Electronically Stored Information Spoliation Sanctions: A New Test, Escaping Liability for Bad Faith Destruction and a $3 Million Fine

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Burr & Forman's Matthew Scully evaluates the efficacy of amended Federal Rule of Civil Procedure 37(e), focusing on the new test for imposing spoliation sanctions the rule sets out.

Matthew Scully

By Matthew Scully

Matthew T. Scully is a labor and employment attorney at Burr & Forman LLP (Birmingham, Ala.). He focuses his practice on managing the complex economic, legal and business decisions employers must make in effectively managing their workforce. He may be reached at (205) 458-5321 or by e-mail at mscully@burr.com.

Almost a year a has passed since the Dec. 1, 2015, amendments to the Federal Rules of Civil Procedure were enacted, to much fanfare. Indeed, Chief Justice Roberts wrote in his Year-End Report on the Federal Judiciary that the changes “may not look like a big deal at first glance, but they are.”

The purpose of the amendments was to inject more “common-sense” and “reasonable limits” in discovery practice, thereby improving discovery's utility, reducing its cost and burden and focusing litigation on the substantive issues in the case; a welcome reprieve from wasteful discovery practices. The lofty goals of the rules, however, have met reality and the early results are mixed. The area of preserving electronically stored information under Rule 37(e) is an exception, however.

ESI Blues

ESI has long been a thorn in most lawyers' sides. Its obligations can attach before litigation even begins (“anticipation…of litigation”), and ESI can be complex and involve an enormous amount of material. Catastrophic consequences can flow from failing to properly identify and preserve relevant information.

Indeed, the former Rule 37(e) armed courts with broad discretion to wield severe sanctions—for example, dismissal, adverse jury instructions, adverse jury inferences—for ESI errors (in some cases even simple mistakes done unwittingly), and ESI mistakes could turn into expensive spoliation sideshows or be used to leverage increased settlement value in a routine case.

Fortunately, the changes to Rule 37(e) are substantial; just as importantly, courts have given heed to the changes.

A New Clear, Legal Standard

National uniformity now exists in the federal courts for determining spoliation of ESI disputes. This matters because the former Rule 37(e)’s imprecise language permitted courts to apply different standards for analyzing ESI spoliation sanctions resulting in inconsistent and sometimes unfair results.

Rule 37(e)—which only applies to ESI and, thus, not the spoliation of tangible evidence—has been overhauled and a two-step process now applies.

To start, in determining whether sanctions are appropriate, a court must first find four predicate elements:

(a) the existence of ESI of a type that should have been preserved;

(b) ESI is lost;

(c) the loss results from a party's failure to take reasonable steps to preserve it; and

(d) ESI cannot be restored or replaced through additional discovery.

Next, if the court finds the four predicate elements satisfied, the court determines sanctions if there is prejudice.

Level one sanctions are measures “no greater than necessary to cure the prejudice.”

If, and only if, the court finds the party that caused the loss “acted with the intent to deprive another party of the information's use in the litigation,” it can impose more severe level II sanctions, such an as adverse presumption, an adverse instruction to the jury, dismissal or default judgment. This article discusses courts' application of this new test.

When Is ESI “Lost” Such That It Cannot “Be Restored or Replaced?”

Rule 37(e) requires, as predicate elements, that ESI be “lost” and not “replace[able]” before sanctions may be available. Determining when ESI is lost and not replaceable is complex because, for example, multiple custodians can possess ESI or sophisticated software can recover ESI otherwise lost.

Recognizing this issue, the Advisory Committee noted that “[b]ecause electronically stored information often exists in multiple locations, loss from one source may often be harmless when substitute information can be found elsewhere.”

The implication of the “replace[able]” concept should not be understated, and parties can now avoid Rule 37(e) spoliation sanctions even from actors who engage in negligent, reckless or bad faith ESI destruction so long as the lost ESI is retrievable from another custodian. Two cases highlight this point:

In Marquette Transportation Company Gulf Island, LLC v. Chembulk Westport M/V, 2016 BL 75407 (E.D. LA. Mar. 11, 2016), the plaintiff alleged that the defendant's negligent operation of its vessel in New Orleans harbor caused the plaintiff's moored boat to flood and capsize.

