Preview
FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022
NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: COMMERCIAL DIVISION
REDHILL BIOPHARMA LTD., Index No. 653200/2022
Plaintiff and Counterclaim Defendant,
IAS Part 61
- against -
Hon. Nancy Bannon
Motion Seq. No. 009
KUKBO CO., LTD.,
Defendant and Counterclaim Plaintiff.
PLAINTIFF AND COUNTERCLAIM DEFENDANT REDHILL BIOPHARMA
LTD.’S MEMORANDUM OF LAW IN
SUPPORT OF ITS MOTION FOR SANCTIONS
HAYNES AND BOONE, LLP
30 Rockefeller Plaza, 26th Floor
New York, New York 10112
(212) 835-4848
Facsimile: 212-884-9561
Attorneys for Plaintiff and Counterclaim
Defendant RedHill Biopharma Ltd.
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TABLE OF CONTENTS
Page
Table of Authorities ....................................................................................................................... iii
I. Preliminary Statement ..........................................................................................................1
II. Factual Background .............................................................................................................3
A. RedHill and Kukbo Negotiate the Subscription Agreement, the Exclusive
License Agreement, and the Letter Agreement ...................................................... 3
B. RedHill Files Complaint for Breach of Contract and Breach of Duty of Good
Faith and Fair Dealing. ........................................................................................... 4
C. Kukbo Files its Answer and Counterclaims, Alleging Kukbo Anticipated
Litigation as of November 23, 2021. ...................................................................... 4
D. During Discovery, Kukbo Identifies James Ahn and Ken Choi as Key Witnesses
but Fails to Collect or Preserve Their Documents and Communications. .............. 5
E. After Receiving Kukbo’s Deficient Production, RedHill Immediately Sought to
Work with Kukbo to Identify Why Documents Were Missing. ............................. 6
F. Kukbo Engaged in Obstruction Rather Than Working to Remediate. ................... 7
G. Kukbo’s Corporate Representative Explains Only Communications He Was
Copied on Were Preserved...................................................................................... 9
III. Argument ...........................................................................................................................10
A. Corporations Must Preserve Electronic Communications .................................... 10
B. Kukbo’s Inadequate Document Preservation Protocol and Failure to Conduct
Searches of Employees’ Emails Both After Litigation Commenced and While
Reasonably Anticipating Litigation Constitutes Unlawful Spoliation. ................ 10
1. Kukbo Had an Unambiguous Obligation to Preserve Document as
Soon as Litigation Was Reasonably Anticipated. ..................................... 12
2. Kukbo’s Unambiguous Obligation to Preserve Documents Continued
After Litigation Commenced. ................................................................... 13
C. Kukbo’s Document Retention Policy Was Negligent and Clearly Violated
New York Standards. ............................................................................................ 14
D. Kukbo Failed to Preserve Evidence From the Individuals Kukbo Identified as
Most Knowledgeable Individuals AFTER Kukbo Identified Them as the
Individuals Most Knowledgeable, Prejudicing RedHill’s Claims and Defenses . 15
E. Kukbo’s Production is Missing Countless Documents RedHill Would Have
Expected to See (and in Fact Produced) That Would (and Do) Support
RedHill’s Claims and Defenses in this Action. .................................................... 16
F. This Court Should Impose a Severe Sanction Upon Kukbo ................................. 18
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1. This Court should strike Kukbo’s Answer and enter judgment in
favor of RedHill. ....................................................................................... 18
2. In the alternative, at minimum, the Court should issue an adverse
inference instruction that the destroyed evidence would have been
favorable to RedHill.................................................................................. 19
IV. Conclusion .........................................................................................................................20
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TABLE OF AUTHORITIES
Page(s)
Cases
Ahroner v. Israel Disc. Bank of New York,
79 A.D.3d 481 (1st Dep’t 2010) ..............................................................................................11
Convolve, Inc. v. Compaq Computer Corp.,
223 F.R.D. 162 (S.D.N.Y. 2004) .............................................................................................10
Einstein v. 357 LLC,
No. 604199/07, 2009 WL 4543044 (N.Y. Sup. Ct. Nov. 12, 2009) ........................................10
Fada Indus., Inc. v. Falchi Bldg. Co.,
730 N.Y.S.2d 827 (Sup. Ct. 2001) .....................................................................................12, 13
Fata v. Heskel's Riverdale, LLC,
223 A.D.3d 520, 203 N.Y.S.3d 550 (1st Dep’t 2024) .............................................................18
Hawley v. Mphasis Corp.,
302 F.R.D. 37 (S.D.N.Y. 2014) ...............................................................................................19
Horace Mann Ins. Co. v. E.T. Appliances, Inc.,
290 A.D.2d 418 (2d Dep’t 2002) .............................................................................................11
Ingoglia v. Barnes & Noble Coll. Booksellers,
48 A.D.3d 636 (2d Dep't 2008)................................................................................................11
In re Keurig Green Mountain Single-Serve Coffee Antitrust Litig.,
341 F.R.D. 474 (S.D.N.Y. 2022) .............................................................................................20
Klipsch Grp., Inc. v. ePro E-Com. Ltd.,
880 F.3d 620 (2d Cir. 2018).....................................................................................................20
Kronisch v. United States,
150 F.3d 112 (2d Cir. 1998)...............................................................................................12, 20
Malouf v. Equinox Holdings, Inc.,
113 A.D.3d 422, 978 N.Y.S.2d 160 (1st Dep’t 2014) .............................................................12
New York City Hous. Auth. v. Pro Quest Sec., Inc.,
108 A.D.3d 471, 970 N.Y.S.2d 21 (1st Dep’t 2013) ...............................................................12
Pension Committee v. Banc of America Securities, LLC,
No. 05 Civ. 9016, 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010) ...............................................11
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People v. Boatwright,
297 A.D.2d 603, 748 N.Y.S.2d 541 (1st Dep’t 2002) .............................................................15
Quinn v. 1649 Rest. Corp.,
18 A.D.3d 281, 795 N.Y.S.2d 19 (1st Dep’t 2005) .................................................................15
Reilly v. Natwest Markets Group Inc.,
181 F.3d 253 (2d Cir. 1999).....................................................................................................20
Sage Realty Corp. v. Proskauer Rose LLP,
275 A.D.2d 11, 713 N.Y.S.2d 155 (1st Dep’t 2000) ...............................................................18
Strong v. City of New York,
112 A.D.3d 15, 973 N.Y.S.2d 152 (1st Dep’t 2013) ...............................................................13
Thyroff v. Nationwide Mut. Ins. Co.,
8 N.Y.3d 283 (2007) ................................................................................................................10
VOOM HD Holdings LLC v. EchoStar Satellite L.L.C.,
939 N.Y.S.2d 321 (1st Dep’t 2012) ...................................................................................13, 14
Zubulake v. UBS Warburg, LLC,
220 F.R.D. 212 (S.D.N.Y. 2003) ..................................................................................... passim
Zubulake v. UBS Warburg LLC,
229 F.R.D. 422 (S.D.N.Y. 2004) .......................................................................................19, 20
Other Authorities
CPLR §3126.....................................................................................................................................1
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Plaintiff and Counterclaim Defendant RedHill Biopharma Ltd. (“RedHill” or “Plaintiff”)
respectfully files this memorandum of law in support of its motion requesting this Court, pursuant
to CPLR §3126, sanction Defendant and Counterclaim Plaintiff Kukbo Co. Ltd. (“Kukbo” or
“Defendant” and collectively with RedHill, the “Parties”) for spoliation of evidence.
I. Preliminary Statement
This case should have been a straightforward breach of contract action between two
sophisticated parties, but has turned into a costly ordeal due to Kukbo’s bad faith efforts to avoid
its obvious liability by bringing frivolous claims for fraudulent misrepresentation, fraudulent
inducement, breach of contract, and anticipatory repudiation and failing to preserve evidence.
RedHill, a pharmaceutical company publicly traded on Nasdaq, executed a series of
agreements with Kukbo, a global logistics company. The first agreement—the Subscription
Agreement signed on October 25, 2021—required that Kukbo invest $10,000,000 in RedHill in
exchange for RedHill American Depository Shares and a right of first offer with respect to one of
RedHill’s pharmaceutical products. The investment was divided into two $5,000,000 tranches,
the second of which was contingent upon the Parties executing a license agreement within six
months of the Subscription Agreement (the “Investment Amount”).
