First Fin. Sec., Inc. v. Freedom Equity Grp., LLC, No. 15-cv-1893-HRL, 2016 WL 5870218 (N.D. Cal. Oct. 7, 2016)

In this case, the court imposed two permissive adverse inference instructions against Defendant at trial. The first adverse inference was ordered pursuant to FRCP 37(e)(2) for Defendant’s failure to preserve text messages. The second was imposed pursuant to FRCP 37(b)(2) (authorizing the court to “remedy the violation of a discovery order with a ‘just’ sanction”), upon the court’s conclusion that Defendant’s failure to produce certain native-format data, despite being repeatedly ordered to do so, resulted in substantial prejudice to the Plaintiff. In so concluding, the court rejected the argument that it was required to find bad faith, reasoning instead that it could impose such a sanction upon a determination of gross negligence.

1. Failure to Preserve Text Messages

Following the court’s order to produce requested data, including the at-issue text messages, Defendant conceded that the text messages had been deleted, but argued it was an innocent mistake on the part of “people who did not understand their discovery obligations.” The court was not convinced and, citing Defendant’s own representation that the custodians had agreed that they should not communicate electronically regarding legal claims, reasoned that such an explicit agreement suggested “a shared intent to keep incriminating facts out of evidence.” Further reasoning that “spoliation of evidence raises a presumption that the destroyed evidence goes to the merits of the case[ ] . . . and that such evidence was adverse to the party that destroyed it,” the court “infer[ed] that [Defendant’s] agents created incriminating text messages, realized the text messages would be discoverable, and, by deleting the text messages, acted improperly upon their shared intent to keep incriminating facts out of evidence.” The court also reasoned that the alternative explanation—that each custodian “happened to have a habit of routinely deleting text messages” and that each was “‘ignorant’ of the fact that [Defendant] might be sued”—“seem[ed] unlikely.” The court therefore indicated that it was “satisfied” that Defendant acted with the intent to deprive and ordered a permissive adverse inference pursuant to FRCP 37(e)(2), which it recognized “prescribes a distinct standard for issuing sanctions in response to spoliation of electronically stored information.”

2. Failure to Produce Native Data

Separately, the court addressed Defendant’s failure to produce native data, despite two court orders requiring it to do so. The court also took issue with Defendant’s initial representations that led Plaintiff and the court to believe that the information would be forthcoming. Instead, after the second order compelling production, Defendant claimed it did not have possession of the data (it was with a third party)—a claim it had not previously raised, despite meeting with Plaintiff’s counsel to discuss discovery as was required by the court’s Standing Order. Accordingly, the court concluded that Defendant had violated both Rule 34(b)(2)(A) (by failing to make the objection in response to the request for production) and the court’s Standing Order (again, by failing to timely raise the issue of possession, etc.). The court further concluded that those “procedural violations” “misled” Plaintiff who was deprived of the opportunity to focus its discovery efforts on the third parties apparently in possession of the data prior to the closure of discovery and thus rejected Defendant’s argument regarding its lack of possession, custody and control as “procedurally improper.”

The court also rejected Defendant’s arguments that the failure to produce native data was the result of “computer ignorance” but not bad faith and that the spreadsheet it had produced instead of the at-issue data was sufficient and negated any meaningful prejudice.

Regarding an appropriate sanction, the court reasoned that it did not need to find bad faith and that an adverse inference instruction was available under Rule 37(b)(2) upon a conclusion that “‘gross negligence’ . . . resulted in the failure to ‘turn over’ the native-format data.” Concluding that Defendant’s violations of Rule 34, the court’s Standing Order, and two subsequent orders compelling production constituted gross negligence that resulted in a failure to produce native data, the court indicated that it had “discretion to issue an additional adverse-inference.” Ultimately, the court ordered a second permissive adverse inference.

The court also ordered Defendant to pay Plaintiff’s reasonable fees and costs related to its sanctions motion and supplemental briefing.

Determining the exact language of the adverse inference instructions was delayed until the pretrial conference (although likely language was set forth in footnote).

A full copy of the court’s order is available here.