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Babcock Power Inc. v. Kapsalis

United States District Court, W.D. Kentucky, Louisville Division

September 27, 2017

BABCOCK POWER, INC., et al. PLAINTIFFS
v.
STEPHEN T. KAPSALIS, et al. DEFENDANTS

          MEMORANDUM OPINION

          CHARLES R. SIMPSON III, SENIOR JUDGE UNITED STATES DISTRICT COURT

         This matter is before the court for consideration of the objections of plaintiffs Babcock Power, Inc. and Vogt Power International, Inc. (collectively “Babcock”) to the June 30, 2017 Memorandum Opinion and Order of the United States Magistrate Judge denying the motion of defendant Stephen T. Kapsalis for discovery and sanctions, and sua sponte imposing Rule 16 discovery sanctions on plaintiffs for issuance and execution of a subpoena duces tecum in violation of the March 2, 2016 Order precluding additional fact discovery in the case and requiring the completion of outstanding discovery by April 1, 2016. The monetary portion of the sanctions was ordered to be paid by plaintiffs or their counsel. For the reasons set forth herein, the objections of the plaintiffs (DN 455) are rejected and the Memorandum Opinion and Order of the magistrate judge (DN 450) will be affirmed by separate order.

         The magistrate judge held an evidentiary hearing on March 8, 2017 to address the motion of Kapsalis for discovery and sanctions (DN 398) and the responses thereto. A transcript of that hearing has been filed in the record. The parties filed post-hearing proposed findings of fact and conclusions of law. On June 30, 2017, Magistrate Judge Colin H. Lindsay issued a carefully considered and comprehensive 56-page memorandum opinion and order addressing the issuance and execution of the subpoena in January 2017 and surrounding events. This series of events occurring both before and after the issuance of the January 23, 2017 subpoena greatly concerns this judge, as it did Magistrate Judge Lindsay. Also troubling to the court is the suggestion in Babcock's objections that Magistrate Judge Lindsay's decision was result-driven and contrary to the evidence:

A functional analysis of the effect of Magistrate Judge Lindsay's sua sponte Motion for Sanctions and Order in the present matter leaves no doubt that the sanctions imposed against Plaintiffs were intended to be and are in fact case dispositive.

DN 455-1, p. 15.

It is easy in hindsight to cherry pick Plaintiffs' actions to preserve evidence that they have spent years trying to obtain from Kapsalis, Express and others, and point to things that could have been done better.

DN 455-1, p. 25.

         “Things that could have been done better” is the height of understatement. Indeed, this statement coupled with an aggressive reiteration of arguments roundly rejected by the magistrate judge, accompanied by a careful recitation of the reasons for the rejection of each argument, evidences that the plaintiffs still seem to miss the point of the magistrate judge's decision.

         I. The Magistrate Judge's Authority

         As an initial matter, Babcock contends that the magistrate judge exceeded the scope of his authority under 28 U.S.C. § 636(b)(1) by issuing an order which purportedly has the effect of being dispositive of the case. Thus, Babcock urges, this court should conduct a de novo review of the record and the magistrate judge's decision, citing Yang v. Brown University, 149 F.R.D. 440, 443 (D.R.I. 1993).

         The Sixth Circuit directs this court to undertake a functional analysis of the order's potential effect on the litigation. Henness v. Jenkins, No. 2:14-cv-2580, 2017 WL 1495265 (S.D.Ohio April 26, 2017).

         Babcock contends that “Magistrate Judge Lindsay's Order prohibits Plaintiffs from introducing at trial evidence that goes to the very heart of their claims…” DN 455-1, p. 15. Babcock explains:

Based on an analysis of the hash values that Kapsalis was compelled to provide, the evidence at issue is likely to be conclusive proof that Plaintiffs' competition-sensitive and proprietary materials were on Express's server(s) and remained there to Plaintiffs' detriment and in violation of this Court's Preliminary Injunction. Plaintiffs must be afforded the opportunity to present the jury with proof that their competition-sensitive and proprietary information and documents were stolen by Kapsalis and illegally uploaded onto Express's server(s). The exclusion of this evidence is fatal to Plaintiffs' claim.