On March 14, 2022, the Parties executed the Exclusive License Agreement, granting
Kukbo a license to RedHill’s drug Opaganib in South Korea. The Exclusive License Agreement
required Kukbo to pay RedHill a $1,500,000 Upfront Payment (the “Upfront Payment”) and
triggered Kukbo’s obligation to pay the Investment Amount still due under the Subscription
Agreement.
On June 8, 2022, after Kukbo undisputedly failed to timely pay the Upfront Payment and
the Investment Amount it owed RedHill, Kukbo signed the June 8, 2022 Acknowledgement and
Undertaking of Payment under Subscription and License Agreements (the “Letter Agreement,”
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and collectively with the Subscription Agreement and Exclusive License Agreement, the
“Agreements”), reaffirming Kukbo’s commitment to pay RedHill the Upfront Payment and the
Investment Amount. However, notwithstanding repeated requests from RedHill and Kukbo’s
subsequent representations that payment would be forthcoming, Kukbo again failed to make the
payments required under the Agreements. As a result, RedHill filed this litigation on September
2, 2022. Only after breaching the Agreements and after litigation was filed did Kukbo allege for
this first time in its Answer and Counterclaims, filed on December 16, 2022, that RedHill had
committed fraudulent misrepresentation and fraudulent inducement with respect to the
Agreements.
As discovery began, RedHill quickly realized that there was a serious problem: Kukbo’s
document production – absurdly totaling only 50 documents given the sophistication of the
transactions and compared to the 15,292 documents ultimately produced by RedHill – was bereft
of a number of responsive communications that RedHill knew existed. Moreover, RedHill soon
thereafter learned that key witnesses James Ahn and Ken Choi—identified in Kukbo’s
interrogatories as most knowledgeable about the Agreements—were terminated.
RedHill immediately sought to understand the obvious inadequacies in Kukbo’s
production. When asked about the specifics of its search protocols, Kukbo claimed that it did not
use any search terms and had reviewed the entire universe of documents concerning the RedHill
matter. But a month later, Kukbo made an additional production of (a still paltry) 212 documents.
Kukbo represented that these documents were excluded from the initial production due to an
internal de-duplication error. However, this representation was false: these documents were not
duplicates of the earlier production and as such Kukbo must have conducted additional searches.
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The deposition of Kukbo’s corporate representative, Mr. Young Seok Kim—a Kukbo
director—illustrated the severity of Kukbo’s malfeasance. First, according to the corporate
representative, Kukbo allowed its employees to use personal email addresses to conduct
business—an option used by the Kukbo employees negotiating the RedHill deal. Second,
communications would only be saved on Kukbo’s internal servers if a Kukbo employee, for the
RedHill communications, Mr. Kim, was copied on the email and voluntarily chose to save it.
Kukbo’s policy, which falls woefully below recognized document retention standards, ensured
that relevant documents would be destroyed.
RedHill has had to expend substantial time, resources, and money as a result of the
egregious document retention standards described by Kukbo’s corporate representative, and the
failure to preserve documents from employees before their employment ended without any
explanation in the middle of litigation. While RedHill has produced sufficient evidence in this
case to defeat Kukbo’s frivolous claims, RedHill’s prosecution of its case has consistently been
disadvantaged by Kukbo’s willful misconduct in not preserving relevant communications by
Kukbo employees, resulting in RedHill having to expend substantial time, resources, and money
to defend against manufactured accusations of fraud and to prosecute a simple breach of contract
claim.
II. Factual Background
A. RedHill and Kukbo Negotiate the Subscription Agreement, the Exclusive License
Agreement, and the Letter Agreement
On October 25, 2021, Kukbo and RedHill entered into the Subscription Agreement. (ECF
Doc. No. 3). Under the Subscription Agreement, (1) Kukbo agreed to purchase RedHill American
Depository Shares (“ADS”) valued at $10,000,000 in two separate tranches of $5,000,000 with
the second tranche conditioned on the Parties executing a license agreement by the sixth month
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anniversary of the Subscription Agreement, and (2) RedHill agreed to grant Kukbo a Right of First
Offer in the event RedHill desired to solicit a third party for a licensing agreement for “RHB-107,
Opaganib or Talicia® in one or more of South Korea, Japan, Indonesia, Vietnam, Thailand and/or
Malaysia.” Id. at p.14.
On March 14, 2022, before the sixth month anniversary of the Subscription Agreement,
RedHill and Kukbo entered into the Exclusive License Agreement pursuant to which RedHill
granted Kukbo an exclusive license for Opaganib in return for the Upfront Payment. (ECF Doc.
No. 4 at pp. 1, 6, 14). The execution of the Exclusive License Agreement also triggered Kukbo’s
obligations to pay RedHill the Investment Amount.
After nearly three months of non-payment by Kukbo of both the Upfront Payment and
Investment Amount, on June 8, 2022, the Parties entered into the Letter Agreement. (ECF Doc.
No. 5). The Letter Agreement reaffirmed Kukbo’s “commitment to pay the overdue upfront
payment of $1,500,000 under the License Agreement (the ‘Upfront Amount’) and the overdue
investment in RedHill in the amount of $5,000,000 under the Subscription Agreement.” Id. Kukbo
never paid the Upfront Amount or the Investment Amount.
B. RedHill Files Complaint for Breach of Contract and Breach of Duty of Good Faith
and Fair Dealing.
RedHill filed its Complaint on September 2, 2022, alleging that “Kukbo repeatedly
defaulted on payment obligations due under the Parties’ (1) Subscription Agreement dated October
25, 2021, . . . and as amended March 14, 2022, (2) Exclusive License Agreement dated March 14,
2022 . . . and (3) June 8, 2022 letter agreement . . . .” (ECF Doc No. 2).
C. Kukbo Files its Answer and Counterclaims, Alleging Kukbo Anticipated Litigation
as of November 23, 2021.
On December 16, 2022, Kukbo filed its Answer and Counterclaims (the “Counterclaims”),
including counterclaims for rescission of the Exclusive License Agreement, rescission of the
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Subscription Agreement, anticipatory repudiation, fraudulent inducement to enter into the
Subscription Agreement, fraudulent inducement to enter into the Exclusive License Agreement,
fraudulent misrepresentation, breach of the Exclusive License Agreement, breach of the
Subscription Agreement, and breach of the covenant of good faith and fair dealing (ECF Doc No.
20). In the Counterclaims, Kukbo alleges that it first became aware of alleged fraudulent
misrepresentations by RedHill during a November 23, 2021 conference call. See id. at ¶ 78.
D. During Discovery, Kukbo Identifies James Ahn and Ken Choi as Key Witnesses but
Fails to Collect or Preserve Their Documents and Communications.
On March 31, 2023, RedHill served Requests for Production (the “Requests”) and
Interrogatories upon Kukbo. See Ex. C to the Affirmation of Rebecca Schwarz (RedHill First Set
of Requests for Production; RedHill First Set of Interrogatories). The Requests covered a broad
range of topics critical to this litigation, including, but not limited to: (1) documents and
communications relating to RedHill’s alleged fraud in inducing Kukbo to sign the Subscription
Agreement and Exclusive License Agreement; (2) documents and communications related to
RedHill’s alleged breach of the Subscription Agreement and the Exclusive License Agreement;
(3) documents and communications related to Kukbo’s valuation of Opaganib; and (4) all
documents concerning, referring, or relating to the claims and defenses asserted in the
Counterclaims. See id.
In response, on May 1, 2023, Kukbo served its initial responses and objections (the
“Responses”) to the Requests and Interrogatories. See Ex. D to the Affirmation of Rebecca
Schwarz (Kukbo’s Responses and Objections to RedHill First Set of Requests for Production).
Kukbo’s objections were boilerplate, routinely stating that the Requests sought “material already
in RedHill’s possession and to which RedHill has greater access than Kukbo or seeks documents
potentially in the possession of third parties and otherwise not in Kukbo’s possession, custody, or
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control.” Id. Moreover, Kukbo’s Responses identified Mr. James K. Ahn and/or Mr. Jung Hoon
(Ken Choi) in response to Interrogatories Nos. 1-6 and 8, or, every interrogatory for which an
individual’s identification was sought. See Ex. E to the Affirmation of Rebecca Schwarz (Kukbo’s
Responses and Objections to RedHill First Set of Interrogatories).
