ESI Preservation 2010 Case Law Update Contents
Title Page & IntRODUCTION 1
The Three Seminal ESI Cases of 2010 2
Additional Selected Cases of 2010 6
Conclusion 10
Complete Opinions 11
Office Locations 551 1 2010 ESI Preservation Case Law Update
uring the past decade the obligation to In selecting ESI-related opinions to address we have preserve electronically stored information deliberately steered away from many cases with (ESI) has continued to be shaped and defined egregious fact patterns where imposition of a severe Dby case law across the United States. 2010 sanction was never in doubt. The use of programs named was no different in this regard. For your review, we “File Shredder” and “Privacy Eraser Pro” to deliberately provide summaries of what we think were 2010’s most destroy ESI on the eve of an inspection makes for noteworthy cases in the area of ESI preservation. interesting reading.1 However, opinions pertaining to such behavior are not particularly instructive relative to You are likely already well-familiar with spoliation methods by which a litigant can comply with preservation in general and the sanctions a court can impose for obligations. Therefore, we have instead focused primarily a litigant’s failure to properly preserve evidence, on cases in which better preservation practices, policies including ESI. This letter focuses primarily on the and procedures at an organization-wide level could have obligations that arise, and the potential sanctions that prevented spoliation of ESI. can be imposed, once a reasonable anticipation of litigation (or an investigation) has triggered the duty For many potential litigants, ESI preservation issues are to preserve. There is no question that certain severe treated as secondary in importance to the underlying sanctions can be a death sentence in litigation, including substantive issues. The Rimkus opinion responds to such the preclusion of evidence, an adverse inference treatment as follows: instruction to a jury, and obviously a dispositive sanction such as a default judgment or a dismissal. “Spoliation of evidence--particularly of electronically Although the federal circuits have slightly varying stored information--has assumed a level of importance standards, all federal courts consider the spoliating in litigation that raises grave concerns. Spoliation party’s degree of culpability, the relevance of the lost allegations and sanctions motions distract from the merits evidence, and the resulting prejudice on the innocent of a case, add costs to discovery, and delay resolution. party when determining whether to impose a sanction The frequency of spoliation allegations may lead to and the severity of the sanction. decisions about preservation based more on fear of potential future sanctions than on reasonable need for Provided below is a review of eight relevant cases, information. Much of the recent case law on sanctions including what we have deemed the three seminal ESI for spoliation has focused on failures by litigants and their cases from the past year: Pension Committee, Rimkus, lawyers to take adequate steps to preserve and collect and Victor Stanley II. Although the three opinions differ information in discovery.”2 in many regards, they each remain consistent with several basic trends we have observed during the past year: Certainly we all have a natural inclination to focus on the merits of a case rather than the preservation of ESI. ►►courts continue to display less tolerance for However, we believe that the implementation of a legal preservation errors; hold policy and associated set of procedures, along with a general understanding of e-Discovery case law, will ►►Preservation errors often have a major impact on the help prevent spoliation allegations and sanctions motions litigation even when not fatal; and which “distract from the merits of a case, add costs to ►►Preservation errors are less likely to occur when a discovery, and delay resolution.” litigant follows reasonable and appropriate steps, including the issuance of a legal hold plus follow-up 1 supervision and monitoring of the hold. See Peal v. Lee, 403 Ill. App. 3d 197 (Ill. App. Ct. 1st Dist. 2010). 2 Rimkus Consulting Group, Inc. v. Cammarata, 688 F. Supp. 2d 598, 607 (S.D. Tex. 2010). 2
The Three Seminal ESI Cases of 2010
Pension Committee v. Banc of America negligent manner. Where a party destroys evidence Southern District of New York, in bad faith, that bad faith alone is sufficient January 15, 2010 circumstantial evidence from which a reasonable With little doubt, the most discussed legal opinion of fact finder could conclude that the missing evidence 2010 pertaining to e-Discovery and ESI is Pension was unfavorable to that party. Committee v. Banc of America.3 You may recall that we distributed an update on this case last year. ►►Although many courts in this district presume This opinion, authored by Judge Shira Scheindlin relevance where there is a finding of gross of Zubulake fame, clarified numerous preservation negligence, application of the presumption is not responsibilities of litigants. In fact, the court held required. However, when the spoliating party was that certain failures in the preservation of ESI can be merely negligent, the innocent party must prove deemed gross negligence, thereby permitting a court both relevance and prejudice in order to justify the to impose sanctions based on the culpability of the imposition of a severe sanction. The innocent party spoliating party. Specifically, the court identified the may do so by adducing sufficient evidence from following examples of gross negligence in the context which a reasonable trier of fact could infer that the of ESI preservation: destroyed or unavailable evidence would have been of the nature alleged by the party affected by its ►►Failure to issue a written litigation hold; destruction. In other words, the innocent party must ►►Failure to cease routine deletion of e-mail; present extrinsic evidence tending to show that the destroyed e-mails would have been favorable to its ►►Failure to collect ESI from key players; case.
►►Failure to collect ESI from retained files of former ►►Courts must take care not to hold the prejudiced employees; and, party to too strict a standard of proof regarding ►►Failure to preserve backup tapes if sole source of the likely contents of the destroyed or unavailable relevant info. evidence, because doing so would allow parties who have destroyed evidence to profit from that In addition to providing bright-line rules for which ESI destruction. preservation failures constitute gross negligence, Judge Based upon the loss of ESI caused by the preservation Scheindlin explained when a court should presume failures of many plaintiffs in the underlying that lost evidence was relevant to the litigation and that litigation, Judge Scheindlin presumed relevance the loss was prejudicial to the requesting party4: and prejudice and ruled that at trial the jury would ►►Relevance and prejudice may be presumed when receive an adverse inference instruction. This sanction the spoliating party acted in bad faith or in a grossly effectively destroyed the plaintiffs’ case. Notably, an important take-away from this case stems from Judge 3 Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Scheindlin’s bold announcement that her Zubulake Secs, LLC, 2010 U.S. Dist. LEXIS 4546 (S.D.N.Y. Jan. 15, 2010). 4 Bulleted quotations paraphrased from Pension Committee [internal series of opinions from 2003 to 2006 had placed quotations omitted]. 3
litigants on notice of ESI preservation obligations, destroyed evidence that was subject to the duty to including the requirement to issue a legal hold. This preserve. However, under the Fifth Circuit’s standards, indicates the clear trend in this area of law that in the court did not issue a dispositive sanction, as recent years courts have had significantly reduced requested by the non-spoliating party. Instead of tolerance for ESI preservation failures.. focusing on the spoliating party’s failures, the Rimkus court highlighted the absence of prejudice due to Rimkus Consulting Group v. Cammarata the availability of extensive remaining evidence Southern District of Texas, which supported both the employer’s counter claims February 19, 2010 and its defenses to the claims brought by its former This opinion, by Judge Lee Rosenthal of the Southern employees. As a result, the court held only that the District of Texas, received extensive publicity jury could hear evidence of the employees’ deletion during the first half of 2010 as it was issued in the of e-mails and could infer that the destroyed evidence wake of Pension Committee and is viewed by many would have been favorable to the employer if it commentators as a response to the harsh sanctions believed that the employees committed intentional imposed by Judge Scheindlin. However, despite an spoliation. Additionally, the employees were ordered apparent surface-level conflict between these two to pay fees and costs associated with the litigation as it seminal cases, the analysis of sanctions in Rimkus pertained to the spoliation issue. was based on Fifth Circuit case law rather than Second Circuit case law as in Pension Committee. Despite a seemingly conflicting result withPension Nevertheless, many e-Discovery commentators have Committee, upon close analysis the Rimkus decision considered these two cases to be dueling opinions was based largely on its facts and on a different due to the difference in the severity of the sanctions application of spoliation sanctions in the Fifth Circuit. imposed. Regardless of these differences, Rimkus emphasizes litigants’ preservation requirements and reinforces The dispute underlying the opinion involved claims the need for companies to have defensible legal hold by former employees of Rimkus Consulting Group procedures in place. Notable quotes from Rimkus regarding an alleged lack of enforceability of include:6 noncompete clauses that the employees had signed prior to terminating their employment. At issue in ►►Dismissal is an available sanction when a party has this opinion were allegations of “the intentional engaged deliberately in deceptive practices that destruction of emails and other electronic information undermine the integrity of judicial proceedings at a time when they were known to be relevant to because courts have inherent power to dismiss an anticipated or pending litigation.”5 Following a lengthy action when a party has willfully deceived the court discussion and analysis of spoliation sanctions and the and engaged in conduct utterly inconsistent with the relevant facts, the court held that the employees had orderly administration of justice. deliberately deleted e-mails and their attachments after ►►A court has statutory authority to impose costs, the duty to preserve had been triggered. expenses, and attorneys’ fees on any attorney who so multiplies the proceedings in any case Anyone with a passing familiarity of Pension unreasonably and vexatiously. Committee, and the knowledge that a failure to issue a litigation hold was held to constitute gross negligence ►►Whether preservation conduct is acceptable in a and warrant an adverse inference sanction, would case depends on what is reasonable, and that in turn expect severe sanctions where a litigant deliberately 6 Bulleted quotations paraphrased from Rimkus [internal quotations 5 Id. omitted]. 4
depends on whether what was done--or not done- Victor Stanley v. Creative Pipe -was proportional to that case and consistent with (“Victor Stanley II”) clearly established applicable standards. As Judge District of Maryland, September 9, 2010 Scheindlin pointed out in Pension Committee, that analysis depends heavily on the facts and Though perhaps not as widely known as Judge Shira circumstances of each case and cannot be reduced Scheindlin, one of the more notable judges in the field to a generalized checklist of what is acceptable or of e-Discovery is Chief Magistrate Judge Paul Grimm unacceptable. of the District of Maryland. His judicial opinions have covered a wide swath of e-Discovery topics. Most ►►Determining whether sanctions are warranted and, recently, Judge Grimm gained increased recognition if so, what they should include, requires a court for the severity of spoliation sanctions issued in to consider both the spoliating party’s culpability Victor Stanley II: imposition of a prison sentence and the level of prejudice to the party seeking for contempt of court until the spoliator paid his discovery. adversary’s attorney’s fees and costs.7 ♦♦ Culpability can range along a continuum Judge Grimm’s lengthy opinion in Victor Stanley II from destruction intended to make evidence recounted an extensive history of failures by defendant unavailable in litigation to inadvertent loss Creative Pipe and its president, Mark Pappas, to of information for reasons unrelated to the preserve ESI relevant to the pending litigation. litigation. More specifically, the court discussed “eight discrete ♦♦ Prejudice can range along a continuum from an preservation failures” by defendants while labeling the inability to prove claims or defenses to little or defendants “the gang that couldn’t spoliate straight.” no impact on the presentation of proof. These eight failures are as follows8
►►A court’s response to the loss of evidence depends (1) Pappas’s failure to implement a litigation hold; on both the degree of culpability and the extent of (2) Pappas’s deletions of ESI soon after [Victor prejudice. Even if there is intentional destruction Stanley] filed suit; of potentially relevant evidence, if there is no prejudice to the opposing party, that influences (3) Pappas’s failure to preserve his external hard drive the sanctions consequence. Even if there is an after Plaintiff demanded preservation of ESI; inadvertent loss of evidence but severe prejudice to the opposing party, that too will influence the (4 Pappas’s failure to preserve files and emails after Plaintiff demanded their preservation; appropriate response, recognizing that sanctions (as opposed to other remedial steps) require some (5) Pappas’s deletion of ESI after the Court issued its degree of culpability. first preservation order;
►►With regard to the safe harbor for routine (6) Pappas’s continued deletion of ESI and use of destruction under Fed. Rule Civ. Pro. 37(e), a programs to permanently remove files after retention/deletion policy that pertains to emails the Court admonished the parties of their duty subject to a present duty to preserve is not a routine, to preserve evidence and issued its second good-faith operation of a computer system where preservation order; the policy is implemented after the duty to preserve 7 The first Victor Stanley opinion pertained primarily to attorney-client has been triggered. privilege issues and is not specifically relevant to ESI preservation. 8 All bulleted points and quotations paraphrased from Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497, 516 (D. Md. 2010) [internal quotations omitted]. 5
(7) Pappas’s failure to preserve ESI when he replaced ♦♦ In contrast, district courts in the Third, Fifth, and the CPI server; and, Ninth Circuits have held that the preservation duty exists only when the party controls the (8) Pappas’s further use of programs to permanently evidence, without extending that duty to delete ESI after the Court issued numerous evidence controlled by third parties. production orders. ♦♦ What should a company that conducts business A reading of Victor Stanley II leaves little doubt that across numerous Federal Circuits do to develop the defendant’s multitude of preservation failures a preservation policy that complies with the and repeated attempts to deliberately destroy ESI, inconsistent obligations imposed by these even after specifically being instructed otherwise circuits? This is the question for which a suitable by the Court, infuriated Judge Grimm. As a result, answer has proven elusive. Judge Grimm ruled that “Pappas’s pervasive and willful violation of serial Court orders to preserve ►►Breach of the preservation duty is also premised and produce ESI evidence be treated as contempt of on reasonableness: A party breaches its duty court, and that he be imprisoned for a period not to to preserve relevant evidence if it fails to act exceed two years, unless and until he pays Plaintiff’s reasonably by taking positive action to preserve attorney’s fees and costs.” Though the severity of this material evidence. The action must be reasonably sanction derived from deliberate spoliation, Judge calculated to ensure that relevant materials will be Grimm reinforced the primary rules pertaining to preserved, such as giving out specific criteria on preservation of ESI, including that a litigant can be what should or should not be saved for litigation. held liable for spoliation of evidence caused by an ►►Each case will turn on its own facts. The variety agent or third-party in possession of ESI. of efforts and failures is infinite. Information ►►A party may be held responsible for the spoliation may have been lost or destroyed inadvertently for of relevant evidence done by its agents. This reasons unrelated to the litigation, or the loss may obligation is not negated should a third party result from intentional acts calculated to prevent the entrusted with the evidence either lose or discard other party from accessing the evidence. Therefore, it. Thus, agency law is directly applicable to a the court must rely on its gut reaction based on spoliation motion, and the level of culpability of the years of experience as to whether a litigant has agent can be imputed to the master. complied with its discovery obligations and how hard it worked to comply. ►►Parties must preserve potentially relevant evidence under their control. ►►That Defendants failed to take any reasonable measures to preserve data is accurate. The evidence ♦♦ In the Fourth Circuit and the Second Circuit, of record is abundantly clear that Defendants did documents are considered to be under a party’s not implement any system to prevent users from control when that party has the right, authority, deleting files from the server or to stop the backup or practical ability to obtain the documents from system from being overwritten. a non-party to the action. In addition to the recognition of multiple preservation ♦♦ In the Fourth Circuit, as well as the First and failures, Judge Grimm included in this opinion Sixth Circuits, the preservation duty applies not criticism of the defendant’s use of an unqualified ESI only when the evidence is in the party’s control. expert whose wife was employed by defendant: There is also a duty to notify the opposing party of evidence in the hands of third parties. 6
►►In evaluating the weight to be given to defendant’s teaches a college-level computer forensics course, expert’s testimony, I cannot overlook his and has worked on computers professionally since dependence on his wife’s income, as he testified 1993. that his wife earns approximately 75-80% of their Although this opinion’s notoriety derives extensively family income. from the imposition of a potential prison term as a ►►Defendant’s expert’s qualifications as an ESI expert spoliation sanction (technically for contempt of court), leave much to be desired, as he has not taken any Judge Grimm has provided many useful practice tips college-level computer courses or passed any in the area of ESI preservation, from recognizing Microsoft proficiency tests. He is certified from HP the obligation to preserve ESI in possession of third- to repair their printers and computers, but failed parties, to the need for a party to retain an appropriate the one Microsoft examination he took. In contrast, ESI consultant. Plaintiff’s ESI expert has passed Microsoft tests, Additional Selected Cases of 2010
In re Toyota Motor Corp. ►►E-mails and attachments to e-mails, including all Unintended Acceleration Marketing, metadata associated with both the e-mail and any Sales Practices, etc. Central District of California, July 20, 2010 attachments. Reasonable preservation approaches include: The class action plaintiffs in this widely known multidistrict litigation against Toyota are seeking i. Identifying individuals reasonably likely to damages for economic losses due to an alleged loss create or receive electronic mail documents of value of their automobiles stemming from the and instructing such individuals to retain such company’s heavily publicized unintended acceleration electronic mail documents in electronic form, problems. Although this recent judicial opinion is merely a preservation order, it provides insight into the ii. Use of an automated electronic preservation forms of ESI which must be maintained pursuant to the system that identifies and preserves specific duty to preserve and, more importantly, the methods of emails based on reasonable criteria such as preservation which the court deems “reasonable.” predetermined keywords and/or other reasonable criteria, As explained in the stipulated order, the parties are required to identify all document custodians and to iii. Saving electronic mail documents in [its] preserve a wide range of documents, plus tangible electronic mail program and refraining from items, pursuant to the preservation requirements of deleting or otherwise altering electronic mail the Federal Rules of Civil Procedure. Though silent documents and attachments required under this regarding many specific preservation issues, the court- Order, or ordered stipulation in the Toyota litigation provides guidance to litigants regarding implementation of iv. Taking any other reasonable preservation step(s) defensible preservation methods. ESI ordered to be as appropriate for such data. preserved, and the methods of preservation, are as follows, in pertinent part:9
9 All bulleted points and quotations paraphrased from In re Toyota Motor Corp. Unintended Acceleration Mktg., Sales Practices, & Prod. Liab. Litig., 2010 U.S. Dist. LEXIS 86136 (C.D. Cal. July 20, 2010). 7
►►Other non-e-mail electronic documents saved on had reassembled the source code and that therefore Network Accessible Storage Devices, Local Hard its adversary would not be prejudiced), this opinion Drives, External Hard Drives or Other Electronic provides another strong warning about the failure of a Media, including all metadata that is contained litigant, or potential litigant, to properly preserve ESI. within a file when the file is preserved. Reasonable As the court inferred, an information retention policy preservation approaches include: should have been in place to prohibit (or at least limit) employees from maintaining data individually, and i. Preserving an identical copy of all such there should have been a policy in place to prevent loss documents, of ESI when employees leave the company. ii. Making reasonable efforts to identify individuals whom they reasonably expect to create, receive This past September, less than two months later, or otherwise come into possession of electronic the Court issued another opinion related to ESI documents saved on Network Accessible preservation triggered by the plaintiff’s continued Storage Devices and to notify them of their request for spoliation sanctions against the defendant. duties and obligations to preserve documents Notable in this opinion was that the defendant asserted under this Order, or an argument that its preservation failures should have been excused based on its lack of experience with iii. Taking any other reasonable preservation step(s) patent litigation. In fact, a corporate representative as appropriate for such data. testified in a deposition that the defendant “didn’t have enough legal knowledge” to know that it needed Phillip M. Adams & Assocs., L.L.C. v. to preserve evidence. Perhaps not surprisingly, this Winbond Electronics, ASUS Computer, et al. argument was decisively rejected by the Court as such District of Utah, July 21, 2010 & September 16, 2010 an excuse would effectively create an immunity from preservation requirements, such as for any newly This long-running intellectual property dispute formed company.11 involving alleged piracy of computer source code has produced numerous judicial opinions during the past several years. In an opinion issued this past July, the Jones v. Bremen High School District Northern District of Illinois, Court discussed the degree of prejudice that would May 25, 2010 result from a failure by ASUS to produce its original In Jones v. Bremen High School District, a seemingly source code. In a concise but scathing opinion, the routine employment discrimination case, the plaintiff, Court criticized ASUS as follows:10 a former school district employee, requested that ASUS again reveals its lack of an information spoliation sanctions be entered against the school retention policy. Engineers would maintain data on district based on its alleged failure to preserve relevant their own, and had no specific requirements on data ESI. The court confirmed the following preservation retention. Another ASUS witness testified that “when errors:12 an individual left the company, the hard drive should ►►Defendant did not place a litigation hold on be left with the company. But there was no SOP or electronically created documents when it first learned standard SOP.” that plaintiff had filed an EEOC charge against it. Although the court ultimately denied a motion for sanctions against ASUS (on the basis that ASUS 11 Phillip M. Adams & Assocs., LLC v. Windbond Elecs. Corp., 2010 U.S. Dist. LEXIS 97305 (D. Utah Sept. 16, 2010). 12 All bulleted points and quotations paraphrased from Jones v. Bremen 10 Paraphrased from Phillip M. Adams & Assocs., L.L.C. v. Winbond Elecs. High Sch. Dist. 228, 2010 U.S. Dist. LEXIS 51312 (N.D. Ill. May 25, Corp., 2010 U.S. Dist. LEXIS 74216 (D. Utah July 21, 2010). 2010). 8
