Electronic Discovery

In February 2003, Aero leamed that Intex had been deleting all of its e-mails every thirty
days since the case was filed in April 2002. On April 1, 2003, a protective order was entered that
required Intex to make a full and complete effort to recover any and all destructed electronic
documents, including e-mail. The order also stated that Plaintiffs may petition for the
appointment of a computer forensics expert to assist in recovering electronic data and that
Plaintiffs may request that Intex bear the costs of this computer forensics expert.

In May 2003, Intex produced forty-five pages of documents. Intex also produced a
declaration from Mark Hunter of Pinkerton that described Intex’s efforts to retrieve the destroyed
e-mails. Intex searched a certain type of file on selective computers. Aero found these
submissions unacceptable; and, thereafter, Aero and Intex engaged in negotiations to hire a
computer forensics expert. These negotiations ultimately proved fruitless. However, at no time
did Plaintiffs file a petition seeking the appointment of a computer forensics expert.

ANALYSIS

Plaintiffs move for discovery sanctions against Defendants, pursuant to Federal Rules of
Civil Procedure 37(c)(1) and 37(b)(2)(A). Specifically, Plaintiffs seeks sanctions finding that:
(1) Intex copied Aero’s commercial embodiment of the ‘726 patent; (2) any infringement of the
‘726 patent by Intex was willful; and (3) Defendants’ equitable defenses of laches and estoppel
are dismissed with prejudice because its litigation misconduct and copying activities preclude
equitable relief. Plaintiffs also seek fees and costs for bringing this motion, deposing Tien Zee,

and investigating Intex’s destruction of electronic evidence.



electronic documents was issued on April 1, 2003. Intex first attempted to comply with that
order in May 2003. Aero found Intex’s submissions unacceptable. Aero then attempted to
negotiate with Intex over the appointment of a computer forensics expert.

However, at no time did Aero file a petition, as was its right under the April 1, 2003
order, seeking the appointment of a computer forensics expert to assist in recovering electronic
data. Plaintiffs were also entitled to request that Intex bear the costs of the computer forensics
expert. Instead, Plaintiffs did nothing further before they filed the present motion for sanctions,
on October 15, 2003. Plaintiffs waited over seven months to bring this mater before the Court.
It would also be unjust to award these sanctions now. Accordingly, Plaintiffs’ motion seeking
sanctions for Intex’s alleged failure to comply with the April 1, 2003 order regarding electronic
discovery is denied.

CONCLUSION

For the foregoing reasons, Plaintiffs’ Motion for Sanctions is denied.

Dated: AG 2004

Unjled States District Judge



BACKGROUND
Document Discovery

Intex is part of a multi-corporation structure. Defendant Intex sells the products that
Plaintiffs accuse infringe their United States patent rights. A separate management corporation
provides management services to Intex. Tien Zee is the president of both Intex and the separate
management corporation, and Tien Zee’s holding company owns both entities. These companies
are collectively referred to as the “American Intex Companies.”

Intex purchases the accused products from a foreign corporation, “Intex Trading Ltd.” A
separate, second foreign management corporation provides Intex Trading Ltd. with management
services. Tien Zee runs Intex Trading Ltd. and is the president of the foreign management
corporation. Tien Zee also runs the factories that design and manufacture the accused products.
These companies are collectively referred to as the “Foreign Entities.”

Plaintiffs sought production of documents relating to the development of the original
accused products. According to Plaintiffs, Intex developed the accused products by copying
Plaintiffs’ patented air mattress. In January 2003, Plaintiffs asked Intex for the documents in the
possession of the Foreign Entities. Intex did not produce a single document related to the
development of these products; Intex stated, in May 2003, that these materials are not
discoverable because they are in the possession of the Foreign Entities. However, despite the
links that Plaintiffs claim exist between the American Intex Companies and the Foreign

Companies, Plaintiffs never filed a motion to compel production of these documents.