On May 31 2023, a month after Kukbo served its Responses to RedHill’s discovery
identifying Mr. Ahn as a key witness, Mr. James Ahn’s employment was terminated. See Ex. F to
the Affirmation of Rebecca Schwarz (October 6, 2023 Letter from Jipyong LLC to Haynes and
Boone, LLP) (hereinafter “Ex. F”).
Subsequently, Kukbo served its initial production, totaling only 50 documents. See
Affirmation of Rebecca Schwarz at ¶2. Missing from Kukbo’s production were any internal
substantive communications or documents between Kukbo’s personnel supporting Kukbo’s
allegations. In comparison, RedHill’s initial production contained 1,159 documents. Id. at ¶4.
E. After Receiving Kukbo’s Deficient Production, RedHill Immediately Sought
to Work with Kukbo to Identify Why Documents Were Missing.
After receiving Kukbo’s production, RedHill requested a meet and confer regarding
Kukbo’s production’s deficiencies. See Ex. G to the Affirmation of Rebecca Schwarz (July 13,
2023 Letter from Haynes and Boone, LLP to Jipyong LLC). Specifically, RedHill sought to know
why it was so limited. Id. In response, Kukbo agreed to “undertake a further reasonable search of
resources likely to have responsive documents” to supplement its initial production. See Ex. H to
the Affirmation of Rebecca Schwarz (July 31, 2023 Letter from Jipyong LLC to Haynes and
Boone, LLP). On September 15, 2023, nearly two months later, Kukbo informed RedHill that
Kukbo’s counsel had “completed [a] reasonable search and [does] not have any additional
documents to produce in response to RedHill’s RFPs.” See Ex. I to the Affirmation of Rebecca
Schwarz (September 15, 2023 Letter from Jipyong LLC to Haynes and Boone, LLP).
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Then, in response to RedHill’s notices of deposition, Kukbo informed RedHill that Mr.
James Ahn and Mr. Ken Choi were no longer employed by Kukbo and could not be produced for
deposition. See Ex. J to the Affirmation of Rebecca Schwarz (September 25, 2023 Email from
Somin Jun to Rebecca Schwarz, re Index No. 653200/2022 – Notice of Deposition). Immediately
thereafter, RedHill’s counsel expressed concerns regarding Kukbo’s document preservation efforts
and the possibility that relevant evidence had not been preserved. See Ex. K to the Affirmation of
Rebecca Schwarz (September 27, 2023 Letter from Haynes and Boone, LLP to Jipyong LLC). In
particular, RedHill requested “(1) the identity of the custodian for the 50 documents produced by
Kukbo; (2) all search terms used by Kukbo and the associated hit counts; (3) the dates of
termination for James K. Ahn and Jung Hoon (Ken) Choi, (4) what ESI, if any, Kukbo retained
for James K. Ahn and Jung Hoon (Ken) Choi, (5) Kukbo’s document retention policy, and (6) any
litigation holds issued by Kukbo related to this matter.” Id.
F. Kukbo Engaged in Obstruction Rather Than Working to Remediate.
Rather than provide the requested information, Kukbo baselessly accused RedHill of
spoliation and demanded that RedHill “(1) identify the custodians from whom you have collected
documents, (2) provide the search terms you used to screen out documents, (3) the date and copy
of RedHill’s litigation hold notice, (4) RedHill’s document retention policy, (5) certified legal
opinion that RedHill’s document retention policy is compliant with Israeli law.” See Ex. L to the
Affirmation of Rebecca Schwarz (September 28, 2023 Letter from Jipyong LLC to Haynes and
Boone, LLP).
RedHill immediately provided Kukbo with the search terms, hit counts, and custodians
used in identifying a universe of 28,565 documents. See Ex. M to the Affirmation of Rebecca
Schwarz (September 29, 2023 Letter from Haynes and Boone, LLP to Jipyong LLC). RedHill
ultimately produced 15,292 documents. Affirmation of Rebecca Schwarz at ¶4.
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In response, Kukbo provided only the following information: “(1) The custodians of
documents reviewed and produced were Mr. James K. Ahn. Mr. Jung Hoon (Ken) Choi, Mr.
Young Seok Kim, and Mr. Keun Hyo Choi. (2) We reviewed the entirety of these custodians’
documents for relevance and responsiveness to RedHill’s RFP, the total count of which exceeded
600. (3) The date of employment termination for Mr. James Ahn and Mr. Jung Hoon [Ken] Choi
is May 31, 2023 and March 18, 2022, respectively. (4) The entirety of Kukbo’s business record
including any ESI of its employees is stored in a cloud server and retained for a minimum of 3
years. (5) Kukbo has maintained all ESI relating to its business with RedHill, irrespective of a
litigation hold notice issues upon retention of legal counsel for this matter.” Ex. F to the
Affirmation of Rebecca Schwarz.
The Parties subsequently met and conferred on October 9, 2023, but Kukbo did not provide
any further information regarding how the universe of approximately 600 documents was
identified.
On October 19, 2023, Kukbo made a supplemental production of 212 documents. Kukbo’s
counsel represented that these documents were excluded from Kukbo’s initial production due to a
“communication error concerning de-duplication.” See Ex. N (October 19, 2023 Email from
Jipyong LLC to Haynes and Boone, LLP). Kukbo’s counsel insisted that “[t]hese emails constitute
parts of various email chains already produced by Kukbo and do not contain any contents that
were not already disclosed.” Id.
However, the newly produced documents were not duplicative, and included documents
that could only have been discovered following a subsequent search. See, e.g., Ex. O to the
Affirmation of Rebecca Schwarz, KBC00000927 (Written Summary from James Ahn of June call
in which Kukbo agreed to the principles of the Letter Agreement); Ex. P to the Affirmation of
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Rebecca Schwarz, KBC00001153 (James Ahn response to Adi dated 10/04/23, after Kukbo
claimed that no additional searches took place); Ex. Q to the Affirmation of Rebecca Schwarz,
KBC00001888 (Internal conversation with LSK Global, which Kukbo did not previously
disclose); see also Ex. B to the Affirmation of Rebecca Schwarz.
G. Kukbo’s Corporate Representative Explains Only Communications He was
Copied on Were Preserved.
Kukbo’s corporate representative, testified that “there is no obligation within the company
that we have to use Kukbo e-mail” and “for personal e-mail accounts, the e-mails are not saved
automatically.” Ex. R to the Affirmation of Rebecca Schwarz (Kim Dep. Tr. 38:17-25; 40:3-9)
(hereinafter “Ex. R”). The corporate representative further acknowledged that all emails where he
was not copied would not be saved under this ad hoc system. (See id. at 38:17-41:4) (“It’s not
likely.”)
The two employees most involved in Kukbo’s negotiation of the Subscription Agreement
and the Exclusive License Agreement, Mr. James Ahn and Mr. Ken Choi, both routinely used their
personal email addresses without copying Young Seok Kim. 1 See, e.g., Ex. D to the Affirmation
of Rebecca Schwarz (Kukbo Objections and Responses to RedHill First Set of Interrogatories);
Ex. R (Kim Dep. Tr. at 39:10-23.)
Mr. Ken Choi was responsible for Kukbo’s communications with RedHill and other outside
parties regarding the RedHill matter – specifically, the negotiation of the Subscription Agreement
and the Exclusive License Agreement – and acted as the translator for Kukbo on calls with RedHill.
Ex. R (Kim Dep. Tr. 24:21-24; 28:25-29:12.) Mr. James Ahn, was hired as an expert in the
pharmaceutical space to aid Kukbo and was responsible for “[overseeing] all the tasks and works
1
Mr. James Ahn’s personal email address was Jameskwahn@gmail.com and Mr. Ken Choi’s was ourpro@naver.com.
Ex. R (Kim Dep Tr. 30:10-18).
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[sic] related to Redhill.” (ECF Doc No. 20, Kukbo Answer and Counterclaims at ¶76); Ex. R (Kim
Dep. Tr. 25:16-26:7; 46:14-23).
RedHill has identified a number of communications between the Parties that were not saved
and produced as a result of Kukbo’s deficient policy. See Ex. A to the Affirmation of Rebecca
Schwarz. However, RedHill does not and cannot know the extent to which any internal discussions
occurred at Kukbo because of Kukbo’s failure to preserve evidence.
