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Article: July 2017: A Practical Guide to Spoliation Sanctions Under Amended Rule 37(e)

July 01, 2017
Business Litigation Reports

Federal Rule of Civil Procedure 37(e), addressing the availability of sanctions for failure to preserve electronically stored information (ESI), was amended effective December 1, 2015. One purpose of the amendments, as the advisory committee explained upon the new rule’s promulgation, is to resolve disagreement among the federal courts of appeals regarding the circumstances under which sanctions are available. See Fed. R. Civ. P. 37(e) advisory committee note (2015). Noting that under the prior version of the rule (which had been adopted in 2006) litigants often felt compelled to undertake excessive preservation measures in order to avoid the possibility of losing a case because of an inadvertent preservation error, the committee sought a compromise under which the district courts would retain authority to punish extreme violations of discovery obligations without creating a mandate that would lead to excessive or disproportionate penalties. The amended rule aims to achieve this goal in part by specifying a detailed sequence of conditions to the imposition of sanctions.

  • First, the preamble of the rule makes clear that it applies only if (i) relevant ESI “should have been preserved in the anticipation or conduct of litigation”; (ii) that ESI “is lost because a partyfailed to take reasonable steps to preserve it”; and (iii) the lost information “cannot be restored or replaced through additional discovery.”
  • Second, paragraph (e)(1) provides that if a loss of ESI satisfies the preamble paragraph’s prerequisites and caused prejudice to another party, the court “may order measures no greater than necessary to cure the prejudice.” This provision allows the court to grant curative sanctions even if the loss of information was unintentional, and thus encompasses both negligent and reckless behavior. But as the advisory committee’s note makes clear, an innocent loss of information is not sanctionable so long as the party in question has taken reasonable steps to attempt to preserve the ESI at issue—perfection is not required.
  • Third, paragraph (e)(2) provides that if a loss of ESI satisfies the preamble prerequisites and was the result of a party’s action “with the intent to deprive another party of the information’s use in the litigation,” the court may impose more serious sanctions including (A) presuming that the lost information was unfavorable to the party; (B) instructing the jury that it may or must presume the information was unfavorable to the party; or (C) terminating the case by dismissing the action or entering a default judgment. The advisory committee explained that such sanctions may be ordered without an express finding of prejudice, on the theory that when a party intentionally destroys information for the purpose of depriving an adversary of that information, it may fairly be presumed that access to the information in question would benefit the adversary (and, conversely, that loss of access causes prejudice). However, the advisory committee also made clear that imposition of such harsh sanctions is not required even upon a finding of intentional spoliation—rather, “the remedy should fit the wrong,” and lesser sanctions should be used when adequate.

A survey of decisions issued since the amendment went into effect, which cover a wide variety of factual scenarios and substantive subject matter, shows that courts are closely parsing the rule’s new language, giving effect to each of its stated prerequisites and limiting the circumstances in which they award the harsh and potentially case-terminating sanctions authorized by paragraph (e)(2). The new provisions are thus generally having their desired effect: Issuance of ESI-spoliation sanctions has become relatively predictable and standardized, even while the discretion afforded to district court judges and the inevitable differences among fact patterns has led to variation in the particular sanctions awarded.

Enforcing the Amended Rule’s Prerequisites to Sanctions
First, with respect to the duty to preserve, the advisory committee notes make clear that the rule itself “does not attempt to create a new duty to preserve,” but merely provides a mechanism for enforcing rules that exist at common law or which may be imposed by some other authority (such as a court order). This leaves the courts with flexibility to determine whether and when a duty attaches on the facts of each case—though in general, once litigation is anticipated (or commenced) the common law will impose a duty to preserve information that may be relevant to the case. For instance in Keim v. ADF Midatlantic, LLC, No. 12-CV-80577, 2016 WL 7048835 (S.D. Fla. Dec. 5, 2016), the plaintiff brought a putative class action under the Telephone Consumer Protection Act, alleging that the defendants had unlawfully sent him unsolicited text messages. The defendants sought Rule 37(e) sanctions on grounds that the plaintiff had deleted many of his text messages, including messages over which he was suing and which had been exchanged in February or March of 2011. The plaintiff did not anticipate bringing the action until October of that year, and the defendants were unable to produce evidence that the messages were deleted after that date—in fact it appeared that the plaintiff had deleted the messages close in time to when he received them. The court thus declined to impose sanctions even though the evidence in question was potentially central to the case.

