YCB INTERNATIONAL, INC., Plaintiff, v. UCF TRADING CO., LTD., Defendant No. 09–CV–7221 United States District Court, N.D. Illinois, Eastern Division June 12, 2012 Counsel Gregory John Bueche, Law Offices of Gregory J. Bueche, Warrenville, IL, for Plaintiff. Arthur J. Howe, Anand C. Mathew, Schopf & Weiss, LLP, Chicago, IL, for Defendant. Mason, Michael T., United States Magistrate Judge REPORT AND RECOMMENDATION *1 To: The Honorable James F. Holderman United States District Judge In this case, YCB International, Inc. (“YCB”) has sued UCF Trading Co. (“UCF”), alleging that UCF failed to pay for bearings that YCB had delivered to it. In its answer, UCF has asserted, among other things, that YCB supplied counterfeit bearings. UCF also filed a counterclaim against YCB and a third-party claim against Yantai CMC Bearing Co., Ltd. (“CMC”), in which UCF alleges that CMC is an alter-ego of YCB and that CMC is also liable for the sale of counterfeit bearings. Currently pending before this Court is UCF's “Renewed Motion for Discovery Sanctions” [185—emphasis in original]. In that motion, UCF argues that CMC and YCB have repeatedly failed to comply with court orders regarding discovery, failed to implement any procedure to preserve documents relating to this litigation, and destroyed clearly relevant documents relating to the inspection and testing of bearings supplied by a third party, Taizhou Ruili (“Ruili”), that CMC and YCB purchased and then supplied to UCF. UCF seeks dispositive relief, specifically, that the Court dismiss CMC's and YCB's affirmative claims with prejudice. Alternatively, UCF asks that the Court bar CMC and YCB from presenting certain testimony or evidence regarding CMC's inspection and testing of the Ruili bearings, enter an adverse inference instruction against CMC and YCB for documents that have been destroyed or not produced, and award UCF its attorneys' fees incurred in connection with this motion, its two prior motions to compel, and its prior motion for sanctions. The District Court has referred the matter to this Court for discovery supervision [126], as well as for resolution of the pending motion [222]. We have reviewed the numerous briefs and exhibits submitted by the parties and considered the arguments set forth therein. For the reasons set forth below, we respectfully recommend that the District Court grant UCF's motion in part and deny it in part, and order that YCB produce certain material to UCF within fourteen days of the date of this ruling. I. FACTUAL BACKGROUND A. The Parties' Relationship YCB/CMC's relationship as a supplier of bearings to UCF dates back to as early as 1992.[1] YCB/CMC supplied UCF with bearings through most of 2008. In late 2008, UCF stopped paying for bearing shipments it received from YCB/CMC. As a result, shortly thereafter, YCB/CMC stopped supplying UCF with bearings. (Am. Resp. [204] at Ex. B—Liu Dep. at 250–52.) On December 19, 2008, YCB's president Mark Liu emailed CMC's president Jumbin Tao a letter to be sent to UCF to urge payment, and to “serve as legal evidences which we should keep as a record together with their responses for the preparation of future lawsuit [sic].” (UCF's Reply [206] at Ex. Q.) The record before this Court does not indicate whether CMC ever sent that letter. On April 26 and 27, 2009, YCB's Liu and CMC's Tao met with UCF's president Robert Gagnon in New Jersey. According to Gagnon, his first question to Tao and Liu during that meeting was whether YCB/CMC had sold UCF bearings made by anyone other than CMC: “the first question was ‘Did you make the bearing, yes or no?’[sic].” (UCF's Reply at Ex. B—Gagnon Dep. at 123). Gagnon further testified: “At that particular time we knew and we were almost positive that what we were getting is not what we were ordering. And they still made the statement that they made the bearings themselves. And then that was it, that means they were just lying to me. So I decided this was never going to be ending and that was the end.” (Id.) *2 Following those meetings, Gagnon sent Liu a letter dated April 27, 2009, listing $1,181,352.08 in outstanding invoices, and stating that, beginning July 15, 2009, “we [UCF] will make monthly payments in the amount of $100,000.00, and continue until the total invoices outstanding are paid In the event our business recovers sooner than anticipated, we will increase the amount of our monthly payment [sic .]” (Am. Compl. [70] at Ex. A—4/27/09 Letter.) B. Litigation History UCF failed to make any of the outstanding payments, and on October 5, 2009, YCB filed a complaint against UCF in DuPage County, Illinois, alleging breach of contract claims under the UCC and common law. According to CMC's Rule 30(b)(6) witness, CMC instructed YCB to file suit against UCF. (Reply at Ex. R—Jumbin Tao Rule 30(b)(6) Dep. at 7–9.) UCF removed the case to federal court [1], and in December 2009, UCF filed a motion to dismiss for lack of personal jurisdiction [11]. In its supporting memorandum [12 at 2–3], UCF stated, among other things: [UCF] had specified that the bearings were to be manufactured by [CMC] and were to meet certain specified standards. [CMC] and [YCB] had represented to [UCF] that the bearings were manufactured by [CMC] and met the specified standards. In fact, [UCF] discovered in or around June 2009, that it had received counterfeit bearings that were not manufactured by [CMC] and that did not meet the specified standards. In August 2010, after the District Court denied its motion to dismiss, UCF filed an answer, counterclaim, and third-party complaint. That pleading alleged, among other things, that YCB/CMC had supplied UCF with “counterfeit bearings” that were manufactured not by CMC but by a different supplier, Ruili, who had not been approved by UCF [33 at 15]. UCF maintains that CMC and Ruili used different manufacturing processes and Ruili's bearings were inferior to CMC's, and asserts claims of breach of contract, breach of express and implied warranties, unjust enrichment, consumer fraud and deceptive business practices, and civil conspiracy. YCB/CMC have responded variously that CMC and Ruili performed similar testing on the bearings, that Ruili's bearings were “qualified,” that a CMC engineer concluded in 2008 that CMC's and Ruili's production processes were “basically the same,” that UCF resold all the bearings at issue before the end of 2008, and that none of UCF's customers has ever complained about those bearings' quality. In January 2011, UCF served interrogatories and requests for production of documents to YCB and CIVIC. In their February 2011 responses, YCB and CIVIC refused to produce, among other things, documents relating to the bearings they supplied to UCF. In March 2011, UCF moved to compel CIVIC and YCB to produce that, among other, written discovery [94]. Thereafter, the District Court (the late Honorable