►►Only three employees of defendant, administrators Passlogix Inc. v. 2FA Technology against whom plaintiff’s allegations were primarily Southern District of New York, directed, were tasked by the district to search April 27, 2010 through their own electronic mail, and no one The lawsuit underlying this opinion involved the else’s, and cull out relevant documents. alleged breach of a licensing agreement between two companies in the business of selling security-related ►►There is no evidence that suggests that the software. The dispute at issue pertained to spoliation employees’ assessment of what was relevant and by 2FA’s two principals who allegedly deleted “at least what was not was guided by outside counsel. These twelve e-mails, ninety-one text messages, and forty three employees, and only these three employees, Skype messages.”13 2FA allegedly failed to retain were asked to preserve whatever email and computer logs as well. The court held as follows:14 documents they believed were relevant. ►►2FA had a duty to preserve the ESI and computer ►►Defendant’s e-mail system permitted employees logs; to permanently delete emails by “double-deleting” the email from his or her computer. After thirty ►►2FA acted with a “culpable state of mind” based on days it would automatically erase from the back-up its gross negligence from failing to issue a litigation system. hold; and,
Based on the above, the Court held that the ►►Extrinsic evidence introduced by Passlogix defendant did not reasonably prevent employees demonstrated that the lost ESI would have been from destroying documents concerning the case and relevant and that its loss was prejudicial to failed to adequately supervise the three employees Passlogix. who were asked to preserve documents. Following a The court ultimately held that a sanction of an adverse discussion of the legal standards requiring preservation inference or evidentiary preclusion would be overly of evidence, including ESI, the Court held that harsh. The court instead assessed a monetary fine of defendant’s preservation failures warranted the $10,000. Although this amount may at a glance seem following sanctions: trivial, the court explained that the relatively small ►►The jury will be informed that Defendant had a amount of the fine was due to 2FA being a “small duty to preserve all email concerning plaintiffs’ corporation” and that a fine of that amount would serve allegations, but that it did not begin to do so until “the dual purposes of deterrence and punishment” by 11 months after the duty to preserve was triggered. directly affecting both of the company’s sole principals and co-founders. ►►Defendant will be precluded from arguing that the absence of discriminatory statements from the Orbit One Communications relevant ESI is evidence that no such statements v. Numerex Corp. were made; Southern District of New York, October 26, 2010 ►►Defendant will be assessed the costs and fees of plaintiff’s preparation of the motion for sanctions; This opinion, issued by Magistrate Judge James and, Francis who sits in the Southern District of New York alongside Judge Scheindlin, has received a fair degree ►►If it so chooses, Plaintiff will be permitted to
depose witnesses concerning emails that Defendant 13 Passlogix, Inc. v. 2FA Tech., LLC, 708 F. Supp. 2d 378, 415 (S.D.N.Y. eventually produced, and such depositions will be 2010). 14 All bulleted points and quotations paraphrased from Passlogix, Inc. v. at Defendant’s cost. 2FA Tech. 9
of publicity for disagreeing with certain propositions Despite heavily criticizing Orbit One’s deficient announced in Pension Committee and for refusing to preservation efforts, Judge Francis refused to issue grant sanctions where a party failed to issue a written sanctions based on “a mere showing that [Orbit One]’s litigation hold. But is this an actual disagreement with preservation efforts were inadequate.” In stark contrast Pension Committee, or merely a different result based to Pension Committee, there was no suggestion here on different underlying facts? A review of the facts of a loss of relevant evidence since additional copies in Orbit One may help explain. This matter involved of nearly all of the lost ESI happened to remain in a motion by defendant Numerex for sanctions against existence. Some ESI had been automatically backed Orbit One based on that party’s preservation failures. up to a server and a lost hard drive was later recovered Judge Francis found the following errors in Orbit It was determined that ESI deleted to free up server One’s preservation efforts:15 space pre-dated the relevant issues. As a result, the opposing party was unable to demonstrate prejudice ►►The initial litigation hold was established by due to the preservation failures. counsel without any apparent input from persons familiar with Orbit One’s computer system: The ruling in Orbit One is not surprising and perhaps seems quite obvious based on the facts. However, ♦♦ It lacked detailed instructions; this opinion is notable due to its disagreement with ♦♦ There is no indication that it was disseminated to Pension Committee: all persons who might have possessed relevant data; and, “The implication of Pension Committee appears to be that at least some sanctions are warranted as long as ♦♦ The attorney who issued the hold evidently did any information was lost through the failure to follow not monitor compliance in any way. proper preservation practices, even if there has been no ►►There is no evidence that litigation counsel showing that the information had discovery relevance, imposed any formal litigation hold when the instant let alone that it was likely to have been helpful to litigation was commenced. the innocent party. If this is a fair reading of Pension Committee, then I respectfully disagree.” ►►When information was deleted from servers, archived, or otherwise manipulated, the employee Is Pension Committee wrong, or is Judge Francis responsible for information technology was not mistaken when asserting that Pension Committee informed of the litigation hold or of pendency of supports the imposition of sanctions even where no the instant case. relevant information is lost? Pension Committee does not hold that sanctions are required for a loss of information, ►►Primary responsibility for safeguarding information but rather only that “[r]elevance and prejudice may often remained with Orbit One’s key employee, be presumed when the spoliating party acted in bad the very individual with the greatest incentive to faith or in a grossly negligent manner.” Regardless destroy harmful evidence. of this analysis, the takeaway from Orbit One is ►►The key employee’s treatment of the information that a potential litigant must take steps to avoid was cavalier: he removed computer hardware from preservation errors so that it need not rely on fortuitous the premises, he permitted it to leave his control, circumstances to avoid a loss of relevant information and he failed to document his archiving practices. and imposition of spoliation sanctions. 16
16 Orbit One also criticizes the concept of proportionality despite its 15 Bulleted quotations paraphrased from Orbit One Communications v. pervasive acceptance for narrowing the scope of preservation obligations. Numerex Corp., 2010 U.S. Dist. LEXIS 123633 (S.D.N.Y. Oct. 26, This criticism seems unfounded and is unlikely to gain widespread 2010). acceptance. 10
Conclusion
The cases discussed above significantly reinforce the party. Although the analysis of these factors and the litigation-related preservation requirements to issue resulting sanctions can vary from one federal circuit timely legal holds and subsequently oversee employee to the next, certain preservation requirements are compliance. Attention to these obligations will uniformly required. Most notably, this includes the minimize the risk of destroying ESI, irrespective of issuance of a legal hold and the ensuing supervision the degree of culpability (i.e., whether through simple and monitoring of the hold. This includes a strong negligence or deliberate acts of a rogue employee). preference to avoid custodian self-collection of The absence of a solid legal hold policy with defined ESI. The preservation obligation does not require procedures is more likely to foster an environment in perfection, but when ESI is lost, the existence of a which such an employee can deliberately delete ESI. legal hold policy and associated set of procedures Though organizations will always find it difficult to is more likely to render the preservation efforts police their own employees, existence of legal hold defensible and reduce the severity of any spoliation procedures will help reduce this risk, such as by sanctions. imaging employees’ hard drives and conducting early We are pleased to provide this review of recent case ESI collection when deemed appropriate. law pertaining to the preservation of ESI. If you have The severity of a sanction for a preservation failure any questions regarding any of the above cases, recent (and whether a sanction should be imposed at all) ESI preservation trends, or anything else related to always depends on a balancing of the spoliating e-Discovery, please do not hesitate to contact us. party’s degree of culpability, the relevance of the lost evidence, and the resulting prejudice to the innocent
Thomas W. Tobin, Esq. Daniel M. Braude, Esq. 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IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION
RIMKUS CONSULTING GROUP, INC., § § Plaintiff, § § v. § CIVIL ACTION NO. H-07-0405 § NICKIE G. CAMMARATA, et al.,§ § Defendants. §
MEMORANDUM AND OPINION
Spoliation of e vidence—particularly of electronically stored inform ation—has assumed a level of importance in litigation thatraises grave concerns. Spoliation allegations and sanctions motions distract from the merits of a case, add costs to discovery, and delay resolution. The frequency of spoliation allegations may lead to decisions about preservation based more on fear of potential future sanctions than on reasonable need for inform ation.
Much of the recent case law on sanctions for spoliation has focused on failures by litigants and their lawyers to take adequate steps to preserve and collect inform ation in discovery.1
The spoliation allegations in the present case are different. They are allegations of willful misconduct: the intentional destruction of emails and other electronic information at a time when they were known to be relevant to anticipated or pending litigation. The alleged spoliators are the plaintiffs in an earlier-filed, related case and the defendants in this case.
1 See, e.g., Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, No. 05 Civ. 9016, 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010). Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 2 of 139
The allegations include that these parties—referred to in this opinion as the defendants—concealed and delayed providing inform ation in discovery that would have revealed their spoliation. The case law recognizes that such conduct is harmful in ways that extend beyond the parties’ interests and can justify severe sanctions.2
Given the nature of the allegations, it is not surprising that the past year of discovery in this c ase has focused on spoliation. The extensive record includes evidence that the defendants intentionally de leted some emails and attachm ents after there was a duty to preserve them. That duty arose because the defendants were about to file the related lawsuit in which they were the plaintiffs. The individuals who deleted the information testified that they did so for reasons unr elated to the litigation. But the individuals gave inconsistent testimony about these reasons and som e of the testim ony was not supported by othe r evidence. The record also includes evidence of efforts to conceal or delay revealing that emails and attachm ents had been deleted. There is sufficient evidence from which a reasonable jury could find that emails and attachments were intentionally deleted to prevent their use in anticipated or pending litigation.
The record also shows that m uch of what was deleted is no longe r available. But
2 See, e.g., Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006) (“Dismissal is an available sanction when ‘a party has engaged deliberately in deceptiv e practices that underm ine the integrity of judicial proceedings’ because ‘courts have inherent power to dismiss an action when a party has willfully deceived the court and engaged in conduct utterly inconsistent with the orderly administration of justice.’” (quoting Anheuser-Busch, Inc. v. Natural Beverage Distribs., 69 F.3d 337, 348 (9th Cir. 1995))); Silvestri v. Gen. Motors Corp., 271 F.3d 583, 590 (4th Cir. 2001) (“The policy underlying this inherent power of the courts [to impose sanctions for spoliation] is the need to pr eserve the integrity of the judicial process in order to retain confidence that the process works to uncover the truth.”). Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 3 of 139
some of the deleted emails were recovered from other sources. While some of the recovered deleted e mails we re adverse to the defendants’ positions in this litigation, som e were favorable to the defendants. The record also shows that despite the deletions of em ails subject to a preservation duty, there is extens ive evidence available to the plaintiff to prosecute its claims and respond to the defenses. These and other factors discussed in more detail below lead to the conclusion that the m ost severe sanctions of entering judgm ent, striking pleadings, or imposing issue preclusion are not warranted. Instead, the appropriate sanction is to allow the jury to hear evidence of the defendants’ conduct—including deleting emails and attachments and providing inaccurate or inconsistent testimony about them—and to give the jury a form of adverse inference instruction. The instruction will inform the jury that if it finds that the defendants intentionally deleted evidence to prevent its use in anticipated or pending litigation, the jury m ay, but is not required to, infer that the lost evidence would have been unfavorable to the defendants. In addition, the plaintiff will be awarded the fees and costs it reasonably incurred in identifying and revealing the spoliation and in litigating the consequences.
The opinion first sets out the pending m otions. Before a nalyzing the spoliation allegations, related sanctions motions, and the summary judgment motions (which are also impacted by the spoliation allegations), the opinion sets out some of the analytical issues that spoliation sanctions raise. The relevant factual and procedural history is then set out and the evidence on breach of the duty to preserve, the degree of culpability, relevance, and prejudice is examined. The opinion then analyzes the evidence to determine the appropriate response.
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The defendants’ motion for summary judgment based on claim and issue preclusion arising from the related, earlier-filed, state-law case are then analyzed in detail. That motion is denied in part because of the spoliation and withholding of evidence relevant to that case.
Finally, the opinion exam ines the parties’ cross-m otions for sum mary judgment on the defendants’ counterclaims for attorneys’ fees.
The opinion re sults in narrowing and defining the issues to be tried. A pretrial conference is set for February 26, 2010, at 10:00 a.m.to set a schedule for completing any remaining pretrial work and a trial date.
I. The Pending Motions
In November 2006, Rimkus Consulting Group, Inc. (“Rimkus”) was sued in Louisiana state court by Nickie G. Cammarata and Gary Bell, who had just resigned from the Rimkus office in Louisiana. Cam marata, Bell, and other ex-Rimkus employees had begun a new company, U.S. Forensic, L.L.C., to com pete with Rim kus in offering investigative and forensic engineering services primarily for insurance disputes and litigation. In the Louisiana suit, Cammarata and Bell sought a declaratory judgment that the forum-selection, choice-of- law, noncompetition, and nonsolicitation provisions in agreem ents they had signed with
Rimkus were unenforceable. In January and February 2007, Rimkus sued Cammarata and
Bell in separate suits in Texas, allegi ng that they breached the noncom petition and nonsolicitation covenants in the ir written em ployment agreem ents and that they used
Rimkus’s trade secrets and proprietary information in setting up and operating U.S. Forensic.
U.S. Forensic is a defendant in the Cammarata case. The Texas Cammarata and Bell cases
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were consolidated in this court. (Docket Entry Nos. 211, 216).
Two sets of motions are pending.3 One set is based on Rimkus’s allegations that the defendants spoliated evidence. Rimkus moves for sanctions against the defendants and their counsel and asks that they be held in c ontempt. (Docket Entry Nos. 313, 314). Rim kus alleges that the defendants and their counsel “conspiratorially engaged” in “wholesale discovery abuse” by destroying evidence, failing to preserve evidence after a duty to do so had arisen, lying under oath, failing to comply with court orders, and significantly delaying or failing to produce requested discovery. (Docket Entry No. 313 at 1). Rimkus asks this court to strike the defendants’ pleadings and to enter a default judgment against them or give an adverse inference jury instruction. Rimkus also seeks monetary sanctions in the form of the costs and attorneys’ fees it incurred because of the defendants’ discovery abuses.
In response, the defendants acknowledge that they did not preserve “some arguably relevant emails” but argue that Rimkus cannot show prejudice because the missing emails
“would be merely cumulative of the evidence already produced.” (Docket Entry No. 345 at
6). Rimkus filed supplements to its motions for contempt and sanctions, (Docket Entry Nos.
342, 343, 410, 414, 429, 431, 439, 445), and the defendants responded, (Docket Entry No.
3 Some of the pending motions can be disposed of in short order. The defendants’ Motion for Leaveto File Replies to Plaintiff’s Supplemental Responses to Motion for Summary Judgment, (Docket Entry No. 375), is granted. Rim kus’s Motion for Leave to File Third Amended Complaint, Application for Tem porary Restraining Order, Temporary Injunction, and Permanent Injunction, (Docket Entry No. 387), Motion for Leave to File Memorandum of Law in Excess of 25 Pages, (Docket Entry No. 388), Motion to Supplement Response to Defendants’ Motion for Summary Judgment, (Docket Entry No. 389), Motion to Supplement Motion for Sanctions and Response to Defendants’ Motion for Summary Judgment, (Docket Entry No. 394), Motion for Leave to FileSecond Supplement to Motion for Sanctions and Responseto Motion for Summary Judgment, (Docket Entry No. 412), Motion for Leave to File to Supplement the Record, (Docket Entry No. 413), and Motion for Leave toFile Brief in Excess of Page Limitations, (Docket Entry No. 438), are granted.
5 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 6 of 139
350, 435).4
The second set of motions is based on the defendants’ assertion that they are entitled to summary judgment on the m erits based on the preclusive effects of the judgm ent and rulings they obtained in the lawsuit they filedin the Louisiana state court before Rimkus sued them in Texas. (Docket Entry No. 309). The defendants argue that the claims in this Texas suit should be dism issed under res judicata, or in the alternative, that they are entitled to judgment as a m atter of law on Rim kus’s claims for m isappropriation of trade secrets, tortious interference, unfair com petition, civil conspiracy, disparagement, and breach of fiduciary duty. (Id.). Cammarata also moved for summary judgment on his counterclaim for attorneys’ fees under Texas Business & Com merce Code § 15.51(c). ( Id.). Rim kus responded, (Docket Entry Nos. 321, 324), the defendants replied, (Docket Entry No. 349),
4 At a motion hearing held on August 6, 2009, this court addressed several discovery disputes. The parties were instructed to report on the stat us of recovering additional electronically stored inform ation that the defendants had stated they could not provide in discovery because it had been deleted or was on computers that were no longer available. The court permitted Rimkus to reopen the depositions of Bell and Cammarata and to supplem ent the su mmary judgment record. (D ocket Entry No. 356). Rim kus filed supplem ental responses to the m otion for sum mary judgment, (Docket Entry Nos. 362, 374), and the defendants filed supplemental replies, (Docket Entry Nos. 376, 377). On August 28, 2009, Rimkus submitted information showing that Gary Bell maintained a previously undisclosed personal e-mail address to which he forwarded information obtained from Rimkus. At a discovery conference held on September 2, 2009, this court allowed Rimkus to subpoena Google to obtain emails Bell sent and received. (Docket Entry No. 380). Rimkus also notified the court that Cammarata had testified in his recent deposition about electronic files on hispersonal home computer that he had not produced. Cammarata subsequently produced these files to Rimkus as well as numerous boxes of paper documents that Cammarata asserted could be relevant to this case. Rimkus also notified the court that Cam marata and Bell had testified in their reope ned depositions that they used a copyrighted powerpoint presentation on behalf of U.S. Forensic. Based on these developments, this court allowed the parties to supplement the summary judgment record and Rimkus to file an amended complaint to add a copy right infringement claim. (Docket Entry No. 381). Rim kus filed supplemental briefs with attached exhibits on September 23, 2009. (Docket Entry Nos. 389, 393, 394). Rimkus also filed an amended complaint. (D ocket Entry N os. 401, 403). The defendants filed a response to the supplemental filings, (Docket Entry No. 408), and Rimkus replied, (Docket Entry No. 423).