Plaintiffs offer two arguments for why sanctions should be entered against Defendants.
First, Plaintiffs contend that Intex hid documents and lied about its relationship with the Foreign
Entities. Secondly, Plaintiffs assert Intex failed to comply with the April 1, 2003 order regarding
electronic discovery.

Document Discovery

Plaintiffs first argue that because the American Intex Companies and the Foreign Entities
are related, Intex had the practical ability to obtain documents from the Foreign Entities.
Plaintiffs, though, never brought a motion to compel these documents. Plaintiffs claim that they
did not know the extent of any relationship until late September, when Tien Zee was deposed.
However, in January 2003, Plaintiffs asked for the documents in the possession of the Foreign
Entities. Moreover, Plaintiffs knew by May 2003 that Intex would not tum over the requested
documents,

Entering findings of copying and willful infringement are serious sanctions. These
findings, if Defendants are found liable for infringement, would enable Plaintiffs to possibly
recover treble damages. See, e.g., Transclean Corp. v. Bridgewood Servs., Inc., 290 F.3d 1364,
1377-78 (Fed. Cir. 2002). Under the circumstances, such drastic sanctions are not warranted.
Plaintiffs had at least five months to bring a motion to compel the requested documents and
failed to do so.

Plaintiffs also claim that Intex lied about its involvement in the design and manufacture
of the accused products. According to Plaintiffs, Intex stated, in an interrogatory response, that it
was not involved in the manufacture, design, or development of the accused products. Plaintiffs

further contend that Tien Zee saw the Aero mattress and had the Foreign Entities make a copy.


Minute Order Farm (06/97)

United States District Court, Northern District of Illinois

nero Magra duet John W. Darrah “than Asigved Jude

CASE NUMBER 02 C 2590 DATE 1/29/2004

CASE Aero Products Intl vs. Intex Recreation Corporation

TITLE

[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.]
DOCKET ENTRY:
qd) o Filed motion of [ use listing in “Motion” box above.]
(2) Qo Brief in support of motion due
@) a Answer brief to motion due___. Reply to answer brief due__.
(4) a Ruling/Hearingon__setfor___—_at
(5) a Status hearing[held/continued to] [set for/re-set for] on setfor_ at
(6) a Pretrial conference{held/continued to] [set for/re-set for}on__—_—setfor_——at_—
() a Trial[set for/re-set for]on__—_at
(8) oO [Bench/Jury trial] [Hearing] held/continuedto__—_at
(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OOFRCP4(m) OlLocal Rule 41.1 OFRCP41(a)(1) FRCP41(a)(2).

ao =f {Other docket entry] For the reasons stated in the attached memorandum opinion and order,

plaintiffs’ motion for sanctions is denied [86-1]. Enter Memorandum Opinion and Order.

(al) [For further detail see order attached to the original minute order.]
No notices required, advised in open court.

No notices required.

Notices mailed by judge’s staff.

Notified counsel by telephone.

wv | Docketing to mail notices.
Mail AO 450 form.

Copy to judge/magistrate judge. 4
—
dase quiled notice
courtroom
MF deputy’s

initials

een)
OL C datdhiine beécived in

central Clerk's Office mailing depuly initials



However, entering a finding that Intex copied and willfully infringed Aero’s patent would
be a disproportionate sanction for Intex’s alleged failure to comply with its discovery obligations.
As Plaintiffs concede in their reply, Intex is correct in asserting that reviewing competitors’
products does not prove copying. “[O]ne wonders how to distinguish between the intentional
copyist making minor changes to lower the risk of legal action, and the incremental innovator
designing around the claims, yet seeking to capture as much as is permissible of the patented
device.” Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17, 36 (1997).