William J. Hibbler then presiding) repeatedly heard and refereed the parties' discovery disputes, and ordered various categories of information, including that related to bearings YCB/CIVIC supplied to UCF, to be produced. (3/29/11 Hr'g Tr. at 4–5, 7–8[152]; 4/21/11 Hr'g Tr. at 25, 29[153]; 4/21/11 Order [109].) *3 YCB and CIVIC eventually identified Ruili as one of five entities involved in the manufacture of bearings they sold to UCF, but also stated “[i]t is impossible to know if the above listed persons [including Ruili] had any part in the bearings actually delivered to UCF Trading.” (Reply at Ex. C[206].) UCF then sought information and documents related to Ruili. The District Court repeatedly ordered YCB and CIVIC to produce such information. (5/25/11 Hr'g Tr. at 11[154]; 6/14/11 Hr'g Tr. at 15, 19[155].) When YCB/CIVIC failed to do so, claiming, among other things, that they had no “personal knowledge” of how Ruili made its bearings (6/14/11 Hr'g Tr. at 9), UCF filed another motion to compel [128], which was referred to this Court for resolution. In our ruling on that motion, we noted that the District Court had previously ordered YCB and CIVIC to produce information regarding the production of the bearings supplied by Ruili. (8/4/11 Order at 1[148].) We also rejected YCB/CIVIC's re-hashing of arguments previously rejected by the District Court, including their efforts to “pars[e] words by suggesting they cannot understand what ‘source’ or ‘manufacture’ means.” (Id.) Finding such arguments “ridiculous,” we ordered YCB and CIVIC to produce, among other things, “[a]ll documents relating to any manufacturers used by [CMC/YCB] to supply bearings to UCF,” noting that “UCF is entitled to discover information relating to the production or manufacture of the bearings it purchased.” (Id.) We also ordered them to “produce communications between CMC/YCB and Ruili to the extent that the communications relate in any way to the bearings supplied to UCF.” (Id.) On August 29, 2011, UCF filed a motion for discovery sanctions based on YCB and CMC's failure to produce documents relating to the bearings they supplied to UCF [160]. After seeking and obtaining the parties' agreement resolving the disputed issues raised in that and another motion, we denied UCF's motion as moot and explicitly ordered YCB/CMC to produce “all documents in their possession, custody, or control related to the source and manufacture of bearings that YCB/CMC supplied to UCF from 2004 through 2008, whether originally manufactured by YCB/CMC or [Ruili]. Those documents shall include, without limitation, documents reflecting the manufacturing process (including testing, inspection, and quality control) used for those bearings.” (8/31/11 Order at 1[163].) Our order “again strongly advised to refrain from engaging in any further semantic games or other unreasonable behavior regarding the scope of their discovery obligations, including the orders of this or the District Court.” (Id. at 2 .) We also directed each attorney, as well as an appropriate corporate representative of each party, to file a declaration stating that he or she had read our order as well as the Standards for Professional Conduct within the Seventh Federal Judicial Circuit. (Id.) Mark Liu and Catherine Cai signed such declarations on behalf of YCB and CMC, respectively [168, 169, 174], and Gregory Bueche signed such a declaration as counsel for those companies [167]. *4 YCB/CIVIC did not produce all the material required. Following a status hearing on September 28, 2011, we noted our extreme disappointment with YCB/CIVIC's behavior, including their counsel's continued engagement in “semantic games regarding the scope of their discovery obligations.” (9/28/11 Order at 1.) We again explicitly ordered YCB/CIVIC to promptly complete their production of “all documents related to the source and manufacture of bearings that they supplied to UCF from 2004 through 2008, whether originally manufactured by them or [Ruili].” (Id.)[2] Thereafter, UCF filed the pending Renewed Motion for Discovery Sanctions. C. YCB's and CMC's Efforts to Collect Responsive Documents and Preserve Relevant Information. CIVIC's marketing manager, Catherine Cai, testified during her first deposition that she was responsible for searching and collecting documents and electronically stored information (“ESI”) to produce on behalf of CIVIC in this lawsuit. (Renewed Mot. at Ex. C–Cai 11/12/11 Dep. at 54.) She stated that CIVIC had not searched the emails of anyone at CIVIC outside the marketing department, including the emails of its purchasing or inspection departments. (Id. at 71, 73–76.) She also testified that no one ever told her that CIVIC had to preserve documents relating to this litigation, and that she never instructed her colleagues at CIVIC to preserve documents relating to this lawsuit. (Id. at 122–23.) As to the latter point, she further testified: “[T]his case is very clear. In China, as principle—as the bottom line principle is if you owe somebody money, you have to pay the money owed.” (Id. at 123.) Ms. Cai stated that prior to and in 2008, CMC did not communicate with Ruili via email, but only by facsimile, telephone, or sending people to Ruili's factory. (Am. Reply at Ex. G—Cai [date not provided] Dep. at 130–31.) She also testified that bearings CMC purchased from Ruili and resold to UCF were “CMC's product” because CMC cleaned and inspected them before sending them to UCF. (Cai 11/12/11 Dep. at 53–54.) She stated that CMC created an “internal inspection report” substantiating that inspection and cleaning. (Id. at 118.) However, she testified that CMC had not produced those reports in this litigation because UCF had never requested them.[3] (Id.) She also testified that she was unable presently to produce those reports because they had a “preservation” or “validity” term, meaning that, after a certain period of time, CMC disposed of such documents. (Id. at 120–122 .) She stated that she did not know the precise “validity term” for CMC's internal inspection reports, but that CMC's quality department would know that. Interestingly, when deposed again in late December 2011 (after UCF filed the pending sanctions motion), Cai testified that she had instructed CMC employees—orally—to preserve documents related to this lawsuit. (Reply at Ex. M—Cai 12/26/11 Dep. at 43–59.) However, she could not recall when she communicated those instructions. (Id.)