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Rimkus filed a surreply, (Docket Entry No. 353), and several supplem ental responses,
(Docket Entry Nos. 362, 374, 394, 410, 429, 439, 445), and the defendants filed supplemental replies, (Docket Entry Nos. 376, 377). Rimkus argues that preclusion does not apply and that the summa ry judgment evidence reveals m ultiple disputed fact issues that preclude summary judgment on the merits of its claims.
Rimkus moved for partial summary judgment on the defendants’ counterclaims for attorneys’ fees under Texas Business & Co mmerce Code § 15.51(c). (Docket Entry Nos.
302, 305). The defendants responded, (Docket Entry Nos. 317, 322), and Rimkus replied,
(Docket Entry No. 352). Rim kus also m oved to extend the pretrial m otions deadline, asserting that an extension is warranted because discovery is incomplete. (Docket Entry No.
306). The defendants responded, (Docket Entry No. 323), and Rimkus re plied, (Docket
Entry No. 351).
Both sets of motions are addressed in this memorandum and opinion. Based on a careful review of the pleadings; the motions, responses, and replies; the parties’ submissions; the arguments of counsel; and the applicable law, this court grants in part and denies in part
Rimkus’s motions for sanctions. An adverse inference instruction on the deletion of emails and attachments will be given to the jury at trial. The motion for contempt is denied as moot because it seeks relief that would be duplicative of the sanctions. Rimkus is also awarded the reasonable attorneys’ fees and costs it incurred in investigating the spoliation, including fees and costs for obtaining em ails through third-party subpoenas, taking additional depositions, and filing and responding to motions on sanctions.
7 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 8 of 139
As to the summary judgment motions, this court denies Rimkus’s motion to extend the motions-filing deadline, grants in part and denies in part the defendants’ m otion for summary judgment based on preclusion (based in part on spoliation that concealed and delayed producing relevant information in the Louisiana case), and grants Rimkus’s motions for partial sum mary judgm ent on the defendant s’ counterclaim s for attorneys’ fees.
Summary judgm ent is granted dismissing Rim kus’s claim s for disparagem ent, tortious interference, and damages for breach of the noncompetition and nonsolicitation provisions.
Summary judgment is denied on Rim kus’s claims for m isappropriation of tra de secrets, breach of fiduciary duty to the extent it is based on misappropriation, unfair competition, and civil conspiracy. With respect to the counterclaim for attorneys’ fees, Cammarata’s motion for summary judgment is denied and Rimkus’s motions for summary judgment are granted.
The reasons for these rulings are explained in detail below.
II. The Framework for Analyzing Spoliation Allegations
In her recent opinion in Pension Committee of the University of Montreal Pension
Plan v. Banc of America Securities, LLC, No. 05 Civ. 9016, 2010 WL 184312 (S.D.N.Y. Jan.
15, 2010), Judge Scheindlin has again done the courts a great service by laying out a careful analysis of spoliation and sanctions issues in electronic discovery. 5 The focus of Pension
Committee was on when negligent failures to preserve, collect, and produce
5 See Zubulake v. UBS Warburg LLC (Zubulake IV), 220 F.R.D. 212 (S.D.N.Y. 2003); Zubulake v. UBS Warburg LLC (Zubulake III), 216 F.R.D. 280 (S.D.N.Y. 2003); Zubulake v. UBS Warburg LLC (Zubulake II), 230 F.R.D. 290 (S.D.N.Y. 2003); Zubulake v. UBS Warburg LLC (Zubulake I), 217 F.R.D. 309 (S.D.N.Y. 2003).
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documents—including electronically stored information—in discovery may justify the severe sanction of a form of adverse inference instruction. UnlikePension Committee, the present case does not involve allegations of negligence in electronic discovery. Instead, this case involves allegations of intentional destruction of electronically stored evidence. But there are some common analytical issues between this case and Pension Committee that deserve brief discussion.
A. The Source of Authority to Impose Sanctions for Loss of Evidence
Allegations of spoliation, including the de struction of evidence in pending or reasonably foreseeable litigation, are addressed in federal courts through the inherent power to regulate the litigation process if the conduct occurs before a case is filed or if, for another reason, there is no statute or rule that adequately addresses the conduct.6 See Chambers v.
NASCO, Inc., 501 U.S. 32, 43–46 (1991); Natural Gas Pipeline Co. of Am. v. Energy
Gathering, Inc., 2 F.3d 1397, 1408 (5th Cir. 1993) (sum mary calendar). If an applicable statute or rule can adequately sanction the conduct, that statute or rule should ordinarily be applied, with its attendant limits, rather than a more flexible or expansive “inherent power.”
Chambers, 501 U.S. at 50;see Klein v. Stahl GMBH & Co. Maschinefabrik, 185 F.3d 98, 109
(3d Cir. 1999) (“[A] trial court should consider invoking its inherent sanctioning powers only where no sanction established by the Federal Rules or a pertinent statute is ‘up to the task’ of remedying the damage done by a litigant’s malfeasance . . . .”); Natural Gas Pipeline Co.
6 In diversity suits, federal courts apply federal evidence rules rather than state spoliation law. Condrey v. SunTrust Bank of Ga., 431 F.3d 191, 203 (5th Cir. 2005).
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of Am., 2 F.3d at 1410 (“When parties or their attorneys engage in bad faith conduct, a court should ordinarily rely on the Federal Rules as the basis for sanctions.”).
When inherent power does apply, it is “interpreted narrowly, and its reach is limited by its ultimate source—the court’s need to orderly and expeditiously perform its duties.”
Newby v. Enron Corp., 302 F.3d 295, 302 (5th Cir. 2002) (footnote om itted) (citing
Chambers, 501 U.S. at 43). In Chambers, the inherent power was linked to the bad-faith conduct that affected the litigation. See 501 U.S. at 49. If inherent power, rather than a specific rule or statute, provides the source of the sanctioning authority, underChambers , it may be limited to a degree of culpability greater than negligence.
Rule 37(b)(2)(A) provides:
If a party or a party’s officer, director, or managing agent--or a witness designated under Rule 30(b)(6) or 31(a)(4)--fails to obey an order to provide or permit discovery, including an order under Rule 26(f), 35, or 37(a), the court where the action is pending may issue further just orde rs. They m ay include the following: (i) directing that the matters embraced in the order or other designated facts be taken as established for purposes of the action, as the prevailing party claims; (ii) prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence; (iii) striking pleadings in whole or in part; (iv) staying further proceedings until the order is obeyed; (v) dismissing the action or proceeding in whole or in part; (vi) rendering a default judgment against the disobedient party; or (vii) treating as contem pt of court the failure to obey any order except an order to subm it to a physical or m ental examination.
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FED. R. CIV. P. 37(b)(2)(A). In addition, a court has statutory authority to im pose costs, expenses, and attorneys’ fees on “any attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously.” 28 U.S.C. § 1927.
Rule 37(e) applies to electronically stored information lost through “routine good-faith operation” of an electronic information system rather than through intentional acts intended to ma ke evidence unavailable in litigation. Rule 37(e) states: “Absent exceptiona l circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.” FED. R. CIV. P. 37(e).
The alleged spoliation and proposed sanctions in this case im plicate the court’s inherent authority, including for spoliation occurring before this c ase was filed or before discovery orders were entered and Rule 37, for failures to comply with discovery orders.
B. When Deletion Can Become Spoliation
Spoliation is the destruction or the significant and meaningful alteration of evidence.
See generally THE SEDONA CONFERENCE, THE SEDONA CONFERENCE GLOSSARY: E-
DISCOVERY & DIGITAL INFORMATION MANAGEMENT (SECOND EDITION) 48 (2007)
(“Spoliation is the destruction of records or properties, such as etadata,m that may be relevant to ongoing or anticipated litiga tion, government investigation or audit.”). Electronically stored information is routinely deleted or altered and affirmative steps are often required to preserve it. Such deletions, alterations, and losses cannot be spoliation unless there is a duty
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to preserve the information, a culpable breach of that duty, and resulting prejudice.
Generally, the duty to preserve arises when a party “‘has notice that the evidence is relevant to litigation or . . . should have known that the evidence may be relevant to future litigation.’”7 Generally, the duty to preserve exte nds to docum ents or tangible things
(defined by Federal Rule of Civil Procedure 34) by or to individuals “likely to have discoverable information that the disclosing party may use to support its claims or defenses.”
See, e.g., Zubulake IV, 220 F.R.D. at 217–18 (footnotes omitted).
These general rules are not controversial. But applying them to determine when a duty to preserve arises in a particular case and the extent of that duty requires careful analysis of the specific facts and circumstances. It can be difficult to draw bright-line distinctions between acceptable and unacceptable conduct in preserving information and in conducting discovery, either prospectively or with the benefit (and distortion) of hindsight. Whether preservation or discovery conduct is acceptable in a case depends on what reasonableis , and that in turn depends on whether what was done—or not done—wasproportional to that case
7 John B. v. Goetz, 531 F.3d 448, 459 (6th Cir. 2008) (om ission in original) (quoting Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423, 436 (2d Cir. 2001)); see O’Brien v. Ed Donnelly Enters., Inc., 575 F.3d 567, 587–88 (6th Cir. 2009) (remanding to the district court to consider whether it was reasonably foreseeable that the missing documents would be needed in future litigation);Leon v. IDX Sys. Corp., 464 F.3d 951, 959 (9th Cir. 2006) (“A party’s destruction of evidence qualifiesas willful spoliation if the party has ‘some notice that the documents were potentially relevant to the litigation beforethey were destroyed.’” (quoting United States v. Kitsap Physicians Serv., 314 F.3d 995, 1001 (9th Cir. 2002) (emphasis added))); Zubulake v. UBS Warburg LLC (Zubulake IV), 220 F.R.D. 212, 216 (S.D.N.Y.2003) (“The obligation to preserve evidence arises when the party has notice that the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation.” (quotin g Fujitsu Ltd., 247 F.3d at 436)); T HE SEDONA PRINCIPLES: SECOND EDITION, BEST PRACTICES RECOMMENDATIONS & PRINCIPLES F OR ADDRESSING ELECTRONIC DOCUMENT PRODUCTION 70 cmt. 14.a (2007) (“[T]he common law duty of preservation arises when a party, either plaintiff or defendant, reasonably anticipates litigation.”).
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and consistent with clearly established applicable standards.8 As Judge Scheindlin pointed out in Pension Committee, that analysis depends heavily on the facts and circumstances of each case and cannot be reduced to a generalized checklist of what is acceptable or unacceptable.9
Applying a categorical approach to sanctions issues is also difficult, for sim ilar reasons. Determining whether sanctions are warranted and, if so, what they should include, requires a court to consider both the spoliating party’s culpability and the level of prejudice to the party seeking discovery. Culpability can range along a continuum from destruction intended to make evidence unavailable in litigation to inadverte nt loss of inform ation for reasons unrelated to the litigation. Prejudice can range along a continuum from an inability to prove claims or defenses to little or no im pact on the presentation of proof. A cour t’s response to the loss of evidence depends on both the degree of culpability and the extent of prejudice. Even if there is intentional destruction of potentially relevant evidence, if there is no prejudice to the opposing party, that influences the sanctions consequence. And even if there is an inadvertent loss of evidence but severe prejudice to the opposing party, that too will influence the appropr iate response, recognizing that sanctions (as opposed to other
8 See THE SEDONA PRINCIPLES: SECOND EDITION, BEST PRACTICES RECOMMENDATIONS & PRINCIPLES FOR ADDRESSING ELECTRONIC DOCUMENT PRODUCTION 17 cmt. 2.b. (2007) (“Electronic discovery burdens should be proportional to the amount in controversy and the nature of the case. Otherwise, transaction costs due to electronic discovery will overwhelm the ability to resolve disputes fairly in litigation.”).
9 Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, No. 05 Civ. 9016, 2010 WL 184312, at *3 (S.D.N.Y. Jan. 15, 2010). For example, the reasonableness of discovery burdens in a $550 million case arising out of theliquidation of hedge funds, as in Pension Committee, will be different than the reasonableness of discovery burdens in a suit toenfo rce noncompetition agreements and related issues, as in the present case.
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remedial steps) require some degree of culpability.
C. Culpability
As a general rule, in this circuit, the severe sanctions of granting default judgment, striking pleadings, or giving adverse inference instructions may not be imposed unless there is evidence of “bad faith.” Condrey v. SunTrust Bank of Ga., 431 F.3d 191, 203 (5th Cir.
2005); King v. Ill. Cent. R.R., 337 F.3d 550, 556 (5th Cir. 2003); United States v. Wise, 221
F.3d 140, 156 (5th Cir. 2000). “‘Mere negligence is not enough’ to warrant an instruction on spoliation.” Russell v. Univ. of Tex. of Permian Basin, 234 F. App’x 195, 208 (5th Cir.
2007) (unpublished)(quoting Vick v. Tex. Employment Comm’n, 514 F.2d 734, 737 (5th Cir.
1975); see also King, 337 F.3d at 556 (“King m ust show that ICR acted in ‘bad faith’ to establish that it was entitled to an adverse inference.”) Vick v. Tex. Employment Comm’n, 514
F.2d at 737 (“The adverse inference to be drawn from destruction of records is predicated on bad conduct of the defendant. More over, the circumstances of the act m ust manifest bad faith. Mere negligence is not enough, for it does not sustain an inference of consciousness of a weak case.” (quotation omitted)).
Other circuits have also held negligence insufficient for an adverse inference instruction. The Eleventh Circuit has held that bad faith is required for an adverse inference instruction.10 The Seventh, Eighth, Tenth, and D.C. Circuits also a ppear to require bad
10 See Penalty Kick Mgmt. Ltd. v. Coca Cola Co., 318 F.3d 1284, 1294 (11th Cir. 2003) (“[A]n adverse inference is drawn from a party ’s failure to preserve evidence only when the ab sence of that evidence is predicated on bad faith.” (quoting Bashir v. Amtrak, 119 F.3d 929, 931 (11th Cir. 1997))).
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faith.11 The First, Fourth, and Ninth Circuits hold that bad faith is not essential to imposing severe sanctions if there is severe prejudice, although the cases often emphasize the presence of bad faith.12 In the Third Circuit, the courts balance the degree of fault and prejudice.13
11 See, e.g., Turner v. Pub. Serv. Co. of Colo., 563 F.3d 1136, 1149 (10th Cir. 2009) (“Mere negligence in losing or destroying records is not enough because it do es not support an inference of consciousness of a weak case.” (quoting Aramburu v. Boeing Co., 112 F.3d 1398, 1407 ( 10th Cir. 1997))); Faas v. Sears, Roebuck & Co., 552 F.3d 633, 644 (7 th Cir. 2008) (“In order to draw an inference that the [ destroyed documents] contained inform ation adverse to Sears, we must find that Sears intentionally destroyed the documents in bad faith.”); Greyhound Lines, Inc. v. Wade, 485 F.3d 1032, 1035 (8th Cir. 2007) (“A spoliation-of-evidence sanction requires ‘a finding of intentional destruction indicating a desire to suppress the truth.’” (quoting Stevenson v. Union Pac. R.R. Co., 354 F.3d 739, 746 (8th Cir. 2004)));Wyler v. Korean Air Lines Co., 928 F.2d 1167, 1174 (D.C. Cir. 1991) (“Mere i nnuendo . . . does not justify drawing the adverse inference requested . . . .”).
12 See, e.g., Hodge v. Wal-Mart Stores, Inc., 360 F.3d 446, 450 (4th Cir. 2004) (holding that an inference cannot be drawn merely from negligent loss or destruction of evidence but requires a showing that willful conduct resulted in the loss or destruction);Silvestri v. Gen. Motors Corp., 271 F.3d 583, 593 (4th Cir. 2001) (holding that dismissal is “usually justified only in circumstances of bad faith” but “even when conduct is less culpable, dismissal may be necessary if the prejudice to the defendant is extraordinary, denying it the ability to adequately defend its case”); Sacramona v. Bridgestone/Firestone, Inc., 106 F.3d 444, 447 (lst Cir. 1997) (“Certainly bad faith is a propera nd important consideration in deciding whether and how to sanction conduct resulting in the destruction of evidence. But bad faith is not essential. If such evidence is mishandled through carelessness, and the other side is prejudiced, we think that the district court is entitled to considerimposing sanctions, including exclusion of the evidence.”); Allen Pen Co. v. Springfield Photo Mount Co., 653 F.2d 17, 23–24 (1st Cir. 1981) (“In any event, Allen Pen has not shown that the document destruction was in bad faith or flowed from the consciousness of aweak case. There is no evidence that Springfield believedthe lists would have damaged it in a lawsuit. Without some such evidence, ordinarily no adverse inference is drawn from Springfield’s failure to preserve them.”); Glover v. BIC Corp., 6 F.3d 1318, 1329 (9th Cir. 1993) (“Short of excluding the disputed evidence, a trial court also has the broad discretionary power to permit a jury to draw an adverse inference from the destruction or spoliation against the party or witness responsible for that behavior.”).
13 See, e.g., Bensel v. Allied Pilots Ass’n, No. 02-2917, 2009 WL 4884052 (D.N.J. Dec. 17, 2009) (declining to apply a spoliation inference or other sanction for the loss of inform ation resulting from the defendant’s failure to impose litigation holds in a timely manner); Mosaid Techs. Inc. v. Samsung Elecs. Co., 348 F. Supp. 2d 332, 335 (D.N.J. 2004) (noting that “[ t]hree key considerations that dictate whether such sanctions are warranted are: ‘(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 and, where the offending party is seriously at fault, will serve to deter such conduct by others in the future’”and holding that bad faith wasnot required for an adverse inference instruction as long as there was a showingof relevance and prejudice (quoting Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76, 79 (3d. Cir. 1994))).
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The court in Pension Committee imposed a form of adverse inference instruction based on a finding of gross negligence in preserving inform ation and in collecting it in discovery.14 The court applied case law in the Second Circuit, including the language in
Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99, 108 (2d Cir. 2002), stating that “[t] he sanction of a n a dverse inference m ay be appropriate in som e cases involving the negligent destruction of evidence because each party should bear the risk of its own negligence.” Tha t language has been read to allow severe sanctions for negligent destruction of evidence. See, e.g., Rogers v. T.J. Samson Cmty. Hosp., 276 F.3d 228, 232
(6th Cir. 2002); Lewis v. Ryan, 261 F.R.D. 513, 521 (S.D. Cal. 2009) (noting that California district courts had followed the Second Circuit’s approach in Residential Funding). In the
Fifth Circuit and others, negligent as opposed to intentional, “bad faith” destruction of evidence is not sufficient to give an adverse inference instruction and m ay not relieve the party seeking discovery of the need to show that missing documents are relevant and their loss prejudicial. The circuit differences in the level of culpability necessary for an adverse inference instruction limit the applicability of the Pension Committee approach. And to the extent sanctions are based on inherent power, the Suprem e Court’s decision in Chambers may also require a degree of culpability greater than negligence.
14 The finding of gross negligence inPension Committee was in part based on the finding that the spoliating party submitted declarations describing discovery efforts that were either lacking in detail or intentionally vague in way s the court characterized as m isleading. Pension Committee, No. 05 C iv. 9016, 2010 WL 184312, at *10–11. Counsel’s m isrepresentations to the court can result in severe sanctions. See, e.g., Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., 20 So. 3d 952, 954 (Fla. Dist. Ct. App. 2009) (trial court entered a partial default judgment and deemed certain allegations as established facts based in part on misrepresentations by counsel to the court about when they learned that emails existed on backup tapes; on appeal, the judgment was set aside on other grounds).