Lastly, Plaintiffs assert that Intex’s conduct during Tien Zee’s deposition was improper
because Tien Zee would not answer questions about the ownership of the Foreign Entities
because of privacy concerns, However, entering conclusive findings of copying and willful
infringement would be a disproportionate and inappropriate remedy for this alleged refusal to
answer deposition questions, particularly when Plaintiffs failed to take any steps to compel
answers. Also, Plaintiffs have not shown any connection between ownership of the Foreign
Entities and the alleged copying and infringement of the patented products.

Furthermore, awarding fees and costs for deposing Tien Zee would not be appropriate; it
appears the parties reached a good-faith dispute over the ownership of the Foreign Entities during
the deposition. Plaintiffs made no attempt to resolve this dispute by filing a discovery motion.
Accordingly, Plaintiffs’ motion seeking sanctions for the failure to comply with documentary
discovery requests is denied.

Electronic Discovery
Plaintiffs’ request for sanctions concerning electronic discovery is also denied. The order

requiring Intex to make a full and complete undertaking to recover any and all destructed



UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

AERO PRODUCTS INTERNATIONAL, INC.,
a Florida corporation; and
ROBERT B. CHAFFEE, an individual,

Plaintiffs,

v. No: 02 C 2590
INTEX RECREATION CORPORATION,
a California corporation;

QUALITY TRADING, INC.,

a California corporation; and
WAL-MART STORES, INC.,

a Delaware corporation,

Judge John W. Darrah

Defendants.

MEMORANDUM OPINION AND ORDER

The Plaintiffs, Aero Products International, Inc. (“Aero”) and Robert B. Chaffee, filed
suit against the Defendants, Intex Recreation Corporation (“Intex”); Quality Trading, Inc.
(“Quality Trading”); and Wal-Mart Stores, Inc. (“Wal-Mart”). Presently before the Court is
Plaintiffs’ Motion for Sanctions. For the following reasons, the Plaintiffs’ motion is denied.

LEGAL STANDARD

The Federal Rules of Civil Procedure provides authority to sanction litigants that fail to
comply with their discovery obligations. Rule 37(c)(1) provides:

A party that without substantial justification fails to disclose information as

required by Rule 26(a) or 26(e)(1) shall not, unless such failure is harmless, be

permitted to use as evidence at trial, at a hearing, or on a motion, any witness or

information not so disclosed. In addition or in lieu of this sanction, the court, on

motion after affording opportunity to be heard, may impose other appropriate
sanctions. In addition to requiring payment of reasonable expenses, including |



attorney’s fees, caused by the failure, these sanctions may include any actions

authorized under subparagraphs (A), (B), and (C) of subdivision (b)(2) of this rule

and may include informing the jury of the failure to make the disclosure.

Rule 37(b)(2)(A) states that if a party fails to comply with a court order regarding discovery, “an
order that the matters regarding which the order was made or any other designated facts shall be
taken to be established for the purposes of the action in accordance with the claim of the party
obtaining the order” may be entered.

District courts have “wide latitude in fashioning appropriate” discovery sanctions.
Johnson v. Kakvand, 192 F.3d 656, 661 (7th Cir. 1999). However, a sanction must be
proportionate to the circumstances resulting in a litigant’s failure to comply with its discovery
obligations. “The sanction must be one that a reasonable jurist, apprized of all of the
circumstances, would have chosen as proportionate to the infraction.” Salgado v. Gen. Motors
Corp., 150 F.3d 735, 740 (7th Cir. 1998).

Ifa litigant knows have should of known that it failed to comply with a discovery order, it
may be found at fault for failure to comply with the order. See Melendez v. Illinois Bell Tel. Co.,
79 F.3d 661, 671 (7th Cir. 1996). A knowing and willing violation of a discovery order merits a
finding of bad faith against the violating litigant. While bad faith is not necessary to impose
sanctions, discovery sanctions are proper if the litigant acts in bad faith, willfully violates a
discovery order, or is found at fault for failure to comply with a discovery order. In re Golant,

239 F.3d 931, 936, n.1 (7th Cir. 2001).