The Southern District of New York explored the meaning of the rule’s next requirement—that ESI be “lost”—in CAT3, LLC v. Black Lineage, Inc., 164 F. Supp. 3d 488 (S.D.N.Y. 2016). CAT3 was a trademark case in which the parties disputed the date on which the defendant had notice of the plaintiff’s mark. In seeking to establish an early notice date, the plaintiff pointed to emails purporting to show that the defendant’s employee was aware of the mark—but in fact the evidence showed (and Magistrate Judge Francis found) that the plaintiff had digitally altered the emails. Undoctored copies of the emails were available (and arguably defeated any notion that ESI was “lost” in a manner that it could not be recovered), but the court concluded that Rule 37(e) nevertheless could apply because “the fact that there are near-duplicate emails showing different addresses casts doubt on the authenticity of both.” (The court also ruled in the alternative that even if Rule 37(e) did not apply, it still would have inherent authority to impose sanctions as a remedy for the plaintiff’s bad-faith evidence manipulation.)

Even where ESI has been lost, Rule 37(e) sanctions will not attach if the party in possession of the information undertook “reasonable steps” to preserve it. The advisory committee explained that the amended rule “does not call for perfection,” and that data loss as a result of “routine, good-faith operation of an electronic information system” likely is not sanctionable. In assessing reasonableness, courts should be “sensitive to the party’s sophistication with regard to litigation,” as well as to the party’s financial resources. For instance, in Best Payphones, Inc. v. City of New York, No. 1-CV-3924, 2016 WL 792396 (E.D.N.Y. Feb. 26, 2016), the plaintiff’s principal had lost a number of relevant emails with third parties, which he had a duty to preserve because of pending litigation. But the court declined to order sanctions for his breach of this duty, in part because he believed, mistakenly but reasonably in light of his level of sophistication, that he could sufficiently preserve the emails by marking them as “new.” Best Payphones contrasts with Feist v. Paxfire, Inc., No. 11-CV-5436, 2016 WL 4540830 (S.D.N.Y. Aug. 29, 2016), where the court imposed sanctions on the plaintiff, who had lost relevant ESI when her computer crashed. The court observed that the plaintiff was “not a novice at computer functioning” and should therefore have known that she would need to back up data relevant to the case. Id. at *4.

Consistent with the final requirement of the preamble, courts will not order Rule 37(e) sanctions where the party seeking relief is not prejudiced because the purportedly lost ESI can be “restored or replaced.” For example, in Eshelman v. Puma Biotechnology, Inc., No. 7:16-CV-18, 2017 WL 2483800, (E.D.N.C. June 7, 2017), a libel suit based on the contents of an investor presentation, the plaintiff sent a notice instructing to the defendant to preserve ESI including the web browser histories of individuals involved in preparing the presentation. The defendant lost that data, despite awareness of the need to preserve it, when individual users’ browser software automatically deleted their histories. But the court declined to impose sanctions, explaining that “other avenues of discovery,” such as deposition testimony, were “likely to reveal information about the searches performed in advance of the investor presentation.”

Even where all the preamble’s prerequisites are satisfied, courts have declined to impose sanctions where the record does not establish either prejudice or intentional destruction of ESI. In Living Color Enterprises, Inc. v. New Era Aquaculture, Ltd., No. 14-CV-62216, 2016 WL 1105297 (S.D. Fla. Mar. 22, 2016), for instance, the court expressly found that each of the preamble’s prerequisites was met, but nevertheless denied relief: Although the defendant had deleted a number of text messages, the loss of the ESI was not prejudicial to the plaintiff (ruling out paragraph (e)(1) remedial sanctions) because the plaintiff had not established that the missing messages were relevant to its claims. The court also concluded that paragraph (e)(2) was inapplicable because in deleting the messages the defendant had not intended to deprive the plaintiff of access to evidence, but had instead engaged in a routine maintenance of his phone’s data and had not acted in bad faith.