[4] She also stated that, as of January 18, 2010, CIVIC had destroyed all of its internal inspection reports relating to the Ruili bearings created during or before 2008. (Id . at 59–60.) *5 The manager of CIVIC's quality inspection department, Jun Bo, testified at his deposition that CIVIC sent employees to Ruili to supervise Ruili's manufacture of bearings; that Ruili inspected the bearings it sold to CIVIC prior to sending them to CIVIC; that for each shipment Ruili provided CIVIC an internal or quality inspection report; and that upon receiving a shipment from Ruili, CIVIC would conduct its own inspection of the bearings. (Am. Resp. at Ex. F—Jun Bo Dep. at 35–36, 44–45, 49–50, 87–88.) He also testified that his department maintained the inspection reports; that he had searched for them but could not find any that predated 2010; and that those predating 2010 had been destroyed. (Id. at 39–40.) He agreed with UCF's counsel that CIVIC's “quality recording requirements” state that “the keeping period for the material inspection and testing category is 15 years,” but clarified that “[t]his is our company's requirement on the suppliers,” and that CIVIC's “document regulation” required CIVIC itself to preserve documents for “the same year plus one calendar year.” (Id. at 40–42.)[5] Jun Bo also testified that he was never asked to preserve documents for this lawsuit. (Jun Bo Dep. at 30.) Other CIVIC employees also testified that no one ever told them to search for or preserve documents related to this litigation. (E.g., Am. Resp. at Ex. J–Jian Guo Zhi Dep. at 112–13; id. at Ex. L–Pan Faxin Dep. at 25–26.) Jun Bo further testified that he does not have an email address (at CMC or otherwise), and that he received and passed along requests to visit Ruili's factory orally (by telephone or in person), but not in writing. (Jun Bo Dep. at 47–48.) At least one other CMC employee similarly testified that he does not have an email address (at CMC or otherwise), and that he cannot access the internet at his work computer. (Am. Resp. at Ex. J—Jian Guo Zhi Dep. at 110–11.) YCB's president, Mark Liu, testified during his deposition that he never told YCB employees that they were not to delete any documents related to UCF. (Renewed Mot. at Ex. D—Liu Dep. at 70.) Liu also stated that, because of the capacity limitations of his email system, he would delete emails that were two or three years old, and that in April 2010, when he set up a new email account, his emails prior to that date were “lost.” (Id. at 231–34.) YCB maintains that it “recovered emails from its computer with help of an expert technician, dating back to 2005[sic],” and produced them to UCF on October 24, 2011. (Am. Resp. at 6.) Additionally, during Liu's deposition, he referred to a black binder as containing “records regarding this lawsuit.” (Liu Dep. at 65.) When UCF's counsel Anand Mathew asked to see the binder, YCB/CMC's counsel Gregory Bueche objected to Mr. Mathew reviewing it before Mr. Bueche, and began removing documents from the binder which Mr. Bueche stated are privileged. (Id. at 65–68.) Mr. Mathew then apparently did not respond to Mr. Bueche's offer to provide the non-privileged documents to him at the deposition. However, UCF has since served a formal discovery request on YCB to produce the binder, but YCB has refused to produce it. (Reply at Ex. V.) II. LEGAL STANDARDS A. Duty to Preserve Evidence *6 Federal Rule of Civil Procedure 26 provides that “[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense, and that “[r]elevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” Fed.R.Civ.P. 26(b)(1). “This broad duty of disclosure extends to all documents that fit the definition of relevance for the purposes of discovery—whether the documents are good, bad, or indifferent.” Danis v. USN Commc'ns, Inc., No. 98 C 7482, 2000 WL 1694325, at *1 (N.D.Ill. Oct.20, 2000). A party's duty to preserve extends to evidence over which it had control and “reasonably knew or could reasonably foresee was material to a potential legal action.” China Ocean Shipping (Group) Co. v. Simone Metals Inc., No. 97–2694, 1999 WL 966443, at *3 (N.D.Ill. Sept.30, 1999) (collecting cases). Put another way, a party must preserve evidence that is properly discoverable under Rule 26. Wiginton v. Ellis, No. 02–6832, 2003 WL 22439865, at *4 (N.D.Ill. Oct.27, 2003). Discoverable evidence includes electronic data such as email. Id.; Byers v. Illinois State Police, No. 99–8105, 2002 WL 1264004, at *10 (N.D.Ill. June 3, 2002). “A party fulfills its duty to preserve evidence if it acts reasonably.” Jones v. Bremen High Sch. Dist., No. 09–3548, 2010 WL 2106640, at *6 (N.D.Ill. May 25, 2010); accord Marrocco v. General Motors Corp., 966 F.2d 220, 224 (7th Cir.1992) (fault for discovery violation rests on the reasonableness of the party's actions). A party does not have to go to “extraordinary measures” to preserve all potential evidence. Wiginton, 2003 WL 22439865, at *4 (quoting China Ocean Shipping (Group) Co., 1999 WL 966443, at *3). Nor need it preserve “every single scrap of paper in its business.” Wiginton, 2003 WL 22439865, at *4 (citing Danis, 2000 WL 1694325, at *32). However, a party must preserve evidence that it has notice is reasonably likely to be the subject of a discovery request, even before a request is actually received. Wiginton, 2003 WL 22439865, at *4; Cohn v. Taco Bell Corp., No. 92–5852, 1995 WL 519968, at *5 (N.D.Ill. Aug.30, 1995); Wm. T. Thompson, Co. v. Gen. Nutrition Corp., 593 F.Supp. 1443, 1455 (D.C.Cal.1984). A party may receive notice before a complaint is filed if that party knows that litigation is likely to begin. Wiginton, 2003 WL 22439865, at *4; Cohn, 1995 WL 519968, at *5. B. Sanctions for Spoliation Courts have the inherent power to impose sanctions for abuse of the judicial system, including the failure to preserve or produce documents and other evidence. Chambers v. NASCO, Inc., 501 U.S. 32, 49, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991); Barnhill v. U.S., 11 F.3d 1360, 1368 (7th Cir.1993). Courts also have the statutory authority, under Rule 37, to sanction a party for the failure to preserve and/or produce documents where a court order or discovery ruling has been violated. China Ocean Shipping (Group) Co., 1999 WL 966443, at *2. The analysis for imposing sanctions under Rule 37 or our inherent power is “essentially the same.” Danis, 2000 WL 1694325, at *30 (quoting Cobell v. Babbit, 37 F.Supp.2d 6, 18 (D.D.C.1999)). *7 Courts have broad discretion to choose an appropriate sanction for discovery misconduct based on the unique facts of every case. Danis, 2000 WL 1694325, at *31 (citing National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 642, 96 S.Ct. 2778, 49 L.Ed.2d 747 (1976)). An award of sanctions should be proportionate to the offending conduct, and the harsh sanction of default reserved for extreme circumstances. Collins v. Illinois, 554 F.3d 693, 696 (7th Cir.2009); Barnhill, 11 F.3d at 1367. Ultimately, the Court's discretion is informed by three principle factors: (1) a breach of the duty to preserve or produce documents; (2) the level of culpability for the breach; and (3) the prejudice that results from the breach. Danis, 2000 WL 1694325, at *31. Regarding the level of culpability, sanctions