III. Argument
A. Corporations Must Preserve Electronic Communications
Few developments have been as instrumental to modern litigation as proper electronic
document retention protocols. “Computers and digital information are ubiquitous and pervade all
aspects of business, financial and personal communication activities” and these documents have
“the same value as a paper document kept in a file cabinet.” Thyroff v. Nationwide Mut. Ins. Co.,
8 N.Y.3d 283, 291-92 (2007). As electronic recordkeeping has evolved, basic standards and
expectations of document retention have followed in lock step.
“It is impossible for an organization to achieve acceptable legal compliance without an
appropriate and functioning records retention program.” R. Thomas Howell, Jr. & Rae N. Cogar,
Records Retention – An Essential Part of Corporate Compliance, in Records Retention and
Destruction Current Best Practices (2003). When litigation is reasonably foreseeable, companies
must ensure that their electronic documents are preserved. See, e.g., Convolve, Inc. v. Compaq
Computer Corp., 223 F.R.D. 162, 176 (S.D.N.Y. 2004); Zubulake v. UBS Warburg, LLC, 220
F.R.D. 212, 218 (S.D.N.Y. 2003).
B. Kukbo’s Inadequate Document Preservation Protocol and Failure to
Conduct Searches of Employees’ Emails Both After Litigation Commenced and
While Reasonably Anticipating Litigation Constitutes Unlawful Spoliation.
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Spoliation occurs “when a party negligently loses or intentionally destroys key evidence.”
Ingoglia v. Barnes & Noble Coll. Booksellers, 48 A.D.3d 636, 637 (2d Dep't 2008). New York
courts impose sanctions—including striking an answer and entering judgment in favor of the
moving party—“[w]hen a party alters, loses, or destroys key evidence.” Horace Mann Ins. Co. v.
E.T. Appliances, Inc., 290 A.D.2d 418, 419 (2d Dep’t 2002); see also Pension Committee v. Banc
of America Securities, LLC, No. 05 Civ. 9016, 2010 WL 184312, at *1 (S.D.N.Y. Jan. 15, 2010)
(When litigants fail to “take the necessary steps to ensure that relevant records are preserved when
litigation is reasonably anticipated,” “the integrity of the judicial process is harmed and the courts
are required to fashion a remedy.”).
To prove spoliation, “the party seeking sanctions must establish that (1) the party with
control over the evidence had an obligation to preserve it at the time it was destroyed; (2) the
records were destroyed with a ‘culpable state of mind,’ and (3) the destroyed evidence was
‘relevant’ to the moving party's claim or defense. A ‘culpable state of mind,’ for purposes of a
spoliation inference, includes ordinary negligence.” Ahroner v. Israel Disc. Bank of New York, 79
A.D.3d 481, 482 (1st Dep’t 2010).
There can be no dispute that Kukbo destroyed key evidence. Kukbo employed a document
preservation protocol that allowed countless documents to be lost. Kukbo failed to issue a
litigation hold or take any affirmative steps to preserve documents for Messrs. Ahn and Choi, the
individuals Kukbo identified as most knowledgeable about the RedHill deal, during the reasonable
anticipation of litigation and after litigation commenced. Finally, Kukbo failed to take any steps
to preserve relevant documents and communications on Messrs. Ahn and Choi’s email accounts
and hard drives prior to the termination of their employment, leading to the effective destruction
of these documents and communications.
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1. Kukbo Had an Unambiguous Obligation to Preserve Document as Soon
as Litigation was Reasonably Anticipated.
“The duty to preserve [documents] attache[s] at the time that litigation [i]s reasonably
anticipated.” Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 216 (S.D.N.Y. 2003). “Once a
party reasonably anticipates litigation, it must suspend its routine document retention/destruction
policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents.” Id. at
218. Reasonable anticipation can predate the date that a complaint is filed. See Fada Indus., Inc.
v. Falchi Bldg. Co., 730 N.Y.S.2d 827, 842 (Sup. Ct. 2001) (“[W]here a party is on notice that
litigation is likely to be commenced, the obligation to preserve evidence may even arise prior to
the filing of a complaint.”); see also Kronisch v. United States, 150 F.3d 112, 126-27 (2d Cir.
1998) (noting that a party must preserve documents when it “should have known that the evidence
may be relevant to future litigation” even when “no litigation ... had commenced”).
The Counterclaims allege that Kukbo interpreted the lack of prior notice of the November
public offering as a material misrepresentation and fraudulent inducement. (ECF No. 20, Kukbo
Answer and Counterclaims at ¶121) (“RedHill concealed its financial condition and an immediate
IPO plan from Kukbo in order to induce Kukbo to enter into the Subscription Agreement.”) Thus,
per the Counterclaims, Kukbo should have anticipated litigation as of November 23, 2021, the date
that Kukbo was alerted of the November public offering and should have begun preserving
documents. Id. at ¶78; see also Malouf v. Equinox Holdings, Inc., 113 A.D.3d 422, 978 N.Y.S.2d
160, 161 (1st Dep’t 2014) (concluding that litigation could be reasonably anticipated prior to the
commencement of litigation where the plaintiff reported the accident and the defendant’s litigation
department prepared a claims defense form); New York City Hous. Auth. v. Pro Quest Sec., Inc.,
108 A.D.3d 471, 473, 970 N.Y.S.2d 21, 24 (1st Dep’t 2013) (finding that the plaintiff reasonably
anticipated litigation one year prior to litigation commencing because the plaintiff began reviewing
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footage of the fire that caused the action to identify information relevant to the cause of the action);
Strong v. City of New York, 112 A.D.3d 15, 22, 973 N.Y.S.2d 152, 157 (1st Dep’t 2013) (holding
that a party can reasonably anticipate litigation when they have notice prior to the filing of an
action). Kukbo failed to do so.
Kukbo’s counsel and its corporate representative admitted that Kukbo anticipated litigation
as of June 8, 2022. At oral argument for RedHill’s Motion to Dismiss, Kukbo’s counsel
represented that Kukbo entered into the Letter Agreement on June 8, 2022 in order to avoid
litigation. See (ECF No. 89, Transcript from the Court’s Conference held on May 8, 2023 at
p.14:20) (“[The Letter Agreement] was forced upon Kukbo to sign because Kukbo was being
forced – was threatened with a litigation.”). According to Ms. Kim, as of June 8, 2022, Kukbo
was actively avoiding litigation, yet failed to issue a litigation hold or amend its document
preservation policy. Finally, as of July 18, 2022—when RedHill explicitly informed Kukbo it
would file suit if payment was not made—Kukbo maintained its deficient document retention
policy. Despite overwhelming evidence “that litigation [was] likely to be commenced,” Kukbo
did not issue a litigation hold or take any steps to preserve documents to ensure that evidence
would be preserved. See Falchi Bldg. Co., 730 N.Y.S.2d at 842.
2. Kukbo’s Unambiguous Obligation to Preserve Documents Continued
After Litigation Commenced.
Even if the court finds that Kukbo did not reasonably anticipate litigation prior to Redhill’s
complaint, Kukbo continued to ignore its obligations to preserve documents after litigation
commenced. See VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 939 N.Y.S.2d 321, 328
(1st Dep’t 2012) (holding that a failure to preserve documents after a lawsuit is filed was grounds
for spoliation). RedHill’s complaint was filed on September 2, 2022. James Ahn was terminated
nine months later and a whole month after responding to interrogatories identifying him as an
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individual with relevant information for every category requested by RedHill. See supra §II.D.
Kukbo did so without first collecting documents and communications from Mr. Ahn’s personal
email account, despite Kukbo’s policy permitting Kukbo employees to use personal email and
Kukbo’s awareness that Mr. Ahn used his personal email. Id. at II.D-G.
C. Kukbo’s Document Retention Policy was Negligent and Clearly Violated
New York Standards.
New York state courts have adopted the Zubulake “litigation hold” standard for electronic
information. See e.g., Voom HD Holdings, 939 N.Y.S.2d at 324 (“The Zubulake standard is
harmonious with New York precedent in the traditional discovery context, and provides litigants
with sufficient certainty as to the nature of their obligations in the electronic discovery context and
when those obligations are triggered.”). This standard requires a “litigation hold” which “must
direct appropriate employees to preserve all relevant records, electronic or otherwise, and create a
mechanism for collecting the preserved records so they might be searched by someone other than
the employee.” Id. at 328.