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D. Relevance and Prejudice: The Burden of Proof
It is well established that a party seeking the sanction of an adverse inference instruction based on spoliation of evidence must establish that: (1) the party with control over the evidence had an obligation to preserve it at the time it was destroyed; (2) the evidence was destroyed with a culpable state of mind; and (3) 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. See Zubulake v. UBS Warburg LLC (Zubulake IV), 220 F.R.D.
212, 220 (S.D.N.Y. 2003). The “relevance” and “prejudice” factors of the adverse inference analysis are often broken down into three subparts: “(1) whether the evidence is relevant to the lawsuit; (2) whether the evidence would have supported the inference sought; and (3) whether the nondestroying party has suffered prejudice from the destruction of the evidence.”
Consol. Aluminum Corp. v. Alcoa, Inc., 244 F.R.D. 335, 346 (M.D. La. 2006) (citing
Concord Boat Corp. v. Brunswick Corp., No. LR-C-95-781, 1997 WL 33352759, at *7 (E.D.
Ark. Aug. 29, 1997)). Courts recognize that “[t]he burden placed on the m oving party to show that the lost evidence would have been favorable to it ought not be too onerous, lest the spoliator be permitted to profit from its destruction.” Chan v. Triple 8 Palace, Inc., No.
03CIV6048(GEL)(JCF), 2005 WL 1925579, at *7 (S.D.N.Y. Aug. 11, 2005).
Pension Committee recognized the difficulty and potential for unfairness in requiring an innocent party seeking discovery to show that inform ation lost through spoliation is relevant and prejudicial. Those concerns are acute when the party seeking discovery cannot replace or obtain extrinsic evidence of the c ontent of deleted inform ation. But in m any
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cases—including the present case—there are sources from which at least som e of the allegedly spoliated evidence can be obtained. And in m any cases—including the present case—the party seeking discovery can also obtain extrinsic evidence of the content of at least some of the deleted inform ation from other docum ents, de position testim ony, or circumstantial evidence.
Courts recognize that a showing that the lost information is relevant and prejudicial is an important check on spoliation allegations and sanctions motions. Courts have held that speculative or generalized assertions that the missing evidence would have been favorable to the party seeking sanctions are insufficient.15 By contrast, when the evidence in the case as a whole would allow a reasonable fact finder to conclude that the issingm evidence would have helped the requesting party support its cl aims or defenses, that may be a sufficient showing of both relevance and prejudice to m ake an a dverse inference instruction
15 See Mintel v. Neergheen, No. 08-cv-3939, 2010 WL 145786, at *8 (N.D. Ill. Jan. 12, 2010)(holding that although data on a laptop was destroyed after the filing of the lawsuit, no evidence waspresented that the data destroyed was relevant); Pandora Jewelry, LLC v. Chamilia, LLC, No. CCB-06-3041, 2008 WL 4533902, at *9 (D. Md. Sept. 30, 2008) (denying an adverse inference instruction because the plaintiff did not offer proof “that the lost materials would have produced evidence favorable to the required showing of injury”; the plaintiff could not “point to even a single diverted customer or any evidence of damage to its reputation . . . stemming from any of the [emails] at issue”); Consol. Aluminum Corp., 244 F.R.D. at 346 (“Although Consolidated has generally asserted that the destroyed information is relevant to thislitigation ‘based simply on the tim e frame and the individuals involved,’ a c ourt cannot infer that d estroyed documents would contradict the destroying party’s theory of the case, and corroborate the other’s party’s theory, simply based upon temporal coincidence. While Consolidated is not held to ‘too specific a level of proof’ regarding the destroyed documents, it must provide some evidence that the documents would have aided it in the manner alleged in their inferences in order for such sanction to be imposed.”); Sovulj v. United States, No. 98 CV 5550, 2005 WL 2290495, at *5 (E.D.N.Y Sept. 20, 2005) (denying an adverse inference instruction when there was only “pure speculation” that the m issing evidence was relevant ); Convolve, Inc. v. Compaq Computer Corp., 223 F.R.D. 162, 176 (S.D.N.Y. 2004) (denying an adverse inference instruction when the substance of the deleted communication was only described in the most general terms), clarified on other grounds, 2005 WL 1514284 (S.D.N.Y. June 24, 2005). 18 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 19 of 139
appropriate.16
In Pension Committee, the court followed the approach that even for severe sanctions, relevance and prejudice m ay be presum ed when the spoliating party acts in a grossly negligent manner. Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. §.,
LLC, No. 05 Civ. 9016, 2010 WL 184312, at *5 (S.D.N.Y. Jan. 15, 2010). The presumption of relevance and prejudice is not mandatory. Id. at *5. The spoliating party may rebut the presumption by showing that the innocent party had access to the evidence allegedly destroyed or that the evidence would not have been helpful to the innocent party. Id. When the level of culpability is “mere” negligence, the presumption of relevance and prejudice is not available; the Pension Committee court imposed a limited burden on the innocent party to present some extrinsic evidence. Id.
The Fifth Circuit has not explicitly addressed whether even bad-faith destruction of evidence allows a court to presum e that the destroyed evidence was relevant or its loss prejudicial. Case law in the Fifth Circuit indicates that an adverse inference instruction is not proper unless there is a showing that the spoliated evidence would have been relevant. See
Condrey v. SunTrust Bank of Ga., 431 F.3d 191, 203 & n.8 (5th Cir. 2005) (holding that an
16 See, e.g., Vodusek v. Bayliner Marine Corp., 71 F.3d 148, 155–57 (4th Cir. 1995) (holding that an adverse inference instruction was appropriate becausethe plaintiff’s expert willfully destroyed parts of a boat at issue in a products-liability action before the defendant and its experts were able to examine it); Broccoli v. Echostar Commc’ns Corp., 229 F.R.D. 506, 511–12 (D. Md. 2005) (noting that the defendant did not preserve vital em ployment and term ination docum ents, including em ails in which plaintiff h ad made complaints to his supervisors about being sexually harassed and the in ternal investigative file into those complaints, and imposing an adverse inference instruction); GE Harris Ry. Elecs., L.L.C. v. Westinghouse Air Brake Co., No. 99-070-GMS, 2004 WL 5702740, at *4–5 (D. Del. Mar. 29, 2004 ) (holding that an adverse inference was warranted when the defendant de leted relevant emails and electronic files and the emails the plaintiff was able to recover from other sources were probative of the defendant’s liability).
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adverse inference was not appropriate because there was no evidence of bad faith but also noting that even if bad faith had been shown, an adverse inference would have beenproper im because relevance was not shown); Escobar v. City of Houston, No. 04-1945, 2007 WL
2900581, at *17–18 (S.D. Tex. Sept. 29, 2007) (denying an adverse inference instruction for destruction of emails in a police department following a shooting because the plaintiffs failed to show bad faith and relevance). One opinion states that bad-faith destruction of evidence
“alone is sufficient to demonstrate relevance.” See Consol. Aluminum Corp. v. Alcoa, Inc.,
244 F.R.D. 335, 340 n.6 (M.D. La. 2006). But that opinion also went on to state that “before an adverse inference may be drawn, there must be some showing that there is in fact a nexus between the proposed inference and the information contained in the lost evidence” and that
“some extrinsic evidence of the content of the emails is necessary for the trier of fact to be able to determ ine in what respect and to what extent the em ails would have been detrimental.” Id. at 346. In the present case, the party seeking sanctions for deleting emails after a duty to preserve had aris en presented evidence of their contents. The evidence included som e recovered deleted em ails and circum stantial evidence and deposition testimony relating to the unrecovered records. There is neither a factual nor legal basis, nor need, to rely on a presumption of relevance or prejudice.
E. Remedies: Adverse Inference Instructions
Courts agree that a willful or intentional destruction of evidence to prevent its use in litigation can justify severe sanctions. Courts also agree that the severity of a sanction for failing to preserve when a duty to do so has arisen must be proportionate to the culpability
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involved and the prejudice that results. Such a sanction should be no harsher than necessary to respond to the need to punish or deter and to address the impact on discovery.17 “[T]he judge [imposing sanctions] should take pains neither to use an elephant gun to slay a mouse nor to wield a cardboard sword if a dragon looms. Whether deterrence or compensation is the goal, the punishment should be reasonably suited to the crim e.” Anderson v. Beatrice
Foods Co., 900 F.2d 388, 395 (1st Cir. 1990). A m easure of the appropriateness of a sanction is whether it “restore[s] the prejudiced party to the sam e position he would have been in absent the wrongful destruction of evidence by the opposing party.” West v.
Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999) (quotation omitted); see also
Silvestri v. Gen. Motors Corp., 271 F.3d 583, 590 (4th Cir. 2001) (“[T]he applicable sanction should be molded to serve the prophylactic, punitive, and remedial rationales underlying the spoliation doctrine.” (quoting West, 167 F.3d at 779)).
Extreme sanctions—dismissal or default—have been upheld when “the spoliator’s conduct was so egregious as to am ount to a forfeiture of his claim ” and “the effect of the spoliator’s conduct was so prejudicial that it substantially denied the defendant the ability to defend the claim.” Sampson v. City of Cambridge, Maryland, 251 F.R.D. 172, 180 (D. Md.
2008) (quoting Silvestri, 271 F.3d at 593); see Leon v. IDX Sys. Corp., 464 F.3d 951, 959
(9th Cir. 2006) (“The prejudice inquiry ‘l ooks to whether the [spoiling party’s] actions
17 See FED. R. CIV. P. 37(e) (sanctions may not be imposed for the inability to produce electronically stored information lost because of the routine, good-fa ith operation of a party ’s computer sy stem); Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76, 79 (3d Cir. 1994);Dillon v. Nissan Motor Co., Ltd., 986 F.2d 263, 267 (8th Cir. 1993).
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impaired [the non-spoiling party’s] ability to go to trial or threatened to interfer e with the rightful decision of the case.’” (alteration in original) (quoting United States ex rel. Wiltec
Guam, Inc. v. Kahaluu Constr. Co., 857 F.2d 600, 604 (9th Cir. 1988))).
When a party is prejudiced, but not irreparably, from the loss of evidence that was destroyed with a high degree of culpability, a harsh but less extreme sanction than dismissal or default is to perm it the fact finder to presum e that the destroyed evidence was prejudicial.18 Such a sanction has been imposed for the intentional destruction of electronic evidence.19 Although adverse inference instructions can take varying form s that range in harshness, and although all such instructions are less harsh than so-called term inating sanctions, they are properly viewed as am ong the m ost severe sanctions a court c an administer.
In Pension Committee, the court stated that it would give a jury charge for the grossly
18 See FDIC v. Hurwitz, 384 F. Supp. 2d 1039, 1099–1100 (S.D. Tex. 2005) (citing Nation-Wide Check Corp. v. Forest Hills Distribs., Inc., 692 F.2d 214, 217–18 (1st Cir. 1982)).
19 See, e.g., Se. Mech. Servs., Inc. v. Brody, — F. Supp. 2d — , 2009 WL 2883057 (M.D. Fla. 2009) (holding that an adverse inference jury instruction was appropriate when a party wiped several Blackberry devices that may have contained emails, telephone records, text messages, and calendar entries relevant to the case); Goodman v. Praxair Servs., Inc., 632 F. Supp. 2d 494, 523–24 ( D. Md. 2009) (holding that an adverse jury instruction was proper when aparty destroyed a laptop and the party’s agent deleted emails after the duty to preserve arose and allowing the opposing si de to seek recovery of costs associated with the sanctions motion); Technical Sales Assocs., Inc. v. Ohio Star Forge Co., Nos. 07-11745, 08-13365, 2009 WL 728520, at *9 (E.D. Mich. Mar. 19, 2009) (holding that monetary sanctions were appropriate where a party deleted emails and electronic files after the litigationbe gan and after the party became aware that the adverse party would be seeking a forensic exam ination but deferring until trial the deci sion of whether adverse inference jury instructions were appropriate); Super Future Equities, Inc. v. Wells Fargo Bank Minn., N.A., No. 3:06-CV-0271-B, 2008 WL 3261095, at *13–14 (N.D. Tex. Aug. 8, 2008) (im posing an adverse inference jury instruction and awarding attorney s’ fees and costs agai nst a party for, among other things, intentionally wiping a hard drive so that files would be unrecoverable, damaging backup data, and deleting emails and documents from a web site); Doe v. Norwalk Cmty. Coll., 248 F.R.D. 372, 381–82 (D. Conn. 2007) (imposing an adverse inference jury instruction and awarding attorneys’ fees and costs against aparty that failed to preserve hard drives and emails).
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negligent plaintiffs that: (1) laid out the elements of spoliation; (2) instructed the jury that these plaintiffs were grossly negligent in perform ing discovery obligations and failed to preserve evidence after a preservation duty arose; (3) told the jury that it could presume that the lost evidence was relevant and would have been favorable to the defendant; (4) told the jury that if they declined to presum e that the lost evidence was relevant or f avorable, the jury’s inquiry into spoliation was over; (5) explained that if the jury did presume relevance or prejudice, it then had to decide if any of the six plaintiffs had rebutted the presumption; and (6) explained the consequences of a rebutted and an unrebutted presumption.20 The court
20 The court provided the text of the charge:
The Citco Defendants have argued that 2M, H unnicutt, Coronation, the Chagnon Plaintiffs, Bombardier Trusts, and the Bombardier Foundation destroyed relevant evidence, or failed to prevent the destruction of relevant evidence. This is known as the “spoliation of evidence.”
Spoliation is the destruction of evidence or the failure to preserve property for another’ s use as evidence in pending or reasonably foreseeable litigation. To demonstrate that spoliation occurred, the Citco Defendants bear the burden of proving the following two elements by a preponderance of the evidence:
First, that relevant evidence was destroyed after the duty to preserve arose. Evidence is relevant if it would have clarified a fact at issuein the trial and otherwise would naturally have been introduced into evidence; and
Second, that if relevant evidence was destroyed after the duty to preserve arose, the evidence lost would have been favorable to the Citco Defendants.
I instruct you, as a matter of law, that each of these plaintiffs failed to preserve evidenceafter its duty to preserve arose. This failure resulted from their gross negligence in performing their discovery obligations. As a result, you may presume, if you so choose, that such lost evidence was relevant, and that it would have been favorable to the Citc o Defendants. In deciding whether to adopt this presumption, you may take into account the egregiousness of the plaintiffs’ conduct in failing to preserve the evidence.
However, each of these plaintiffs has offered evidence that (1) no evidence was lost; (2) if evidence was lost, it was not relevant; and (3) if evidence was lost and it was relevant, it would not have been favorable to the Citco Defendants.
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noted that it was “important to explain that the jury is bound by the Court’s determ ination that certain plaintiffs destroyed documents after the duty to preserve arose” but that “the jury is not instructed that the Court has made any finding as to whether that evidence isrelevant or whether its loss caused any prejudice to the [] Defendants.” Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. §., LLC, No. 05 Civ. 9016, 2010 WL 184312, at
*23 n.251. The “jury m ust m ake these determ inations because, if the jury finds both relevance and prejudice, it then may decide to draw an adverse inference in favor of the []
Defendants which could have an impact on the verdict,” and “[s]uch a finding is within the province of the jury not the court.” Id.
As explained in more detail below, based on the record in this case, this court makes the preliminary findings necessary to submit the spoliation evidence and an adverse inference instruction to the jury. But the record also presents conflicting evidence about the reasons
If you decline to presume that the lost evidence was relevant or would have been favorable to the Citco Defendants, then your consideration of the lost evidence is at an end, and you will not draw any inference arising from the lost evidence.
However, if you decide to presume that the lost evidence was relevant and would have been favorable to the Citco Defendants, you must next decide whether any of the following plaintiffs have rebutted that presumption: 2M, Hunnicutt, Coronation, the Chagnon Plaintiffs, Bombardier Trusts, or the Bombardier Foundation. If you determine that a plaintiff has rebutted the presumption that the lost evidence was either relevant or favorable to the Citco Defendants, you will not draw any inference arising from the lost evidence against that plainti ff. If, on the other hand, y ou determine that a plaintiff has not rebutted the presumption that the lost evidence was both relevant and favorable to the Citco Defendants, y ou may draw an inference ag ainst that plain tiff and in favor of the Citco Defendants—namely that the lost evidence would have been favorable to the Citco Defendants.
Each plaintiff is entitled to your separate consideration. The question as to whether the Citco Defendants have proven spoliation is personal to each plaintiff and must be decided by you as to each plaintiff individually.
Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, No. 05 Civ.9016, 2010 WL 184312, at *23–24 (S.D.N.Y. Jan. 15, 2010) (footnote omitted).
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the defendants deleted the emails and attachments; evidence that some of the deleted emails and attachments were favorable to the defendants; and an extensive amount of other evidence for the plaintiff to use. As a result, the jury will not be instructed that the defendants engaged in intentional misconduct. Instead, the instruction will ask the jury to decide whether the defendants intentionally deleted emails and attachments to prevent their use in litigation. If the jury finds such m isconduct, the jury m ust then decide, considering all the evidence, whether to infer that the lost information would have been unfavorable to the defendants.
Rather than instruct the jury on the rebuttable presumption steps, it is sufficient to present the ultimate issue: whether, if the jury has found bad-faith destruction, the jury will then decide to draw the inference that the lost inform ation would have been unfavorable to the defendants.21
III. Background
A. Factual and Procedural History
Rimkus is a forensic engineering contractor with its principal place of business in
Houston, Texas. Founded in 1983, Rimkus has thirty offices in eighteen states and works across the country. Rim kus analyzes unexpected accidents and occurrences that cause
21 This is similar to the approach courts use in other contexts involving threshold burden-shifting analyses by the judge followed by a trial in which the jury is instructed on the ultimate question. See, e.g., Kanida v. Gulf Coast Med. Personnel LP, 363 F.3d 568, 576 (5th Cir. 2004) (“This Court has consistently held that district courts should not frame jury instructions based upon the intricacies of theMcDonnell Douglas burden shifting analysis. Instead, we have held that district courts should instruct the jury to consider the ultimate question of whether a de fendant took the adverse em ployment action against a plaintiff because of her protected status.” (citations omitted)); Olitsky v. Spencer Gifts, Inc., 964 F.2d 1471, 1478 (5th Cir. 1992) (“Instructing the jury on the elements of a prima facie [ADEA] case, presumptions, and the shifting burden of proof is unnecessary and confusing. Instead, t he court should instruct the jury to consider the ultimate question of whether the defendant terminated plaintiff because of his age.”).
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damage to people or property, primarily in connection with insurance disputes or litigation, and provides reports and testimony.