may be appropriate “where the noncomplying party acted either with wilfulness, bad faith or fault.” Marrocco, 966 F.2d at 224 (emphasis in original). Notably, Rule 37(e), entitled “Failure to Provide Electronically Stored Information,” addresses an aspect of culpability and good faith in the context of ESI. It provides that, “[a]bsent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.” However, that subdivision's notes clarify that “[g]ood faith in the routine operation of an information system may involve a party's intervention to modify or suspend certain features of that routine operation to prevent the loss of information, if that information is subject to a preservation obligation.” Fed.R.Civ.P. 37, Advisory Committee's Notes to 2006 Amendments. III. ANALYSIS A. YCB and CIVIC Breached Their Duty to Preserve, and Discoverable Information has been Destroyed. We conclude that YCB's and CMC's duty to preserve documents and other information arose once they began contemplating a lawsuit against UCF. Based on the evidence before us, that duty attached no later than December 19, 2008, the date on which YCB's president emailed CMC's president a draft demand letter addressed to UCF and noted such a letter could serve as evidence in any future litigation with UCF. As for the scope of documents and other information YCB and CMC were required to preserve, in their briefs, they argue they were not on notice of the relevance or discoverability of CMC's internal inspection reports until UCF first disclosed “its theory of why it need not pay” for the bearings, and when they first learned that UCF's claims against them involved “life testing.” (See, e.g., Am. Resp. at 5; Surreply at 11–12.) That argument lacks merit. “ ‘[A] party cannot destroy documents based solely on its own version of the proper scope’ of its document retention responsibilities.” Larson v. Bank One Corp., No. 00–2100, 2005 WL 4652509, at *11 (N.D.Ill. Aug.18, 2005) (citation omitted). “The duty to preserve evidence includes any relevant evidence over which the non-preserving entity had control and reasonably knew or could reasonably foresee was material to a potential legal action.” China Ocean Shipping (Group) Co., 1999 WL 966443, at *3 (emphasis added). *8 Thus, whether or not UCF's December 2009 motion to dismiss for lack of personal jurisdiction or its August 2010 pleadings alleged that YCB/CMC failed to meet “specified standards,” and whether or not those “specified standards” included “life testing,” are utterly irrelevant to YCB's and CMC's preservation obligations. The operative fact is that, at the moment they contemplated filing suit against UCF for its failure to pay for bearings, YCB and CMC were both independently obligated to preserve all documents and other information related to those bearings or to UCF. See, e.g., Richard Green (Fine Paintings) v. McClendon, 262 F.R.D. 284, 289 (S.D.N.Y.2009) (in plaintiff art dealer's suit against collector for breach of contract to purchase painting, collector's “obligation to preserve all documents stored on her computer's hard drive concerning the Work or the plaintiff” arose no later than the date plaintiff filed suit, because at that point, “defendant should have known that such information would be relevant or could lead to the discovery of admissible evidence.”) (emphasis added); See, e.g., Bruno v. Bozzuto's, Inc., –––F.Supp.2d ––––, 2012 WL 382984, at *4 (M.D.Pa. Feb.6, 2012) (plaintiffs violated their duty to preserve in breach of contract action where they destroyed all paper copies of invoices, balance sheets, income statements, and trial balances over a year after contemplating litigation). Notably, YCB/CMC fail to cite any authority supporting their arguments as to when their duty to preserve CMC's inspection reports arose.[6] We also find that YCB and CMC failed to take appropriate steps to preserve documents and other information. “The duty to preserve documents in the face of pending litigation is not a passive obligation. Rather, it must be discharged actively.” Danis, 2000 WL 1694325, at *32. That obligation “requires that the agency or corporate officers having notice of discovery obligations communicate those obligations to employees in possession of discoverable materials.” National Ass'n of Radiation Survivors v. Turnage, 115 F.R.D. 543, 557–58 (N.D.Cal.1987). Here, YCB's president Liu admitted he never instructed anyone to preserve documents related to this litigation, and CMC's deponents all (initially) testified that no one ever told them to preserve documents relating to this litigation. While CMC's marketing manager Cai later recanted her initial testimony and stated that she did instruct CMC employees to preserve documents, she stated she gave those instructions orally and could not recall when she did so. Under the circumstances (including the contrary testimony of other CMC employees), we do not find Cai's later testimony to be particularly persuasive. Indeed, once a party reasonably anticipates litigation, it is obligated to suspend its routine document retention/destruction policy and implement a “litigation hold” to ensure the preservation of relevant documents. E.g., Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y.2003). Although sought by UCF (Reply at Ex. O), neither YCB nor CMC has produced any written litigation hold implemented by either. Nor has either provided this Court with any credible evidence that either suspended its routine retention/destruction policies or otherwise implemented any litigation hold (oral or otherwise) at any point during this litigation, much less before CMC destroyed its internal inspection reports in January 2010. *9 Further, we conclude that CMC's failure to suspend its document destruction policy beginning in December 2008 resulted in the destruction of relevant evidence as late as January 2010, specifically, CMC's internal inspection reports. CMC's Cai and Jun Bo both testified that such reports were normally kept for the year in which they were created, as well as one additional calendar year thereafter. As a result, when CMC began contemplating litigation in December 2008, its internal inspection reports dating back to bearings tested in 2007 would still have been in existence. Those reports would have contained information relevant to, among other things, UCF's allegations regarding the quality of CMC's and Ruili's bearings. We cannot conclude, however, that YCB's and CMC's failure to comply with their preservation duties resulted in the destruction of discoverable ESI such as email. With respect to CMC's ESI, evidence submitted to this Court does not definitively establish that CMC employees outside its marketing department used email to communicate—internally or with Ruili—during the 2004–2008 time period.