Kixsports, LLC v. Munn

Kixsports, LLC v. Munn, 2019 NCBC 61.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
MECKLENBURG COUNTY 17 CVS 16373

KIXSPORTS, LLC,

Plaintiff,

v.

RYAN MUNN; TYLER VAUGHAN;
RENEGADE GK; BIG DREAMZ,
LLC; AND MIRO GROUP, LLC,

Defendants and
Third-Party
Plaintiffs, ORDER AND OPINION ON
DEFENDANTS’ MOTION FOR
v.
ORDER TO SHOW CAUSE FOR
CASEY CARR; and STEPHEN PYE, CONTEMPT OF COURT AND FOR
DISCOVERY SANCTIONS
Third-Party
Defendants.

RYAN MUNN; and TYLER
VAUGHAN, derivatively on behalf of
KIXSPORTS, LLC,

Derivative
Plaintiffs,

v.
CASEY CARR; and STEPHEN PYE,

Derivative
Defendants.

1. This Opinion aims to bring to a close a discovery dispute that began a year

and a half ago. In early 2018, Kixsports, LLC and its principals, Casey Carr and

Stephen Pye, were ordered to produce their electronic devices for inspection by a

forensic expert and to bear the cost of the expert’s fees if the inspection revealed

relevant evidence or the intentional deletion of evidence. The inspection process
limped along while the parties haggled over how to review more than 100,000

documents retrieved by the forensic expert. Out of those negotiations (and with some

prodding from the Court) came a partial production in February 2019. The five

defendants—Ryan Munn, Tyler Vaughan, Renegade GK, Big Dreamz, LLC, and Miro

Group, LLC (“Defendants”)—now contend that the forensic expert retrieved highly

relevant evidence and also detected intentional deletion of evidence by Carr and Pye.

Defendants move to recover the forensic expert’s fees and further argue that

Kixsports, Carr, and Pye should be held in contempt and sanctioned for discovery

abuses. (ECF No. 138.) Having considered all relevant matters, the Court GRANTS

in part and DENIES in part the motion.

Nelson Mullins Riley & Scarborough LLP, by Ariel E. Harris, Evan M.
Sauda, and Fred M. Wood, Jr., for Plaintiff Kixsports, LLC and Third-
Party Defendants Casey Carr and Stephen Pye.

Parker Poe Adams & Bernstein, LLP, by A. Todd Sprinkle and Eric A.
Frick, for Defendants/Third-Party Plaintiffs Ryan Munn, Tyler
Vaughan, Renegade GK, Big Dreamz, LLC, and Miro Group, LLC.

Conrad, Judge.

I.
BACKGROUND

2. This case started as an action by Kixsports against two of its former

members, Vaughan and Munn. Kixsports, now dissolved, was in the business of

making and selling soccer gear and related products. It alleges that Vaughan and

Munn secretly developed a new goalie glove and then began selling it through a

competing business, giving rise to claims for breach of fiduciary duty, breach of

contract, misappropriation of trade secrets, and others. Twice amended, the
complaint also includes related claims against Vaughan and Munn’s new businesses,

Big Dreamz and Miro Group.

3. These allegations prompted an energetic response from Vaughan and Munn.

Along with a handful of contract-related counterclaims against Kixsports, Vaughan

and Munn assert nearly a dozen third-party and derivative claims against Carr and

Pye, the two managing members of Kixsports. Among other things, it is alleged that

Carr and Pye looted Kixsports and put the company at risk through false tax

reporting based on inaccurate valuations. Munn also alleges that Carr and Pye

fraudulently induced him to invest in Kixsports by misrepresenting or concealing

aspects of its financial and business affairs.

4. Discovery proved to be contentious. In March 2018, Defendants moved to

compel complete responses to their discovery requests. (ECF No. 32.) Most relevant

here is Defendants’ request for production number 4, which sought copies of

communications related to the subject matter of the case. Defendants asserted that

Kixsports had produced “limited emails involving Ryan Munn in late 2016” but no

other communications. (ECF No. 32.)

5. Kixsports, Carr, and Pye opposed the motion to compel on the ground that

there were no other responsive documents to produce. In an affidavit, Pye testified

that

I generally am not very proficient with technology, and do not send many
emails or text messages. I know that I have exchanged some text
messages regarding this litigation with Ryan Munn and Casey Carr.
Every text message I am able to locate on my cell phone has been
produced, as well as any emails I have located that are responsive to the
discovery requests.
(Pye Aff. ¶ 11, ECF No. 91.) He went on to state that “it would be impossible for me

to comply with” an order compelling production of additional communications

because “I have turned over any emails, text messages and other written

communications I have been able to locate . . . .” (Pye Aff. ¶ 17.) Carr testified that

he, too, had produced every responsive text message and e-mail he had been able to

locate and that it would therefore be impossible to comply with an order compelling

further production. (See Carr Aff. ¶¶ 10, 16, ECF No. 92.) These sworn statements

have never been modified or retracted.