In 1995, Rimkus hired Bell, a Louisiana resident, as a marketing representative. In
October 1996, Rimkus hired Cammarata, also a Louisiana resident, as a full-tim e salaried employee, to provide forensic engineering services. Both Bell and Cammarata were hired at Rimkus’s office in Houston, Texas, where they signed an Employment Agreement. The
Employment Agreement was between the “Company,” defined as Rimkus Consulting Group,
Inc., and the “Employee,” defined as Bell or Cammarata. The Agreement’s noncompetition provision stated as follows:
a. Employee will not, directly or indirectly, own, manage, finance, control or participate in the ownership, financing or control of, or be connected as a partner, principa l, agent, employee, independent contractor, m anagement advisor and/or m anagement consultant with, or use or permit his name or resume to be used in connection with any business or enterprise performing consulting services similar to those which are carried on by the Company in the “Designated Geographic Area”. For the purposes of this Agreem ent “Designated Geographic Area” shall mean any standard m etropolitan statistical area (or if a client is not located in a standard metropolitan statistical area, then the city, town or township in which such client is locate d a nd the counties or parishes contiguous thereto) in which a client or clients of the Company are located and from which such client or clients have engaged Company on not less than five (5) separate files or engagem ents during the five (5) calendar years proceeding termination of Employee’s employment with Company. If Com pany has received less than five (5) such assignments or engagem ents from a client in any Designated Geogra phic Area, then Em ployee shall be free to compete in such Designated Geographic Area. . . .
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This covenant against competition shall be construed as a separate covenant covering com petition within the State of Texas, or in any other State where the Company, directly or indirectly, whether through itself or its representative or agents, conducts business; . . . [.]
(Docket Entry No. 1, Ex. A at 4–5). The Ag reement also contained a clause prohibiting posttermination solicitation of Rimkus’s employees and of Rimkus’s customers:
b. Employee agrees that after term ination of employment with the Com pany, he will not, directly or indirectly, solicit, employ or in any other fashion, hire persons who are, or were, em ployees, officers or agents of the Company, until such person has term inated his employment with the Company for a period of eighteen (18) months;
c. Employee agrees, that for a period lasting until eighteen (18) months after termination of his employment, he will not at any tim e, directly or indirectly, solicit the Company’s customers[.]
(Id. at 5). The Agreement stated that “any dispute or other proceeding to enforce the terms of this Agreement shall be adjudicated by a court of competent jurisdiction in Harris County,
Texas” and that the “Agreement and all rights, obligations and liabilities arising hereunder shall be governed by, and construed and enforced in accordance with the laws of the State of Texas (excluding its conflicts of law provisions) applicable to contracts made and to be performed therein.” (Id. at 11).
Bell and Cammarata worked for Rimkus Consulting Group of Louisiana (“RCGL”), a wholly owned subsidiary of Rimkus. Both m en worked in RCGL’s Metairie, Louisiana office. They received their paychecks and W-2 forms from RCGL but were provided access
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to Rimkus customer information, Rimkus business plans, Rimkus operations information, and Rimkus work for their clients.
In 2004, Bell became central region property manager and a vice-president of Rimkus.
He was responsible for the area from Louisiana to the Canadian border. On July 14, 2005,
Rimkus and Bell entered into a “Common Stock Purchase Agreement.” Under the Common
Stock Purchase Agreement, Bell purchased 2,000 shares of Rimkus stock. The Agreement was between the “Cor poration,” defined as Rim kus Consulting Group, Inc., and the
“Shareholder,” defined as Bell. The Com mon Stoc k Purchase Agreem ent contained a noncompetition clause, which provided as follows:
Each Shareholder, recognizing that a covenant not to com pete is required to protect the business interests of the Corporation, agrees that unless the Cor poration consents in writing to the contrary, such Shareholder shall not engage directly or indirectly as an em ployee, agent, shareholder, officer, director, partner, sole proprietor or in any other fashion in a competing business in any of the geographic areas in which the Corporation is then conducting business, during his pe riod of employment by the Corporation and for five (5) years after the Closing of the purchase transaction. . . . The covenant is in addition to any non-competition agreem ent contained in any em ployment agreement between each Shareholder and the Corporation. Each Shareholder has entered into a n Employment Agreement with the Corporation which contains such a non-com petition agreement. Shareholders and the Corporation agree that, for purposes of this Agreem ent, the non-com petition provisions extending the period to a five-year period commencing with the date of a ny Terminating event will prevail over the period as specified in the Em ployment Agreem ent between each Shareholder and the Corporation.
(Docket Entry No. 321, Ex. C at 10–11).
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The Common Stock Purchase Agreement also addressed confidential information:
[C]onfidential inform ation pertaining to the Corporation’s customers and business and marketing methods, including, but not limited to, customer or client lists and trade secrets whic h may be available to them is valuable, special and unique except as such m ay be in the public dom ain. Accordingly, each Shareholder hereby agrees that he will not at any time disclose any of such inform ation to any person, firm , corporation, association or other entity for any reason or purpose whatsoever or m ake use in any other way to his a dvantage of such information.
(Id. at 11). The Agreement also stated that Rimkus and Bell “each agree[d] to refrain from any conduct, by word or act, that will reflect negatively on the character or conduct of the other.” (Id. at 10).
On September 27, 2006, Bell resigned from Rimkus effective October 31. Cammarata resigned on November 15, 2006. On that date, Bell, Cammarata, and Mike DeHarde, another employee who had also worked at RCGL in Louisiana, form ed and immediately began to work for U.S. Forensic. Like Rim kus, U.S. Forensic provides investigative and forensic engineering services, prim arily to determ ine the cause, origin, and extent of losses from failures and accidents. The parties do not dispute that U.S. Forensic competes with Rimkus in providing investigative and forensic engineering services, although U.S. Forensic does not offer as broad a ra nge of services as Rim kus. U.S. Forensic currently has offices in
Louisiana, Mississippi, Florida, and Tennessee and employs engineers registered in twenty states.
In this litigation, Rimkus alleges that Bell breached his fiduciary duty as an officer of
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Rimkus by preparing to form U.S. Forensic before he left Rimkus in October 2006. Rimkus alleges that Bell, Cammarata, and DeHarde planned and made preparations to set up U.S.
Forensic and compete against Rimkus long before they resigned. The record shows that Bell registered the domain name “www.usforensic.com” on February 28, 2006. (Docket Entry
No. 321, Ex. F). During the sum mer of 2006, Bell m et with a lawye r, contracted with a company to host a web site, filed a trademark application, and prepared a corporate logo for
U.S. Forensic. ( Id., Exs. G, H, R, S). On October 1, 2006, Bell created U.S. Forensic résumés for himself, Cammarata, and DeHarde. Id.( , Ex. I). Corporate formation documents for U.S. Forensic were filed with the Louisiana Secretary of State on October 5, 2006. Id.( ,
Ex. J). On October 13, 2006, Bell’s wife filed an application for U.S. Forensic to practice engineering in the State of Louisiana. (Id., Ex. T).
Bell testified in his deposition that he did not agree to form a new company until after he had resigned from Rimkus. (Id., Ex. D, Deposition of Gary Bell, at 423:13–:18). Bell testified that he told DeHarde and Cam marata he was leaving and “the y said they were leaving, and – and so we talked about maybe we should do something together. And, I – I think, it was tha t vague, you know, m aybe we should do som ething together, m aybe we talked a little bit about it, you know, after hours or something here, might have a phone call about it, and – but no real – once – once I left, that’s when we kind of really kicked it into high gear.” (Id. at 424:13–:22). On September 30, 2006, Bell emailed Cammarata, DeHarde, and Bill Janowsky, an engineer at another Louisiana firm, to inform them that Rimkus had made him some lucrative offers to entice him to retract his resignation but that he would go
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forward with the plan to form U.S. Forensic if they were still c ommitted to doing so.
(Docket Entry No. 324, Ex. KK). Bell stated, “Without each of you, it will not be worth leaving. If one guy falls [sic] to come along, the whole thing will be completely different.”
(Id.). He continued:
We have a dream team. I really believe that Rimkus is making these ridiculous offers m ore because of who I could possibly recruit than anything I can actually do myself. But fear not. I have committed to each of you and for that reason alone I would not abandon you in our dream. I just wanted to give each of you one last chance to bail with no hard feelings. Te ll me now or meet me on Ridgelake on November 15 with your sleeves rolled up.
(Id.). The record does not include emails responding to this message. Rimkus alleges that this em ail and any responses were not produced in discovery because the defendants intentionally deleted them.
On November 11, 2006, Bell emailed Cammarata, DeHarde, and Janowsky22 asking for their names, addresses, and social security numbers to set up a payroll tax account for
U.S. Forensic. ( Id., Ex. B). Bell stated in the em ail that he had received his COBRA package from Rimkus along with a form letter stating that Rimkus expected him to honor his agreements, including his noncompetition covenant. (Id.). Bell continued: “However, the designated geographic area is the MSA of any city in which Rim kus has received assignments from in the five years prior. Weare in good shape and I’ll bet they know it. We need to serve them on Monday to prevent them from filing in Texas. Larry [Demmons] will
22 The email does not disclose the recipients, but b ecause the message asked for the “partners’” names, addresses, and social security numbers, the recipients were presumably Cammarata, DeHarde, and Janowsky.
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correct the pleading and get it in — then I call Markham.23 Damn the torpedoes — full speed ahead!” ( Id.). Rim kus argues that the defendants’ plan to file a preem ptive lawsuit is evidence of a bad-faith attempt to prevent Rimkus from obtaining relief in Texas under Texas law. The presence of the plan is important to the duty to preserve relevant records.
Bell responds that none of these actions breached his fiduciary duty to Rimkus. Bell contends that even a fiduciary relationship between an officer and the corporation he serves does not preclude the officer from preparing for a future com peting business venture.
Rimkus acknowledges that general preparations for future com petition do not breach fiduciary duty but argues that Bell’s preparatory actions, combined with his misappropriation of trade secrets, solicita tion of Rim kus’s custom ers, and luring away Rim kus’s employees—all while still employed by Rimkus—breached the fiduciary duty he owed as a Rimkus corporate officer.
Rimkus alleges that both Bell and Cam marata misappropriated client lists, pricing information, and other confidential Rimkus business information to which they had access while working at Rimkus and that they used this information to solicit Rimkus clients for
U.S. Forensic. The record shows that Bell and Cammarata emailed some Rimkus clients in
November and December 2006. Some of these emails refer to prior work done for the clients while Bell and Cammarata worked for Rimkus. All these emails offer U.S. Forensic as an alternative to Rimkus. It appears that the emails sent to Rimkus clients soliciting business for U.S. Forensic were first produced by an internet service provider pursuant to a third-party
23 This is presumably a reference to Gary W. Markham, Rimkus’s former Chief Operating Officer.
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subpoena. The defendants either did not produce such emails or delayed doing so until late in the discovery.
The parties vigorously dispute how Bell and Cam marata obtained the contact information necessary to send these solicitation em ails to Rim kus clients. Bell and
Cammarata assert that they did not misappropriate confidential client or other information from Rimkus. Cammarata testified at a hearingthat he did not download or print any Rimkus client list and did not take any written client list with him when he left. Cam marata submitted a n affidavit stating that when he resigned from Rimkus, he did not take any electronic or paper copies of Rimkus client lists or client-contact information and that he has
“never used any Rimkus client lists or client contact inform ation in [his] work for U.S.
Forensic.” (Docket Entry No. 309, Ex. Y, Affidavit of Nick Cammarata ¶¶ 11–12). Bell also submitted an affidavit stating that when he resigned from Rimkus, he did not take any electronic or paper copies of Rimkus pric ing information, investigative m ethods, report formats, operations manual, business plan, client lists, or client-contact information. (Id., Ex.
V, Affidavit of Gary Bell ¶¶ 39–49). Bell stated that he has “never used any Rimkus client lists or client c ontact information in [his] work for U.S. Forensic.” ( Id. ¶ 40). Bell also stated that he did not use his memory of Rimkus client-contact information to solicit business for U.S. Forensic. ( Id. ¶ 41). Bell stated in his affidavit that he has used only publicly available information, primarily from the Casualty Adjuster’s Guides and the internet, to identify people to contact to solicit potential clients for U.S. Forensic. (Id.).
The Casualty Adjuste r’s Guide is a com pilation of the nam es, addresses, phone
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numbers, and email addresses of insurance and adjusting companies and certain employees.
A separate guide is published for different geographical regions in the United States. Each guide is updated annually. Other publicly available guides, including “The Claims Pages,” the “Texas Legal Directory,” and the “Louisiana Blue Book,” contain similar information.
Bell stated in his affidavit tha t whe n he form ed U.S. Forensic, he “used the Casualty
Adjusters Guide, the Louisiana Blue Book and other publicly available publications to find the nam es, addre sses, phone num bers and em ail addresses of potential clients for U.S.
Forensic.” (Id. ¶ 13). Bell also stated in his affidavit that he obtained contact information of potential clients for U.S. Forensic when he attended industry conventions and seminars.
(Id. ¶ 15). Bell testified in his deposition about his primary sources for new client-contact information: “I would say, primarily, the internet was my – the – the main thing that I used right off the bat. As I got names, or as I called people and got other information, it would grow from there. But you can find all the adjusters available online, you can find them in the
Casualty Adjusters book, you can find them wherever. It depends on where I’m trying to get business, maybe. But the internet is the bestsource, it’s the most complete source. You can specify your search to – you know, to insurance adjusters that are working for the company, who are not working for the company, you can get insurance claims office by state, you can adjusters’ license by state.” (Docket Entry No. 314, Ex. 6, Deposition of Gary Bell, Vol. 1 at 59:5–:21). Bell subm itted an exam ple of the sources of client-contact inform ation available on the internet. (Docket Entry No. 309, Ex. V-8 pts. 1,2).
Rimkus asserts that the testim ony by Bell a nd Cam marata describing how they
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obtained client-contact inform ation and denying that they took Rim kus confidential information when they resigned is false. Rimkus contends that Bell and Cammarata could not have obtained conta ct information for the individuals they em ailed to solicit business unless they took the inform ation with them when they left Rim kus. Rimkus points to an email Bell sent on December 10, 2006, in which he asked for a copy of the 2006 Louisiana
Casualty Adjuster’s Guide because he did not yet have one. (Docket Entry No. 324, Ex. E).
Rimkus also points to an October 1, 2006 em ail forwarded to Bell from an em ployee at
Rimkus. This em ail contained contact inform ation for insurance adjusters at Lexington
Insurance, a Rimkus client. (Docket Entry No. 321, Ex. Q).24 And, according to Rimkus, many of the insurance adjusters Bell and Cammarata contacted in November and December
2006 are not listed in the Louisiana Casualty Adjuster’s Guide.
In late August 2009, Rim kus subm itted inform ation showing that Gary Bell maintained a previously undisclosed personal em ail address to which he forwa rded information from Rimkus. In his March 8, 2009 deposition, Bell testified that the only email addresses he used during 2006 were [email protected] and [email protected]. (Docket
Entry No. 314, Deposition of Gary Bell, Vol. 2 at 247:10–:19). The deposition continued:
Q: Are there any others?
A: I don’t believe so.
Q: You don’t have like a Hotmail address?
24 Rimkus alleges that Bell forward ed the October 1 email on October 5, 2006. The copy of the em ail submitted to the court does not clearly reflect a forward on October 5, 2006, but portions of the screen shot submitted are not legible. (Docket Entry No. 321, Ex. Q).
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A: (Shakes head)
Q: A Gmail address?
A: No. I don’t believe so.
(Id. at 247:20–248:1).
In August 2009, Rimkus completed a forensic analysis of its own computer system and discovered a “cookie” showing tha t on Septem ber 30, 2006—three days after Bell officially resigned from Rimkus but before his last day of work—Bell accessed his BellSouth email address from his Rimkus work computer to forward documents to the email address [email protected]. Rimkus filed the forwarded documents under seal. These documents are income statements for Rimkus’s Pensacola, New Orleans, Lafayette, and Indiana polis offices, as well as an em ployee break-even analysis. The incom e statements contain the
August 2006 budget for each of those offices, including revenues, administrative costs, sales and marketing costs, and the total net income or loss. Rimkus asserts that these documents are confidential and accessible only by certain executive employees. Rimkus argues that the
September 30, 2006 em ail Bell forwarded to him self is evidence of trade secret misappropriation. At a discovery hearing held on Septe mber 2, 2009, this court allowed
Rimkus to subpoena Google, an email provider, to obtain emails Bell sent and received using the email address “[email protected].”
On Novem ber 15, 2006—the date Cam marata resigned from Rim kus and U.S.
Forensic began operating—Bell and Cam marata sued Rim kus in Louisiana state court, seeking a declaratory judgment that the forum-selection, choice-of-law, noncompetition, and
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nonsolicitation provisions in the Employment Agreement and the noncompetition provision in the Common Stock Purchase Agreement were unenforceable. In January 2007, Rimkus sued Cammarata in this court, seeking to enjoin Cammarata from competing with Rimkus during the period set out in the Employment Agreement’s noncompetition provision, from soliciting Rimkus employees and customers, and from using Rimkus trade secrets. Rimkus also sought damages for Cammarata’s alleged breach of the Em ployment Agreement and misappropriation of trade secrets. (Docket Entry No. 1).
Rimkus sued Bell in Texas state court in February 2007, alleging breach of the covenants in the Common Stock Purchase Agreement. Bell removed to this court in March
2007. The suit against Bell,Rimkus Consulting Group, Inc. v. Gary Bell, Civ. A. No. H-07-
910, was consolidated with the suit against Cammarata. (Docket Entry No. 211).
In the Louisiana state court suit Bell and Cammarata filed, the judge issued an order on March 26, 2007, stating that Louisiana law applied to their claims.25 (Docket Entry No.
19, Ex. D). On July 26, 2007, the judge issued a fina l judgment stating that “pursuant to
Louisiana law, the covenant not to compete clauses contained in Paragraphs 8(a) and the non- solicitation of customer(s) clauses contained in Paragraphs 8(c) of the respective contracts are invalid and unenforceable.” (Docket Entry No. 71, Ex. H). The noncompetition clause in Bell’s Common Stock Purchase Agreement was, however, held to be enforceable. Both sides appealed.
On January 4, 2008, the Louisian a Fifth Circuit Court of Appeal reversed the trial
25 DeHarde was also a plaintiff in the Louisiana lawsuit.
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court’s ruling on Bell’s Com mon Stock Purchase Agreem ent and held that the noncompetition clause in that Agr eement was invalid and unenforceable. On March 25,
2008, the Louisiana Fifth Circuit Court of Appeal affirm ed the trial court’s decision that
Louisiana law applied to the parties’ agre ements and that the Texas forum -selection and choice-of-law clauses and the noncom petition and nonsolicitation covenants in the
Employment Agreement were unenforceable. Bell v. Rimkus Consulting Group, Inc. of La.,
07-996 (La. App. 5 Cir. 3/25/08); 983 So. 2d 927. In holding that Louisiana law applied to the 1996 Em ployment Agreement despite the Texas choice-of-law clause, the Louisiana
Court of Appeal stated:
Forum selection clauses will be upheld unless they contravene strong public policy of the forum in which the suit is brought. L A. C.C. art. 3450. L A. R.S. 23:921 A(2), a provision which was added by the legisla ture in 1999, is an expression of strong Louisiana public policy concerning forum selection clauses. . . .
. . . Louisiana law expressly provides that conventional obligations are governed by the law of the state whose policies would be most seriously impaired if its law were not applied to the issue. Further, issues of conventional obligations m ay be governed by law chosen by the parties, except to the extent that law contravenes the public policy of the state whose law would be applicable under La. C.C. art 3537.
As previously stated herein, Louisiana has a longstanding public policy to prohibit or severely restrict non-compe tition provisions in em ployment agreem ents which curtail an employee’s right to [] earn his livelihood. These agreements are in derogation of the com mon right, and they m ust be strictly construed against the party seeking their enforcem ent. Application of Texas law to this dispute would thwart Louisiana’s longstanding public policy and interest in this type
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of matter.