[7] While some of CMC's employees apparently have email, it is unclear whether they used email during the relevant time period. (E.g., Cai 11/12/11 Dep. at 70–75.) And while Ruili's purchasing agent may have used a gmail account in 2010 (see Reply at Ex. S; Resp. to Surreply at Ex. B [224–2] ), that fact has no bearing on whether CMC's or Ruili's employees used email between 2004 and 2008.[8] As for YCB's ESI, UCF complains that all but five of the emails produced by YCB date from 2005, which is evidently before the time when YCB/CMC apparently now claim they purchased bearings from Ruili. (See Reply at 13; Reply at Ex. U.) However, UCF has not established that YCB should have produced other emails with discoverable information but instead destroyed them, irretrievably or otherwise. Notably, we explicitly reject YCB/CMC's argument that the routine, good faith exception of Rule 37(e) protects any “unintentional loss of emails.” (See Surreply at 14.) Once a party files suit or reasonably anticipates doing so, it has an obligation to make a conscientious effort to preserve ESI that would be relevant to the dispute. Peskoff v. Faber, 251 F.R.D. 59, 62 (D.D.C.2008); see alsoFed.R.Civ.P. 37, Advisory Committee Notes to 2006 Amendments (“When a party is under a duty to preserve information because of pending or reasonably anticipated litigation, intervention in the routine operation of an information system is one aspect of what is often called a ‘litigation hold.’ ”). Here, YCB and CMC apparently took no steps to preserve emails related to this dispute once they began contemplating (and even after YCB actually filed) a suit against UCF. Thus, Rule 37(e) does not preclude an award of sanctions. Wilson v. Thorn Energy, LLC, No. 08–9009, 2010 WL 1712236, at *3 (S.D.N.Y. Mar.15, 2010). However, to be entitled to relief, UCF must still first establish that discoverable information has been lost. See Smith v. United States, 293 F.3d 984, 988 (7th Cir.2002) (“Spoliation of evidence occurs when one party destroys evidence relevant to an issue in the case. Spoliation of evidence does not apply in this case because the tank itself shed no light on Smith's claims that he owned it, protested its removal, or was assaulted.”) (citation omitted). The evidence submitted by UCF does not establish that YCB or CIVIC destroyed—intentionally or otherwise—discoverable ESI.[9] B. YCB's and CMC's Conduct was Unreasonable and in Disregard of their Duty to Preserve. *10 As noted above, sanctions may be appropriate where the noncomplying party acted with wilfulness, bad faith, or fault. “[W]ilfulness and bad faith are associated with conduct that is intentional or reckless.” Long v. Steepro, 213 F.3d 983, 987 (7th Cir.2000). Bad faith is required for a court to grant an adverse inference. See Fass v. Sears, Roebuck & Co., 532 F.3d 633, 644 (7th Cir.2008). On the other hand, “fault” “doesn't speak to the noncomplying party's disposition at all, but rather only describes the reasonableness of the conduct—or lack thereof—which eventually culminated in the violation.” Marrocco, 966 F.2d at 224. “Fault may be evidenced by negligent actions or a flagrant disregard of the duty to preserve potentially relevant evidence.” Wiginton, 2003 WL 22439865, at *6. Based on the record before us, we cannot conclude that YCB or CIVIC acted wilfully or in bad faith. Among other things, UCF has submitted no evidence demonstrating that YCB or CIVIC intended to destroy or withhold unfavorable information from UCF. Mathis v. John Morden Buick, Inc., 136 F.3d 1153, 1155 (7th Cir.1998) (“bad faith” means “destruction of the purpose of hiding adverse information”); accord In re Kmart Corp., 371 B.R. 823, 848–49 (Bankr.N.D.Ill.2007). Nor is there any evidence that either YCB or CIVIC disposed of documents in violation of their own policies. See, e.g., Park v. City of Chicago, 297 F.3d 606, 615 (7th Cir.2002) (“[A] violation of a record retention regulation ‘creates a presumption that the missing record[s] contained evidence adverse to the violator.’ ”) (citation omitted); Brown & Williamson Tobacco Corp. v. Jacobson & CBS, 827 F.2d 1119, 1134–36 (7th Cir.1987) (applying presumption where employee selectively destroyed documents he knew were relevant to the litigation against defendant in violation of employer's retention policy and offered a noncredible justification for that destruction). However, the fact remains that, at the time CIVIC destroyed its internal inspection reports, it was under a duty to preserve them. Further, it is clear that YCB and CIVIC did little to ensure that relevant materials would be preserved. Other than Cai's changed testimony, there is no evidence that any YCB or CIVIC employee was ever instructed to preserve discoverable information. Even giving Cai's subsequent testimony the benefit of the doubt, YCB/CIVIC have not provided this Court with any evidence showing that her instructions to her coworkers contained sufficient specificity and scope to ensure potentially discoverable or relevant evidence (both paper and electronic) would be preserved. There is also no evidence that YCB or CIVIC imposed any written litigation hold or altered their usual document retention or destruction policies. “While [a party] need not have an official written policy regarding the preservation of documents related to litigation to avoid sanctions,” its “apparent failure to warn its employees to preserve documents potentially relevant to this litigation evidences fault by acting with negligence or flagrant disregard of the duty to preserve potentially relevant evidence.” Diersen, 2003 WL 21317276, at ––––4, 5. *11 Additionally, YCB and CMC repeatedly challenged rulings to produce relevant materials without disclosing that at least some of those materials no longer existed at the time they were ordered to produce them. Most glaringly, the Court repeatedly ordered them to produce all documents related to the source and manufacture of bearings supplied to UCF. We specified that those documents included, without limitation, documents reflecting the manufacturing process used for those bearings, including testing, inspection, and quality control. Yet YCB/CMC still maintain that UCF never requested, and they were never ordered to produce, CMC's internal inspection reports. The argument that we ordered YCB/CMC to produce only those documents related to the process used for inspection and quality control of the bearings, but not the actual results of any inspection or quality control testing—articulated most recently by YCB/CMC's counsel Mr. Bueche in briefing on the pending motion, as well as CMC's witness Cai during her deposition—is utterly absurd. The issue is not simply how “manufacturing process” is defined. The Court's orders called for any document “related to the source and manufacture of bearings”; how a bearing's testing results might not be related to a bearing's manufacture is beyond