6. In an order dated April 25, 2018, the Honorable Hugh B. Lewis granted

Defendants’ motion to compel. Judge Lewis reasoned that it was “extremely difficult

to believe that Mr. Pye and Mr. Carr would operate a business valued between $1

million and $2.5 million without communicating with each other.” (ECF No. 40 at 2

[“April 2018 Order”].) He ordered a forensic examination of the electronic devices of

Kixsports, Carr, and Pye to identify any communications between Carr and Pye (and

third-parties) “related to the subject matter of this proceeding and responsive to

Request for Production No. 4.” (April 2018 Order at 2–3.) Allocation of the forensic

expert’s fees would depend on what the inspection revealed:

[i]f no communications between Casey Carr and Stephen Pye, or between
Casey Carr and/or Stephen Pye and third parties, related to the subject matter
of this proceeding are found, Defendants will bear the cost of the forensic
expert fees. However if communications between Casey Carr and Stephen Pye
are discovered, or there is evidence of intentional deletion of such
communications when Casey Carr or Stephen Pye were aware of circumstances
that were likely to give rise to future litigation, consistent with North Carolina
principles on destruction of evidence, Kixsports, LLC, Casey Carr, and Stephen
Pye shall bear the cost of the forensic expert fees.
(April 2018 Order at 3.)

7. In short order, Defendants retained Clark Walton of Reliance Forensics,

LLC (“Reliance”) as a forensic expert. The parties then stipulated to a Confidentiality

Agreement and Protective Order, along with a separate Computer Protocol, to govern

the inspection. (See Protective Order, ECF No. 42; Protective Order Ex. A, ECF No.

42 [“Computer Protocol”].) Reliance was tasked with creating images of the relevant

devices in a searchable format, using a set of search terms provided by counsel to

identify potentially responsive documents, and performing a second search to screen

the documents for potentially privileged material to be reviewed by counsel for

Kixsports, Carr, and Pye. (Computer Protocol ¶¶ 1, 6, 7.) Reliance was also

authorized to retrieve content associated with various software applications, such as

WhatsApp, Slack, Gmail, and similar applications. (Computer Protocol ¶ 5.) The

parties seem to have contemplated at the time that Reliance would review the results

of the search for relevance and produce any relevant, non-privileged documents to

counsel for both sides. (Computer Protocol ¶¶ 8, 12.)

8. Cooperation soon gave way to conflict. In June 2018, Defendants moved for

sanctions, citing essentially three grounds. (ECF No. 44.) The first was that counsel

at the time for Kixsports, Carr, and Pye had repeatedly refused Walton’s requests for

login credentials for some of the software applications. (See Reply Br. Ex. 1, ECF No.

144.1; 1st Walton Aff. ¶¶ 18–22, 25, ECF No. 45.) Second, Kixsports’s counsel had

received from Reliance a set of potentially privileged documents but failed to provide

a privilege log to Defendants’ counsel. (ECF No. 44 at 4–5.) And third, Defendants
submitted an affidavit from Walton opining that Carr and Pye had deleted relevant

evidence. (1st Walton Aff. ¶ 6.)

9. This motion never received a hearing. While it was pending, Kixsports,

Carr, and Pye retained new counsel, and the parties jointly moved to designate the

case as exceptional under Rules 2.1 and 2.2 of the General Rules of Practice for the

Superior and District Courts of North Carolina. (ECF Nos. 1, 96.) After designation

and assignment in August 2018, this Court entered an order directing that the

General Rules of Practice and Procedure for the North Carolina Business Court would

apply going forward. (ECF No. 2.) The Court also entered a case management order,

which adopted the parties’ proposed schedule for completing fact discovery by March

15, 2019. (ECF No. 98; see also ECF No. 122.) Around the same time, Defendants

withdrew their sanctions motion, stating that “they ha[d] not received the full results

of the forensic examination being conducted by” Reliance and reserving their right to

refile it later. (ECF No. 97.)

10. Once the sanctions motion was withdrawn, the parties worked out some of

the initial issues, including access to necessary login credentials. Reliance completed

the imaging process and identified over 100,000 potentially relevant documents using

the search terms provided by counsel. Although the Computer Protocol stated that

Reliance should go on to review these search hits for relevance, Reliance reported

that it was not capable of doing so. (See Opp’n Defs.’ Mot. Extension Ex. A, ECF No.