Kukbo alleges it implemented a litigation hold when legal counsel was hired, but either
failed to direct it to appropriate employees or take any steps to collect the preserved records so
they might be searched by someone other than the employee. In fact, Kukbo did exactly what
Voom warned against: permitting its employees to exercise their sole discretion to determine which
documents and emails should be preserved. See Ex. R (Kim Dep. Tr. 40:14-41:14); Ex. F (“(1)
The custodians of documents reviewed and produced
Preview
FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: COMMERCIAL DIVISION REDHILL BIOPHARMA LTD., Index No. 653200/2022 Plaintiff and Counterclaim Defendant, IAS Part 61 - against - Hon. Nancy Bannon Motion Seq. No. 009 KUKBO CO., LTD., Defendant and Counterclaim Plaintiff. PLAINTIFF AND COUNTERCLAIM DEFENDANT REDHILL BIOPHARMA LTD.’S MEMORANDUM OF LAW IN SUPPORT OF ITS MOTION FOR SANCTIONS HAYNES AND BOONE, LLP 30 Rockefeller Plaza, 26th Floor New York, New York 10112 (212) 835-4848 Facsimile: 212-884-9561 Attorneys for Plaintiff and Counterclaim Defendant RedHill Biopharma Ltd. i 1 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 TABLE OF CONTENTS Page Table of Authorities ....................................................................................................................... iii I. Preliminary Statement ..........................................................................................................1 II. Factual Background .............................................................................................................3 A. RedHill and Kukbo Negotiate the Subscription Agreement, the Exclusive License Agreement, and the Letter Agreement ...................................................... 3 B. RedHill Files Complaint for Breach of Contract and Breach of Duty of Good Faith and Fair Dealing. ........................................................................................... 4 C. Kukbo Files its Answer and Counterclaims, Alleging Kukbo Anticipated Litigation as of November 23, 2021. ...................................................................... 4 D. During Discovery, Kukbo Identifies James Ahn and Ken Choi as Key Witnesses but Fails to Collect or Preserve Their Documents and Communications. .............. 5 E. After Receiving Kukbo’s Deficient Production, RedHill Immediately Sought to Work with Kukbo to Identify Why Documents Were Missing. ............................. 6 F. Kukbo Engaged in Obstruction Rather Than Working to Remediate. ................... 7 G. Kukbo’s Corporate Representative Explains Only Communications He Was Copied on Were Preserved...................................................................................... 9 III. Argument ...........................................................................................................................10 A. Corporations Must Preserve Electronic Communications .................................... 10 B. Kukbo’s Inadequate Document Preservation Protocol and Failure to Conduct Searches of Employees’ Emails Both After Litigation Commenced and While Reasonably Anticipating Litigation Constitutes Unlawful Spoliation. ................ 10 1. Kukbo Had an Unambiguous Obligation to Preserve Document as Soon as Litigation Was Reasonably Anticipated. ..................................... 12 2. Kukbo’s Unambiguous Obligation to Preserve Documents Continued After Litigation Commenced. ................................................................... 13 C. Kukbo’s Document Retention Policy Was Negligent and Clearly Violated New York Standards. ............................................................................................ 14 D. Kukbo Failed to Preserve Evidence From the Individuals Kukbo Identified as Most Knowledgeable Individuals AFTER Kukbo Identified Them as the Individuals Most Knowledgeable, Prejudicing RedHill’s Claims and Defenses . 15 E. Kukbo’s Production is Missing Countless Documents RedHill Would Have Expected to See (and in Fact Produced) That Would (and Do) Support RedHill’s Claims and Defenses in this Action. .................................................... 16 F. This Court Should Impose a Severe Sanction Upon Kukbo ................................. 18 ii 2 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 1. This Court should strike Kukbo’s Answer and enter judgment in favor of RedHill. ....................................................................................... 18 2. In the alternative, at minimum, the Court should issue an adverse inference instruction that the destroyed evidence would have been favorable to RedHill.................................................................................. 19 IV. Conclusion .........................................................................................................................20 iii 3 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 TABLE OF AUTHORITIES Page(s) Cases Ahroner v. Israel Disc. Bank of New York, 79 A.D.3d 481 (1st Dep’t 2010) ..............................................................................................11 Convolve, Inc. v. Compaq Computer Corp., 223 F.R.D. 162 (S.D.N.Y. 2004) .............................................................................................10 Einstein v. 357 LLC, No. 604199/07, 2009 WL 4543044 (N.Y. Sup. Ct. Nov. 12, 2009) ........................................10 Fada Indus., Inc. v. Falchi Bldg. Co., 730 N.Y.S.2d 827 (Sup. Ct. 2001) .....................................................................................12, 13 Fata v. Heskel's Riverdale, LLC, 223 A.D.3d 520, 203 N.Y.S.3d 550 (1st Dep’t 2024) .............................................................18 Hawley v. Mphasis Corp., 302 F.R.D. 37 (S.D.N.Y. 2014) ...............................................................................................19 Horace Mann Ins. Co. v. E.T. Appliances, Inc., 290 A.D.2d 418 (2d Dep’t 2002) .............................................................................................11 Ingoglia v. Barnes & Noble Coll. Booksellers, 48 A.D.3d 636 (2d Dep't 2008)................................................................................................11 In re Keurig Green Mountain Single-Serve Coffee Antitrust Litig., 341 F.R.D. 474 (S.D.N.Y. 2022) .............................................................................................20 Klipsch Grp., Inc. v. ePro E-Com. Ltd., 880 F.3d 620 (2d Cir. 2018).....................................................................................................20 Kronisch v. United States, 150 F.3d 112 (2d Cir. 1998)...............................................................................................12, 20 Malouf v. Equinox Holdings, Inc., 113 A.D.3d 422, 978 N.Y.S.2d 160 (1st Dep’t 2014) .............................................................12 New York City Hous. Auth. v. Pro Quest Sec., Inc., 108 A.D.3d 471, 970 N.Y.S.2d 21 (1st Dep’t 2013) ...............................................................12 Pension Committee v. Banc of America Securities, LLC, No. 05 Civ. 9016, 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010) ...............................................11 iv 4 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 People v. Boatwright, 297 A.D.2d 603, 748 N.Y.S.2d 541 (1st Dep’t 2002) .............................................................15 Quinn v. 1649 Rest. Corp., 18 A.D.3d 281, 795 N.Y.S.2d 19 (1st Dep’t 2005) .................................................................15 Reilly v. Natwest Markets Group Inc., 181 F.3d 253 (2d Cir. 1999).....................................................................................................20 Sage Realty Corp. v. Proskauer Rose LLP, 275 A.D.2d 11, 713 N.Y.S.2d 155 (1st Dep’t 2000) ...............................................................18 Strong v. City of New York, 112 A.D.3d 15, 973 N.Y.S.2d 152 (1st Dep’t 2013) ...............................................................13 Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283 (2007) ................................................................................................................10 VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 939 N.Y.S.2d 321 (1st Dep’t 2012) ...................................................................................13, 14 Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212 (S.D.N.Y. 2003) ..................................................................................... passim Zubulake v. UBS Warburg LLC, 229 F.R.D. 422 (S.D.N.Y. 2004) .......................................................................................19, 20 Other Authorities CPLR §3126.....................................................................................................................................1 v 5 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 Plaintiff and Counterclaim Defendant RedHill Biopharma Ltd. (“RedHill” or “Plaintiff”) respectfully files this memorandum of law in support of its motion requesting this Court, pursuant to CPLR §3126, sanction Defendant and Counterclaim Plaintiff Kukbo Co. Ltd. (“Kukbo” or “Defendant” and collectively with RedHill, the “Parties”) for spoliation of evidence. I. Preliminary Statement This case should have been a straightforward breach of contract action between two sophisticated parties, but has turned into a costly ordeal due to Kukbo’s bad faith efforts to avoid its obvious liability by bringing frivolous claims for fraudulent misrepresentation, fraudulent inducement, breach of contract, and anticipatory repudiation and failing to preserve evidence. RedHill, a pharmaceutical company publicly traded on Nasdaq, executed a series of agreements with Kukbo, a global logistics company. The first agreement—the Subscription Agreement signed on October 25, 2021—required that Kukbo invest $10,000,000 in RedHill in exchange for RedHill American Depository Shares and a right of first offer with respect to one of RedHill’s pharmaceutical products. The investment was divided into two $5,000,000 tranches, the second of which was contingent upon the Parties executing a license agreement within six months of the Subscription Agreement (the “Investment Amount”). On March 14, 2022, the Parties executed the Exclusive License Agreement, granting Kukbo a license to RedHill’s drug Opaganib in South Korea. The Exclusive License Agreement required Kukbo to pay RedHill a $1,500,000 Upfront Payment (the “Upfront Payment”) and triggered Kukbo’s obligation to pay the Investment Amount still due under the Subscription Agreement. On June 8, 2022, after Kukbo undisputedly failed to timely pay the Upfront Payment and the Investment Amount it owed RedHill, Kukbo signed the June 8, 2022 Acknowledgement and Undertaking of Payment under Subscription and License Agreements (the “Letter Agreement,” 1 6 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 and collectively with the Subscription Agreement and Exclusive License Agreement, the “Agreements”), reaffirming Kukbo’s commitment to pay RedHill the Upfront Payment and the Investment Amount. However, notwithstanding repeated requests from RedHill and Kukbo’s subsequent representations that payment would be forthcoming, Kukbo again failed to make the payments required under the Agreements. As a result, RedHill filed this litigation on September 2, 2022. Only after breaching the Agreements and after litigation was filed did Kukbo allege for this first time in its Answer and Counterclaims, filed on December 16, 2022, that RedHill had committed fraudulent misrepresentation and fraudulent inducement with respect to the Agreements. As discovery began, RedHill quickly realized that there was a serious problem: Kukbo’s document production – absurdly totaling only 50 documents given the sophistication of the transactions and compared to the 15,292 documents ultimately produced by RedHill – was bereft of a number of responsive communications that RedHill knew existed. Moreover, RedHill soon thereafter learned that key witnesses James Ahn and Ken Choi—identified in Kukbo’s interrogatories as most knowledgeable about the Agreements—were terminated. RedHill immediately sought to understand the obvious inadequacies in Kukbo’s production. When asked about the specifics of its search protocols, Kukbo claimed that it did not use any search terms and had reviewed the entire universe of documents concerning the RedHill matter. But a month later, Kukbo made an additional production of (a still paltry) 212 documents. Kukbo represented that these documents were excluded from the initial production due to an internal de-duplication error. However, this representation was false: these documents were not duplicates of the earlier production and as such Kukbo must have conducted additional searches. 2 7 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 The deposition of Kukbo’s corporate representative, Mr. Young Seok Kim—a Kukbo director—illustrated the severity of Kukbo’s malfeasance. First, according to the corporate representative, Kukbo allowed its employees to use personal email addresses to conduct business—an option used by the Kukbo employees negotiating the RedHill deal. Second, communications would only be saved on Kukbo’s internal servers if a Kukbo employee, for the RedHill communications, Mr. Kim, was copied on the email and voluntarily chose to save it. Kukbo’s policy, which falls woefully below recognized document retention standards, ensured that relevant documents would be destroyed. RedHill has had to expend substantial time, resources, and money as a result of the egregious document retention standards described by Kukbo’s corporate representative, and the failure to preserve documents from employees before their employment ended without any explanation in the middle of litigation. While RedHill has produced sufficient evidence in this case to defeat Kukbo’s frivolous claims, RedHill’s prosecution of its case has consistently been disadvantaged by Kukbo’s willful misconduct in not preserving relevant communications by Kukbo employees, resulting in RedHill having to expend substantial time, resources, and money to defend against manufactured accusations of fraud and to prosecute a simple breach of contract claim. II. Factual Background A. RedHill and Kukbo Negotiate the Subscription Agreement, the Exclusive License Agreement, and the Letter Agreement On October 25, 2021, Kukbo and RedHill entered into the Subscription Agreement. (ECF Doc. No. 3). Under the Subscription Agreement, (1) Kukbo agreed to purchase RedHill American Depository Shares (“ADS”) valued at $10,000,000 in two separate tranches of $5,000,000 with the second tranche conditioned on the Parties executing a license agreement by the sixth month 3 8 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 anniversary of the Subscription Agreement, and (2) RedHill agreed to grant Kukbo a Right of First Offer in the event RedHill desired to solicit a third party for a licensing agreement for “RHB-107, Opaganib or Talicia® in one or more of South Korea, Japan, Indonesia, Vietnam, Thailand and/or Malaysia.” Id. at p.14. On March 14, 2022, before the sixth month anniversary of the Subscription Agreement, RedHill and Kukbo entered into the Exclusive License Agreement pursuant to which RedHill granted Kukbo an exclusive license for Opaganib in return for the Upfront Payment. (ECF Doc. No. 4 at pp. 1, 6, 14). The execution of the Exclusive License Agreement also triggered Kukbo’s obligations to pay RedHill the Investment Amount. After nearly three months of non-payment by Kukbo of both the Upfront Payment and Investment Amount, on June 8, 2022, the Parties entered into the Letter Agreement. (ECF Doc. No. 5). The Letter Agreement reaffirmed Kukbo’s “commitment to pay the overdue upfront payment of $1,500,000 under the License Agreement (the ‘Upfront Amount’) and the overdue investment in RedHill in the amount of $5,000,000 under the Subscription Agreement.” Id. Kukbo never paid the Upfront Amount or the Investment Amount. B. RedHill Files Complaint for Breach of Contract and Breach of Duty of Good Faith and Fair Dealing. RedHill filed its Complaint on September 2, 2022, alleging that “Kukbo repeatedly defaulted on payment obligations due under the Parties’ (1) Subscription Agreement dated October 25, 2021, . . . and as amended March 14, 2022, (2) Exclusive License Agreement dated March 14, 2022 . . . and (3) June 8, 2022 letter agreement . . . .” (ECF Doc No. 2). C. Kukbo Files its Answer and Counterclaims, Alleging Kukbo Anticipated Litigation as of November 23, 2021. On December 16, 2022, Kukbo filed its Answer and Counterclaims (the “Counterclaims”), including counterclaims for rescission of the Exclusive License Agreement, rescission of the 4 9 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 Subscription Agreement, anticipatory repudiation, fraudulent inducement to enter into the Subscription Agreement, fraudulent inducement to enter into the Exclusive License Agreement, fraudulent misrepresentation, breach of the Exclusive License Agreement, breach of the Subscription Agreement, and breach of the covenant of good faith and fair dealing (ECF Doc No. 20). In the Counterclaims, Kukbo alleges that it first became aware of alleged fraudulent misrepresentations by RedHill during a November 23, 2021 conference call. See id. at ¶ 78. D. During Discovery, Kukbo Identifies James Ahn and Ken Choi as Key Witnesses but Fails to Collect or Preserve Their Documents and Communications. On March 31, 2023, RedHill served Requests for Production (the “Requests”) and Interrogatories upon Kukbo. See Ex. C to the Affirmation of Rebecca Schwarz (RedHill First Set of Requests for Production; RedHill First Set of Interrogatories). The Requests covered a broad range of topics critical to this litigation, including, but not limited to: (1) documents and communications relating to RedHill’s alleged fraud in inducing Kukbo to sign the Subscription Agreement and Exclusive License Agreement; (2) documents and communications related to RedHill’s alleged breach of the Subscription Agreement and the Exclusive License Agreement; (3) documents and communications related to Kukbo’s valuation of Opaganib; and (4) all documents concerning, referring, or relating to the claims and defenses asserted in the Counterclaims. See id. In response, on May 1, 2023, Kukbo served its initial responses and objections (the “Responses”) to