this Court's comprehension. Worse, YCB, CMC, and their counsel's misinterpretation of our orders—particularly in the face of our past admonishments to dispense with future word games—leads this Court to question the forthrightness with which they have litigated this case. That behavior further bolsters our conclusion that YCB's and CMC's conduct constitutes fault. C. UCF Has Been Prejudiced, But Not as Severely as It Claims. While prejudice is not required to impose sanctions, Barnhill, 11 F.3d at 1368, the prejudice to the non-offending party should be considered by the court when determining the appropriate penalty for discovery misconduct. Marrocco, 966 F.2d at 225. In cases where spoliation results from “fault,” as opposed to wilfulness or bad faith, courts often use prejudice as a “ ‘balancing tool’ to tip the scales in favor of or away from severe sanctions.” Larson, 2005 WL 4652509, at *13 (quoting Danis ). UCF contends that CMC's destruction of its internal inspection reports has prejudiced it because those reports “would allow UCF to disprove CMC's bare and unsupported assertion that the purported reports did not relate to life testing,” and “could support UCF's claims that CMC supplied UCF with Ruili bearings as far back as 2004 and that CMC never supervised, unpacked, inspected, or tested bearings manufactured by Ruili before they were supplied to UCF.” (Reply at 11.) We agree that CMC's destruction of the internal inspection reports has prejudiced UCF by depriving it—to some extent—of support for its claims. However, we conclude that the prejudice to UCF does not justify the severe sanctions it seeks in the pending motion. *12 First, UCF has not established that determining precisely when Ruili began supplying bearings to CMC, or resolving the type of supervision or testing that CMC performed on the bearings (if any), involve issues “essential” to UCF's underlying breach of contract, fraud, and other claims against YCB/CMC. In re Old Banc One Shareholders Sec. Litig., No. 00–2100, 2005 WL 3372783, at *4 (N.D.Ill.Dec.8, 2005) (“To suffer substantive prejudice due to spoliation of evidence, the lost evidence must prevent the aggrieved party from using evidence essential to its underlying claim.”) (citing Langley by Langley v. Union Elec. Co., 107 F.3d 510, 515 (7th Cir.1997)). The fact that contemporaneously-generated documents may be more credible evidence than post-suit deposition or trial testimony does not render the former's destruction “essential” to underlying claims. Second, UCF has failed to apprise this Court as to whether it has obtained evidence regarding CIVIC's purchase, supervision, or testing of Ruili's bearings from sources other than CIVIC, namely, Ruili. UCF asserts “there is not a single document produced by CMC that shows that CIVIC actually supervised the production of bearings by Ruili, or that the bearings were ever inspected or tested by either CIVIC or Ruili.” (Reply at 10–emphasis added.) But conspicuously absent from UCF's briefs is any mention of whether UCF has sought or obtained such evidence—in the form of documents or testimony—from Ruili. The evidence before us indicates that CIVIC required Ruili to retain its testing reports for fifteen years after generating them. (Am. Resp. at Ex. F—Jun Bo Dep. at Dep. at 41–42.) UCF's failure to apprise us as to whether Ruili might be an alternative source for at least some of the information allegedly unavailable from CIVIC is particularly noteworthy, given that Ruili has, on other occasions during this litigation, voluntarily provided CIVIC with extensive information, including a two-day factory inspection. (See UCF's Renewed Mot. to Compel Inspection at 2 n. 1 [229].) Third, the fact that CIVIC's internal inspection reports have been destroyed does not foreclose UCF's ability to prove that Ruili's bearings were inferior to CIVIC's, an issue that may prove essential to at least some of UCF's claims. UCF's president Gagnon testified at his deposition that “We have test results that show that YCB supplied bearings with insufficient life.” (Am. Resp. at Ex. A–Gagnon Dep. at 15.) He further testified: “But we have tests on all the bearings,” and confirmed that UCF had a test done on “every single number” of bearing. (Id. at 12.) Further, YCB/CMC point out that the District Court previously ordered UCF to turn over to YCB exemplars of the allegedly defective bearings (10/27/10 Order [61] ), and UCF has not denied that it currently possesses additional such bearings. As a result, UCF has had—and has apparently taken advantage of—the opportunity to test the bearings itself and thus adduce evidence regarding their suitability for supply to UCF. D. Sanctions are Warranted, But Not the Ones Sought by UCF. *13 As noted above, UCF asks that the Court dismiss CMC and YCB's affirmative claims with prejudice as sanction for their discovery misconduct. Alternatively, UCF requests that YCB and CMC be barred from presenting certain testimony or evidence regarding CMC's inspection and testing of Ruili's bearings, that an adverse inference instruction be entered against them, and that UCF be awarded its attorneys' fees incurred in connection with this motion, two prior motions to compel, and its prior motion for sanctions. As set forth below, we do not believe UCF is entitled to any of those sanctions, but do recommend that other sanctions be imposed against YCB and CMC. With respect to dismissal with prejudice of YCB's and CMC's affirmative claims, we note that the Seventh Circuit has repeatedly stated that such a “harsh sanction ... should usually be employed only in extreme situations, where there is a clear record of delay or contumacious conduct, or when other less drastic sanctions have proven unavailable.” Pyramid Energy, Ltd. v. Heyl & Patterson, Inc., 869 F.2d 1058, 1061 (7th Cir.1989) (emphasis omitted) (quoting Webber v. Eye Corp., 721 F.2d 1067, 1069 (7th Cir.1983)). YCB/CMC's actions do not qualify as an extreme situation requiring such a harsh sanction. This action is distinguishable from those involving the destruction of the only existing piece of evidence. See, e.g., Marrocco, 966 F.2d at 224–25 (affirming directed verdict for plaintiffs where defendant failed to preserve evidence and plaintiffs were irreparably prejudiced). “Justice is best served by hearing cases on their merits except in limited circumstances.” Wiginton, 2003 WL 22439865, at *6 (citing Schilling v. Walworth County Park & Planning Comm'n, 805 F.2d 272, 275 (7th Cir.1986)). “The purposes for sanctions do not support the entry of a default judgment—which deprives parties of a trial on the merits—when there is at least some evidence that allows [a party] to prove [its] case and where there are less drastic remedies available to cure the absence of certain evidence, deter others from similar conduct, and to punish the wrongdoer