There is a growing body of law regarding e-discovery from the Delaware Court of Chancery, a familiar judicial body to practitioners across the country. In four recent rulings, the Chancery Court has provided useful guidance for practitioners on the best methods for managing e-discovery requests and avoiding costly expenses. Although Delaware law has been sparse on specific e-discovery rules, these four opinions provide instructive “cautionary tales” to litigants, detailing affirmative steps that should be taken before and during litigation.

Triton Constr. Co. v. Eastern Shore Electrical Services, Inc.

In Triton Constr. Co. v. E. Shore Elec. Servs., Inc., the Delaware Chancery Court addressed in what instance an adverse inference is appropriate where an opposing party has spoliated evidence. 2009 WL 1387115 at *1 (Del. Ch. May 18, 2009). Triton Construction Co. (“Triton”) had filed suit against the defendants, Triton’s former employee, Tom Kirk, and his current employer, Eastern Shore Electrical Services, Inc. (“Eastern”) for breach of fiduciary duty, aiding and abetting such breach, and misappropriation of trade secrets belonging to Triton. The allegations arose from Mr. Kirk’s simultaneous employment with Triton and Eastern from 2005 until 2007, of which Triton was unaware.

Triton ultimately requested an adverse inference against Eastern for Mr. Kirk’s intentional or reckless destruction of electronically stored information (“ESI”) before discovery. The court found that Mr. Kirk had destroyed electronic evidence on his work computer through the use of a wiping program that made files irretrievable and that he had improperly failed to produce his home computer and a backup thumb drive (also known as a USB flash drive), on which he kept work-related files. Id. at *7-8. As a remedy, the court inferred that any information Mr. Kirk destroyed would have supported Triton’s position on any issue to which that information was relevant and granted the motion for an adverse inference. As a result, it inferred that Mr. Kirk’s work for Eastern was significant enough that it involved the use and disclosure of at least some of Triton’s confidential information. Id. at *9. Ultimately, in part due to the adverse inference, the court held Mr. Kirk liable for breach of the fiduciary duties of loyalty, disclosure, and confidentiality. Id. at *27-28.

Other courts have chosen to impose stricter sanctions for destruction of evidence. Our November 2008 issue of the Electronic Discovery Update highlighted Gutman v. Klein, an Eastern District of New York decision, granting a default judgment against the spoliating party who, like Mr. Kirk, deleted key evidence from a computer. 2008 WL 4682208 (E.D.N.Y. Oct. 15, 2008). While the Chancery Court’s decision imposes a lesser punishment, the ultimate result of an adverse inference may be as severe as a default judgment: swift defeat for the spoliating party. Moreover, both decisions reflect that courts are intolerant of intentional and deceptive practices aimed at spoilating ESI and such willful actions will not go unpunished.

Beard Research, Inc. v. Kates

In a second decision on a factually and legal similar matter, the Delaware Chancery Court again imposed an adverse inference instruction against a spoliating party. In Beard Research, Inc. v. Kates, the court granted, in part, plaintiffs CB Research & Development Inc.’s (“CB”) and Beard Research Inc.’s (“Beard”) Motion for Sanctions for Spoliation of Evidence against former employee, Dr. Michael Kates, and his subsequent employers, Advanced Synthesis Group, Inc. (“ASG”) and ASDI, Inc. (“ASDI”). 2009 WL 2997984 at *1 (Del. Ch., May 29, 2009).

CB and Beard had brought an action against Dr. Kates, ASG and ASDI for tortious interference of business relations and misappropriation of trade secrets. Id. at *1. In connection with that litigation, CB and Beard repeatedly requested the production of a laptop that Dr. Kates used for work and personal use, alleging that it contained (1) relevant emails between Dr. Kates and the other defendants; and (2) a PowerPoint presentation through which Dr. Kates shared proprietary information with ASDI. The laptop and its files were never produced. Id. at *12. Moreover, Dr. Kates admitted that he had deleted a significant amount of allegedly relevant information from the laptop in November 2005, at which point he had been involved in this litigation for six months, and had received plaintiffs’ first discovery request. Id. at *6.

Plaintiffs’ motion sought entry of a default judgment against the defendants, or, in the alternative, an adverse inference due to the intentional destruction of relevant evidence. Id. The court found that Dr. Kates had failed to comply with his obligation to preserve relevant evidence. Id. at *6-7. Weighing the likely relevance of the missing evidence and the level of intentionality and bad faith that was exercised in destroying the evidence, the court denied plaintiffs’ motion to the extent it sought entry of a default judgment, but granted an adverse inference against defendants with regard to the contents of the spoliated evidence. The court also awarded plaintiffs their attorneys’ fees and expenses in connection with the motion. Id. at *4.

Interestingly, the court also held ASDI and ASG responsible for this destruction of evidence – even though Dr. Kates had acted independently when he deleted the files. The court reasoned that all parties had received plaintiffs’ first set of interrogatories by the November spoliation, ASG and ASDI knew or should have known that Dr. Kates had possession of relevant electronic information by the time Dr. Kates deleted the files, and ASDI and ASG had a concomitant obligation to find and preserve that evidence. Id. at *7.

The court similarly found all defendants culpable for failure to preserve the original hard drive from the laptop, which ASDI’s technology department had replaced at Dr. Kates’s request. Id. at *8. The court noted specifically that, “[d]espite knowing that the laptop might contain relevant evidence, ASDI, ASG, and their counsel did virtually nothing to preserve that computer. . . At a minimum, ASDI and its counsel should have advised [its technology department] of the importance of preserving relevant information, such as the contents of Dr. Kates’s laptop.” Id.

