Nursing Home Pension Fund v. Oracle Corp., case No. 01-0988 (N.D. Cal. Sept. 2, 2008)

In this class action securities fraud case relating to statement made by oracle concerning its financial results for the second quarter of fiscal year 2001, forecasts for the third quarter, the effects of the slowing economy on Oracle’s business, and the functionality of Oracle’s 11i Applications Suite, District Judge Susan Illston has ruled that Oracle spoliated evidence that would demonstrate Oracle’s Chairman Ellison's knowledge of, among other things, problems with Suite 11i, the effects of the economy on Oracle's business, and problems with Oracle’s forecasting model.

The court noted the development of three types of sanctions: (1) a court can instruct the jury that it may infer that evidence made unavailable by a party was unfavorable to that party; (2) a court can exclude witness testimony based on the spoliated evidence; and (3) the harshest of sanctions, a court can dismiss the claim of the party responsible for the spoliation. The court referred to the Third Circuit’s three factor analysis: (1) "the degree of fault of the party who altered or destroyed the evidence"; (2) "the degree of prejudice suffered by the opposing party"; and (3) "whether there is a lesser sanction that will avoid substantial unfairness to the opposing party." The court also referred to the Ninth Circuit’s dismissal analysis. "Before imposing the 'harsh sanction' of dismissal," courts should consider "(1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its dockets; (3) the risk of prejudice to the party seeking sanctions; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions." Slip Opinion at 5-6 (quoting Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006)).

The court rejected default sanctions as unwarranted given the degree of prejudice demonstrated – plaintiffs had received a large quantity of materials in discovery.

The court next considered a sanction of an adverse interest instruction. In order for a court to impose an adverse inference sanction, plaintiffs must demonstrate "'(1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that [evidence was] destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.'" Slip Opinion at 7 (quoting In re Napster, Inc. Copyright Litig., 462 F. Supp. 2d 1060, 1078 (N.D. Cal. 2006)). The parties agreed that the culpable state of mind was willfulness. Plaintiffs' claims arose under the Private Securities Litigation Reform Act ("PSLRA"), which provides that a party may apply for an award of appropriate sanctions where it is "aggrieved by the willful failure of an opposing party to" preserve relevant evidence.

Plaintiffs sought lesser sanctions with regard to five categories of evidence: (1) documents that may have been in the possession of employees who did not receive document preservation instructions from Oracle after this action was filed; (2) defendant Ellison's email files; (3) materials created during preparation for the book Softwar; (4) documents relating to the audit trail of a November 17, 2000 debit memos; and (5) backup tapes of the OSO database.

With respect to the first of these, the court found that sanctions were not warranted. Plaintiffs did not identify any particular documents that were not preserved as a result of defendants' preservation efforts, and plaintiffs received a great deal of evidence despite any shortcomings in defendants' efforts.

The court did, however, feel that sanctions were appropriate for Ellison’s failure to preserve his emails:

It is undisputed that defendants produced only 15 emails sent or received by Ellison from Ellison's own email files, and defendants do not contend that all of Ellison's emails were preserved in his files. Instead, defendants note that over 1,650 of Ellison's emails were produced to plaintiffs from the files of other Oracle employees. … . Moreover, having established with certainty that numerous emails were not produced from Ellison's email files – because the emails were produced from other files or accounts – it is impossible to know whether additional unproduced emails were also deleted or not turned over.

Slip Opinion at 8-9. The court found that defendants had an obligation to preserve Ellison’s emails at least as early as the date when Plaintiff filed suit or four days later, when preservation instructions were issued.

The court further held that the destruction of these emails was willful, because they had "some notice that the documents were potentially relevant to the litigation before they were destroyed," and because they could have supported the argument that Ellison himself had knowledge of problems with the third quarter forecast or Suite 11i.

The Court also found that an adverse inference is appropriate with regard to materials created in connection with the drafting of the book Softwar. Ellison had ownership rights in the transcribed interviews, knew of the litigation at the time most interviews were conducted, and failed to take any efforts to preserve the materials despite his obligation to do so. Moreover, the court found that the failure to preserve them was willful because they had "some notice that the documents were potentially relevant to the litigation."

Read the Opinion