HEADWATER RESEARCH LLC, Plaintiff, v. VERIZON COMMUNICATIONS INC., CELLCO PARTNERSHIP d/b/a VERIZON WIRELESS, and VERIZON CORPORATE SERVICES GROUP, INC., Defendants.
Case No. 2:23-cv-00352-JRG-RSP
IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS MARSHALL DIVISION
June 3, 2025
Before the Court is the Motion for Sanctions Under
I. BACKGROUND
Headwater Research was founded in 2008 along with another entity, ItsOn. See generally Dkt. No. 164-5. Headwater operated as a research and development entity for technology that ItsOn would license and commercialize. See id. However, in January 2018, ItsOn entered liquidation under California law, and its assets were transferred to an “Assignment for Benefit of Creditors” entity (“ItsOn-ABC“). See Dkt. No. 164-11 at ¶¶ 1-2. Unfortunately, it has since come to light that certain Electronically Stored Information (“ESI“) was not successfully preserved. Specifically, ItsOn emails were not acquired by ItsOn-ABC, which was only interested in collecting assets. Id. at ¶ 7. Further, other ESI—most importantly ItsOn‘s source code and technical documents—although collected by ItsOn-ABC, is no longer accessible because it is encrypted and cannot be decrypted. See id. at ¶¶ 8-9.
On March 19, 2025, Defendants filed the instant Motion, alleging that Headwater Research had an obligation to preserve the now lost ESI in anticipation of litigation (namely, the instant suit) but that it failed to take reasonable steps to do so. See generally Dkt. No. 164.
II. APPLICABLE LAW
Pursuant to
The Advisory Committee Notes to the 2015 amendment quoted above state: ”
A party is obligated to preserve ESI that it has the “right, authority, or practical ability” to control (United States ex rel. Harman v. Trinity Indus., Inc., No. 2:12-CV-00089-JRG, 2014 WL 12603247, at *1 (E.D. Tex. July 11, 2014) (quoting Perez v. Perry, No. SA-11CV-360-OLG-JES-XR, 2014 U.S. Dist. LEXIS 62284 at *12, 2014 WL 1796661 at *1, (W.D. Tex. May 6, 2014))), for use in a “reasonably foreseeable” litigation (
Here, as discussed above, ItsOn entered liquidation in January 2018. See supra Section I. As of that time, based on all of the evidence presented by the parties at the hearing, Headwater Research had no right, authority or practical ability to control ItsOn‘s assets which had been assigned for the benefit of its creditors. This is particularly true of its intellectual property, which was the principal asset being liquidated.
Further, the Court finds that as of January 2018, which was four years before any litigation was commenced by Headwater Research, litigation was not sufficiently foreseeable to require preservation of ESI under a third-party‘s control. Defendants rely upon the Trinity Industries case, but that case involved the intentional deletion of emails of companies that were half-owned by the plaintiff, during the litigation. The Court finds that it was reasonable for Headwater Research to rely upon ItsOn ABC to safeguard the ESI of ItsOn. Moreover, the most important ESI, the source code, was preserved and would be available but for the inability of the liquidator to access the storage devices. Whether the liquidator encrypted it after it was delivered to it, or it was encrypted before it was delivered, would not change the analysis. There is not a shred of evidence that anyone related to Headwater Research intended to render the source code inaccessible.
The record reflects that Headwater Research has preserved all the emails and
No case has been cited where sanctions were imposed on a party for the negligent failure to preserve the ESI of a third party four years before any litigation was commenced. All of the sanctions sought by Defendants would cause serious prejudice to Plaintiff‘s case, and Defendants have not shown prejudice commensurate with the relief being sought, even if a violation of
Accordingly, for the reasons discussed above, the Motion for Sanctions Under
SIGNED this 3rd day of June, 2025.
ROY S. PAYNE
UNITED STATES MAGISTRATE JUDGE