134.1.) That led to a new dispute. In short, both sides agreed that someone must
review the documents for relevance, but neither side wished to bear the expense of

reviewing such a huge volume of material.

11. Defendants brought the dispute to the Court’s attention through a

pre-motion submission under Business Court Rule 10.9. At a hearing on January 17,

2019, the Court urged the parties to identify the documents most likely to be relevant

and to negotiate terms for reviewing that smaller, more manageable subset. The

Court also directed the parties to provide weekly status updates. Over the following

weeks, the parties reported that a first set of documents was produced on February

27, with two additional productions being made in the week following the March 15

close of discovery. When Kixsports, Carr, and Pye refused to produce additional

documents, Defendants moved to reopen the period for fact discovery. (ECF No. 130.)

The Court denied that motion as untimely. (ECF No. 135.)

12. In June 2019, Defendants renewed their request for discovery sanctions and

for an order holding Kixsports, Carr, and Pye in contempt. (ECF No. 138.) They

contend that Reliance’s forensic inspection revealed hundreds of relevant documents

and evidence that Carr and Pye deleted relevant communications, all of which

supports their recovery of the forensic expert fees under Judge Lewis’s order along

with additional sanctions. Kixsports, Carr, and Pye respond that they have complied

with the order and that the forensic inspection turned up nothing of importance. The

motion has been fully briefed, and the Court held a hearing on August 7, 2019, at

which all parties were represented by counsel. The motion is ripe for determination.
II.
ANALYSIS

13. There are, in general, two related issues here. One is whether Kixsports,

Carr, and Pye should bear the cost of Reliance’s expert fees. That issue is controlled

by Judge Lewis’s order. The second issue is whether the discovery conduct of

Kixsports, Carr, and Pye as a whole—including conduct related to the forensic

examination—merits sanctions under Rule 37 of the North Carolina Rules of Civil

Procedure and this Court’s inherent authority.

A. Forensic Expert Fees

14. This Court is not free to revisit Judge Lewis’s ruling (and no party has asked

it to do so). It bears noting, though, that his order finds support in governing rules

and case law. Certainly, courts approach forensic imaging with a measure of caution

because of its intrusive nature. But “[f]orensic examinations . . . may be warranted

when there exists some factual basis to conclude that the responding party has not

met its duties in the production of discoverable information.” Crosmun v. Trs. of

Fayetteville Tech. Cmty. Coll., 2019 N.C. App. LEXIS 658, at *21–22 (N.C. Ct. App.

Aug. 6, 2019).

15. That is exactly what Judge Lewis concluded here. When Defendants moved

to obtain communications relevant to the disputed issues, Carr and Pye testified that

they rarely communicated with each other through electronic means and therefore

had none to produce. (See Carr Aff. ¶¶ 10, 11, 16; Pye Aff. ¶¶ 11, 12, 17.) Judge Lewis

found it “extremely difficult to believe” that the principals of an internet-based

business possibly valued at $2.5 million had not used modern technology to
communicate with each other. (April 2018 Order at 2.) On that basis, he ordered a

forensic analysis of Kixsports, Carr, and Pye’s electronic devices, with the caveat that

Defendants would pay the forensic expert’s fees if what Carr and Pye said turned out

to be true. On the other hand, if the expert found relevant communications between

Carr and Pye or “evidence of intentional deletion of such communications” at a time

when litigation was likely, then the expert’s fees would be borne by Kixsports, Carr,

and Pye. (April 2018 Order at 3.)

16. Defendants contend that Judge Lewis’s skepticism has been validated. They

claim to have found 535 relevant documents through the forensic examination, more

than 50 of which are attached as exhibits to their motion. (See Br. in Supp. 10, ECF

No. 141; see also Sprinkle Aff. Exs. 5–63, ECF Nos. 139.5–139.63.) They also claim

to have found evidence that Carr and Pye intentionally deleted relevant

communications, relying on several affidavits from Walton, the forensic expert, in

support. (See Br. in Supp. 5–8.) Either ground, Defendants contend, supports the

reimbursement of more than $50,000 in forensic expert fees under Judge Lewis’s

order.

17. Kixsports, Carr, and Pye deny this. In their opposition brief, they argue

that the disputed documents “are a far cry from relevant.” (Opp’n 11, ECF No. 142;

see also Opp’n 7, 12, 16, 20–21.) At the hearing, though, their counsel retreated from

that position and conceded that some of the documents were minimally relevant,

though not significant or important. Kixsports, Carr, and Pye also argue that
Reliance did not find evidence of intentional deletion of communications. (See Opp’n

6, 20.)

