from looting the company. During a hearing on the TRO request, Xyngular’s counsel questioned th e propriety of Sche nkel’s receipt of documents from Swan. Xyngular late r moved for terminating sanctions, 3 alleging that Schenkel encouraged Swan to st eal documents belonging to Xyngular, Symmetry, GVMS, and others. Xyngular argued that many of these documents were

3 Specifically, Xyngular asked the cour t to dismiss Schenke l’s claims with prejudice. We refer to such a remedy as a “terminating sanction.” See Conn. Gen. Life Ins. Co. v. New Images of Beverl y Hills, 482 F.3d 1091, 1096 (9th Cir. 2007).5 kept on GVMS servers, which made Sche nkel’s use of them in seeking a TRO improper. Schenkel responded that Swan was authorized to access the documents, that Swan gave the documents to Schenke l voluntarily, and that Schenkel intended to use them to blow the whistle 4 on Xyngular’s directors—not for the purpose of litigation. He further alleged that Xyng ular had spoliated evidence and retaliated against him for whistleblowin g. After the court allowe d additional discovery, both parties filed cross-motions for terminating sanctions. The district court denied Schenkel’s motion. As to Xyngular’s motion, the court found that Schenkel encouraged Sw an to remove documents from GVMS’s servers and then collected, reviewed, and used those doc uments in support of his claims. It further found that the documents bel onged to Xyngular, GVMS, Symmetry, and various other companies. The court noted that although Swan had authorization to access the GVMS servers on which the documents were stored, there was no evidence that Swan had authority to remove the documents, possess them, or give them to third parties. Even th ough Schenkel’s cond uct occurred before litigation officially began, the court dete rmined he had obtained the documents in anticipation of litigation and used them to support his claims. It also held that, as a Xyngular shareholder, Schenkel was not en titled to receive th e documents in the manner he did because he di d not use the proper procedur e to inspect the company’s

4 Schenkel reported what he believed to be the Xyngular directors’ illegal conduct to the FBI and handed over some of the documents to the agency. Additionally, Schenkel spoke with the IRS and Santa Clara County Tax Assessor about a tax fraud scheme the Xyngular di rectors were allege dly employing.6 books and records. Finally, the court concluded that Xyn gular had met its burden in showing that Schenkel acted willfully, in ba d faith, and with faul t. It dismissed Schenkel’s claims without entering default against Schenkel on Xy ngular’s claims. Additionally, the court excluded the doc uments Schenkel obtained from Swan from evidence and awarded Xyngular and the third parties their costs a nd fees in bringing the sanctions motions. Sc henkel timely appealed.
II Schenkel first argues that the district court exceeded its inherent powers by imposing sanctions for pre-liti gation conduct. He largel y relies on our decision in Towerridge, Inc. v. T.A.O., Inc., 111 F.3d 758 (10th Cir. 1997) , for the proposition that a district court has inhe rent authority to sanction onl y: (1) “bad faith occurring during the course of litigation that is abusive of the judi cial process” and (2) “bad faith in bringing an acti on or in causing an action to be brought.” Id. at 768 (quotation omitted). “We review a court’s imposition of sa nctions under its i nherent power for abuse of discretion.” LaFleur v. Teen He lp, 342 F.3d 1145, 1149 (10th Cir. 2003) (quotation omitted). “An abus e of discretion occurs when the district court bases its ruling on an erroneous conclusion of law or relies on clearly errone ous fact findings.” Ashby v. McKenna, 331 F.3d 11 48, 1149 (10th Cir. 2003) (quotation omitted). In concluding that Schenkel’s c onduct was sanctionable, the district court considered not only Schenkel’s misappropri ation of Xyngular’s documen ts, but also his use of them in anticipation of litig ation and during the litigation itself. We agree that under7 Towerridge, a court may exer cise its inherent powers to sanction bad-faith conduct that abuses the judicial pr ocess, including pre-litigation acts that directly affect a lawsuit. While not addressing pre-litigation conduc t per se, the Supreme Court has held that “[a]s long as a party receives an appropriate hearing . . . the party may be sanctioned