Complex Litigation

Penalties Awarded for Wrongful Deletion of Emails

By Michael Hoenig - New York Law Journal - September 9, 2013

A decade after issuing her famous Zubulake line of opinions regarding the scope of a litigant's duty to preserve electronic documents and the perils of noncompliance,1 U.S. Southern District of New York Judge Shira A. Scheindlin is back at the blackboard teaching litigators about the appropriate penalty for intentional and permanent destruction of email files despite knowledge of the likelihood of litigation. The Aug. 15 decision, already creating a buzz, is Sekisui American v. Hart,2 which resulted in the plaintiffs being sanctioned by the grant of an "adverse inference" jury instruction on spoliation of evidence and, additionally, by an award to the defendant of reasonable costs, including attorney fees, associated with the motion for sanctions.

What conduct triggered such penalties? And what additional glosses over and above established e-discovery practices prompted Scheindlin to reject that part of U.S. Magistrate Judge Frank Maas' decision in Sekisui that declined to issue sanctions? In order to answer these questions at least a thumbnail sketch of the facts is needed. The dates are important. In 2008 the Sekisui companies expressed interest in acquiring America Diagnostica Inc. (ADI), a medical diagnostic products manufacturer whose CEO was Richard Hart.

The stock purchase agreement contained representations and warranties by ADI. But, suspecting noncompliance with the representations, Sekisui fired Hart and sent him a Notice of Claim on Oct. 14, 2010, evidencing intent to file a lawsuit. Sekisui's complaint against Hart for breach of contract was filed on May 2, 2012. During litigation, on Feb. 8, 2013, Sekisui's counsel revealed to Hart's defense team that Hart's email files were deleted in March 2011. That was five months after Hart received the Notice of Claim. Sekisui also revealed, in response to questioning, that a litigation hold was first put in place in January 2012, some 15 months after the Notice of Claim was sent to Hart.

Further, Sekisui had an outside vendor in charge of managing its information technology systems named Northeast Computer Services (NCS). But Sekisui did not notify NCS of the duty to preserve electronic documents until July 2012, three months after the complaint was filed. In the interim, Hart's email folder was permanently deleted by NCS at the directive of a former ADI employee named Taylor, despite recommendations to the contrary by NCS personnel. Later, Sekisui maintained that Taylor had made a unilateral decision to delete Hart's email "in order to free up space on the ADI server after determining that Hart was no longer receiving work-related email." But before that deletion, Taylor "identified and printed any emails that she deemed pertinent to the company." These were produced to Hart. However, because Taylor had them merely printed in hard copy, the "metadata" were destroyed. More about that aspect later.

One of the custodians of ADI's email folders was a former employee, Leigh Ayres, responsible for ensuring ADI's compliance with federal regulations. Ayres' electronically stored information (ESI) also was deleted by NCS upon Taylor's instruction in October 2011, one year after Sekisui sent its Notice of Claim. This deletion was carried out with the approval of ADI's president since Ayres was no longer an employee and had only been receiving junk mail. All in all, despite the foregoing deletions, Sekisui produced to the Hart defendants about 36,000 emails to and from Hart and nearly 7,000 emails and attachments from Ayres' archived email files plus several thousand more Ayres emails from other custodians' files.

Hart's counsel moved for sanctions. The dispute was referred to Magistrate Judge Maas who, although concluding that the destruction of Hart's ESI "may well rise to the level of gross negligence," declined to issue sanctions because the Hart defendants had made no showing of prejudice. As to the destroyed Ayres ESI, no determination of Sekisui's culpability was made because of defendant's failure to show prejudice.

Spoliation Sanctions

Scheindlin reversed the magistrate's decision not to award sanctions. She noted that controlling Second Circuit law regarding adverse inference instructions is reflected in the Residential Funding decision.3 There the court held that the party seeking an adverse inference instruction must establish (1) an obligation by the party having control over the evidence to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant to the claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.