1. Relevance of Retrieved Communications

18. After careful review, the Court concludes that many of the communications

recovered through the forensic examination are plainly relevant. Among the

documents are drafts of business plans, strategic plans, and financial projections for

Kixsports from the relevant time period. (See Sprinkle Aff. Exs. 21, 30, 32, 36, 37,

40.) At a minimum, these documents are relevant to Munn’s claims for fraud and the

representations that Carr and Pye either did or did not make in soliciting Munn’s

investment. By way of example, Munn alleges that Carr and Pye falsely represented

that Kixsports owns a patent covering a soccer ball known as KixFriction when, in

fact, Pye personally owns the patent. Some of the disputed documents tend to support

Munn’s allegation: Kixsports refers to “our Kixfriction patented soccer ball,” “[o]ur

unique proprietary KixFriction ball,” and “design and utility patents” held by the

company. (Sprinkle Aff. Exs. 21, 32, 36.)

19. There are also documents reflecting the investments made in Kixsports and

the value assigned by the company to each investor’s shares. (See Sprinkle Aff. Exs.

9, 19, 23, 27, 28, 38, 41, 42, 43.) Other communications between Carr and Pye appear

to discuss their motivations for seeking investors in Kixsports and their plans to use

funds given by others for their own personal expenses. (See Sprinkle Aff. Exs. 5, 7,

11, 12, 13, 14.) These documents are relevant to the fraud claims, the claims alleging

inaccurate valuations of Kixsports, or both.
20. Kixsports, Carr, and Pye contend that cost-shifting is not required because

these are not “important documents” and because other evidence, such as Munn’s

deposition testimony, weighs against Defendants’ claims. (Opp’n 10, 13–15.) But

Judge Lewis’s order is clear: Kixsports, Carr, and Pye must pay the forensic expert’s

fees if the forensic examination revealed communications “related to the subject

matter of this proceeding.” (April 2018 Order at 3.) Through the forensic

examination, Defendants have identified a substantial number of relevant

communications. That Kixsports, Carr, and Pye have responses or defenses to those

documents is beside the point. The condition in Judge Lewis’s order has been

satisfied. Thus, Kixsports, Carr, and Pye must bear the cost of Reliance’s fees.

2. Intentional Deletion of Evidence

21. Next, the Court considers evidence that Carr and Pye intentionally deleted

relevant communications. Judge Lewis’s order refers to “North Carolina principles

on destruction of evidence”—also known as spoliation—as the appropriate standard.

(April 2018 Order at 3.) Thus, Defendants must show that Kixsports, Carr, and Pye

“(1) intentionally destroyed or failed to preserve (2) potentially relevant materials

(3) while aware of the possibility of future litigation.” SCR-Tech LLC v. Evonik

Energy Servs. LLC, 2014 NCBC LEXIS 72, at *14 (N.C. Super. Ct. Dec. 31, 2014)

(citation omitted).

22. First, the evidence shows that Carr’s Mac computer contains folders

associated with the process of backing up a mobile device through Apple’s iTunes

software. (2d Walton Aff. ¶ 17, ECF No. 140.) Walton testified that the folders were
first created in 2014 and would exist only if Carr had in fact backed up a mobile

device. (2d Walton Aff. ¶ 18.) Yet the folders were empty, containing no backup files.

(2d Walton Aff. ¶ 19.) As explained by Walton, the process for deleting a backup file

takes several steps, and “[t]he likelihood that someone unintentionally deleted such

an iTunes backup in this context is extremely slim.” (2d Walton Aff. ¶ 21 (emphasis

omitted).) In addition, the folder that should have contained the backup file was last

modified on October 5, 2017—nearly a month after Kixsports filed its complaint. (2d

Walton Aff. ¶ 19.)

23. All of this testimony is unrebutted. The opposition brief does not address it.

Carr did not submit an affidavit denying or explaining the deletion. And Kixsports,

Carr, and Pye did not retain an expert of their own to rebut or comment upon Walton’s

analysis. The Court concludes that it is more likely than not that Carr intentionally

deleted backup files for his mobile device during the pendency of this lawsuit.