for abuses of process occurri ng beyond the courtroom.” Chambers v. NASCO, Inc., 501 U.S. 32, 57 (1991). Alth ough we held in Towerridge that “an award of attorneys’ fees may not be prem ised solely on prelitigation conduct,” we observed that the bad faith at issue in th at case “lay solely in [defendant]’s prelitigation acts which gave rise to [plain tiff]’s substantive cl aim.” Towerridge, 111 F.3d at 765, 768. By c ontrast, Schenkel’s misconduc t was not the basis for Xyngular’s original suit, which stemmed from contractual disputes between the parties. Instead, the misc onduct centered on his method of gathering evidence related to those substantive claims. Although it took place before litigation began, Schenkel’s misconduct was intended to impr operly influence the judicial process. 5 Our sibling circuits have affirmed te rminating sanctions where bad faith prelitigation conduct extended into court pr oceedings. See, e.g., Eagle Hosp. Physicians, LLC v. SRG Consulting, Inc. , 561 F.3d 1298, 1307 (11th Cir. 2009) (affirming a sanction of dismissal for a pa rty whose “ongoing ability to intercept

5 At the time Swan provided Schenke l with the misappropriated documents, Schenkel was consulting with transactional counsel. In mid-2011, he retained and consulted with litigation counsel. And by th e end of 2011, he had created a privilege log that withheld documents on the basis of “work product.”8 confidential and privileged emails” both before and during litig ation would make adjudication of his claims unt enable); Jackson v. Micros oft Corp., 78 F. App’x 588, 589 (9th Cir. 2003) (unpublished) (affirmi ng a terminating sancti on for a party’s prelitigation receipt of privileged informati on because defendant “would be unfairly prejudiced were the case to go forward”).
III Schenkel argues that the dist rict court, when selecti ng a sanction, abused its discretion because it imprope rly applied the factors articulated in Ehrenhaus v. Reynolds, 965 F.2d 916 ( 10th Cir. 1992), and the clear-and-convincing-evidence standard. “[O]utright dismissa l of a lawsuit . . . is a part icularly severe sanction, yet is within the court’s disc retion.” Chambers, 501 U.S. at 45. In Ehrenhaus, we established five factors that district courts should consid er before imposing dismissal as a sanction: (1) the degree of actual prejudice to the defendant; (2) the amount of interference with the j udicial process; . . . (3 ) the culpability of the litigant, . . . ; (4) whether the court warned the party in advance that dismissal of the action would be a like ly sanction for noncompliance, . . . ; and (5) the effic acy of lesser sanctions. Ehrenhaus, 965 F.2d at 921 (quota tion and citations omitted). We have additionally held that, “[b]ecause dismissal is such a harsh sanction, it is appropriate only in cases of willfulne ss, bad faith, or some fault.” Chavez v. City of Albuquerque, 402 F.3d 1039, 1044 (10t h Cir. 2005) (quotation and brackets omitted). And although our circuit has no precedent preci sely on point, persuasive authority from our sibling circuits indicat es that a clear and convincing standard9 applies. See Maynard v. Nygren, 372 F.3d 890, 891 (7th Cir. 2004); Shepherd v. Am. Broadcasting Cos., Inc., 62 F.3d 1469, 1472 (D.C. Cir. 1995); Aoude v. Mobil Oil Corp., 892 F.2d 1115, 1118 (1st Cir. 1989). We therefore apply the same standard to this case. Schenkel contends the record lacks cl ear and convincing evidence that any document he received was conf idential, privileged, or cont ained trade secrets. This argument misapprehends the district cour t’s reasoning in imposing sanctions. Although the district court concluded that the documents comprised in ternal files such as board meeting minutes and employees ’ personal information, the inquiry that was essential to the imposition of sancti ons was not whether the documents were confidential, privileged, or trade secrets—but rath er, whether Schenkel acted willfully, in bad faith, and w ith fault in a way that abus ed the judicial process in collecting them. In concluding that he did so, the district court noted that Schenkel did not attempt to use the proper procedures for a shareholder to inspect corporate records, that he did so an ticipating litigation, and that he gathered documents that belonged not only to Xyngular but also to his other potential opponents in this litigation. We hold that the di strict