Terminating Sanction Striking Defendants’ Answer for Discovery Abuse Was Proper, But Compensatory and Punitive Damages Award Totaling $24 Million Vacated and Remanded

Elec. Funds Solutions v. Murphy, 36 Cal. Rptr. 3d 663 (Cal. Ct. App. 2005)

In this lawsuit between former business partners, plaintiffs alleged claims for breach of fiduciary duty, intentional interference with economic relations, unfair competition, and related torts. Plaintiffs sought compensatory damages “in an amount in excess of $50,000 and according to proof,” as well as punitive damages.

Defendants committed numerous discovery abuses, including: failing to produce responsive email and electronic data, failing to comply with discovery orders, intentionally destroying data through the use of “Data Eraser” software after the court ordered production of hard drives, and making false representations to the court regarding their compliance with discovery requests and orders. Plaintiffs moved for terminating sanctions, which the court granted. The court struck the defendants’ answer and ordered defendants’ default entered. Thereafter, the court entered judgment against the defendants, assessing compensatory damages of $8,040,272 and punitive damages of $16 million, the amounts reflected in plaintiff’s statement of damages and notice of punitive damages. The court also provided plaintiffs with prejudgment interest and attorney fees.

On appeal, the court determined that, although the entry of default judgment against the defendants was proper, the amount of damages assessed by the court could not stand. The court found that the complaint for damages “in an amount in excess of $50,000” failed to provide defendants notice of their maximum potential liability. The court remanded the case to the trial court with instructions to conduct a new damages prove-up hearing to determine the amount of compensatory damages (not to exceed $50,000), and the amount of any punitive damages. Alternatively, the court held that plaintiffs could elect to amend their complaint to increase the amount of compensatory damages sought, but noted that such amendment would open the defendants’ default judgment.

Full text of this decision can be found here.