Court Finds Absence of Written Document Retention Policy, Failure to Implement Specific Written Litigation Hold, Destruction of Evidence When Computer Failed, Material Misrepresentations to Court, and Very Belated Production of ESI Show a Level Reckless Disregard for Discovery Obligation and Candor and Accuracy Before the Court Sufficient to Warrant Severe Monetary and Evidentiary Sanctions

This case serves as a timely reminder to organizations who don’t think it’s important to prepare for e-discovery. It is. Before this case is over, defendant will have paid hundreds of thousands of dollars in monetary sanctions, and will be subject to an adverse inference jury instruction that will call the jury’s attention to the fact that defendant spoliated evidence. All of the defendants’ problems in the case relate back to the lack of adequate preparation. It had no written document retention policy and no written e-discovery policies and procedures. As a result, it didn’t implement a litigation hold, either timely or adequately. It didn’t know where important ESI might be found. It didn’t adequately determine what ESI might be relevant before it was inadvertently destroyed. And it didn’t realize that representations its counsel was making to the court were incorrect.

Before ruling on the pending motion, Magistrate Judge Elizabeth D. Laporte had already sanctioned defendant more than $148,000 for spoliation. In response to this motion, the court added substantially to that amount, some of which is yet to be determined.

The court began its analysis noting that sanctions are available under the court’s inherent power if “preceded by a finding of bad faith, or conduct tantamount to bad faith,” such as recklessness “combined with an additional factor such as frivolousness, harassment, or an improper purpose.” In contrast, sanctions for violation of Rule 37 may be imposed for negligent conduct. The court discussed the fact that several California district courts have adopted the Second Circuit requirements for whether to impose an adverse inference instruction: “(1) the party having control over the evidence had an obligation to preserve it; (2) the records were destroyed with a culpable state of mind; and (3) the destroyed evidence was relevant to the party's claim or defense.” Slip Opinion at 5 (quoting Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 105 (2d Cir. 2002)).

The court took note, however, of the decision in United Medical Supply, discussed here, which rejected a bad faith requirement in context of Rule 37 sanctions and stated that: “Guided by logic and considerable and growing precedent, the court concludes that an injured party need not demonstrate bad faith in order for the court to impose, under its inherent authority, spoliation sanctions.” Slip Opinion at 5 (quoting United Medical Supply Co. v. United States, 77 Fed. Cl. 257, 269 (Fed. Cl. 2007)).

The court articulated the duty to preserve as follows: The scope of the duty to preserve extends to what the party “knows, or reasonably should know, is relevant in the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery, and/or is the subject of a pending discovery request.” Slip Opinion at 6 (quoting W.T. Thompson Co. v. General Nutrition Corp., 593 F. Supp. 1443, 1455 (C.D. Cal. 1984)). In determining when the duty to preserve triggers, the court quoted the court in In re Napster Inc. Copyright Litigation, 462 F. Supp. 2d 1060, 1070 (N.D. Cal. 2006), discussing A. Farber & Partners, Inc. v. Garber, 234 F.R.D. 186, 193 (C.D. Cal.2006):

The court in A. Farber thus held imminence to be sufficient, rather than necessary, to trigger the duty to preserve documents. Furthermore, the court in A. Farber did not reach the issue of when, exactly, the duty attached. The duty to preserve documents attaches “when a party should have known that the evidence may be relevant to future litigation.” The future litigation must be “probable,” which has been held to mean “more than a possibility.”

Slip Opinion at 7 (citations omitted). This standard is both broad and vague, which will not ease counsel’s mind on the matter.

The court went on to note that the question of how far in advance of the litigation the duty to preserve arose was irrelevant because the defendant had not satisfied its duty to preserve even after the lawsuit was filed. The court was unsparing in its criticism:

At the hearing on March 18, 2008, Defendants conceded that there was no written litigation hold policy in place during any of the relevant time periods. Indeed, no written policy exists even today. Nor was there any evidence, other than oral testimony, of what employees were told with respect to preservation of documents relevant to this case. The lack of a written document retention and litigation hold policy and procedures for its implementation, including timely reminders or even a single e-mail notice to relevant employees, exemplifies Defendants’ lackadaisical attitude with respect to discovery of these important documents.

Slip Opinion at 8-9.

The discussion of the defendant’s failure to preserve source code for many of its web sites is a model of clarity describing a complete failure by the defendant to come to grips with its preservation and production obligations until it was far too late. Production in the wrong format, even after the court had ordered production on a specific media, IT personnel contradicting each other at depositions, and very late production after telling the court that the ESI did not exist and had never existed are just a few of the more dramatic issues the court deals with in the opinion.

The court recommended an adverse inference instruction and went through a series of analyses to determine how much to sanction defendant for each violation. The final total, which will not be determined for some time, will be significant.

Read the opinion