court did not err in c oncluding that this amounted to clear and convincing evidence of Sc henkel’s bad faith. See Archibeque v. Atchison, Topeka & Santa Fe Ry. Co ., 70 F.3d 1172, 1174 (10th Cir. 1995) (concluding that a litigant exhibited bad fa ith warranting dismissa l of her claims by deliberately “fail[ing] to coopera te in the discove ry process”).10 We further hold that the district c ourt permissibly applied the Ehrenhaus factors in determining that terminating sanctions were appropr iate. First, in measuring “the degree of ac tual prejudice to the opposi ng party,” LaFleur, 342 F.3d at 1151, the court noted that Schenkel co llected over three hundred documents, that Xyngular and the other partie s could not identify the documents that he collected, and that some of the documents containe d personal information about Xyngular employees. Although some of the documents may have been subject to discovery, the district court noted that Schenkel’s ac tions amounted to a circumvention of the discovery process and its built-i n protections for parties’ inte rests. The district court did not conclude that any of the documents were privileged, but it did note that Schenkel’s actions deprived th e parties of the right to ar gue that they were before disclosing them in the course of litigation. It also obs erved that Schenkel’s actions led the parties to expend significant time and resources resolving the issue of the misappropriated documents. Second, Schenkel’s actions amounted to a substantial “inte rference with the judicial process,” LaFleur, 342 F.3d at 11 51, because he had, in anticipation of pursuing legal remedies, opted out of th e proper discovery procedures. Schenkel bypassed the judicial process while nevertheless seeking to take advantage of it. As for the third factor—the question of Sc henkel’s culpability—the district court repeated its conclusion that he had acted with willfulness, bad faith, and fault, and that he “made a calculated decision to obtain the documents for strategic use in litigation.”11 The fourth factor asks “whether the litigant was warned in advance that dismissal was a likely sanction.” LaFleur, 342 F.3d at 1151. The district court observed that it did not have an opportunity to warn Sc henkel before he received the documents, but observed that th is factor was not dispositive. See Rogers v. Andrus Transp. Servs., 502 F.3d 1147, 1152 (10th Cir. 2007) (noting that a warning under the fourth Ehrenhaus factor “is not a sine qua non for dismissal” (italics omitted)). Schenkel now argues that the district cour t erred in dismissing his claims without prior warning. He contends that, althoug h some courts have imposed terminating sanctions without a warning, those cases did not involve pre-litigation misconduct. Schenkel does not, however, cite any authority holding that termin ating sanctions in a case like this one necessarily require pr ior warning. We decline to hold that Ehrenhaus dictates such a result. Finally, the district court addressed th e question of whethe r lesser sanctions would be effective. In its analysis, the court reiterated the prejudice to the parties that resulted from Schenkel’s circumvention of the discovery process, and noted that any sanction short of dismissal would in centivize future litig ants to similarly misappropriate documents in anticipation of litigation. It concluded that dismissal was the least severe sanction that would effectively cure the prejudice, deter future misconduct, and punish Schenke l’s wrongdoing. Schenkel argues that the district court erred in declining to impose a less er sanction, descri bing the sanction he received as unprecedented. Bu t Schenkel never argued before the district court that lesser alternative sanctions would be approp riate; he instead insisted that his conduct12 was not improper at all and therefore warra nted no sanction. “Absent extraordinary circumstances, we will not c onsider arguments raised for the first time on appeal.” Turner v. Pub. Serv. Co. of Colo., 563 F.3d 1136, 1143 (10th Cir. 2009). The imposition of sanctions is one of ma ny matters within a trial court’s broad discretion, and we re verse only when that discretion has been abused. LaFleur, 342 F.3d at 1149. In this case, the district court carefully analyzed the evidence and the parties’ arguments. We do not discern any abuse of discre tion in the district court’s analysis.
IV AFFIRMED.