24. Second, it is clear that Carr and Pye frequently sent and received text

messages, yet scores of these messages are missing. Munn provided to Reliance

copies of nearly 300 text messages that he exchanged with Carr and Pye during the

relevant time period, roughly between 2014 and 2017. None of these messages

appears on the devices that Carr and Pye gave to Reliance. (2d Walton Aff. ¶¶ 11,

15.) Indeed, their three smartphones contained no text messages at all from before

May 22, 2017. (See 2d Walton Aff. ¶ 15; 3d Walton Aff. ¶¶ 15, 21, ECF No. 145.) Of

the messages retrieved from Carr’s smartphone, some were exchanged with Pye after

that date. (See 2d Walton Aff. ¶ 9.) Pye’s two smartphones, on the other hand, did
not contain any of these messages even though there were more than 23,000 other

text messages from 2017. (2d Walton Aff. ¶¶ 8, 10, 24.) Walton concludes that this

shows intentional deletion. (2d Walton Aff. ¶ 12.)

25. Kixsports, Carr, and Pye respond that Walton failed to consider alternatives

to intentional deletion, such as software settings that automate deletion of text

messages. (Opp’n 6; see Opp’n Exs. D–F, ECF Nos. 143.4–143.6.) This is not

persuasive. Kixsports, Carr, and Pye offer no expert testimony to support their

position, and Walton submitted a supplemental affidavit showing that any deletions,

whether automated or manual, were far more likely to be intentional than

inadvertent. For one thing, the default setting for these devices is to retain text

messages forever. Automated deletion requires action by the user to alter the setting.

(3d Walton Aff. ¶ 13.) In addition, automated deletion works by scheduling the

deletion of all text messages over a certain age (one year, for example), not by

selecting and deleting messages with a specific user. (3d Walton Aff. ¶ 19.a.)

26. The evidence here is consistent with intentional deletion. Pye’s

smartphones contained thousands of messages from 2017 but none exchanged with

Carr, even though it is undisputed that such messages once existed. This cannot be

explained by a theory of automated deletion; it is strong evidence of selective deletion

of messages between Pye and Carr. Likewise, Pye and Carr altered their

smartphones’ default settings so that they would delete text messages more than one

year old. (See 3d Walton Aff. ¶¶ 15, 19.b.) These were intentional acts, resulting in
the deletion of an unknown number of text messages sent and received before May

22, 2017.

27. Walton notes that the relevant devices do not record and store the exact

dates of these deletions. (3d Walton Aff. ¶ 17; see also 3d Walton Aff. ¶ 19.b.) Thus,

it is possible that Carr or Pye changed the default settings before litigation began.

Even so, that would not excuse their failure to preserve evidence after litigation

became likely. See Tumlin v. Tuggle Duggins P.A., 2018 NCBC LEXIS 51, at *33

(N.C. Super. Ct. May 22, 2018) (“The obligation to preserve evidence begins when ‘a

party is aware of circumstances that are likely to give rise to future litigation.’ ”

(quoting McLain v. Taco Bell Corp., 137 N.C. App. 179, 187, 527 S.E.2d 712, 718

(2000))). Carr and Pye either caused or allowed their smartphones to delete messages

after the complaint was filed (in September 2017), after Defendants requested the

communications (in November 2017), after Defendants filed their motion to compel

(in March 2018), and even after Judge Lewis issued his ruling (in April 2018). As to

Pye, the evidence is even more clear: a comparison with Carr’s device shows that Pye

deleted messages that were exchanged with Carr while the litigation was pending,

even as late as February 2018 when the discovery dispute was coming to the fore.

(See 2d Walton Aff. ¶ 12.)

28. Kixsports, Carr, and Pye’s other arguments are equally unpersuasive. They

argue that Walton’s opinions are outdated because his initial affidavit was signed in

May 2018 but “not updated” to take into account new facts after that date. (Opp’n 5–

6.) This is simply wrong. Walton expanded and reaffirmed his original conclusions
based on the complete forensic examination. (See 2d Walton Aff. ¶ 6; 3d Walton Aff.

¶ 7.) All of Walton’s affidavits reach the same conclusion: Carr and Pye intentionally

deleted potentially relevant information.

29. Kixsports, Carr, and Pye also argue that “[t]he data complained of by

Defendants is not lost” because messages deleted from Pye’s devices were retrieved

from Carr’s. (Opp’n 6.) It is highly doubtful that Pye’s intentional deletion of text

messages should be excused on the ground that Defendants found some of those

messages elsewhere. See, e.g., Nursing Home Pension Fund v. Oracle Corp., 254

F.R.D. 559, 565 (N.D. Cal. 2008) (“[H]aving established with certainty that numerous

emails were not produced from Ellison’s email files—because the emails were

produced from other files or accounts—it is impossible to know whether additional

unproduced emails were also deleted or not turned over.”). Regardless, the relevant

messages from Carr’s device were confined to a few months in 2017. The forensic

examination revealed only one text message between Carr and Pye from November

2015 through April 2017, a key time period for purposes of this case. (See 2d Walton

Aff. ¶¶ 25, 26.) Given their typical communication patterns, it is likely that Carr and

Pye exchanged hundreds of messages during that timeframe. Obviously, this data

was lost.

