A recent US appeal court decision – where a firm was stripped of a positive US$400 million verdict because it had destroyed documents unhelpful to its case – provides a useful reminder to New Zealand businesses that their discovery obligations may arise earlier than they think and that they need to have robust systems in place.

The US case – an object lesson in playing with the paper trail

Rambus was formed in 1990 by two university professors to develop a new DRAM system, obtain patents for it and license it to manufacturers.  During the 1990s, Rambus secretly broadened its pending patent applications to cover new standards under development by JEDEC, the industry standard-setting organisation. 

Rambus participated in the JEDEC discussions but kept silent about its own patents.  Then, in 2000, when manufacturers were locked into producing the new technology, Rambus began patent infringement proceedings against several of them.

In preparation for springing this intellectual property “trap”, Rambus gathered evidence to support its case and destroyed evidence which didn’t, including several tons of documents and over 1200 computer back-up tapes.  This document destruction occurred in two “shred days” to be “battle ready” for the litigation.

The District Court awarded nearly US$400 million against Hynix, one of the manufacturers, and ordered Hynix to pay significant ongoing royalties.  The Court held that Rambus was not liable for spoliation (the US tort of destroying documents when under an obligation to preserve them for litigation) because, at the time of the destruction, any litigation was conditional on other events and was not “imminent”.

On appeal, the Federal Circuit vacated the verdict because the District Court had applied the wrong test for spoliation.  The Federal Circuit rejected Rambus’ argument that the obligation to preserve documents only arose when litigation was “imminent”.  Instead, the relevant test was whether the destruction of evidence occurred when the litigation was “reasonably foreseeable”.

The “reasonably foreseeable” test is an objective standard, taking into account all the circumstances.  Litigation can be “reasonably foreseeable” even if it is contingent on the occurrence of other events where it is reasonably foreseeable that those events will happen.  Because Rambus had a carefully prepared strategy for litigation, which included the document destruction, the Federal Circuit held that the litigation was “reasonably foreseeable” at the time that Rambus held its “shred days”.

The New Zealand position

The legal test in New Zealand is the same as in the US and New Zealand counsel, including in-house counsel, must ensure that their clients understand the scope and duration of their discovery obligations: Rule 13.9, Lawyers Conduct and Client Care Rules and Rule 8.19, High Court Rules. 

This duty probably encompasses any obligation to preserve documents when litigation is reasonably foreseeable.

While there is no tort of spoliation in New Zealand, there are serious consequences for breach of discovery obligations.  These consequences extend from an adverse presumption by the courts that the destroyed evidence was against the party’s case, to dismissal of a claim or striking out of a defence, contempt of court proceedings, professional disciplinary proceedings, and criminal sanctions for fraudulent alteration, forgery or concealment.

How to ensure good housekeeping

When a dispute arises, in-house counsel should ensure that the company and its staff do not trespass against the rule.  This can be achieved by:

  • issuing a “litigation hold” within the organisation to ensure that documents relevant to the dispute are not disposed of and to identify employees with relevant knowledge of the underlying facts.  This hold should be reissued periodically throughout the course of the investigation and any subsequent litigation, to catch new employees
  • identifying relevant IT personnel who know the company’s document retention policies and electronic back-up system.  These staff will be crucial to gathering and preserving documents necessary for discovery.  In some cases electronic back-up tapes should not be over-written, and
  • segregating relevant archive material to avoid mistaken destruction.

The extent to which these steps are needed will depend on the size and value of the dispute, the relevant time period, the likelihood of litigation, and the cost of finding and retaining material. 

The pre-litigation obligation is only to do what is reasonable in the circumstances.  But, good housekeeping and having a plan will allow the company to make considered decisions, comply with legal and ethical duties, and prepare the best possible case for the claim or defence.