Judicial Discretion to Tailor Sanctions
In cases where ESI loss has been caused by merely negligent conduct, courts have heeded the Rule 37(e) amendment’s purpose by avoiding imposition of severe sanctions. For instance, in McQueen v. Aramark Corp., No. 2:15-CV-49, 2016 WL 6988820 (D. Utah Nov. 29, 2016), the defendant admitted that it had lost potentially relevant data because it had failed to put in place reasonable preservation measures. But the district court concluded that there was no evidence that the defendant had intended to deprive the plaintiff of the ESI or otherwise acted in bad faith. Thus, rather than impose a presumption or instruct the jury about what to infer from the missing evidence, the court directed that it would allow each party “to present evidence to the jury regarding the spoliation of the … ESI and to argue any inferences they want the jury to draw” from the spoliation—an intermediate sanction expressly identified in the advisory committee notes as appropriate under paragraph (e)(1), and which other courts have imposed in similar circumstances. See, e.g., BMG Rights Mgmt. (US) LLC v. Cox Commc’ns, Inc., 199 F. Supp. 3d 958, 986 (E.D. Va. 2016); Nuvasive, Inc. v. Madsen Med., Inc., No. 13-CV-2077, 2016 WL 305096 (S.D. Cal. Jan. 26, 2016). The decisions also make clear that the severest sanctions under Rule 37(e)(2) are not mandatory even where the perpetrator acts in bad faith. Instead, the amended rule leaves the courts with discretion to determine what sanction is most appropriate on the particular facts of the case. For instance, in CAT3 (discussed above) the S.D.N.Y. declined to invoke Rule 37(e)(2) even though it found that the plaintiff had intentionally manipulated emails in a bid to strengthen its case. Instead, the court precluded the plaintiffs from using the doctored emails at trial—protecting the defendants from legal prejudice without unnecessarily preventing the plaintiffs from pursing claims that might in fact have been legitimate. The court also ordered the plaintiffs to pay the costs and attorneys’ fees that the defendants had incurred in investigating and litigating the sanctions motion, explaining that this would “ameliorate[] the economic prejudice imposed on the defendants and also serve[] as a deterrent to future spoliation.” Similarly in Ericksen v. Kaplan Higher Educ., LLC, No. 14-CV-3106, 2016 WL 695789 (D. Md. Feb. 22, 2016), the court declined to dismiss the plaintiff’s case even in the face of willful violation of her preservation obligations, opting instead to preclude her from introducing into evidence certain documents whose authenticity could not be determined without the missing ESI.

Of course, serious misconduct may still lead to serious sanctions. In GN Netcom, Inc. v. Plantronics, Inc., No. CV 12-1318-LPS, 2016 WL 3792833 (D. Del. July 12, 2016), one of the defendant’s high-ranking executives intentionally deleted thousands of potentially relevant emails, and admitted that he had instructed other employees to delete relevant emails from their inboxes as well. When confronted with allegations of this wrongdoing, the defendant did not take steps to ameliorate the problem, but dissembled and tried to convince the plaintiff that the emails had largely been recovered. The plaintiff ultimately was forced to hire its own forensic expert, whose analysis revealed a much higher volume of deleted emails than the defendant had acknowledged. The court imposed Rule 37(e)(2) sanctions on the defendant, even though it had taken a series of facially reasonable ESI-preservation steps—including issuing and updating litigation hold notices and conducting training sessions. The defendant remained responsible for the executive’s intentional deletions, and the court found that its obfuscations in response to the plaintiff’s investigation demonstrated bad faith. Yet despite the defendant’s bad faith, the court did not enter default judgment or order a mandatory inference against it; instead, it imposed a $3 million monetary sanction and ordered that it would instruct the jury that it would be allowed (but not required) to infer that the missing ESI was unfavorable to the defendant. Other cases have similarly opted for permissive rather than mandatory instructions to remedy intentional spoliation, in accord with the amendment’s general goal of dialing back the severity of discovery sanctions. See, e.g., Edelson v. Cheung, No. 13-CV-5870, 2017 WL 150241 (D.N.J. Jan. 12, 2017); First Fin. Sec., Inc. v. Freedom Equity Grp., LLC, No. 15-CV-1893-HRL, 2016 WL 5870218, (N.D. Cal. Oct. 7, 2016); Lexpath Techs. Holdings, Inc. v. Welch, No. 13-CV-5379, 2016 WL 4544344 (D.N.J. Aug. 30, 2016); accord Sec. Alarm Fin. Enters., L.P. v. Alarm Prot. Tech., LLC, No. 13-CV-00102, 2016 WL 7115911 (D. Alaska Dec. 6, 2016) (both granting permissive inference instruction and precluding introduction of certain evidence).

A final case illustrates the severity of wrongdoing that courts may require before imposing case-terminating sanctions under paragraph (e)(2). In Omnigen Research v. Yongqiang Wang, No. 6:16-CV-00268-MC, 2017 WL 2260071 (D. Or. May 23, 2017), the court granted default judgment in favor of the plaintiff, but did so only after finding numerous instances in which the defendant had intentionally deleted and blocked production of thousands of emails and documents that were obviously relevant to the dispute (including by “donating” a desktop computer containing relevant documents to Goodwill)—even after the court had issued multiple orders requiring their production. The intentional destruction was egregious, and its extent was such as to “severely undermine[] the Court’s ability to render a judgment based on the evidence.” Id. at *1. The decision confirms that Rule 37(e)’s amendments have not foreclosed the possibility of case-ending sanctions, but it simultaneously illustrates that truly extraordinary conduct will likely be necessary to persuade a court to grant a default judgment or similar case-dispositive relief based on discovery violations.