The "culpable state of mind" factor is satisfied by showing that the evidence was destroyed knowingly. The sanction may be appropriate in some cases involving only negligent destruction of evidence, not because of moral culpability, but because the adverse inference is a mechanism for "restoring the evidentiary balance." Gross negligence also satisfies the culpability requirement. A "case-by-case approach" is used by the courts because failures to produce relevant evidence "occur along a continuum of fault—ranging from innocence through the degrees of negligence to intentionality."4

"Relevance" of the destroyed evidence means a sufficient showing that it would have been helpful to the party moving for the adverse inference sanction. The proof standard, however, should not be "too strict." Otherwise, the purposes of the adverse inference would be subverted. Parties who destroyed evidence would then be allowed to profit from that destruction. When the destruction is "willful," i.e., intentional, the destruction alone is sufficient circumstantial evidence for a reasonable fact finder to conclude that the missing evidence was unfavorable to the destroyer. Similarly, a showing of gross negligence, standing alone, will sometimes suffice. Indeed, frequently, the same evidence that satisfies the "culpable state of mind" factor also will be sufficient to satisfy the "relevance" factor.

The "prejudice" factor may be "presumed" when evidence is destroyed willfully or via gross negligence. When the destruction is merely negligent, however, the "burden falls on the innocent party to prove prejudice." The failure to adopt good preservation practices is "one factor in the determination of whether discovery sanctions should issue."

Scheindlin proceeded to apply the foregoing standards to the facts in Sekisui. That the plaintiff provided a good faith explanation for destruction of Hart's ESI (to save space on the server) does not change the fact that the ESI was willfully destroyed. Taylor directed NCS to permanently delete Hart's emails despite a recommendation by the IT vendor against such action. Indeed, no back-up tapes were made and even the Hart emails that Taylor did print were devoid of their metadata rendering them of "less evidentiary value." In footnote 71, the court observes that the MIT Media Lab recently developed a tool demonstrating the significance of email metadata. "The tool analyzes the metadata from the user's Gmail account and visualizes that data, revealing who the user talked to, how often, and when, among other things. See immersion: a people-centric view of your email life, http://immersion.media.mit.edu (last visited July 31, 2013). Printing paper copies of emails and permanently deleting the electronic data, then, deprives those emails of a significant amount of their evidentiary value."

The "good faith" explanation for the willful destruction of Ayres' ESI when the duty to preserve has attached does not alter the finding of willfulness. The deletion was intentional. It was done at the behest of an ADI employee with at least the knowledge, if not outright approval, of ADI's then-president.

'Inexcusable' Failures

The failure of Sekisui to implement appropriate document retention practices constitutes gross negligence. The "facts here are egregious." First, the failure to institute a litigation hold until 15 months after the Notice of Claim was gross negligence. That failure was "inexcusable" since Sekisui had full knowledge of the possibility of future litigation. Second, it took another six months to notify its IT vendor of the duty to preserve. In the meantime, the ESI of at least two significant former ADI employees was destroyed.

Moreover, there is no question that the deleted ESI is relevant. Sekisui's breach of contract action claimed violation of representations and warranties ADI made in the stock purchase agreement. One of those was that ADI complied with all relevant federal regulations. Another was that its facilities were sufficient to conduct its business activities. A third was that ADI's products contained no material defects. Clearly, CEO Hart's incoming and outgoing emails might be relevant. Further, Ayres had been ADI's employee responsible for compliance with Food and Drug Administration regulations. Her emails would be relevant on that issue.

The adverse inference analysis also includes the "prejudice" factor, i.e., that the destroyed evidence would have supported the party's claim or defense. Sometimes, this is quite difficult to prove. After all, the permanent deletion creates a void. In Sekisui, the situation was further compromised because the defendant, Hart, was unable to testify on his own behalf due to a cognitive disorder. Could the "prejudice" factor be presumed from the circumstances of an intentional destruction of evidence?

Scheindlin says "yes," weighing in mightily. The imposition of a burden upon the innocent party to show that relevant information potentially helpful to them is missing is "contrary to law." The intentional destruction "is sufficient evidence from which to conclude that the missing evidence was unfavorable to that party." Once willfulness is established, "no burden is imposed on the innocent party to point to now-destroyed evidence which is no longer available because the other party destroyed it." Rather, the risk the evidence was detrimental to the spoliator should fall on the party responsible for its loss.