In discovery, the defendant produced its boat's voyage data recorder (VDR), but it was missing key audio and radar data for important time periods. The fact that key data was missing was fishy, and the plaintiff's expert determined that the missing data had in fact been intentionally erased.

In subsequent discovery, the plaintiff obtained a copy of the full VDR via a subpoena to the defendant's boat captain, who “found” an original copy months after denying he possessed a copy.

The plaintiff moved for sanctions pursuant to Rule 37(c), claiming it was forced to expend thousands of dollars to obtain ESI that the defendant had a duty to preserve. The court—holding that Rule 37(c) did not apply to the plaintiff's motion because the VDR contained ESI, and, thus, Rule 37(e) applied—determined that because “the full data contained on the VDR was discovered and produced” the plaintiff's claim was merely that the defendant did not take reasonable steps to find and preserve the VDR which was insufficient to impose sanctions under the new Rule 37(e). Thus, the defendant's potential wrongdoing became irrelevant.

In Konica Minolta Bus. Solutions, U.S.A., Inc. v. Lowery Corp., 2016 BL 284790 (E.D. Mich. Aug. 31, 2016)—a hotly contested spoliation case involving former employees who formed a competitive company—the plaintiff alleged significant document destruction, which was supported by detailed expert testimony showing manual deletions of confidential information while the individual defendants were logged into their computers and the use of software programs that erased data, which one defendant installed three months after litigation started.

The court found “[t]here is strong evidence that ESI was lost, and that it was lost with complete awareness of litigation” but tabled the plaintiff's motion for sanctions under Rule 37(e) because, among other things, additional discovery was needed to determine whether the purported lost ESI existed in other locations.

The clear implication was that, despite the evidence strongly suggesting intentional misconduct, if the information destroyed was retrievable from other custodians, sanctions would not be proper under Rule 37(e).

The take away from the “lost” and “replaced” revision to Rule 37(e) and the two cases discussed above is: (1) those fearing sanctions must consider other custodians who may possess lost ESI and (2) before seeking sanctions, a party must establish the information lost is not discoverable from other sources.

What are “Reasonable Steps To Preserve” ESI?

Rule 37(e) directs that parties take “reasonable steps” to preserve ESI. The Rules' intent was not to create a new “reasonableness” test for determining whether a party has taken appropriate steps to preserve ESI. Rather, the addition of the phrase “reasonable steps” to Rule 37(e) will go to the core of most ESI disputes and, thus, will be one of the principal battleground provisions.

The phrase, unfortunately, is not defined in the Rules or in the Advisory Committee notes. Moreover, courts' application of the phrase is still developing and they have provided limited guidance for practitioners. The Advisory Committee notes do, however, provide helpful indicators of what is reasonable, specifically:

  •  Perfection in preserving all relevant electronically stored information is not required.
  •  The routine, good-faith operation of an electronic information system is a relevant factor in evaluating whether a party failed to take reasonable steps to preserve lost information.
  •  Courts should be sensitive to the party's sophistication with regard to litigation in evaluating preservation efforts.
  •  Information may be lost despite the party's reasonable steps to preserve ( e.g., natural occurrence like a flood, a cloud service failure, etc.) but courts should consider what steps the preserving party could reasonably have taken to prepare for the problem before it occurred.
  •  Courts should consider proportionality in analyzing what are reasonable steps.

Given the ambiguity in the “reasonable steps” language and the lack of clear guidance for interpreting it, prudent practitioners should look to already existing jurisprudence to guide the reasonableness analysis, with a special emphasis on properly securing information after the initial litigation hold.

Indeed, early case law interpreting Rule 37(e) suggests that merely preserving ESI is insufficient if the information is later lost by accident or mistake; for example, recently courts have found that a party didn't take reasonable steps by printing out a single paper copy of ESI and not keeping the paper copy in a secure location, failing to secure a phone containing important text messages and not securing a thumb drive containing ESI.

