Carvana: Discovery Sanctions Denied in Stock Inflation Lawsuit

• A federal judge denied sanctions against Carvana in a class action lawsuit alleging artificial stock inflation.
• Plaintiffs, the United Association National Pension Fund, accused Carvana of intentionally withholding tens of thousands of documents under false claims of attorney-client privilege.
• Carvana argued the documents were genuinely privileged due to legal advice sought during regulatory scrutiny, and a special master later found most were not privileged.
• Judge Michael T. Liburdi found no "bad faith" by Carvana, but acknowledged "bad calls" in the discovery process.
• The court allowed plaintiffs to conduct limited follow-up depositions of six Carvana executives using the newly disclosed documents.

This ruling underscores the high bar for proving intentional misconduct in discovery, even when significant delays and questionable privilege assertions occur.

A federal judge recently declined to impose sanctions against Carvana in a class action lawsuit alleging the company artificially inflated its stock value, despite significant delays in document production. While the court found no bad faith, it did authorize the plaintiffs, represented by the United Association National Pension Fund, to conduct follow-up depositions of key Carvana executives. This ruling highlights the court's nuanced approach to discovery misconduct, balancing the need for complete disclosure with the complexities of large-scale litigation.

The core of the dispute centered on Carvana's delayed release of tens of thousands of documents. Daniel Drosman, counsel for the United Association National Pension Fund, informed U.S. District Judge Michael T. Liburdi that Carvana had produced approximately 49,000 pages in "drips and drabs" between June and August. This late production occurred after Carvana's attorneys had previously stated in December that discovery was "substantially complete."

Drosman further detailed that out of nearly a quarter-million documents disclosed in the case, 75,000 were provided later than required, with a substantial 23,000 documents appearing on August 21 alone. He argued that Carvana deliberately withheld these materials, which would have been crucial during earlier depositions of company executives, in an attempt to exhaust the discovery period, which is set to conclude in April 2026. This strategy, Drosman contended, forced plaintiffs to conduct multiple rounds of discovery disputes and repeatedly request additional information during witness examinations.

Carvana defended its delayed disclosures by asserting attorney-client privilege over the withheld documents, which primarily consisted of internal emails and communications. The company explained that beginning in 2020, it faced extensive regulatory scrutiny and state license suspensions as its rapid sales growth outpaced its ability to properly register vehicles. During this period, executives frequently sought and discussed legal advice, leading Carvana to include many of these communications in its privilege log.

However, a court-appointed special master subsequently reviewed these privileged communications and determined that the majority did not, in fact, qualify for protection. Following this review, Carvana attorneys released the documents to the plaintiffs. Carvana's attorney, Jeff Hammel, maintained that there was "no effort to withhold" the information, explaining that the process of reviewing and producing the documents after the special master's determination was time-consuming, having commenced on July 1.

Conversely, Drosman argued that Carvana's decision not to challenge the plaintiffs' objections to its privilege logs indicated the company's awareness that the documents were not genuinely privileged. He cited an email obtained by the plaintiffs, in which a Carvana executive allegedly suggested labeling all communications with "attorney client privilege" to prevent their production in court, implying an intentional strategy to delay or avoid disclosure.

U.S. District Judge Michael T. Liburdi, a Donald Trump appointee, ultimately sided with Carvana on the issue of sanctions. Following a two-hour hearing, Judge Liburdi stated from the bench that he found "no bad faith or any reason to hold the Carvana defendants culpable," though he acknowledged that the company "made some bad calls." This ruling underscores the high bar for proving intentional misconduct in discovery, even when significant delays and questionable privilege assertions occur.

Despite the denial of sanctions, the judge did not fully absolve Carvana of the consequences of its actions. He rejected Drosman's requests for Carvana to bear the costs of the special master's fees and the expenses incurred by the plaintiffs for conducting depositions that were rendered incomplete by the late disclosures. However, Judge Liburdi granted the United Association National Pension Fund permission to conduct limited follow-up depositions of six Carvana executives, chosen by the plaintiffs, utilizing the newly acquired documents that were unavailable during the initial rounds of questioning. The specific content that will be explored in these additional depositions remains unclear, as much of the original motion for sanctions is redacted. This outcome, while not imposing financial penalties, still extends the litigation timeline and necessitates further resource expenditure for both parties in the Carvana artificial stock inflation case.

This case illustrates the court's discretion in sanctioning discovery misconduct, even when significant document production delays and questionable privilege claims occur. Lawyers should note that while sanctions might be denied, such actions can still lead to extended litigation, additional costs (e.g., special master fees), and the need for follow-up depositions, impacting case strategy and client resources. It underscores the importance of meticulous discovery management and privilege review processes.

Source: Original reporting via Courthouse News Service