the Requests and Interrogatories. See Ex. D to the Affirmation of Rebecca Schwarz (Kukbo’s Responses and Objections to RedHill First Set of Requests for Production). Kukbo’s objections were boilerplate, routinely stating that the Requests sought “material already in RedHill’s possession and to which RedHill has greater access than Kukbo or seeks documents potentially in the possession of third parties and otherwise not in Kukbo’s possession, custody, or 5 10 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 control.” Id. Moreover, Kukbo’s Responses identified Mr. James K. Ahn and/or Mr. Jung Hoon (Ken Choi) in response to Interrogatories Nos. 1-6 and 8, or, every interrogatory for which an individual’s identification was sought. See Ex. E to the Affirmation of Rebecca Schwarz (Kukbo’s Responses and Objections to RedHill First Set of Interrogatories). On May 31 2023, a month after Kukbo served its Responses to RedHill’s discovery identifying Mr. Ahn as a key witness, Mr. James Ahn’s employment was terminated. See Ex. F to the Affirmation of Rebecca Schwarz (October 6, 2023 Letter from Jipyong LLC to Haynes and Boone, LLP) (hereinafter “Ex. F”). Subsequently, Kukbo served its initial production, totaling only 50 documents. See Affirmation of Rebecca Schwarz at ¶2. Missing from Kukbo’s production were any internal substantive communications or documents between Kukbo’s personnel supporting Kukbo’s allegations. In comparison, RedHill’s initial production contained 1,159 documents. Id. at ¶4. E. After Receiving Kukbo’s Deficient Production, RedHill Immediately Sought to Work with Kukbo to Identify Why Documents Were Missing. After receiving Kukbo’s production, RedHill requested a meet and confer regarding Kukbo’s production’s deficiencies. See Ex. G to the Affirmation of Rebecca Schwarz (July 13, 2023 Letter from Haynes and Boone, LLP to Jipyong LLC). Specifically, RedHill sought to know why it was so limited. Id. In response, Kukbo agreed to “undertake a further reasonable search of resources likely to have responsive documents” to supplement its initial production. See Ex. H to the Affirmation of Rebecca Schwarz (July 31, 2023 Letter from Jipyong LLC to Haynes and Boone, LLP). On September 15, 2023, nearly two months later, Kukbo informed RedHill that Kukbo’s counsel had “completed [a] reasonable search and [does] not have any additional documents to produce in response to RedHill’s RFPs.” See Ex. I to the Affirmation of Rebecca Schwarz (September 15, 2023 Letter from Jipyong LLC to Haynes and Boone, LLP). 6 11 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 Then, in response to RedHill’s notices of deposition, Kukbo informed RedHill that Mr. James Ahn and Mr. Ken Choi were no longer employed by Kukbo and could not be produced for deposition. See Ex. J to the Affirmation of Rebecca Schwarz (September 25, 2023 Email from Somin Jun to Rebecca Schwarz, re Index No. 653200/2022 – Notice of Deposition). Immediately thereafter, RedHill’s counsel expressed concerns regarding Kukbo’s document preservation efforts and the possibility that relevant evidence had not been preserved. See Ex. K to the Affirmation of Rebecca Schwarz (September 27, 2023 Letter from Haynes and Boone, LLP to Jipyong LLC). In particular, RedHill requested “(1) the identity of the custodian for the 50 documents produced by Kukbo; (2) all search terms used by Kukbo and the associated hit counts; (3) the dates of termination for James K. Ahn and Jung Hoon (Ken) Choi, (4) what ESI, if any, Kukbo retained for James K. Ahn and Jung Hoon (Ken) Choi, (5) Kukbo’s document retention policy, and (6) any litigation holds issued by Kukbo related to this matter.” Id. F. Kukbo Engaged in Obstruction Rather Than Working to Remediate. Rather than provide the requested information, Kukbo baselessly accused RedHill of spoliation and demanded that RedHill “(1) identify the custodians from whom you have collected documents, (2) provide the search terms you used to screen out documents, (3) the date and copy of RedHill’s litigation hold notice, (4) RedHill’s document retention policy, (5) certified legal opinion that RedHill’s document retention policy is compliant with Israeli law.” See Ex. L to the Affirmation of Rebecca Schwarz (September 28, 2023 Letter from Jipyong LLC to Haynes and Boone, LLP). RedHill immediately provided Kukbo with the search terms, hit counts, and custodians used in identifying a universe of 28,565 documents. See Ex. M to the Affirmation of Rebecca Schwarz (September 29, 2023 Letter from Haynes and Boone, LLP to Jipyong LLC). RedHill ultimately produced 15,292 documents. Affirmation of Rebecca Schwarz at ¶4. 7 12 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 In response, Kukbo provided only the following information: “(1) The custodians of documents reviewed and produced were Mr. James K. Ahn. Mr. Jung Hoon (Ken) Choi, Mr. Young Seok Kim, and Mr. Keun Hyo Choi. (2) We reviewed the entirety of these custodians’ documents for relevance and responsiveness to RedHill’s RFP, the total count of which exceeded 600. (3) The date of employment termination for Mr. James Ahn and Mr. Jung Hoon [Ken] Choi is May 31, 2023 and March 18, 2022, respectively. (4) The entirety of Kukbo’s business record including any ESI of its employees is stored in a cloud server and retained for a minimum of 3 years. (5) Kukbo has maintained all ESI relating to its business with RedHill, irrespective of a litigation hold notice issues upon retention of legal counsel for this matter.” Ex. F to the Affirmation of Rebecca Schwarz. The Parties subsequently met and conferred on October 9, 2023, but Kukbo did not provide any further information regarding how the universe of approximately 600 documents was identified. On October 19, 2023, Kukbo made a supplemental production of 212 documents. Kukbo’s counsel represented that these documents were excluded from Kukbo’s initial production due to a “communication error concerning de-duplication.” See Ex. N (October 19, 2023 Email from Jipyong LLC to Haynes and Boone, LLP). Kukbo’s counsel insisted that “[t]hese emails constitute parts of various email chains already produced by Kukbo and do not contain any contents that were not already disclosed.” Id. However, the newly produced documents were not duplicative, and included documents that could only have been discovered following a subsequent search. See, e.g., Ex. O to the Affirmation of Rebecca Schwarz, KBC00000927 (Written Summary from James Ahn of June call in which Kukbo agreed to the principles of the Letter Agreement); Ex. P to the Affirmation of 8 13 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 Rebecca Schwarz, KBC00001153 (James Ahn response to Adi dated 10/04/23, after Kukbo claimed that no additional searches took place); Ex. Q to the Affirmation of Rebecca Schwarz, KBC00001888 (Internal conversation with LSK Global, which Kukbo did not previously disclose); see also Ex. B to the Affirmation of Rebecca Schwarz. G. Kukbo’s Corporate Representative Explains Only Communications He was Copied on Were Preserved. Kukbo’s corporate representative, testified that “there is no obligation within the company that we have to use Kukbo e-mail” and “for personal e-mail accounts, the e-mails are not saved automatically.” Ex. R to the Affirmation of Rebecca Schwarz (Kim Dep. Tr. 38:17-25; 40:3-9) (hereinafter “Ex. R”). The corporate representative further acknowledged that all emails where he was not copied would not be saved under this ad hoc system. (See id. at 38:17-41:4) (“It’s not likely.”) The two employees most involved in Kukbo’s negotiation of the Subscription Agreement and the Exclusive License Agreement, Mr. James Ahn and Mr. Ken Choi, both routinely used their personal email addresses without copying Young Seok Kim. 1 See, e.g., Ex. D to the Affirmation of Rebecca Schwarz (Kukbo Objections and Responses to RedHill First Set of Interrogatories); Ex. R (Kim Dep. Tr. at 39:10-23.) Mr. Ken Choi was responsible for Kukbo’s communications with RedHill and other outside parties regarding the RedHill matter – specifically, the negotiation of the Subscription Agreement and the Exclusive License Agreement – and acted as the translator for Kukbo on calls with RedHill. Ex. R (Kim Dep. Tr. 24:21-24; 28:25-29:12.) Mr. James Ahn, was hired as an expert in the pharmaceutical space to aid Kukbo and was responsible for “[overseeing] all the tasks and works 1 Mr. James Ahn’s personal email address was Jameskwahn@gmail.com and Mr. Ken Choi’s was ourpro@naver.com. Ex. R (Kim Dep Tr. 30:10-18). 9 14 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 [sic] related to Redhill.” (ECF Doc No. 20, Kukbo Answer and Counterclaims at ¶76); Ex. R (Kim Dep. Tr. 25:16-26:7; 46:14-23). RedHill has identified a number of communications between the Parties that were not saved and produced as a result of Kukbo’s deficient policy. See Ex. A to the Affirmation of Rebecca Schwarz. However, RedHill does not and cannot know the extent to which any internal discussions occurred at Kukbo because of Kukbo’s failure to preserve evidence. III. Argument A. Corporations Must Preserve Electronic Communications Few developments have been as instrumental to modern litigation as proper electronic document retention protocols. “Computers and digital information are ubiquitous and pervade all aspects of business, financial and personal communication activities” and these documents have “the same value as a paper document kept in a file cabinet.” Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283, 291-92 (2007). As electronic recordkeeping has evolved, basic standards and expectations of document retention have followed in lock step. “It is impossible for an organization to achieve acceptable legal compliance without an appropriate and functioning records retention program.” R. Thomas Howell, Jr. & Rae N. Cogar, Records Retention – An Essential Part of Corporate Compliance, in Records Retention and Destruction Current Best Practices (2003). When litigation is reasonably foreseeable, companies must ensure that their electronic documents are preserved. See, e.g., Convolve, Inc. v. Compaq Computer Corp., 223 F.R.D. 162, 176 (S.D.N.Y. 2004); Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212, 218 (S.D.N.Y. 2003). B. Kukbo’s Inadequate Document Preservation Protocol and Failure to Conduct Searches of Employees’ Emails Both After Litigation Commenced and While Reasonably Anticipating Litigation Constitutes Unlawful Spoliation. 10 15 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 Spoliation occurs “when a party negligently loses or intentionally destroys key evidence.” Ingoglia v. Barnes & Noble Coll. Booksellers, 48 A.D.3d 636, 637 (2d Dep't 2008). New York courts impose sanctions—including striking an answer and entering judgment in favor of the moving party—“[w]hen a party alters, loses, or destroys key evidence.” Horace Mann Ins. Co. v. E.T. Appliances, Inc., 290 A.D.2d 418, 419 (2d Dep’t 2002); see also Pension Committee v. Banc of America Securities, LLC, No. 05 Civ. 9016, 2010 WL 184312, at *1 (S.D.N.Y. Jan. 15, 2010) (When litigants fail to “take the necessary steps to ensure that relevant records are preserved when litigation is reasonably anticipated,” “the integrity of the judicial process is harmed and the courts are required to fashion a remedy.”). To prove spoliation, “the party seeking sanctions must establish that (1) the party with control over the evidence had an obligation to preserve it at the time it was destroyed; (2) the records were destroyed with a ‘culpable state of mind,’ and (3) the destroyed evidence was ‘relevant’ to the moving party's claim or defense. A ‘culpable state of mind,’ for purposes of a spoliation inference, includes ordinary negligence.” Ahroner v. Israel Disc. Bank of New York, 79 A.D.3d 481, 482 (1st Dep’t 2010). There can be no dispute that Kukbo destroyed key evidence. Kukbo employed a document preservation protocol that allowed countless documents to be lost. Kukbo failed to issue a litigation hold or take any affirmative steps to preserve documents for Messrs. Ahn and Choi, the individuals Kukbo identified as most knowledgeable about the RedHill deal, during the reasonable anticipation of litigation and after litigation commenced. Finally, Kukbo failed to take any steps to preserve relevant documents and communications on Messrs. Ahn and Choi’s email accounts and hard drives prior to the termination of their employment, leading to the effective destruction of these documents and communications. 11 16 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 1. Kukbo Had an Unambiguous Obligation to Preserve Document as Soon as Litigation was Reasonably Anticipated. “The duty to preserve [documents] attache[s] at the time that litigation [i]s reasonably anticipated.” Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 216 (S.D.N.Y. 2003). “Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents.” Id. at 218. Reasonable anticipation can predate the date that a complaint is filed. See Fada Indus., Inc. v. Falchi Bldg. Co., 730 N.Y.S.2d 827, 842 (Sup. Ct. 2001) (“[W]here a party is on notice that litigation is likely to be commenced, the obligation to preserve evidence may even arise prior to the filing of a complaint.”); see also Kronisch v. United States, 150 F.3d 112, 126-27 (2d Cir. 1998) (noting that a party must preserve documents when it “should have known that the evidence may be relevant to future litigation” even when “no litigation ... had commenced”). The Counterclaims allege that Kukbo interpreted the lack of prior notice of the November public offering as a material misrepresentation and fraudulent inducement. (ECF No. 20, Kukbo Answer and Counterclaims at ¶121) (“RedHill concealed its financial condition and an immediate IPO plan from Kukbo in order to induce Kukbo to enter into the Subscription Agreement.”) Thus, per the Counterclaims, Kukbo should have anticipated litigation as of November 23, 2021, the date that Kukbo was alerted of the November public offering and should have begun preserving documents. Id. at ¶78; see also Malouf v. Equinox Holdings, Inc., 113 A.D.3d 422, 978 N.Y.S.2d 160, 161 (1st Dep’t 2014) (concluding that litigation could be reasonably anticipated prior to the commencement of litigation where the plaintiff reported the accident and the defendant’s litigation department prepared a claims defense form); New York City Hous. Auth. v. Pro Quest Sec., Inc., 108 A.D.3d 471, 473, 970 N.Y.S.2d 21, 24 (1st Dep’t 2013) (finding that the plaintiff reasonably anticipated litigation one year prior to litigation commencing because the plaintiff began reviewing 12 17 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 footage of the fire that caused the action to identify information relevant to the cause of the action); Strong v. City of New York, 112 A.D.3d 15, 22, 973 N.Y.S.2d 152, 157 (1st Dep’t 2013) (holding that a party can reasonably anticipate litigation when they have notice prior to the filing of an action). Kukbo failed to do so. Kukbo’s counsel and its corporate representative admitted that Kukbo anticipated litigation as of June 8, 2022. At oral argument for RedHill’s Motion to Dismiss, Kukbo’s counsel represented that Kukbo entered into the Letter Agreement on June 8, 2022 in order to avoid litigation. See (ECF No. 89, Transcript from the Court’s Conference held on May 8, 2023 at p.14:20) (“[The Letter Agreement] was forced upon Kukbo to sign because Kukbo was being forced – was threatened with a litigation.”). According to Ms. Kim, as of June 8, 2022, Kukbo was actively avoiding litigation, yet failed to issue a litigation hold or amend its document preservation policy. Finally, as of July 18, 2022—when RedHill explicitly informed Kukbo it would file suit if payment was not made—Kukbo maintained its deficient document retention policy. Despite overwhelming evidence “that litigation [was] likely to be commenced,” Kukbo did not issue a litigation hold or take any steps to preserve documents to ensure that evidence would be preserved. See Falchi Bldg. Co., 730 N.Y.S.2d at 842. 2. Kukbo’s Unambiguous Obligation to Preserve Documents Continued After Litigation Commenced. Even if the court finds that Kukbo did not reasonably anticipate litigation prior to Redhill’s complaint, Kukbo continued to ignore its obligations to preserve documents after litigation commenced. See VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 939 N.Y.S.2d 321, 328 (1st Dep’t 2012) (holding that a failure to preserve documents after a lawsuit is filed was grounds for spoliation). RedHill’s complaint was filed on September 2, 2022. James Ahn was terminated nine months later and a whole month after responding to interrogatories identifying him as an 13 18 of 137 FILED: NEW YORK COUNTY CLERK 04/30/2024 12:32 PM INDEX NO. 653200/2022 NYSCEF DOC. NO. 206 RECEIVED NYSCEF: 04/30/2024 individual with relevant information for every category requested by RedHill. See supra §II.D. Kukbo did so without first collecting documents and communications from Mr. Ahn’s personal email account, despite Kukbo’s policy permitting Kukbo employees to use personal email and Kukbo’s awareness that Mr. Ahn used his personal email. Id. at II.D-G. C. Kukbo’s Document Retention Policy was Negligent and Clearly Violated New York Standards. New York state courts have adopted the Zubulake “litigation hold” standard for electronic information. See e.g., Voom HD Holdings, 939 N.Y.S.2d at 324 (“The Zubulake standard is harmonious with New York precedent in the traditional discovery context, and provides litigants with sufficient certainty as to the nature of their obligations in the electronic discovery context and when those obligations are triggered.”). This standard requires a “litigation hold” which “must direct appropriate employees to preserve all relevant records, electronic or otherwise, and create a mechanism for collecting the preserved records so they might be searched by someone other than the employee.” Id. at 328. Kukbo alleges it implemented a litigation hold when legal counsel was hired, but either failed to direct it to appropriate employees or take any steps to collect the preserved records so they might be searched by someone other than the employee. In fact, Kukbo did exactly what Voom warned against: permitting its employees to exercise their sole discretion to determine which documents and emails should be preserved. See Ex. R (Kim Dep. Tr. 40:14-41:14); Ex. F (“(1) The custodians of documents reviewed and produced