30. The Court therefore concludes that it is more likely than not that Carr and

Pye intentionally deleted or failed to preserve communications related to the subject

matter of this case. For this independent reason, Carr and Pye must bear the cost of

Reliance’s expert fees under the terms of Judge Lewis’s order.
3. Amount of Fees

31. The amount of recoverable fees is also disputed. Along with their motion,

Defendants submitted invoices from Reliance totaling approximately $60,000. (See

2d Walton Aff. Ex. C, ECF No. 140.3; 3d Walton Aff. Ex. A, ECF No. 145.1.) Kixsports,

Carr, and Pye object that Reliance’s fees are disproportionately high given the

number of relevant documents recovered and given certain actions by Defendants

that drove up the cost of the inspection. (See Opp’n 17–18, 20–21.)

32. Viewed in light of what the inspection revealed, the expert fees are not

unreasonably high. Put simply, the inspection hit pay dirt. Defendants identified a

substantial number of relevant communications even though they received and

reviewed only a fraction of the 100,000 documents retrieved by Reliance. Beyond

that, the inspection showed that Carr and Pye intentionally deleted or failed to

preserve other electronically stored information. It is impossible to know how many

communications were lost or what their import would have been, and Defendants

almost certainly would not have discovered these improper actions in the absence of

a forensic inspection. Reliance’s fees are not excessive when compared with the

results achieved by its inspection.

33. Nor are the fees excessive due to Defendants’ actions. Kixsports, Carr, and

Pye point to the parties’ early agreement to have Reliance review search hits for

relevance, which Reliance later reported that it was not equipped to do. (See Opp’n

17–18.) The opposition brief goes on to state without citation that “[a]ny expenses

associated with this mistake are the sole fault of Defendants,” who had hired
Reliance. (Opp’n 18.) The Court is left to guess at what those expenses might be. In

the absence of further explanation, it seems more likely that calling off the relevance

review actually reduced Reliance’s fees.

34. Although Kixsports, Carr, and Pye offer no other specific objections (such as

to Reliance’s hourly rates or individual line items), the Court has reviewed Reliance’s

invoices. The vast majority of charges appear to be consistent with the work that

Reliance performed: imaging and searching seven electronic devices and then

managing more than 100,000 documents retrieved from those devices. (See Computer

Protocol Ex. 1; Sprinkle Aff. ¶ 14, ECF No. 139.) In addition, it appears that

Reliance’s work was hampered by resistance—including the refusal to provide login

credentials—from Kixsports, Carr, and Pye before they retained their current counsel

in July 2018. (See 2d Walton Aff. ¶ 28; 3d Walton Aff. ¶ 30; see also Reply Br. Ex. 1.)

In view of these considerations, Reliance’s charges for its forensic work appear to be

fair and reasonable.

35. There are, however, numerous charges related to Walton’s preparation of

affidavits in support of Defendants’ motions. (See 3d Walton Aff. Ex. A; 2d Walton

Aff. Ex. C.) These charges were not part of the forensic inspection, and the Court

does not believe they are fairly included within the scope of Judge Lewis’s order.

Accordingly, the Court reduces the amount of Reliance’s expert fees by $7,881.25.

Kixsports, Carr, and Pye shall pay the remainder, $51,707.10, in compliance with

Judge Lewis’s order.
36. Finally, the Court declines to hold Kixsports, Carr, and Pye in contempt for

their failure to pay these invoices to date. The record does not establish willful

noncompliance with Judge Lewis’s order, particularly given that the order does not

specify an amount owed or a deadline for payment. Under the terms of this Order,

Kixsports, Carr, and Pye are jointly and severally liable for the amount to be paid to

Reliance. Should they fail to comply, their failure may be punishable by contempt in

future proceedings.

B. Sanctions

37. Defendants also seek sanctions under Rule 37 and this Court’s inherent

authority. Defendants ask the Court to strike the pleadings of Kixsports, Carr, and

Pye and to enter a default judgment against them or, alternatively, to impose less

severe sanctions. (See Br. in Supp. 23, 25.) Kixsports, Carr, and Pye oppose any

sanctions largely on the ground that they complied with Judge Lewis’s order. (See

Opp’n 19–20.)

38. As this Court recently observed, Rule 37(b) “permits a court to order a

variety of sanctions against a party who fails to obey a court order regarding

discovery.” Red Valve, Inc. v. Titan Valve, Inc., 2019 NCBC LEXIS 57, at *40 (N.C.