for destruction of this evidence.” Danis, 2000 WL 1694325, at *35. Under the circumstances here, we recommend that this case be heard on its merits. As for UCF's request that YCB and CMC be barred from presenting at trial any testimony or evidence that CMC allegedly unpacked, cleaned, inspected, tested, or performed any other purported procedure on the bearings manufactured by Ruili, UCF has not established that such a sanction is warranted here. As discussed above, the destruction of CMC's internal inspection reports has not foreclosed UCF's ability to adduce evidence essential to its claims. For that reason, the single case cited by UCF in support of this sanction (see Renewed Mot. at 8 (citing Abiola v. Abubakar, No. 02–6083, 2007 WL 2875493 (N.D.Ill. Sept.28, 2007)) is distinguishable. *14 Regarding UCF's request for an adverse inference instruction, a party's “destruction of or inability to produce a document, standing alone, does not warrant an inference that the document, if produced, would have contained information adverse to [that party's] case.” Park, 297 F.3d at 615. “Rather, the destruction of evidence presumption has two elements: (1) the totality of the circumstances must show that the destruction was in bad faith and (2) if prong (1) is met the court ‘may ... infer from this state of mind that the contents of the evidence would be unfavorable to the party if introduced in court.’ “ Dierson, 2003 WL 21317276, at *7 (quoting S.C. Johnson & Son, Inc. v. Louisville & Nashville Railroad Co., 695 F.2d 253, 258 (7th Cir.1983)). “More than mere speculation is necessary to find that the documents contained adverse information.” Wiginton, 2003 WL 22439865, at *7 n. 6 (citing Rummery v. Illinois Bell Tele. Co., 250 F.3d 553, 558 (7th Cir.2001)). Here, although CMC failed to preserve its internal inspection reports, the facts surrounding their destruction do not support an inference that those documents would have been unfavorable to CMC. As discussed above, UCF has not adduced evidence that CMC purposefully discarded the documents to hide evidence material to UCF's claims. Jones, 2010 WL 2106640, at *9. Cf. Plunk v. Village of Elwood, Ill., No. 07–88, 2009 WL 1444436 (N.D.Ill. May 20, 2009) (adverse inference instruction warranted where defendant deliberately attempted to “wipe” hard drives and destroy relevant evidence by other technological or manual means). Instead, the evidence indicates that CMC destroyed the reports in the ordinary course of its business, albeit after its duty to preserve them arose. While in some circumstances a party's destruction of evidence after the duty to preserve arises may evidence bad faith, see, e.g ., Wiginton, 2003 WL 22439865, at *7, UCF has not established that such circumstances exist here. As a result, we will not recommend any presumption that the content of the internal inspection reports was unfavorable to CMC. However, despite our refusal to recommend the substantive sanctions sought by UCF, we nonetheless have broad discretion to fashion and recommend more appropriate sanctions for YCB's and CMC's misconduct. Such sanctions should be narrowly tailored to ameliorate any potential prejudice to UCF, deter others from similar conduct, and punish YCB and CMC for the destruction of relevant evidence. Under the circumstances, we conclude that, at trial, instructing the jury as follows would be sufficient to achieve those goals, and recommend that the District Court do so: “YCB and CMC had a duty to preserve all documents and electronically stored information related to the claims and defenses in this litigation beginning in December 2008, but did not do so. As a result, written documentation of the testing CMC claims it performed on the Ruili bearings has been destroyed.” *15 Additionally, we decline to recommend that UCF be awarded all of the attorneys' fees it incurred in connection with this motion and three others. UCF has not prevailed on all aspects of the pending motion, despite the extensive amount of briefing and exhibits it filed. However, we do recommend that YCB and CMC be ordered to pay UCF a total of $1,000.00, to partially compensate UCF for its attorneys' fees incurred in connection with the pending motion.[10] As discussed above, YCB, CMC, their counsel, and their witnesses have repeatedly raised a number of frivolous arguments against the discovery sought by UCF, arguments that wasted not only UCF's but this Court's time and resources. We have previously warned YCB, CIVIC, and its counsel against parsing discovery orders and semantic gamesmanship, to no avail. For the same reason, we also recommend that YCB and CIVIC be ordered to pay a total of $1,000.00 to the Clerk of Court. See Clark Equip. Co. v. Lift Parts Mfg. Co. Inc., 972 F.2d 817, 819 (7th Cir.1992) (“A district court may sanction abusive behavior directly by imposing a punitive fine made payable to the court or by imposing non-monetary sanctions.”); Turnage, 115 F.R.D. at 559 (ordering defendant, which had destroyed potentially discoverable information, to pay, in addition to fees and costs to plaintiff, $15,000 to clerk of court for unnecessary consumption of court's time and resources). Finally, we order YCB to produce any non-privileged documents contained within the black binder referenced during Mark Liu's deposition. To the extent YCB continues to maintain that any of the documents contained within that binder are privileged, it shall produce a privilege log describing each of those documents in accordance with Fed.R.Civ.P. 26(b)(5)(A). In sum, we respectfully recommend that UCF's “Renewed Motion for Discovery Sanctions” [185] be granted in part and denied in part as follows: 1. The Court recommends that the motion be denied as to UCF's request that YCB and CIVIC's “affirmative claims” be dismissed with prejudice. 2. The Court recommends that the motion be denied as to UCF's request that YCB and CIVIC be barred from presenting any testimony or evidence that CIVIC allegedly unpacked, cleaned, inspected, tested, or performed any other purported procedure on the bearings manufactured by Ruili. 3. The Court recommends that the motion be denied as to UCF's request that, at trial, the jury be instructed that the missing evidence would have been adverse to YCB and CMC's case. However, we recommend that, at trial, the jury be instructed as follows: “YCB and CMC had a duty to preserve all documents and electronically stored information related to the claims and defenses in this litigation beginning in December 2008, but did not do so. As a result, written documentation of the testing CMC claims it performed on the Ruili bearings has been destroyed.” 