To remedy defendants’ breach, the court drew an adverse inference against them with regard to the missing file allegedly containing Dr. Kates’ PowerPoint presentation to ASDI, but did not extend that inference to the content of emails that might have been present on the laptop because those emails ostensibly were available elsewhere. To that end, the court opined that “[a]n e-mail, almost by definition, has a sender and a receiver. Plaintiffs have taken extensive discovery from ASDI and from other third parties with whom CB or BR had relationships. Even if Kates had destroyed certain e-mails on his end, the e-mails still would exist on the other end and would have been produced.” Id. at *12.

Finally, the court held defendants liable for attorneys’ fees and costs. Id. at *13. In a subsequent decision awarding $76,906.80 in costs and attorneys’ fees, the court noted that plaintiffs’ award was given solely because “Defendants wasted Plaintiffs’ (and the Court’s) time and resources by forcing litigation of a third motion to compel, even though the original hard drive in [Dr.] Kates’s laptop already had been changed, reformatted, and ultimately lost well before the July 24, 2008 hearing.” Beard Research Inc. v. Kates, 2009 WL 3206416 at *2 (Del. Ch. Oct. 1, 2009).

Omnicare Inc. v. Mariner Health Care Management Co.

In another contemporaneous opinion, Omnicare, Inc. v. Mariner Health Care Management Co. the Chancery Court took up the issue of cost shifting, denying a request by Omnicare Inc. (“Omnicare”) to shift costs to defendants, Mariner Heath Care Management Co. (“Mariner”), and affiliates, for restoring Mariner’s email communications from backup tapes. 2009 WL 1515609 at *7 (Del. Ch. May 29, 2009).

Omnicare, a pharmaceutical supplier, had brought an action against Mariner, a nursing home operator, to compel performance of an alleged contractual obligation, among other claims. Id. at *2. Mariner counterclaimed that, among other things, Omnicare knowingly overcharged for its services. Id. During discovery, Omnicare specifically requested production of Mariner emails from 2003 to 2005, which were only available on backup tapes created by an automatic deletion program, and which would cost between $22,000 and $40,000 to restore. Id. at *7. Although the responding party traditionally bears the production expenses of ESI, Mariner argued that it should not be expected to cover the costs because the request was unreasonable. Id.

The Chancery Court did not shift the costs to Omnicare for production of the ESI in question, holding that although cost shifting may be appropriate when a party requests files that are not reasonably accessible, “[s]imply because the ESI is now contained on Backup Tapes instead of in active stores does not necessarily render it not reasonably accessible.” Id. The court added that checking backup tapes is a logical step that a defendant takes when complying with discovery requests. Id. Demonstrating some sensitivity to Omnicare’s cost concerns, however, the court ordered that “[p]roduction should first be from Defendants’ active stores in order to assess the likelihood of finding relevant and discoverable data on the Backup Tapes. If that is productive, then it becomes more likely that recovery from the Backup Tapes would be fruitful and processing of the Backup Tapes at Defendant’s expense would be appropriate.” Id. Since restoration of the backup tapes was a “reasonable” discovery request, the court refused to shift Omnicare’s production costs to Mariner.

Grace Bros. Ltd. v. Siena Holdings Inc.

Finally, in Grace Bros. Ltd. v. Siena Holdings Inc., the Chancery Court dealt with the issue of compelling the production of ESI when it granted Grace Brothers’ motion to compel production of incoming and outgoing emails belonging to Siena Holdings Inc.’s (“Siena”) board of directors. 2009 WL 1547821 at *1 (Del. Ch. June 2, 2009).

Grace Brothers, a shareholder in Siena, had brought allegations against Siena for conduct related to a 2003 reverse stock split. In an April 2009 discovery request, Grace asked Siena to turn over non-privileged email communications from the company’s board of directors. Siena refused to comply with the request, claiming that it had turned over all relevant emails during the initial discovery period and that production of the directors’ emails would be duplicative. Grace then filed its Motion to Compel Discovery. Id.

The Chancery Court granted Grace’s motion, holding that Grace’s production request was “reasonably calculated to lead to the discovery of admissible evidence.” Id. Moreover, the court held that “[t]he burden is on the objecting party to show that the information sought is privileged or improperly requested,” id., and Siena failed to demonstrate that the request was improperly duplicative. The directors’ declaration that none of their e-mails were discoverable was insufficient, particularly because “Siena failed to even ask that the directors look for any relevant e-mails in their accounts.” Id. Additionally, Grace’s opportunity to inquire about relevant emails during the directors’ depositions did not render the subsequent production request improper. Id. Accordingly, although Grace’s production request would result in producing some duplicative emails, the court found that “this added production would not be overly burdensome and would not result in great expense for Siena.” Id.

Conclusion

One of the first judiciaries to use e-filing and an electronic docketing system for civil cases, the Delaware Court of Chancery has been on the cutting edge of technological litigation developments. Simultaneously, the court has experienced an influx of e-discovery related issues. These decisions showcase the court’s influential role in shaping jurisprudence on e-discovery issues and its concerted efforts to provide litigants with guidance on such e-discovery issues as spoliation, cost shifting and the complications of ESI production.