Shifting such a burden to the innocent party "is inappropriate because it incentivizes bad behavior on the part of would-be spoliators." The destroyers of evidence would profit from that destruction. Thus, "prejudice is presumed" (for the purposes of determining whether to give an adverse inference instruction) when the spoliating party willfully destroys evidence.

Here, as a result of the destruction of Hart's and Ayres' ESI, defendants "are left without an untold amount of contemporaneous evidence of ADI's operations prior to purchase by Sekisui." Despite Sekisui's "real effort to minimize the harm," it is "unable to rebut the presumption of prejudice" because an unknowable amount of ESI was permanently destroyed and remains irretrievable. Scheindlin emphasizes that the presumed prejudice affects only the question whether the adverse inference instruction will be given. The jury may still determine that Hart was not prejudiced by Sekisui's willful ESI destruction. Thus, the jury can decline to draw any adverse inference.

Sekisui (1) willfully and permanently destroyed the ESI of at least two key players in this litigation; (2) failed to impose a litigation hold for more than a year after the duty to preserve arose (Sekisui was the plaintiff so, irrefutably, it knew that litigation could ensue); and (3) failed to advise its IT vendor of such litigation hold for nearly six months after (belatedly) imposing such hold. These facts justify granting the request for an adverse inference instruction. Indeed, at the end of her opinion, Scheindlin sets out the text of the jury charge she will give on spoliation. Readers will see that it truly is an uncomfortable, burdensome type of instruction for a litigant to bear.

In footnote 51 of the opinion, Scheindlin acknowledges that the proposed amendment to Federal Rule of Civil Procedure 37(e) (recently issued for public comment by the U.S. Judicial Conference's Standing Committee on Rules of Practice and Procedure), if adopted, would "abrogate" Residential Funding insofar as it holds that sanctions may be appropriate for negligent destruction of evidence.

The proposed amendment would permit sanctions only if the destruction (1) caused substantial prejudice and was willful or in bad faith, or (2) irreparably deprived a party of any meaningful opportunity to present or defend its claims. The Advisory Committee Note to the proposed rule would require the innocent party to prove "substantial prejudice" by the loss of relevant information, even where the spoliator's destruction was willful or in bad faith.

Scheindlin disagrees that such a burden in willful spoliation circumstances should fall on the innocent party. This would create "perverse incentives" and encourage "sloppy behavior." Further, under the proposed rule, spoliating parties cannot be sanctioned even if they were negligent, grossly negligent or reckless. In any event, since the proposal has not yet undergone public comment and hearings, it was "irrelevant" for the purposes of the motion in Sekisui.

Conclusion

Electronic discovery continues to be an area of turmoil, particularly when litigants fall below norms of recommended practices and procedures regarding preservation of evidence or when excessive, disproportionate discovery demands are made and bitter battles to limit those demands ensue. For more than a decade, Scheindlin's decisions regarding preservation of ESI have helped refine litigant behavior. Sekisui is the latest wake-up call that rules governing electronic discovery are to be taken seriously.

Michael Hoenig is a member of Herzfeld & Rubin.

Endnotes:

1. See Zubulake v. UBS Warburg, 217 F.R.D. 309 (S.D.N.Y. 2003) (Zubulake 1); Zubulake v. UBS Warburg, No, 02 Civ. 1243,2003 WL 21087136 (S.D.N.Y. May 13, 2003) (Zubulake 11); Zubulake v. UBS Warburg, 216 F.R.D. 280 (S.D.N.Y. 2003) (Zubulake III); Zubulake v. UBS Warburg, 220 F.R.D. 212 (S.D.N.Y. 2003) (Zubulake IV); Zubulake v. UBS Warburg, 229 F.R.D. 422 (S.D.N.Y. 2004) (Zubulake V).

2. 2013 U.S. Dist. LEXIS 115533 (S.D.N.Y. Aug. 15, 2013); see B. Pierson, "Sanctions Imposed for Non-Malevolent Destruction of Emails," New York Law Journal, Aug. 19, 2013, p. 1.

3. Residential Funding v. DeGeorge Financial, 30 F.3d 99 (2d Cir. 2002).

4. Quoting from Residential Funding, 306 F.3d at 108.

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