According to well established Louisiana law and jurisprudence, the forum selection and choice of law provisions contained in the 1995 and 1996 employment contracts are null and void. Thus, the agreem ents in this case are governed by Louisiana law.
Id. a t pp. 9–10; 983 So.2d at 932–33 (citations om itted).26 On March 17, 2008, the
26 Article 3540 of the Louisiana Civil Code states:
All other issu es of conventional ob ligations are governed by the law expressly chosen or clearly relied upon by the parties, except to the extent that law contravenes the public po licy of the st ate whose law would otherwise be applicable under Article 3537.
LA. CIV. CODE art. 3540.
Article 3537 of the Louisiana Civil Code states:
Except as otherwise provided in this Title, an issue of conventional obligations is governed by the law of the state whose policies would be most seriously impaired if its law were not applied to that issue.
That state is determined by evaluating the strength and pertinence of the relevant policies of the involved states in the light of: (1) the pertinent contacts of each state to the parties and the transaction,including the place of negotiation, formation, and performance of the contract, the location of the object of the contract, and the place of domicile, habitual residence, or business of the parties; (2) the nature, type, and purpose of the contract; and (3) th e policies referred to in Article 3515, as well as the policies of facilitating the orderly planning of transactions, of prom oting multistate commercial intercourse, and of protecting one party from undue imposition by the other.
LA. CIV. CODE art. 3557.
Section 921(A) of the Louisiana Revised Statutes states:
A. (1) Every contract or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, except as provided in this Section, shall be null and void.
(2) The provisions of every em ployment contract or agreem ent, or provisions thereof, by which any foreign or domestic employer or any other
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Louisiana state trial court declared that the nonsolicitation-of-em ployees clause in the defendants’ Employment Agreements was “ambiguous and unenforceable.” (Docket Entry
No. 105, Ex. D).
In this federal suit, Cam marata filed two m otions to dism iss Rimkus’s claims for breach of the noncompetition and nonsolicitation provisions in the Employment Agreement.
Cammarata based his motions to dismiss on the preclusive effect of the Louisiana state court ruling invalidating the noncompetition, nonsolicitation, forum-selection, and choice-of-law provisions in the Em ployment Agreement. (Docket Entry Nos. 71, 105). In ruling on
Rimkus’s application for a preliminary injunction, this court concluded that the Louisiana court’s judgment “clearly precludes relitigation of the issue of whether the forum-selection and choice-of-law provision, as well as the noncompetition and nonsolicitation covenants, are unenforceable in Louisiana, under Louisiana law.” (Docket Entry No. 159, August 13,
2008 Memorandum and Opinion at 24). This court decided that, even if Texas law applied and the noncompetition and nonsolicitation provisions were enforceable outside Louisiana,
Rimkus was not entitled to the preliminary injunctive relief it sought. Under Texas law, the noncompetition covenant was broader in geographical scope than necessary to protect
person or entity includes a choice of forum clause or choice of law clause in an employee’s contract of em ployment or collective bargaining agreement, or attempts to enforce either a choice of forum clause or choice of law clause in any civil or administrative action involving an employee, shall be null and void except where the choice of forum clause or choice of law clause is expressly, knowingly, and voluntarily agreed to and ratified by the employee after the occurrence of the incident which is the subject of the civil or administrative action.
LA. REV. STAT. § 23:921(A).
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Rimkus’s legitimate business interests and the nonsolicitation c ovenant was broader than necessary because it applied to all Rim kus customers, not m erely those Cam marata had worked with or solicited business from while working for Rimkus.
Cammarata again m oved to dism iss based on res judicata, asking this court to determine the preclusive effect of the Louisiana court’s ruling outside Louisiana. (Docket
Entry No. 169). Cam marata’s motions to dismiss were granted “insofar as Rim kus seeks damages for Cammarata’s postemployment competitive activities inside Louisiana on the basis that those activities breached his Employment Agreement.” (Docket Entry No. 260,
March 24, 2009 Memorandum and Opinion at 27). The motions to dismiss were denied with respect to Cammarata’s activities outside Louisiana. Id.( ). This court held that the Louisiana state c ourt’s rulings that the forum -selection, choice-of-law, noncom petition, and nonsolicitation contract provisions were unenforceable in Louisiana under Louisiana law did not make those provisions invalid in all states. (Id. at 25).
In response to the declaratory judgm ent com plaint Bell and Cam marata filed in
Louisiana state court on November 15, 2006, Rimkus filed an answer and a “Reconventional
Demand.”27 Rimkus asserted that “the entirety of this Reconventional Dem and should be governed according to the laws of the State of Texas.” (Docket Entry No. 309, Ex. B at 6).
Rimkus’s reconventional demand asserted causes of action for breach of the Em ployment
Agreement’s noncompetition, nonsolicitation, and confidentiality provisions, breach of the
Common Stock Purchase Agreement, breach of fiduciary duty, and disparagem ent. (Id.).
27 Under Louisiana civil procedure, a reconventional demand is similar to a counterclaim.
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After the Louisiana state court ruled that the noncompetition and nonsolicitation clauses in the Employment Agreements were unenforceable under Louisiana law, Bell, Cammarata, and
DeHarde m oved for sum mary judgm ent on the rem aining claims a sserted in Rim kus’s reconventional demand in the Louisiana lawsuit. The summary judgment motion cited only
Texas cases and sought judgment as a matter of Texas law. Rimkus responded to the motion and argued that summary judgment was inappropriate under Texas law. The Louisiana state trial court heard oral argument from the parties on the viability of these claims under Texas law. On May 11, 2009, the Louisiana court issued an order stating that “after reviewing the evidence, the law and argum ents of c ounsel . . . IT IS ORDERED, ADJUDGED, AND
DECREED that the Motion for Summary Judgment is GRANTED, and the reconventional demands of the plaintiffs-in-reconvention, Rim kus Consulting Group, Inc. and Rimkus
Consulting Group, Inc. of Louisiana, are DISMISSED WITH PREJUDICE, each party to bear its own costs.” (Docket Entry No. 309, Ex. G). The defendants in this case, Bell and
Cammarata, argue that the Louisiana state court’s ruling dismissing these claims is entitled to preclusive effect.
B. Discovery
In the fall of 2007, Rim kus sought “docum ents, including em ails, re lated to
Cammarata’s and Bell’s com munications with one another and with other U.S . Forensic,
L.L.C. members concerning the creation and inception of U.S. Forensic, L.L.C., their roles with the company, and contact with clients.” (Docket Entry No. 313 at 4). Rimkus deposed
Cammarata in Octobe r 2007. In response to a subpoena duces tecum issued for that
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deposition, Cammarata produced two emails relevant to the formation of U.S. Forensic. In
November 2007, Rimkus served the defendants with a request to produce all such documents, including all emails sent among those setting up or working for U.S. Forensic before January
1, 2007. The defendants objected to this request as overbroad because it could include irrelevant personal emails and “day-to-day emails regarding the operation of U.S. Forensic’s business,” but stated that they “searched several times for any such responsive emails and turned over any responsive em ails in the ir possession.” (Docket Entry No. 345 at 47).
Rimkus asserts that from November 2007 to June 11, 2009, despite repeated requests, the defendants did not produce any em ails. In June 2009, the defendants produce d approximately sixty emails sent by the defendants and others involved with U.S. Forensic during the fall of 2006. (Docket Entry No. 313 at 4).
In the spring of 2009, Rimkus noticed the depositions of Gary Bell, William
Janowsky, and Michael DeHarde. Each was served with a subpoena duces tecum seeking any em ail com munications about U.S. Forensic’s form ation. On Ma rch 7, 2009, Bell testified in his de position that he had “printed out the things that [he] thought m ight be responsive, and sent it to [his attorney], when [he] first received the first request” for these emails. (Docket Entry No. 314, Ex. 6, Depositionof Gary Bell, Vol. 1 at 16:24–17:2). Bell testified that it was his custom to delete an em ail after com pleting the task for which he needed the em ail but that he m ight have saved som e relevant, responsive em ails on his personal computer until the related tasks were completed. (Id. at 15:21–16:4). When asked whether he still had that personal computer, Bell testified that he had donated it to charity in
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2007, well after the litigation was underway. ( Id. at 16:11–:18). When Bell was asked whether, when he sued Rimkus in Louisiana on November 15, 2006, he attempted to preserve emails, documents, calendar entries, or other inform ation relevant to his departure from
Rimkus to form a competing business, Bell testified as follows:
A: For m y em ployment at Rim kus, I used the Rim kus E-mail system. They would – you know, they would have everything there. I didn’t use m y personal – but, you know, I – I – you know, I don’t know wha t to tell you. I – you know, I don’t think I had anything. I certainly wasn’t trying to get rid of anything. I think, it wasn’t as, you know, planned as – as it could have been.
Q. At the time you instituted that legal action, did you have an understanding that you should endeavor, as best you could, to try to keep any relevant information?
A. I – if I thought there was som ething that – that, you know, was requested of m e, I would – I would turn it over. I didn’t try to get rid of anything that I thought I shouldn’t.
(Id. at 17:21–18:13).
Janowsky was deposed on March 9, 2009. He testified that in response to the subpoena duces tecum, he looked in his desk, ilef cabinet, and computer. (Docket Entry No.
314, Ex. 12, Deposition of William Janowsky at 16:2–:22). Janowsky testified that he “went to Windows Explorer and searched the – the directories where I thought those things might have occurred,” but he was unable to find responsive emails. (Id. at 17:5–18:3). Janowsky also searched his web-based email account with NetZero and found nothing responsive. Id. ( at 18:8–:13). Janowsky acknowledged that he exchanged emails with Gary Bell using his
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NetZero account while they were working on form ing U.S. Forensic . ( Id. at 19:8–:11).
Janowsky’s deposition testimony continued:
Q. And what did you do with them?
A. I deleted them.
Q. And when did you delete them?
A. I don’t know.
Q. Did you ever print them?
A. No.
Q. What was – what is your routine or your normal practice with respect to either deleting or saving Emails?
A. I get rid of them very frequently. I get a lot of Emails and they fill up my box, so I go through on kind of a weekly basis and – and get rid of anything that’s – that’s not current, needs to be taken care of.
(Id. at 19:12–:25). Janowsky testified that he did not participate in any discussion with Bell,
Cammarata, or DeHarde about deleting emails related to forming U.S. Forensic. Janowsky testified that there was no agreement to delete emails on a routine or regular basis. ( Id. at
40:24–41:10). “I deleted my Emails out of convenience. I’m not sure what the other guys did, if they deleted – but I didn’t have any agreement to delete Emails about this interest.”
(Id. at 41:14–:17). Janowsky did not remember whether anyone had ever talked to him about preserving records related to the form ation of U.S. Forensic. ( Id. at 26:1–:4). He acknowledged that he had not tried to save any em ails related to the form ation of U.S.
Forensic or with Bell, Cammarata, and DeHarde about U.S. Forensic. (Id. at 26:5–:8).
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DeHarde was deposed on April 1, 2009. He testified that he had looked for “the emails that [he] and Mr. Bell exchanged concerning – forming a company to compete with
Rimkus” but did not “recall” whether he was able to find those emails. (Docket Entry No.
313, Ex. F, Deposition of Michael DeHarde at 13:10–:16). The following exchange occurred:
Q: What did you do to try to find them?
A: I looked on my computer.
Q: And when did you do that, sir?
A: I don’t recall.
Q: Can you give me an estimate of when you did it?
A: About 2007, 2008, something like that.
Q: Why did you do it?
A: Because I was requested to do that.
Q: And did you find any?
A: I don’t recall.
Q: What would you have done with them after you found them?
A: Given them to Larry Demmons [counsel for defendants Bell and Cammarata].
MR. WARD [counsel for Rimkus]:
Larry, do you have any emails from Mr. DeHarde?
MR. DEMMONS:
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Nothing other than what’s been turned over.
MR. WARD:
I don’t believe anything has been turned over from Mr. DeHarde.
MR. DEMMONS:
Then I didn’t get anything from Mr. DeHarde.
(Id. at 13:17–14:17). DeHarde testified that he deleted em ails—including em ail communications with Bell, Cammarata, and Janowsky—because of concern about the storage capacity of his Yahoo! email account. (Id. at 37:14–:20; 38:19–:25). DeHarde testified that he did not delete emails on a regular or systematic basis. (Id. at 22:2–:10).28
After this deposition, Rim kus asked this court to com pel DeHarde to look for and produce documents and information responsive to the subpoena duces tecum . This court ordered DeHarde to do so and to reappearfor one hour of additional deposition questioning.
Rimkus then subpoenaed several internet service providers seeking the defendants’ emails.
At a hearing held on May 1, 2009, this court perm itted Rimkus to proceed with those subpoenas with limits based on relevance and privacy protection.29 The May 1, 2009 hearing revealed that the defendants’ efforts to locate and retrieve electronically stored information,
28 Pages 22, 37, and 38 of the April 2009 deposition of Mike DeHarde are quoted in Rimkus’s motions for contempt and sanctions and are identified in the motion as attached as Exhibit F. (Docket Entry No. 313 at 13–14). Exhibit F, however, contains only sporadic pages from the DeHarde deposition and doesnot include pages 22, 37, or 38. The content of these passages of DeHarde’s deposition have not been disputed.
29 The defendants objected to some of the subpoenas onthe grounds that they would allow Rimkus to access private, irrelevant information as well as emails covered by attorney–client privilege. This court required the subpoena notices to direct the ISPs to use search terms to avoid production of personal or privileged emails. This court also required the documents from some of the internet service providers to be submitted directly to the court for in camera review before production to Rimkus.
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including emails, had been superficial. The defendants had looked for readily accessible emails that were still on the computers they still had. They had not identified any sources of relevant information that were not reasonably accessible. They had no information about whether any of the emails that had been deleted or were otherwise not reasonably accessible could be recovered and how much time and expense might be required. The defendants were ordered to conduct that inquiry and report the results.30
Rimkus deposed Allen Bostick, an information technology (“IT”) consultant that U.S.
Forensic used in the fall of 2006. Bostic k’s de position revealed that Hom estead
Technologies web-hosted U.S. Forensic’s email accounts beginning on November 15, 2006.
On December 19, 2006, Bostick switched U.S. Forensic to an in-house em ail host using a small business server. U.S. Forensic used a series of external hard drives for backup storage.
The documents on U.S. Forensic’s network, including emails, were backed up every night using backup software and the external harddrives. On April 4, 2007, Bostick advised U.S.
Forensic that the software for the type of hard drive U.S. Forensic was using was not meant to back up a small business server. According to Bostick, the hard drive was subsequently returned to the m anufacturer as defective. On April 5, 2007, U.S. Forensic switched to different backup software. Every night, the software created a local copy on the server and saved a backup copy onto two external hard drives. Near the end of 2007, one of these drives
30 See Fed. R. Civ. P. 26(b)(2)(b) (“A party need not provide discovery of electronically stored information from sources that the party identifies as not reas onably accessible because of undue b urden or cost. On motion to compel discovery or for a protective order, the party from whom discovery is sought must show that the information is not reasonably accessible because of undue burden or cost. If that showing is made, the court m ay nonetheless order discovery from such sources if the requesting party shows good cause, considering the limitations of Rule 26(b)(2)(C). The court may specify conditions for the discovery.”).
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failed. Bostick testified that space on the external hard drives became a concern around late
2007. (Docket Entry No. 314-9, Deposition of Allen Bostick at 148:1–:4).
In late 2007, U.S. Forensic began using three external hard drives and subsequently began using different backup software. Thenew software did not create a backup image on the server. Instead, the backup was directly to the external hard drive. On May 28, 2009, the defendants reported that three backup im ages had been located. Bostick was able to restore one of these images but two others were corrupted and U.S. Forensic no longer had the software to restore them. According to the defendants, the hard drives had to be sent to the software company for any attempt at restoration.
The defendants reviewed the emails recovered from the restored backup image and determined that none were relevant The defendants also retained Roddy Orgeron, an IT consultant, to determ ine the tim e, cost, and likelihood of obtaining inform ation from the corrupted drives. Orgeron could not open the files because the hard drive was damaged and because he did not have the necessary soft ware. According to Orgeron, there was som e possibility that some backup files could be recovered, but it would cost between $2,000.00 and $10,000.00 and there was a slim likelihood of success because of the damage to the hard drive.
On May 29, 2009, Rimkus continued with DeHarde’s deposition. DeHarde produced several responsive emails that he had found in his Yahoo! mail account. These emails were sent to DeHarde from other Rim kus employees while DeHarde still worked at Rim kus.
DeHarde received these em ails at his Rim kus email address but forwarded them to his
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personal Yahoo! account. None of the emails was from Bell or Cammarata. The following exchange occurred:
Q: Is there any reason that you don’t have any emails from this same time frame from Mr. Cammarata?
A. Yes.
Q. Why is that?
A. We deleted them. We had a policy that we would delete e-mails during the start-up after two weeks.
(Docket Entry No. 313, Ex. F, Deposition of Michael DeHarde at 18:14–:21). DeHarde testified that he, Bell, Cammarata, and Janowsky had agreed on this email-deletion policy.
According to DeHarde, this agreem ent was made “[s]ometime in the fall of 2006, fa ll or summer, 2006,” while he was still working at Rimkus. (Id. at 34:24–:25). DeHarde testified that there was no discussion with Bell or Cam marata about suspending or m odifying this policy once they decided to file the Louisianalawsuit or when they did so on November 15,
2006. DeHarde acknowledged that he had dele ted all emails that Cammarata sent to his
Yahoo! account. The deposition continued:
Q. And those we re e mails th at spe cifically related to discussions you were having about leaving Rimkus and forming a new business?
A. Yes.
Q. And part of the motivation for that was to make sure that there wasn’t evidence of those communications, correct?
A. We had a policy to delete the emails after two weeks, and I followed the policy.
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(Id. at 35:1–:9). DeHarde testified that the policyremained in effect after the Louisiana state suit was filed. (Id. at 34:9–:14).
On June 11, 2009, the defendants produced approximately 103 pages of emails sent in the fall of 2006. The em ails include com munications among the defendants clearly responsive to long-standing Rimkus discovery requests. These emails were forwarded from
Gary Bell to defense counsel Larry Demmons on May 15, 2009. These emails were only a portion of those sent or received by Bell, Cammarata, and DeHarde beginning in the fall of
2006, relating to U.S. Forensic.
Rimkus was able to obtain num erous additional em ails via subpoena from the defendants’ internet service providers and em ail providers. Most were produc ed by
Homestead. The se em ails show that Bell and Cam marata contacted Rim kus clients in
November and December 2006 to solicit business for U.S. Forensic. The following emails were obtained from Homestead:
C On November 9, 2006, Bell emailed Doug Delaune of Southern Farm Bureau Casualty Insurance and attached U.S. Forensic’s marketing materials. (Docket Entry No. 324, Ex. F). Bell asked for Delaune’s help in getting U.S. Forensic on Farm Bureau’s approved list and invited Delaune to meet. (Id.).
C On November 15, 2006, Bell emailed Stephanie Jackson of Louisiana Citizens Property Insurance and attached “initial com pany inform ation on U.S. Forensic.” (Docket Entry No. 321, Ex. L-2). Bell thanked Jackson for “speaking with [ him] last week” and asked for a m eeting “some time next week” to “go over our capabilities, capacities, the com pany insurance coverages, and how we plan to improve on services to Citizens.” (Id.). Bell stated that U.S. Forensic would be “officially open for business tomorrow” and that he “hope[d] we get a chance to continue working with you.” (Id.).