Id. Babcock states earlier in the objections, however, that “Since day one of this lawsuit, there has been no question that the confidential, competition-sensitive, and proprietary materials at issue belong to Plaintiffs and only Plaintiffs and that Kapsalis stole these materials.” Id. at p. 3 (emphasis in original). In its Introduction, Id. at p. 1, Babcock contends that

For years, Kapsalis lied to this Court and Plaintiffs. And now that Plaintiffs have irrefutable proof that Kapsalis stole their competition-sensitive and proprietary materials, provided those materials to Plaintiffs competitor, and failed to remove the materials from the competitor's server in direct violation of this Court's Preliminary Injunction, the Magistrate Judge is disposing of this entire case due to a Scheduling Order violation.

(emphasis in original).

         It is unclear to the court how precluding the plaintiffs from “using the information obtained pursuant to the January 23, 2017 subpoena, including any information from the copies made of the Express servers” (which Babcock states “is likely to be conclusive proof” that Babcock's documents “were on Express's server(s) and remained there”) is “disposing of the entire case” or is “fatal to Plaintiffs' claim.” Babcock states that from day one, there has been no question that Kapsalis stole Babcock's proprietary documents and that Plaintiffs have “irrefutable proof” that he provided those materials to Babcock's competitor and failed to remove them from the competitor's server. This “irrefutable proof” is clearly not what was taken pursuant to the subpoena, as the plaintiffs have represented to the court that they have never searched or reviewed what was taken pursuant to the subpoena. Indeed, Babcock represents only that the evidence taken pursuant to the subpoena is likely to be conclusive proof.

         Babcock has repeatedly stated that a comparison run by Lacey Walker, Babcock's computer expert, of the hash values for all of the documents on the Express server with Kapsalis' Western Digital hard drive identified six Babcock documents existing on the Express server as of March 2016. (see, most recently, DN 426, Motion for Leave to file Supplemental Evidence of Contempt, and DN 461, Plaintiff's Motion to Amend Scheduling Order). Babcock contends that the hash values for these documents conclusively establish that they were on both the Western Digital hard drive (the hard drive onto which Kapsalis apparently downloaded documents before he left employment with Babcock's subsidiary, Vogt Power) and the Express server as of March 2016. Babcock also states that it has determined that these documents are proprietary, confidential, and/or trade secret documents of Babcock. To date, the court has seen no evidence substantiating these assertions.[1] However, Babcock urges that Lacey Walker is ready and willing to “certify” what his hash value comparison yielded and what such evidence establishes. DN 426, p. 3. Babcock has also stated that certain matched documents identified by the hash value comparison consist of files for a specific Vogt Power project - the Parnaiba Project in Brazil - which contains proprietary and trade secret information. Id. If Babcock possesses this evidence, as it has repeatedly stated that it does, then the preclusion of the evidence taken under the subpoena would not sound the death knell of this case. Rather, it would merely limit Babcock to evidence other than that which was taken pursuant to the subpoena on January 26 and 27, 2017.

Babcock has stated in its objections:
Hence, the timing of the document retrieval performed on Express's server(s) is equally as important as identifying the hash values contained on the server. The Express server evidence obtained by Plaintiffs on January 26 and 27, 2017 is the only relevant snapshot of what was on the Express server prior to it being sold to Innova Global.

DN 455-1, p. 26 (emphasis added). Babcock seeks to offer evidence that it anticipates it now possesses by reason of the execution of the subpoena to prove that Babcock proprietary documents remained on the server(s) immediately prior to sale of the servers by the bankruptcy court to Innova Global, a third party. Clearly, Babcock wishes to further investigate the copies of the server(s) that were made, and use the results of the searches conducted on January 26-27th. However, being precluded from doing so would not dispose of Babcock's case against Kapsalis. Rather, it would preclude Babcock from utilizing that “snapshot” taken in January, 2017.

         Babcock has failed to establish that Magistrate Judge Lindsay's order is dispositive of the case or of any claim asserted by Babcock. Therefore, in accordance with 28 U.S.C. § 636(b)(1)(A), the magistrate judge's decision will be overturned only upon a finding that the ruling is clearly erroneous or contrary to law.

         II.

         III. Fed.R.Civ.P. 16 Sanctions

         The magistrate judge imposed sanctions on the plaintiffs and their counsel sua sponte, pursuant to Fed.R.Civ.P. 16(f), for violation of his March 2, 2016 scheduling order. Babcock takes issue with the fact that he denied Kapsalis' motion for additional discovery, and for sanctions sought under Fed.R.Civ.P. 26(g)(2) and the court's inherent power to redress claimed abuses of the subpoena process, yet sua sponte imposed Rule 16 discovery sanctions. ...


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