In Kinexus Representative LLC v. Advent Software, Inc., C.A. No. 1161-VCN (July 5, 2012), the Court of Chancery granted defendant’s renewed Rule 41 motion to dismiss an action filed seven years ago which involved a dispute about an “earn out” payment related to defendant Advent’s acquisition of Kinexus Corp. approximately ten years ago.  A year ago, the Court denied the defendant’s Rule 41 motion to dismiss while severely criticizing the plaintiffs for their failure to take steps to prosecute the action.  The Court then entered a revised scheduling order, but unfortunately for the plaintiffs, nothing of any substance happened.  Indeed, the only things that changed in the interim were the reasons why the plaintiffs could not comply with the discovery schedule or proceed with the case — bankruptcy, a federal investigation, and the resignation of lead trial counsel. 

Under Court of Chancery Rule 41(b), the Court may dismiss an action for a failure to prosecute the matter or a failure to comply with a court order.  Noting that prejudice to the defendant included additional costs; extensive turnover in personnel making it more burdensome to find appropriate witnesses and  “the simple fact that the passage of a decade from the events in question will dim memories,” the Court found that both components of Rule 41(b) were met — the plaintiffs had failed to prosecute the case and to comply with the Court’s scheduling order.

Kinexus Representative LLC v. Advent Software, Inc., C.A. No. 1161-VCN (Del. Ch. June 30, 2011), read letter ruling here.  See summary of 2008 Chancery decision in this case here for more background on the long history of this Delaware corporate litigation. That 2008 decision also includes important procedural rulings involving electronic discovery, and the obligation to specify which documents, by Bates-number, among 288,000 produced, were responsive to specific interrogatories.

In this latest ruling, the Court denied a motion to dismiss for failure to prosecute based on Court of Chancery Rules 41(b) and 41(c)–but after expressing its displeasure with the lack of alacrity with which this matter has progressed. The Court of Chancery often leaves it up to counsel for the parties to propose a scheduling order, as compared to many other courts that impose a scheduling order. Nonetheless, the Court of Chancery often brings cases to trial within a year of a complaint being filed, and if there is insufficient activity in a case, without justification, the Court will often require the parties to explain why the case is not moving forward with celerity.

The bottom line in this case is that the Court gave the plaintiff another chance to “move this case along.” The author of this ruling exhibited more sympathy for counsel whose client may not have been fully cooperative–a leniency that is not always found in decisions by Delaware’s court of equity.

One practical insight at footnote 5 was the request, which was rejected, for over $250,000 to cover the cost of storage and preservation of electronic data during the 10 years since the date of the incident giving rise to the lawsuit–in the event the motion to dismiss was denied. The figure sought for EDD is an indication of the increased cost of litigation due to electronic discovery and the high cost of storing and preserving ESI.

I am declining to give any more details of the dilatory nature of this litigation in my short overview because the purpose of this blog is not to pillory any party or counsel but rather to highlight the issues addressed in key corporate and commercial decisions from Delaware’s Supreme Court and Court of Chancery. Some rulings naturally have wider application than others.

Kinexus  Representative LLC v. Advent Software, Inc. (Del. Ch., Sept. 22, 2008), read opinion here. In this Chancery Court decision, that decided cross motions to compel discovery, the  Court addressed important and practical issues involving electronic discovery and what the Court will accept as satisfactory responses to both interrogatories and requests for documents.

The key parts of the Court’s ruling are at least twofold: (i) The Court required the defendant to produce documents by Bates number that were responsive to each of the interrogatories from plaintiff; and (ii) Defendant was required to provide to plaintiffs “searchable ‘extracted text’ from the TIFF–formatted documents already produced, but only if plaintiffs pay for the process.”  This will be explained in more detail later in this summary.

This is the type of practical decision that provides useful tools for the toolbox of a business litigator dealing with the almost inevitable and usually unpleasant discovery disputes that arise in a typical business case.

The Court quoted from Rule 33(d) of the Chancery Court Rules as follows:

“Where the answer to an interrogatory may be . . . ascertained from the business records of the party upon whom the interrogatory has been served[,] . . .  it is a sufficient answer to such interrogatory to specify the records from which the answer may be derived or ascertained.” (emphasis in Court’s quote).

Next, it was emphasized that: “This court requires a specific designation of the documents pertaining to each interrogatory when Rule 33(d) is employed” (citing Andresen v. Bucalo, 1982 WL 17824, at * 3 (Del. Ch., Dec. 2, 1982)) (“Defendants must particularize the specific records from which adequate answers may be extracted and not . . . just make all of the records available for inspection.”)(emphasis added.)

In footnote 6, the court also cited to a case interpreting a predecessor to Rule 33(d)  and supporting the following aspect of the Court’s interpretation of this important rule: The rule “does not shift to the interrogating party the obligation to find out whether sought after information is ascertainable from the files tendered, but only permits a shift of the burden to dig it out once the  respondents have specified the records from ‘where the answer’ can be derived or ascertained . . . . Thus, the interrogated party must be specific in order to protect against any abusive use of the [option in the] rule . . . . " In sum, the court held that simply “making all the records available for inspection” does not constitute a proper response.

Plaintiffs also sought to compel defendants to specify the documents, by Bates number, that were responsive to each of the document requests.

The opinion referred to Court of Chancery Rule 1 that requires that all rules: “shall be construed and administered to secure the just, speedy and inexpensive determination of every proceeding.” Applying this Rule, the court reasoned that it was “unreasonable for defendant to simply produce over 288,000 documents without specifying which documents or categories of documents are responsive to each specific request.”

Plaintiffs also argued that the documents they requested should be provided “in their native format with metadata and, if not available in that format, must be in a searchable Optical Character Recognition (“OCR”) format." However, the Court observed that neither native file format nor OCR format were agreed upon as delivery formats. On this point, the Court held that:

“I decline to hold that the Court of Chancery Rules governing document production in 2005 required an OCR format or native file format, including metadata, without a particularized showing of need. Nevertheless, defendant’s proposal to provide searchable ‘extracted text’ amounts to an acceptable compromise. As such, defendants shall provide the ‘extracted text’ format to plaintiffs, but only if plaintiffs agree to reimburse all of defendant’s related expenses. Plaintiffs must pay these associated costs because they failed to timely object to the non-searchable TIFF format. It is the untimely objection that necessitates creation of the ‘extracted text’."(citing Ryan v. Gifford, 2007 WL 4259557, at * 1 (Del. Ch., Nov. 30, 2007)). [see short summary of this particular Ryan case here. Note that this is only one of several decisions in the Ryan case.]

Also note that the initial discovery requests that were the subject of this motion were, for reasons not relevant here, submitted in 2005. Query, whether the Court would reach the same result if the requests at issue were submitted in 2008.