C On November 15, 2006, Bell em ailed Don Livengood, a Fidelity National
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representative with whom Bell and Cammarata had dealt while employed at Rimkus. (Docket Entry No. 321, Ex. L-1). Bell attached to the email “initial company information on U.S. Forensic” and asked to meet with Livengood to “go over the insurance coverages, the non com pete agreement for Orleans Parish and our capacity to do jobs out of state.” (Id.). Livengood responded that he would “be in touch with you next week about working our jobs.”Id. ( ). Bell replied that he and Cam marata were “looking forward to working with you again.” (Id.).
C On November 27, 2006, Bell e mailed Bill Eckert of Ungarino Eckert and Tommy Dupuy of Cunningham Lindsey to introduce U.S. Forensic and solicit business. (Docket Entry No. 324, Exs. L, N). Ungarino Eckert and Cunningham Lindsey had been Rimkus clients and the record shows that Bill Eckert worked with Bell while he was still employed at Rimkus. (Id., Ex. M).
C On December 1, 2006, Bell sent an em ail to “[email protected],” with blind copies apparently addressed to numerous individuals. (Id., Ex. P at 4). The email introduced U.S. Forensic, “a Louisiana and Mississippi licensed forensic engineering firm which specializes in evaluation of civil, structural and m echanical failures.” ( Id.). Bell highlighted the experience of U.S. Forensic’s engineers and attached their resumes and U.S. Forensic brochures. The email included a link to U.S. Forensic’s web site and invited recipients to contact Bell for more information. (Id.). Two recipients of that em ail were Cary Soileau of Allstate Insurance and Dianna Drewa of Fidelity National Insurance Company, both Rimkus clients. (Docket Entry No. 324, Exs. P, Q, R). Bell had worked with Soileau while employed by Rimkus. After Bell left Rimkus, he asked Soileau to provide contact inform ation for Allstate employees Claudia Danesi and Julie Kron so that U.S. Forensic could “get on the Allstate approved list locally.” (Id., Ex. P).
C On December 11, 2006, Bell emailed Tim Krueger of Safeco Insurance. (Id., Ex. S). Bell stated that he “really had no idea [he] was leaving [Rimkus] the day [he] did” and expressed hope that Krueger had been served well since his departure. (Id.). Bell asked Krueger to direct him to “any local claims people that might be looking for some local help” but noted that “due to contractual obligations we would not be able to accept any assignments in New Orleans until October 2007.” (Id. (emphasis added)).
C On December 12, 2006, Bell emailed Denise Milby of Scottsdale Insurance and D. Powell and Jeff Baker of Boulder Claims to introduce U.S. Forensic and its engineers and services. (Id., Exs. T, V).
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C On December 13, 2006, Bell emailed Sandra Carter with Lexington Insurance “to introduce U.S. Forensic, a Louisiana a nd Mississippi based forensic engineering firm which specializes in evaluation of civil, structural, electrical and mechanical failures.” (Docket Entry No. 321, Ex. L-3). Bell continued: “You may remember me from my previous position as Central U.S. Operations Manager at Rim kus Consulting Group and m y trip to Boston a couple of months back. I left with a couple of engineers from Rimkus and a couple from a competitor to form a new, leaner firm that focuses on decisive, cost effective reports with no more than a two week turnaround.” Id.( ). Bell stated that U.S. Forensic “would be pleased to work with you and Lexington Insurance.”Id. (). Rimkus has subm itted evidence that Carter’s new contact inform ation was contained in an em ail that Bell received from a coworker at Rim kus on October 1, 2006. Rimkus alleges that Bell forwarded this email on October 5, 2006, using his Rimkus email account, to an unknown email address. (Id., Ex. Q).31
The belatedly produced em ails show that in Novem ber and Decem ber 2006,
Cammarata also contacted individuals he had dealt with while working at Rim kus. On
November 30, 2006, Cammarata emailed Ken Mansfield about his new firm. (Docket Entry
No. 324, Ex. Z). Cammarata referred to assignments they had worked on together at Rimkus and told Mansfield to let Rimkus know his requirements if he wanted Rimkus to continue providing forensic engineering services. ( Id.). Cam marata gave Mansfield the contact information for the Rim kus New Orleans District Manager but also offered “to provide professional engineering services to you and your firm as you ma y require” and asked
Mansfield to contact him. (Id.). On December 11, 2006, Cammarata emailed Bill Parsons of Gray Insurance to fol low up on a phone conversation th ey had about an assignm ent
Cammarata had been working on for Parsons before leaving Rim kus. ( Id., Ex. AA).
31 The copy of the email submitted to the court does not clearly reflect a forward on October 5, 2006, but portions of the screen shot submitted are not legible. (Docket Entry No. 321, Ex. Q). 53 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 54 of 139
Cammarata told Parsons that it would be easier to have the file transferred from Rimkus to
U.S. Forensic so that Cammarata could complete the work himself. (Id.). Cammarata told
Parsons that if he wanted the file transferred, he should contact Rim kus’s New Orleans
District Manager. (Id.).
The emails Rimkus recovered from the internet service providers were largely from
November and December 2006, when Homestead was hosting U.S. Forensic’s email. The defendants had deleted these em ails in late 2006, despite the fact that they had filed the
Louisiana suit against Rim kus and despite the likelihood that Rim kus would sue them .
Rimkus argues that because Bell and Cammarata had deleted these emails, and the emails were solicitations of former Rimkus clients, it is clear that Bell and Cammarata sent other similar emails, particularly after December 2006. Rimkus contends that the record supports an inference that the deleted emails would have helped its case and that the pursuit of this case has been impaired by the inability to obtain those emails in discovery.
Rimkus also alleges that the defendants’ testimony that they did not delete emails to cover up unfavorable evidence is perjurious. Rimkus alleges that “there are other specific instances of perjury that have occurred in the testim ony of Bell, Cam marata, Janowsky,
DeHarde, and Darren Balentine tha t [a lso] justify the im position of a severe sanction.”
(Docket Entry No. 313 at 24). Rimkus argues that Bell’s and Cammarata’s testimony that they did not take confidential client inform ation from Rimkus is false because the em ails obtained from Homestead show that the defendants contacted Rimkus clients shortly after leaving Rimkus. According to Rim kus, there is no way Bell and Cam marata could have
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obtained that contact information so quickly unless they took it from Rimkus when they left.
At the August 6, 2009 m otion he aring, this court allowed Rim kus to reopen the depositions of Bell and Cam marata and to supplem ent the sum mary judgm ent record.
Rimkus filed a supplemental response, (Docket Entry No. 374), and the defendants filed a supplemental reply, (Docket Entry No. 376). At a September 2, 2009 discovery conference, the parties presented arguments on the significance of the recently obtained evidence. The new evidence included emails on Bell’s personal email account with Google, reports created by the defendants for U.S. Forensic that Rimkus alleged contain its copyrighted materials, and the presence of Rimkus files on Cammarata’s home computer. The court allowed the parties another opportunity to supplement the record to include relevant, recently obtained evidence. Rimkus filed supplements to its summary judgment responses and to its sanctions motions. (Docket Entry No. 389, 393, 394).
The suppleme ntal filings included em ails Rim kus subpoenaed from Hom estead showing that Cammarata used his personal email address in November and December 2006 to send Rimkus engineering data and reports to his U.S. Fore nsic email address. (Docket
Entry No. 393, Ex. C). Cammarata testified that while he was working at Rimkus, he often transferred work and re ports to his hom e com puter. ( Id., Ex. E, Deposition of Nickie
Cammarata at 45:18–:24). Rimkus also obtained an email showing that Cammarata copied part of a Rimkus vibration report that he had used when he worked at Rimkus and sent it to a U.S. Forensic Associates contract engineer to include in a project presentation. (Docket
Entry No. 393, Ex. C; Ex. E, Deposition of Nickie Cammarata at 16:13–17:23). Cammarata
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and Bell both testified that they obtained a copy of a Rim kus wind/ha il powerpoint presentation to use at U.S. Forensic. ( Id. at 15:22–16:4; Docket Entry No. 389, Ex. I,
Deposition of Gary Bell at 69:10–70:13). Rimkus filed an amended complaint alleging that the use of the powerpoint presenta tion and other Rim kus materials constitutes copyright infringement. (Docket Entry No. 403 at 13–14).
Cammarata testified that one of his clients at U.S. Forensic gave him photographs taken by Rim kus of a job in the Port Sulphur, Louisiana area because the client wanted
Cammarata to continue working on that job at U.S. Forensic. (Docket Entry No. 389, Ex.
H, Deposition of Nickie Cam marata at 10:9–15:21). Rim kus argues that Cam marata misappropriated these photographs from Rimkus and used them in preparing U.S. Forensic reports. (Docket Entry No. 389 at 5).
On September 13, 2009, Cam marata produced, for the first tim e, fifteen disks of electronically stored information and numerous boxes of paper documents. Rimkus reviewed these m aterials and “determ ined that [they] contained a significant a mount of Rim kus correspondence, job photographs, job files, engagement letters, Terms and Conditions, client contact information, and Rimkus PowerPoint presentations.” (Docket Entry No. 389 at 5).
Rimkus points to Cammarata’s October 4, 2007 deposition testimony that he only retained
“some reports” in a box as further evidence of perjury and discovery obstruction. (Docket
Entry No. 393, Ex. K, Deposition of Nickie Cammarata at 122:17).
Rimkus also subm itted evidence from its own forensic a nalysis of Bell’s Rim kus laptop. The analysis showed that on the day he resigned from Rimkus, Bell downloaded
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financial information from the Rimkus server to the laptop. This inform ation includes financial spreadsheets for six Rim kus offices, including Chicago, Indianapolis, Jackson,
Lafayette, New Orleans, and Pensacola. These offices comprise Rimkus’s Central Region, which had been Bell’s responsibility. Rim kus argues that there was no reason for Bell to download these docum ents from the server on the day he resigned other tha n to misappropriate them for use in his new competing business.
On September 30, 2006, Bell sent an email to his personal Gmail account containing financial data for four Rim kus offices. Bell had downloaded this data from his Rim kus laptop. In an earlier deposition, Bell had testified that he did not have a Gm ail account during this period. (Docket Entry No. 394, Ex. A, Deposition of Gary Bell at
450:10–451:11). In his August 2009 deposition, Bell was asked about the belated disclosure that he had sent Rimkus information to a personal Gmail account:
Q: Now, do you rem ember m e asking you in your prior deposition about all of the email accounts you had?
A: I believe you did.
Q: You didn’t mention a G-mail account, did you?
A: Not that I recall.
Q: And I specifically asked you if you had a G-m ail account, right?
A: I don’t know if you specifically asked m e. I don’t use the G-mail account. I set it up during the hurricane right after I evacuated to Lafayette. I got an invitation to set one up. I set it up and it’s really som ething I haven’t really used.
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(Id., Ex. C, Deposition of Gary Bell at 10:9–:22).
Rimkus argues that Bell first tried to conceal, then distance himself from, the Gmail account because he used it to “go under the radar” to download and take confidential Rimkus financial inform ation. Bell testified in his deposition that he sent Rim kus f inancial documents to his BellSouth email account, not to use for U.S. Forensic but to help with the transition of the branch m anagers in the Central Region before he left Rim kus. ( Id. at
17:8–18:1). But Bell se nt this email on September 30, 2006, three days after he resigned from Rim kus. Bell testified in his March 2009 deposition that he de clined Rim kus’s invitation to help with transition work at th e branch offices and tha t he never worked for
Rimkus after September 27, 2006. (Docket Entry No. 394, Ex. A, Deposition of Gary Bell at 78:18–79:4; 80:19–:22; 81:16–:20). Rimkus also argues that Bell did not need to email these docum ents to him self if he was using them for Rim kus work because they were contained on his Rimkus work laptop, which he could take with him until he was finished assisting with the transition. Rimkus also notes that the September 30, 2006 email was not produced by BellSouth in response to a subpoena because Bell had previously deleted it.
On October 1, 2009, Rimkus filed its second supplemental memorandum of law in support of its m otion for sanctions and response to the m otion for sum mary judgment.
(Docket Entry No. 410). In the supplemental filing, Rimkus identified an email that had been produced in native format as required in this court’s August 17, 2009 order. (Docket Entry
No. 411). The defendants had previously produced this email in PDF format. (Docket Entry
No. 410, Ex. Supp. T). The email was dated April 6, 2008 and labeled “From: Gary Bell”
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and “To: Gary Bell,” with no indication of the email addresses. (Id.). When the email was produced in native form at, it showed six a ttachments not included in the original P DF version. (Doc ket Entry No. 411). Rim kus filed the attachm ents under seal. ( Id.). The attachments contain contact information for Rimkus clients in Florida and for one client’s national catastrophe manager in Minnesota. (Docket Entry No. 410 at 7). Rimkus asserts that the m etadata shows that Darren Balentine created the docum ents at Rim kus on
December 14, 2007 and April 2, 2008, while he was working for Rim kus. Balentine subsequently quit Rimkus to become a 50% owner of U.S. Forensic Associates. (Id. at 8).
The metadata also shows that the documents were converted to PDF on April 2, 2008. Id.( ).
On May 1, 2008, less than a m onth after th e April 6, 2008 em ail with the client- contact information attached, Bell had testified in this court that he did not ta ke or use confidential information when he left Rimkus and started U.S. Forensic. (Docket Entry No.
410, Ex. Supp. V at 80:16–:24). On October 6, 2009, Bell testified that he did not remember getting the April 2008 email until it was produced. He did not know whether he had received other Rimkus client information. (Docket Entry No. 430 at 12). Bell testified that he had never used the client-contact inform ation in the email attachments. (Id. at 14). Bell also testified that he did not ask Balentine for the information and did not know why Balentine sent it to him. (Id. at 16). Bell’s counsel, Demmons, stated that he had prepared and printed the emails for production and could not explain why the initial production not only failed to include the attachments but concealed their presence. (Id. at 36).
In his April 9, 2009 deposition, Balentine stated that he had not to his knowledge
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transmitted any information he knew to be confidential Rimkus information. (Docket Entry
No. 410, Ex. Supp. W, Deposition of J. Darren Balentine at 60:10–:18). Rimkus took a brief additional deposition on October 27, 2009. In the October deposition, Balentine stated he did not recall sending Bell the client-contact information and that he was unable to find a record of sending Bell an email with the client information in April 2008. (Docket Entry No.
445, Ex. B., Deposition of J. Darren Balentine at 35:7–:10, 39:11–:18, 51:1–:25, 97:6–98:4).
Rimkus filed a m otion for a prelim inary injunction on October 1, 2009, seeking, among other things, to require Bell and others to return all of Rim kus’s confidential information and seeking to enjoin Bell and anyone at U.S. Forensic from using the information contained in the em ail attachments. (Docket Entry No. 416). At a he aring before this court on October 6, 2009, the partiesagreed to certain provisions of the proposed injunction, and this court granted the preliminary injunction in part. (Docket Entry No. 425).
In addition to the email attachments containing Rimkus customer information, Rimkus also points to a newly discovered em ail stating that Bell m et with a real estate agent in
August 2006, while he was still working at Rim kus, and on Augus t 15, 2006 received a
Letter of Intent to lease the space. (Docket Entry No. 410, Ex. Supp. Q). The Letter of
Intent identified “U.S. Forensics, LLC” as the subtenant and noted that the “LLC [was] to be established in September, 2006.” (Id.). Rimkus argues that the Letter of Intent naming
U.S. Forensic contradicts Bell’s earlier deposition testimony that Bell did not plan to leave
Rimkus before he did so and that his only steps before leaving Rimkus was speaking to his brother about going to work for him. (Docket Entry No. 410 at 13–23).
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Rimkus filed a supplem ental memorandum of law, arguing that it ha d discovered proof that Bell had used the Rim kus client information contained in the April 2008 em ail attachments. (Docket Entry No. 429). Rimkus submitted an affidavit from Michael Sanchez, a claims vendor manager for American Strategic Insurance Company. (Id., Ex. Supp. Y).
Sanchez’s affidavit stated that Bell contacted him by email and phone, seeking to provide engineering services through U.S. Forensic. Id. at 2. Sanchez also stated that Balentine contacted him on September 9, 2009, seeking to provide engineering services through U.S.
Forensic Associates, L.L.C. Id. Sanchez did not recall providing his contact information to
Bell. Id. Rimkus alleges that Sanchez’s affidavit establishes that Bell had used Rim kus confidential information, contradicting his statements under oath.
In response, the defendants noted that Sanc hez’s affidavit did not preclude the possibility that his contact information could have been obtained from a source other than
Rimkus’s client lists. (Docket Entry No. 435 at 9 n.3). The defendants offered a roster from a conference Bell attended in 2008 containing Sa nchez’s phone number and address as a possible source of the contact inform ation. ( Id. at 9). The defendants also attacked the language in the affidavit as “far from definitive” because Sanchez said “[t]o my knowledge” and “that I recall” when referring to communications from Bell. (Id.). The defendants also objected that Sanchez did not attach his call log showing the phone call from Bell or any emails from Bell. (Id.).
Rimkus filed a fourth supplem ental memorandum on October 14, 2009. (Doc ket
Entry No. 439). Rimkus argued that Sanchez’s email address does not appear in the contact
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information listed in the conference documents. (Id. at 2). Rimkus argued that the evidence of Bell’s contact with Sanchez conflicts with Bell’s testimony before this court that he had not contacted persons listed on the Rimkus client list. (Id.).
On November 5, 2009, the defendants filed a m otion to strike Sanc hez’s affidavit,
Rimkus’s fourth supplement, and the supplemental responses to the m otion for contempt.
(Docket Entry No. 446). The defendants argued that Sanchez’s testimony in his November
2, 2009 deposition was different from his affidavit. Sanchez testified in his deposition that
Bell called him in June 2009; the affidavit states the date as June 2008. Sanchez testified in his deposition that he never received an email from Bell; his affidavit states that Bell emailed him. Sanchez testified in his deposition that his contact inform ation was on lists in Bell’s possession and that he believed he gave Bell a business card. Sanchez also testified that he did not read through the whole affidavit after signing it. (Id.). The defendants argued that this court should strike Rimkus’s fourth supplement because it was filed after this court’s
October 14, 2009 deadline for filing supplem ental pleadings. ( Id. at 13 n.21). Rim kus responded and argued that Sanchez’s affidavit and deposition testim ony both contradict
Bell’s October 6, 2009 testimony that he had not contacted any client on the Rimkus client list attached to the April 6, 2008 email. (Docket Entry No. 447).32
32 The defendants’ motion to strike, (DocketEntry No. 446), is denied. Although Rimkus filed a supplement after this court’s deadline for doing so passed, that upplements was filed to submit evidence from Balentine’s October 27, 2009 deposition about the April 6, 2008 email attachments. (Docket Entry No. 445). Rimkus could not have filed the evidence until afterBalentine was deposed. Rimkus filed the supplement three days after Balentine’s deposition. Given the circumstances, the Rimkus supplement was timely filed and will not be stricken. The defendants’ motion to strike the Sanchez affidavit, (Docket Entry No. 446), is also denied. The inconsistencies between Sanchez’s affidavit and his deposition testimony are appropriately treated as impeachment evidence but not as a basis for striking the affidavit. 62 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 63 of 139
After the October 6, 2009 hearing, the defendants produced 277 reports and other documents that contain data or language taken from Rimkus materials. (Docket Entry No.