Super. Ct. Sept. 3, 2019). In addition, “[t]rial courts retain the inherent authority ‘to

do all things that are reasonably necessary for the proper administration of justice.’ ”

Id. at *39 (quoting Beard v. N.C. State Bar, 320 N.C. 126, 129, 357 S.E.2d 694, 696

(1987)). Thus, trial courts have the inherent authority to impose sanctions on a party

for bad-faith conduct and “for discovery abuses beyond those enumerated in Rule 37.”
Cloer v. Smith, 132 N.C. App. 569, 573, 512 S.E.2d 779, 782 (1999); see also Tumlin,

2018 NCBC LEXIS 51, at *29 (“A court may impose discovery sanctions even absent

an order pursuant to its inherent power to manage its own affairs.” (alteration,

citations, and quotation marks omitted)).

39. As noted, the evidence shows that Carr deleted one or more backup files

related to his mobile device; that Carr and Pye altered their mobile devices’ default

settings so as to delete text messages over one year old; and that Pye selectively

deleted text messages exchanged with Carr. Most alarming, though, is that Carr and

Pye allowed the automated deletion of text messages to continue well after Judge

Lewis ordered a forensic inspection. The deletion of evidence during the pendency of

litigation and the continuing failure to preserve evidence in the face of a court order

are sanctionable under Rule 37 and this Court’s inherent authority.

40. Furthermore, it is now clear that Carr and Pye made false representations

to Judge Lewis in an effort to convince him to deny Defendants’ motion to compel.

Both vowed that it would be “impossible” to comply with any order compelling the

production of the requested communications because they had already turned over

any e-mails, text messages, and other written communications that they had been

able to locate. (See Pye Aff. ¶¶ 11, 12, 17; Carr Aff. ¶¶ 10, 11, 16.) Pye went so far as

to testify that he was “not very proficient with technology” and therefore does not

“send many emails or text messages.” (Pye Aff. ¶ 11.) Yet Reliance retrieved more

than 30,000 text messages from Pye’s mobile devices. (2d Walton Aff. ¶ 24.) Pye also

possessed enough technological savvy to delete the most important text messages—
those exchanged with Carr. And given the substantial number of relevant

communications revealed by the forensic inspection, the only reasonable conclusion

is that, contrary to their affidavits, Carr and Pye made inadequate efforts to locate

responsive communications, failed to preserve them, or refused to produce them.

Carr and Pye have never explained, corrected, or retracted their false, sworn

statements.

41. These false representations are sanctionable under the Court’s inherent

authority, even if not sanctionable as a violation of Judge Lewis’s order under Rule

37(b). The Court has a duty to protect the integrity of the legal process. That includes

taking steps to address false statements made to the Court, both to ensure that the

party making the false statement receives no advantage from it and to deter similar

conduct by other parties in the future. See, e.g., First Bank v. Hartford Underwriters

Ins. Co., 307 F.3d 501, 512 (6th Cir. 2002) (court’s inherent authority “derives from

its equitable power to control the litigants before it and to guarantee the integrity of

the court and its proceedings”); Goodvine v. Carr, 761 Fed. App’x 598, 599, 602 (7th

Cir. 2019) (affirming sanction of dismissal based on false affidavit); Oliver v. Gramley,

200 F.3d 465, 466 (7th Cir. 1999) (same).

42. The remaining question is what sanctions to impose. When choosing

appropriate sanctions, trial courts have broad discretion. See, e.g., Feeassco, LLC v.

The Steel Network, Inc., 826 S.E.2d 202, 210 (N.C. Ct. App. 2019). “The sanction

imposed should be proportionate to the gravity of the offense.” Montano v. City of
Chicago, 535 F.3d 558, 563 (7th Cir. 2008); see also Few v. Hammack Enters., Inc.,

132 N.C. App. 291, 299, 511 S.E.2d 665, 671 (1999).

43. The Court concludes that it would not be appropriate to strike Kixsports,

Carr, and Pye’s pleadings. “Dismissals in general are viewed as the harshest of

remedies in a civil case and should not be imposed lightly.” Page v. Mandel, 154 N.C.

App. 94, 100, 571 S.E.2d 635, 639 (2002). Moreover, our appellate courts have

stressed that “the general purpose of the Rules [is] to encourage trial on the merits.”

Batlle v. Sabates, 198 N.C. App. 407, 419, 681 S.E.2d 788, 797 (2009) (citation and

quotation marks omitted). Given the totality of the circumstances, the Court

concludes that other, lesser sanctions are sufficient to address these abuses.