4. The Court recommends that the motion be denied as to UCF's request for an award of all of its attorney's fees incurred in connection with this motion, its two prior motions to compel, and its prior motion for sanctions. However, we recommend that YCB and CMC be ordered to pay UCF a total of $1,000.00, and to pay the Clerk of Court a total of $1,000.00. Those payments should be made within fourteen days of the date the District Court approves this Report and Recommendation, in the event that Court chooses to do so. *16 Finally, we order YCB to produce any non-privileged documents contained within the black binder referenced during Mark Liu's deposition. To the extent YCB continues to maintain that any of the documents contained within that binder are privileged, YCB shall produce a privilege log describing each of those documents in accordance with Fed.R.Civ.P. 26(b)(5)(A). YCB shall produce that material within fourteen days of the date of this ruling. IV. CONCLUSION As set forth above, we respectfully recommend that the District Court grant UCF's “Renewed Motion for Discovery Sanctions” [185] in part and deny it in part. Specific written objections to this Report and Recommendation may be served and filed within fourteen (14) days from the date that this order is served. Fed.R.Civ.P. 72. Failure to file objections with the District Court within the specified time will result in a waiver of the right to appeal all findings, factual and legal, made by this Court in the Report and Recommendation. Lorentzen v. Anderson Pest Control, 64 F.3d 327, 330 (7th Cir.1995). Footnotes [1] Based, among other things, on CMC's admission that it is the sole shareholder of YCB [72 ¶ 25] and the fact that YCB and CMC share the same counsel [4, 43], and for ease of reference, this Court has on occasion previously referred to YCB and CMC jointly, as “YCB/CMC” or “CMC/YCB.” Additionally, with respect to discovery, we have advised counsel that both YCB and CMC are independently required to comply with their discovery obligations as well as this Court's orders. (See, e.g., 9/28/11 Order at 1 [171].) None of the parties has objected to such collective references. As a result, we continue them here, except where simpler or more appropriate to refer to either singly. [2] We also stated what should have been obvious, that it would not be enough for either YCB or CIVIC to search for and produce documents, but that representatives of both companies had to conduct such searches and produce all responsive documents, even if duplicative of the other's production, and that “ALL responsive documents”—not just one type and not others—“must be produced by both YCB and CIVIC.” (9/28/11 Order at 1.) [3] YCB/CMC's counsel appeared to second that position during Ms. Cai's deposition, stating after her response: “I think that's correct. I think that the order was for communications where Taizhou Ruili and not every single document that related to introduction [sic].” (Cai 11/12/11 Dep. at 118–19.) Additionally, in their amended response, YCB/CMC argue that this Court's 8/31/11 order “clearly called for documents ‘reflecting the manufacturing process,’ which was then broadly defined to include the testing process, but never to include test results.” (Am. Resp. at 10—emphasis in original.) [4] Ms. Cai's deposition testimony on those issues is heavily peppered with objections by Mr. Bueche, along with non-responsive answers such as the following: “Let me answer like this way. CIVIC doesn't think the outsourcing of the bearing products are related to the overdue payment of UCF, no matter it is outsourced by CIVIC to the other parties or it is manufactured by CIVIC itself.” (Cai 12/26/11 Dep. at 50.) [5] Neither side has seen fit to provide this Court with a copy of CMC's document retention policy, however, UCF has given us no reason to think that the testimony described herein mischaracterizes that policy's provisions. [6] As a practical matter, accepting YCB/CMC's arguments regarding the timing and scope of their duty to preserve would provide potential litigants with the wrong incentive regarding their future discovery obligations. It would not serve the truth-seeking function of the litigation process or further the interests of justice if a party could contemplate suit against another, yet thereafter dispose of evidence related to the subject of the suit. [7] Here again, the parties have failed to fully apprise this Court of relevant facts. YCB/CMC's counsel had previously represented to this Court that YCB/CMC supplied Ruili bearings to UCF during the 2004–2008 time period—indeed, that representation formed the basis of this Court's order circumscribing the time period for certain of YCB's and CMC's discovery responses. (See 9/28/11 Order at 1.) However, according to UCF, YCB/CMC now claim that they supplied Ruili bearings to UCF during a shorter period of time. (Reply at 13. Cf. Surreply at 14 (discussing statistics regarding email usage by China's residents in 2004 and 2008)[211].) Unfortunately, neither side explicitly states the scope of that shorter time period in the briefs on the pending motion. [8] Given the lack of importance we place on that evidence, we need not comment on YCB/CMC's “evidentiary objections” [227] to it. [9] Nor do we find that YCB or CIVIC violated this Court's orders with respect to discoverable ESI. While CIVIC evidently produced Cai's emails and other documents on the morning of the November 11, 2011 depositions of CMC's employees, UCF does not describe the information contained in those documents (see Renewed Mot. at 3). As a result, we cannot determine whether CMC's production was untimely vis a vis any deadline set by this Court. Further, UCF has not established—much less argued—that it was prejudiced by the timing of that production. Among other things, UCF deposed Cai again in late December 2011, and thus would have been able to question her regarding any new information contained in the November 11 production. Additionally, UCF does not argue that the production included new information that it was unable to question other CIVIC employees about. [10] YCB/CMC argues that UCF “neglects to tell the Court that Magistrate Judge Mason has ordered that any sanctions would be paid into the Court, not to UCF, due to UCF's own bad actions regarding discovery.” (Am. Resp. at 2 (citing 8/31/11 Order); see also Surreply at 2–3.) This is yet another example of YCB/CMC's misreading of court orders. In fact, our order “warn[ed] the parties that any future failure to comply with court orders or their discovery obligations generally will likely lead to this Court issuing an order to show cause as to why the parties and their counsel should not be ordered to pay fines to the Court for wasting its (and the District Court's) time and resources.” (8/31/11 Order at 2—emphasis added.) Contrary to YCB/CMC's characterizations, we did not limit our (or any other court's) ability to impose any of the sanctions available under the Federal Rules, the court's inherent powers, or applicable precedent.