Federal courts have broad authority to manage discovery, but when it comes to punishing litigants for discovery violations, their inherent authority is limited by rule and now Supreme Court precedent. Recently, the U.S. Supreme Court held that any sanction imposed for discovery misconduct pursuant to a court’s inherent authority must be compensatory, rather than punitive, in nature and that a court may only award legal fees that would not have been incurred but for the bad-faith conduct. That inherent authority had already been limited by the recent Federal Rules of Civil Procedure amendments concerning electronically stored information (ESI). Rule 37(e) eliminated inherent authority as a basis for sanctions, demanding instead proof of prejudice or intent to deprive before a court may impose sanctions for failure to preserve ESI.

The Goodyear Case Clarifies the Standard

In Goodyear Tire & Rubber Co. v. Haeger, the Haegers sued Goodyear and the manufacturers of their motorhome for injuries when it swerved off the road and flipped over. The Haegers alleged that the Goodyear tire on their motorhome was defective and not designed to withstand the heat generated at highway speeds. The Haegers repeatedly sought information about testing of the tire, but Goodyear’s responses revealed little. Although the case settled before trial, the Haegers’ lawyer later learned that Goodyear had disclosed test results in another case, which said that the tire got unusually hot at highway speeds. Goodyear admitted that it had not produced the test despite receiving requests for “all testing data,” so the Haegers moved for sanctions.

The district court held that no statute or rule enabled it to reach the offending behavior, but agreed to sanction Goodyear by exercising its inherent power to sanction litigation misconduct. In light of Goodyear’s years-long course of bad-faith conduct, the court awarded the Haegers all legal fees and costs incurred during the litigation from the point where Goodyear made its first dishonest discovery response, which the court calculated at $2.7 million. The court reasoned that, because the conduct was “truly egregious,” it did not need to find a causal link to the fees awarded. In case the U.S. Court of Appeals for the Ninth Circuit disagreed, the court specified an alternative award of $2 million, which subtracted $700,000 spent by the Haegers in litigating against other defendants. The Ninth Circuit affirmed the entire $2.7 million award, finding that the court below acted reasonably.

The Supreme Court confirmed that federal courts possess certain inherent powers, one of which is the ability to fashion an appropriate sanction for conduct that abuses the judicial process. The Court made clear, however, that any award of attorneys’ fees must be compensatory, rather than punitive, in nature and may go no further than to redress the losses sustained. If an award extends beyond legal bills that the litigation abuse occasioned, then it crosses the boundary from compensation to punishment. A court must establish a causal link between a litigant’s misbehavior and the legal fees paid by the opposing party. This but-for standard requires the court to assess and allocate specific expenses in exercising its discretion. In an exceptional case, the but-for standard might encompass all fees incurred in a litigation, such as a when an action is commenced in bad faith.

The Court found that both the district court and the Ninth Circuit applied the incorrect legal standard and were mistaken as to the necessary findings. Neither court made the requisite finding that the $2.7 million sanction would not have been incurred but for the misconduct at issue. The Supreme Court remanded for consideration of two issues: (1) whether Goodyear waived its objection to the conditional award, which was based on its own calculation of the Haegers’ fees incurred litigating against the other defendants and (2) if there was no waiver, for a but-for reassessment of fees.

Thre Is No Inherent Authority to Sanction the Loss of ESI

When it comes to ESI, the drafters of Rule 37(e) made explicit that the rule forecloses reliance on inherent authority to determine when certain measures should be used. The advisory committee note to the 2015 amendment provides that:

New Rule 37(e) replaces the 2006 rule. It authorizes and specifies measures a court may employ if information that should have been preserved is lost, and specifies the findings necessary to justify these measures. It therefore forecloses reliance on inherent authority or state law to determine when certain measures should be used.

Rule 37(e)(1) requires a finding of prejudice and then limits sanctions to measures no greater than necessary to cure that prejudice. Rule 37(e)(2) requires a finding that the party acted with intent to deprive the other of the information’s use and then the court may (a) presume the information lost was unfavorable, (b) instruct the jury that it may or must presume the information was unfavorable, or (c) dismiss the action or enter a default judgment. Rule 37(e) is carefully drafted to provide a safe harbor and to limit measures to the minimum necessary to cure prejudice. It does not authorize the award of punitive monetary sanctions.

Courts acknowledge that they must evaluate alleged spoliation of ESI pursuant to Rule 37(e) and not resort to inherent authority. Matthew Enter., Inc. v. Chrysler Group LLC, 2016 U.S. Dist. LEXIS 67561, *10-11 (N.D. Ca.) (“The [advisory] committee also sought to foreclose ‘reliance on inherent authority or state law to determine when certain [curative or sanctioning] measures should be used.’ To that end, Rule 37(e) now provides a genuine safe harbor for those parties that take ‘reasonable steps’ to preserve their electronically stored information.”); Fiteq Inc. v. Venture Corp., 2016 U.S. Dist. LEXIS 60213, * 10-11 (N.D. Ca.) (agreeing with the defendant that the advisory committee's note to Rule 37(e) explicitly forecloses reliance on inherent authority to sanction).

Some courts, however, have continued to sanction discovery misconduct pursuant to their inherent authority, based on either pre-amendment case law or when the advisory committee note was not brought to their attention. See, e.g., Cat 3, LLC v. Black Lineage, Inc., 164 F. Supp. 3d. 488, 497 (S.D.N.Y. 2016) (citing pre-amendment case law for the proposition that the “[i]nherent power of a court can be invoked even if procedural rules exist which sanction the same conduct”); Cohn v. Manhattan Mortgage Co., Inc., 2016 U.S. Dist. LEXIS 169670 (N.D. Ill.) (without reference to the advisory committee note, asserting right to rely on inherent authority to impose sanctions “over and above the provisions of the federal rules”). And in GN Netcom v. Plantronics, 2016 WL 3792833 (D. Del., July 12, 2016), the court imposed a $3 million sanction without citation to authority, whether Rule 37(e) or inherent authority, and made no findings as to how that amount was incurred but for the misconduct at issue.

It has been more than 18 months since the amended rules took effect, so it is reasonable to expect that more courts will apply them, and more counsel advocate that they do so in order to take advantage of their safe harbor. Further, in light of Goodyear, courts may not impose punitive spoliation sanctions, thereby bringing proportionality to discovery sanctions.