44. First, at trial, the Court intends to advise the jury regarding Kixsports,

Carr, and Pye’s misconduct and to instruct the jury on spoliation of evidence. “The

spoliation doctrine recognizes that where a party fails to produce certain evidence

relevant to the litigation, the finder of fact may infer that the party destroyed the

evidence because the evidence was harmful to its case.” Outlaw v. Johnson, 190 N.C.

App. 233, 244, 660 S.E.2d 550, 559 (2008); see also Red Hill Hosiery Mill, Inc. v.

Magnetek, Inc., 138 N.C. App. 70, 78, 530 S.E.2d 321, 328 (2000); McLain, 137 N.C.

App. at 185, 527 S.E.2d at 717. In other words, the jury will be permitted, but not

required, to draw an adverse inference from the evidence that Kixsports, Carr, and

Pye either deleted or failed to preserve certain text messages and backup files for

mobile devices. See Arndt v. First Union Nat’l Bank, 170 N.C. App. 518, 526–27, 613

S.E.2d 274, 280–81 (2005).
45. Second, some additional discovery is needed to ameliorate the loss of

evidence. See Zimmerman v. Poly Prep Country Day Sch., 2011 U.S. Dist. LEXIS

40704, at *110–11 (E.D.N.Y. Apr. 13, 2011) (allowing additional deposition as

sanction); see also Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of

Am. Sec., LLC, 685 F. Supp. 2d 456, 470 (S.D.N.Y. 2010) (identifying “further

discovery” as potential sanction). Specifically, the Court will permit Defendants to

depose Carr and Pye. Defendants deserve an opportunity to ask Carr and Pye, at a

minimum, about the communications that have been disclosed, the communications

that were deleted, their efforts to preserve evidence, and the statements made in their

affidavits submitted in opposition to the motion to compel in March 2018.

46. Although Defendants have requested additional document discovery, the

Court declines that request. Defendants could have sought a timely extension of the

discovery period before it ended in March 2019. They did not, and when they later

sought to reopen the discovery period after it expired, the Court denied the request

due in part to their unexplained delay. (ECF No. 135.) Allowing additional document

discovery now would unnecessarily delay resolution of this matter. Allowing

Defendants to depose Carr and Pye, on the other hand, both serves to restore

Defendants to the position they would have been in absent the destruction of

electronically stored evidence and also allows the case to move forward without

unreasonable delay.

47. Third, monetary sanctions are in order. Defendants have incurred

substantial costs in pursuing this matter, necessitated by the false statements and
other improper resistance of Carr and Pye (and, by extension, Kixsports). Monetary

sanctions are needed to compensate Defendants for their costs, including reasonable

attorneys’ fees, incurred in connection with filing this motion. See, e.g., Pension

Comm., 685 F. Supp. 2d at 471. To the extent Defendants seek additional costs of

discovery, the request is denied.

III.
CONCLUSION

48. Accordingly, in the exercise of its discretion, the Court GRANTS the motion

in part and ORDERS as follows:

a. Under the terms of Judge Lewis’s order, Kixsports, Carr, and Pye shall

bear the cost of the forensic examination performed by Reliance. Within 30 days

of the entry of this Order, Kixsports, Carr, and Pye shall reimburse Defendants in

the amount of $51,707.10.

b. The Court DENIES the request to hold Kixsports, Carr, and Pye in

contempt.

c. The Court holds that Defendants shall be entitled to an adverse inference

jury instruction, to be addressed at trial.

d. The Court further ORDERS that Defendants may depose Carr and Pye

individually. These depositions, limited to seven hours each, shall take place

within 14 days of the entry of this Order. Counsel shall work together to identify

mutually agreeable dates and locations.

e. The Court ORDERS that Kixsports, Carr, and Pye shall pay the

reasonable costs and fees incurred by Defendants in pursuing this motion. These
costs are set forth in “Group 5” of Exhibit 35 to the Supplemental Affidavit of A.

Todd Sprinkle. (ECF No. 149.1 at 14–18.) Within fourteen days of this Order,

Kixsports, Carr, and Pye may file their objections, if any, to the reasonableness of

these costs. This filing shall not exceed 1,500 words. Defendants may respond to

the objections no later than seven days after they are served with a similar word

limit. The Court invites the parties to stipulate to an appropriate amount and

jointly submit that amount to the Court for its approval.

49. Finally, the parties shall file all post-discovery dispositive motions on or

before November 12, 2019. Response and reply briefs shall be governed by Business

Court Rule 7.8.

SO ORDERED, this the 30th day of September, 2019.

/s/ Adam M. Conrad
Adam M. Conrad
Special Superior Court Judge
for Complex Business Cases