This situation was best illustrated in GN Netcom, Inc. v. Plantronics, Inc., 2016 BL 230622 (D. Del. July 12, 2016), in which the court found a member of management's intentional destruction of ESI trumped the extensive reasonable steps—including “issu[ing] multiple litigation holds, conduct[ing] training sessions to ensure compliance with these holds, and respond[ing] promptly to [the member of management's] deletion of emails”—the company took to preserve ESI.

In awarding sanctions, the court stated that the defendant's “extensive document preservation efforts” didn't excuse the intentional, destructive behavior of a member of management and any other conclusion would require a “‘perverse interpretation’ of Rule 37(e)” and would “set a dangerous precedent for future spoliators.”

The take away from this revision to Rule 37(e) is that while the needle on what is “reasonable” hasn't moved significantly, additional factors such as proportionality, the parties' sophistication and the routine operation of electronic information systems must be considered. Most importantly, however, may be the early signals from the case law that negligence, recklessness and bad faith in securing ESI can undo prior reasonable preservation steps.

When and What Type of “Sanctions” are Appropriate?

Rule 37's most substantial change likely pertains to the type and availability of sanctions. Severe sanctions under Rule 37 now require specific intent—“acted with the intent to deprive another party of the information's use in the litigation”—and severe sanctions are unavailable for negligent or even grossly negligent conduct.

The heightened standard of culpability creates national uniformity in the federal courts where there were once inconsistencies. The severe sanctions available under Rule 37(e)(2) are dismissing the case, entering default judgment or “instruct[ing] the jury that it may or must presume the information was unfavorable to the party.”

This change is substantial. The new Rule 37's impact was made apparent in Nuvasive, Inc. v. Madsen Med., Inc., 2016 BL 20440 (S.D. Cal. Jan. 26, 2016). In Nuvasive, on July 27, 2015 (before the new Rule 37) the court granted the defendant's spoliation motion and ordered that an adverse inference be made regarding lost text messages because the employer failed to enforce compliance with its litigation hold.

On Dec. 10, 2015 (before the ink had even dried on the new rules), the plaintiff moved for reconsideration contending the new Rule 37 applied and the previous order should be vacated. The court agreed, holding adverse inferences are not permissible under the new Rule 37 unless a finding of intent is made and, failure to enforce compliance with a litigation hold, did not establish intent.

Because there was no bad intent, the court could only order measures “no greater than necessary to cure the prejudice,” which could include:

  •  forbidding the party that failed to preserve information from putting on certain evidence;
  •  permitting the parties to present evidence and argument to the jury regarding the loss of information; and
  •  giving the jury instructions to assist in its evaluation of such evidence or argument, other adverse jury instructions.

Ultimately, the court held that both sides could present evidence regarding the loss of ESI and the jury could consider such evidence in making its decision in the case.

As illustrated above, absent a showing of an intent to deprive, courts are limited in issuing sanctions under Rule 37(e). What else can a party do that has been denied important ESI but cannot show an “intent to deprive”? The party could seek sanctions pursuant to the court's inherent authority.

Role of Inherent Authority

While the Advisory Committee notes seemingly forbid a court from relying on its inherent authority to sanction for spoliation of ESI by stating the new Rules “forecloses reliance on inherent authority or state law to determine when certain measures should be used,” one judge disagreed with that conclusion.

A magistrate judge in New York found, that despite what the Committee notes state, courts retain the inherent authority to remedy spoliation of ESI because sanctions would be available under the court's inherent authority even if Rule 37(e) did not apply. Cat3, LLC v. Black Lineage, Inc., 164 F. Supp. 3d 488 (S.D.N.Y. 2016). Whether other courts follow this lead will be an issue to watch closely .

While Nuvasive, Inc. and the heightened culpability standard in Rule 37(e) are encouraging for those facing spoliation sanctions, the risk from ESI mistakes are still very real. Remember the Plantronics case discussed above? The court resolved the spoliation issue by imposing a $3 million fine and left the possibility open for further sanctions.

Conclusion

The new Rule 37(e) of the Amended Federal Rules of Civil Procedure should improve discovery's utility, reduce its cost and burden and focus litigation on the real issues in the case.

While not every issue associated with ESI preservation failures has been addressed by Rule 37(e), it is a welcome addition for most practitioners.

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