431 at 6–7). Rimkus argued that the reports were further evidence of bad faith and discovery obstruction. (Id. at 7). Rim kus argued that in addition to the evidence of spoliation, this court should look to the defendants’ delay in responding to discovery, their “formulaic and groundless objections,” and their “chaotic production” to support a finding of contumacious conduct. (Id. at 10).
The parties’ contentions are examined against the extensive evidence in the record, including the supplemental filings, and the applicable law.
IV. Rimkus’s Motion for Sanctions and Contempt
A. The Parties’ Contentions
Rimkus argues that the defendants intentionally deleted em ails “in direct contravention of their legal duty to preserve electronically stored inform ation when they anticipated they would be engaged in litigation with Rimkus.” (Docket Entry No. 313 at 6).
Rimkus contends that the duty to preserve arose be fore Novem ber 2006, when Bell,
Cammarata, and DeHarde planned to sue Rim kus in Louisiana. Rim kus points to the
November 11, 2006 email that Bell sent to Cammarata, DeHarde, and Janowsky stating that they needed to file suit in Louisiana and “serve [Rimkus] on Monday to prevent them from filing in Texas.” (Id.). Rimkus argues that the defendants understood that their Louisiana suit seeking to invalidate the noncompetition and nonsolicitation clauses would be met with a countersuit seeking to enforce the provisions as well as the contractual and common-law
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duty not to misappropriate propriety and confidential information. (Id. at 7).
Rimkus alleges that the defendants “schem e[d]” to destroy evidence showing the extent to which they took confidential information from Rimkus to use to set up, operate, and solicit business for U.S. Forensic. Id.( ). The scheme, and the attempt to conceal it, included deleting emails showing that the defendants took information from Rimkus and used it for
U.S. Forensic, donating or throwing away laptop computers from which such emails might be recovered, and lying about personal email accounts. According to Rimkus, the cover-up unraveled when DeHarde testified about the defendants’ agreement to delete all emails more than two weeks old. Rim kus also points to the April 2008 em ail Gary Bell sent him self containing attachm ents with confidential Rim kus custom er-contact inform ation and the reports Cammarata produced containing language and data copied from Rimkus. (Docket
Entry No. 431 at 6–7). Rimkus argues that these documents, withheld from production until recently, com bined with Cam marata’s and Bell’s prior testim ony, provide evidence of intentional, bad-faith efforts to withhold or destroy relevant information.
As a sanction for spoliation, Rimkus asks this court to strike the defendants’ pleadings and enter a default judgm ent or, in the alternative, to give an adverse inference jury instruction at trial. Rim kus also seeks reim bursement of the costs and fees it incurred in discovering or attempting to discover spoliated evidence and in moving for sanctions.
The defendants respond that the deleted em ails responsive to Rim kus’s discovery requests—to produce “Cammarata’s and Bell’s communications with one another and with other U.S. Forensic, L.L.C. members concerning the creation and inception of U.S. Forensic,
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L.L.C., their roles with the company, and contact with clients”—“only relate to Plaintiff’s claim for breach of fiduciary duty against Mr. Bell, not the m yriad of other claims in this litigation.” (Docket Entry No. 345 at 13–14). The defendants argue that there was no duty to preserve these emails in November and December 2006 because they only planned to sue
Rimkus for a declaratory judgment that the noncompetition and nonsolicitation provisions were unenforceable.
The defendants also argue that there is insufficient prejudice to Rimkus to warrant a default judgment or adverse inference instruction because Rimkus has been able to obtain some of the deleted emails from other sources and has sufficient evidence to argue its claims.
The defendants contend that any em ails or docum ents they destroyed that could not be obtained from other sources in discovery “would be merely cumulative of evidence already produced.” (Id. at 15). The defendants a ssert that there is a “wealth” of evidence on the formation of U.S. Forensic and the defendants’ preparations to form a competing business.
They point to several documents that were produced earlier in this litigation that “could be deemed relevant to Plaintiff’s claim for breach of fiduciary duty and the issue of Defendants’ formation of U.S. Forensic.” (Id. at 16).
The defendants adm it that sanctions in the am ount of reasonable costs and fees
Rimkus incurred to obtain production of the April 2008 em ail Gary Bell sent him self containing attachments with Rimkus client-contact information and the reports with Rimkus language are appropriate. (Docket Entry No. 408 at 26). The defendants argue that other sanctions are not warranted because the failure to produce earlier was not due to intentional
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wrongdoing but to “ineptitude” and that Rimkus is not prejudiced because “the vast majority of information requested by Plaintiff, and previously thought to be lost or destroyed, has now been produced.” (Id. at 28).
2. The Duty to Preserve
The record shows that no later than November 11, 2006, when the defendants were about to “preem ptively” sue Rim kus, they had an obligation to preserve docum ents and information—including electronically stored information—relevant to these disputes. The disputes included whether Bell breached the fiduciary duty he owed Rimkus as an officer, whether Bell or Cam marata breached enforceable obligations under the noncom pete and nonsolicitation provisions in the parties’ contracts, and whether Bell or Cammarata breached contractual or common-law duties not to take or use Rimkus’s confidential and proprietary information.
Bell sought the advice of counsel before leaving Rimkus. The November 11, 2006 email from Bell to Cammarata, DeHarde, and Janowsky discussing the final steps of the plan to sue Rim kus in Louisiana to cha llenge the noncom pete and nonsolicitation provisions shows that the defendants knew that they would be suing Rimkus within days. The duty to preserve electronically stored information and documents relevant to that suit and reasonably anticipated related litigation was triggered no later than November 11, 2006.
The defendants’ argument that their preservation obligation was limited to documents or emails related to breach of fiduciary obligation claims against Bell is unpersuasive. Bell,
Cammarata, and DeHarde sued Rimkus in Louisiana seeking a declaratory judgment that the
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noncompetition and nonsolicitation clauses were unenforceable so that they could operate
U.S. Forensic to com pete with Rim kus. It was reasonable for Bell and Cam marata to anticipate that Rimkus would seek to enforce those contractual provisions as to all the U.S.
Forensic employees who left Rimkus, as well as the contractual and common-law duty not to disclose Rimkus’s confidential and proprietary information. Emails and attachments and other documents relating to U.S. Forensic and its related com pany, to soliciting Rim kus clients or em ployees, and to obtaining or using Rim kus inform ation were subject to a preservation obligation. Such records were relevant to the claims involved in the Louisiana state court action that Cammarata, Bell, and DeHarde filed and to the reasonably anticipated claims that Rimkus would file, and involved the key players in the parties’ litigation.
Rule 37(e), which precludes sanctions if the loss of the inform ation arises from the routine operation of the party’s computer system, operated in good faith, does not apply here.
The evidence in the record shows that the defendants and other U.S. Forensic founders did not have em ails deleted through the routine, good-faith operation of the U.S. Forensic computer system. DeHarde testified that he, Bell, Cammarata, and Janowsky decided on a
“policy” of deleting emails more than two weeks old. Putting aside for the m oment other evidence in the record inconsistent with this testimony, a policy put into place after a duty to preserve had arisen, tha t applies alm ost exclusively to em ails subject to that duty to preserve, is not a routine, good-faith operation of a com puter system . Moreover, the evidence shows that the founders of U.S. Forensic manually and selectively deleted emails, after the duty to preserve arose. The selective, manual deletions continued well after Rimkus
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filed suit in January and February 2007.
Despite the fact that the founders of U.S. Forensic had sought and obtained legal advice on many aspects of their departure from Rimkus and their formation and operation of the competing business, they made no effort to preserve relevant documents, even after the Louisiana and Texas suits had been f iled. To the contrary, the evidence shows affirmative steps to delete potentially relevant documents. Even assuming that there was an email destruction policy as DeHarde testified, it was selectively implemented. The deleted documents included em ails and attachm ents relevant to the disputes with Rim kus—the emails and attachm ents showing what info rmation U.S. Forensic ’s founders took from
Rimkus to use in the competing business, including to solicit business from Rimkus clients, and how they solicited those clients.
The record shows that the electronically stored information that the defendants deleted or destroyed after the duty to preserve arose was relevant to the issues involving both Bell and Cammarata, not limited to a breach of fiduciary claim against Bell. The deleted emails and attachments related not only to setting up U.S. Forensic but also to obtaining information from Rimkus, including copyrighted materials, financial documents, and customer lists; using at least some of that information to operate U.S. Forensic in competition with Rimkus; and soliciting business for U.S. Forensic. The evidence shows that by deleting emails relating to forming U.S. Forensic and to using information from Rimkus for U.S. Forensic, by failing to preserve such em ails, and by giving away or destroying laptops with such em ails, the defendants destroyed potentially relevant evidence.
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3. The Degree of Culpability
Destruction or deletion of inform ation subject to a preservation obligation is not sufficient for sanctions. Bad faith is required. A severe sanction such as a default judgment or an adverse inference instruction requires bad faith and prejudice.See Condrey v. SunTrust
Bank of Ga., 431 F.3d 191, 203 (5th Cir. 2005);see also Whitt v. Stephens County, 529 F.3d
278, 284 (5th Cir. 2008) (“[A] jury m ay draw an adverse inference ‘that party who intentionally destroys important evidence in bad faith did so because the contents of those documents were unfavorable to that party.’” (quotingRussell v. Univ. of Tex. of the Permian
Basin, 234 F. App’x 195, 207 (5th Cir.2007) (unpublished))).33
33 Two cases illustrate the range of culpability. In GE Harris Railway Electronics, L.L.C. v. Westinghouse Air Brake Co., No. 99-070-GMS, 2004 WL 5702740 (D. Del. Mar. 29, 2004), the court concluded that the defendant’s employee acted in bad faith by destroying documents that were potentially incriminating, id. at *4. The plaintiff had sued the defendant and its em ployee for patent infri ngement and trade secret misappropriation. Id. at *1. The parties settled the case and a consent order was entered prohibiting the employee for three y ears from involvem ent in sellin g any radio-based distributed power product manufactured by his employer. Id. It was undisputed that the employee was aware of this prohibition. Id. at *2. During that three-year period, the employee participated in a proposal to sell the product. Id. After the plaintiff learned about this proposal, it moved for a contempt order. Id. at *1. The parties did not dispute that the employee deleted computer files related to the proposal when he becam e aware that the plaintiff might have concerns. Id. at *2. The courtconcluded that the employee’s destruction was “clearly motivated by an intent to eliminate evidence that could potentially incriminate [his employer] in a contempt claim.” Id. at *4. The court held that dismissal was improper because the prejudice to the innocent party was minimal but adopted an adverse inference against the spoliating party. Id. at *4–5. By contrast, in Pandora Jewelry, LLC v. Chamilia, LLC, No. CCB-06-3041, 2008 WL4533902 (D. Md. Sept. 30, 2008), there was insufficient evidencethat the defendant deliberately deleted emails to find bad faith. After the plaintiff filed suit, the court granted the defendant’s motion to quash a subpoena for records. Id. at *1. The defendant then sent a letter to a number of the plaintiff’s customers. Id. The letter purportedly misrepresented the court’s order granting the defendant’s motion to quash. Id. The defendant also sent this “letter via email to a number of blind copy recipients.” Id. After the plaintiff filed additional claims, the defendant contended that it no longer possessed the emails because it “changed its electronic server twice during the litigation period or due to its email system forcing users to delete or archive emails every ninety days.” Id. at *2. The court rejected the plaintiff’s motion for sanctions for spoliation. Id. at *6. There was no evidence, “other than [the defendant’s] failure to retain the emails, that [the defendant] deliberately deleted or destroyed evidence.” Id. at *9. Although the loss of the emails violated the preservation obligation, this did not “necessitate a finding of willful or bad faith destruction.” Id. The court held that the defendant was merely “grossly negligent in its failure to preserve evidence” but declined to impose an adverse inference instruction or grant summary judgment because the innocent party failed to show that the lostdocuments were 69 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 70 of 139
The defendants’ proffe red reasons and explanations for deleting or destroying the emails and attachments are inconsistent and lackrecord support. Bell testified that he deleted emails for “space concerns,” Janowsky testified that he deleted em ails on a weekly basis because he got a lot of emails and they “fill up [his] box,” and DeHarde testified in his first deposition that he deleted emails on an ad hoc basis because he was concerned about storage capacity in his in-box. The defendants also asserted that they deleted em ails about preparations to form U.S. Forensic for fear of retaliation by Rimkus if they ended up staying on at Rimkus. Allen Bostick, the IT consultant, testified that lack of space on U.S. Forensic’s server and external hard drives did not becom e an issue until late 2007, well after this litigation began. The fact that DeHarde did not reveal the “policy” of deleting all em ails more than two weeks old until after Rim kus was able to subpoena DeHarde’s Yahoo! account is another reason for questioning the truthfulness of this explanation. Fear of retaliation by Rim kus m ight explain the deletions that occurred before the defendants resigned, but not after.
Some of the emails the defendants deleted were obtained from a Rule 45 subpoena issued to one of the internet service providers, Hom estead. These em ails show the defendants making preparations to form U.S. Forensic in September, October, and November
2006, and soliciting clients with whom they worked while at Rimkus in late November and early December 2006. Other emails, obtained not from the defendants but through forensic analysis of the laptop Bell used at Rim kus, show that Bell downloaded and transm itted
relevant. Id. 70 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 71 of 139
financial spreadsheets for specific Rim kus offices after his resignation. Em ails obtained from Homestead show that Cammarata forwarded language in Rimkus reports from his home email account to his U.S. Forensic email account; Cammarata admitted giving the language from a Rim kus report to a U.S. Forensic Associates engineer for use on a proje ct. Still another email from Bell to himself, which the defendants did not originally produce with the attachments, shows that Bell was in possession of Rimkus client-contact information in April
2008.
The evidence that the defendants knew about the litigation with Rimkus when they deleted the emails; the inconsistencies in the explanations for deleting the emails; the failure to disclose information about personal email accounts that were later revealed as having been used to obtain and disseminate information from Rimkus; and the fact that some of the emails reveal what the defendants had previously denied—that they took information from Rimkus and used at least some of it in competing with Rimkus—support the conclusion that there is sufficient evidence for a reasonable jury to find that the defendants intentionally and in bad faith deleted em ails releva nt to setting up and operating U. S. F orensic, to obtaining information from Rimkus and using it for U.S. Forensic, and to soliciting Rimkus clients, to prevent the use of these emails in litigation in Louisiana or Texas.
4. Relevance and Prejudice
Despite the evidence of spoliation and efforts to conceal it, the record also shows that
Rimkus was able to obtain a significant am ount of evidence. Rimkus had the laptop Bell used during his employment, although Rimkus delayed in examining it. That laptop revealed
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useful information about records Bell took from Rimkus. Although they deleted or destroyed the relevant emails, attachments, and documents on other com puters, the defendants also produced numerous documents and emails relating to their communications and preparations to form U.S. Forensic. Rimkus was also able to obtain numerous emails from Homestead, which hosted all U.S. Forensic’s em ails between Novem ber 15, 2006 and Decem ber 19,
2006. And the defendants have subsequently, if belatedly, produced numerous responsive emails and docum ents relating to the form ation of U.S. Fore nsic and the solicitation of
Rimkus clients.
Between the records the defendants did produce, the deleted records Rimkus obtained from other sources, and other evidence of the contents of deleted lost records, Rimkus has extensive evidence it can present. The evidence of the contents of the lost records shows that some would have been favorable to Rimkus. There is prejudice to Rimkus, but it is far from irreparable. Rimkus’s demand that this court strike the defendants’ pleadings and enter a default judgm ent is not a ppropriate. The sanction of dism issal or default judgm ent is appropriate only if the spoliation or destruction of evidence resulted in “irreparable prejudice” and no lesser sanction would suffice.See Silvestri v. Gen. Motors Corp., 271 F.3d
583, 593–94 (4th Cir. 2001) (a ffirming dismissal as a sanction when the alterations to the plaintiff’s vehicle were tantamount to destroying the central piece of evidence in the case, which denied the defendant “access to the only evidence from which it could develop its defenses adequately,” causing “irreparable prejudice”).
Although a term inating sanction is not appropriate, a lesser sanction of a form of
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adverse inference instruction is warranted to level the evidentiary playing field and sanction the improper conduct. See Russell v. Univ. of Tex. of the Permian Basin, 234 F. App’x 195,
207 (5th Cir. 2007) (unpublished) (“A spoliation instruction entitles the jury to draw an inference that a party who intentionally destroys im portant documents did so because the contents of those documents were unfavorable to that party.”); Turner v. Pub. Serv. Co. of
Colo., 563 F.3d 1136, 1149 (10th Cir. 2009) ( intentional destruction of recordsay m “support an inference of consciousness of a weak case” (quoting Aramburu v. Boeing Co., 112 F.3d
1398, 1407 (10th Cir. 1997)).
The evidence of the contents of the deleted emails and attachments shows that deleted and unrecoverable emails and attachments were relevant and that som e would have been helpful to Rimkus. Emails that Rimkus was able to obtain from Homestead and other sources show the defendants obtaining and using confidential or copyrighted Rimkus information for the benefit of U.S. Forensic. The confidential information includes Rimkus financial data.
The copyrighted inform ation includes portions of engineering reports and powerpoint presentations. Rimkus did not receive from Bell in discovery the September 30, 2006 email that Bell forwarded from his BellSouth email account to his Gmail account, with confidential
Rimkus information attached. Rimkus was able to obtain this inform ation as a result of analyzing its own com puter systems; it was not produced in discovery. Rim kus did not receive in discovery the April 6, 2008 email Bell sent to himself with attachments containing
Rimkus customer contact information. Rimkus was only able to obtain this information as a result of this court’s order to conduct additional review of the information restored from
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external disk drives and later order to produce the emails in native format.
The marketing emails from U.S. Forensic that Rimkus has recovered from third-party internet service providers show that at least during November and December 2006, Bell and
Cammarata were soliciting Rimkus clients for U.S. Forensic. Some of the post-December
2006 emails that Rim kus has rec overed from third parties are sim ilar to the Hom estead emails and show Bell and Cam marata soliciting business from Rimkus clients. Sim ilar marketing emails sent or received after December 2006 were deleted by the defendants, but the extent of the m issing emails remains unknown. DeHarde testified that the founding members of U.S. Forensic deleted emails that were more than two weeks old beginning in the fall of 2006. Bell testified in his deposition that he deleted all U.S. Forensic marketing- related emails. The record supports an inference that emails soliciting Rimkus clients were deleted by the defendants and that some of these emails will never be recovered.
Some deleted emails, later discussed in detail, show that Bell was contacting Rimkus clients whose information was not listed in the 2006 Casualty Adjuster’s Guide and that Bell did not have the Guide before Decem ber 2006. Even if this contact inform ation was available on the internet in 2008, the record does not show that it was available in 2006. The emails to Rim kus clients whose contact inform ation may not have been available in the
Casualty Adjuster’s Guide or on the internet is relevant to whether Bell obtained the contact information from Rimkus.
The emails that have been recovered by Rim kus, through great effort and expense, include some that support Rimkus’s claims, contradict testimony the defendants gave, and
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are unfavorable to the defendants. Rim kus has shown that it has been prejudiced by the inability to obtain the deleted emails for use in the litigation. To level the evidentiary playing field and to sanction the defendants’ bad-faith conduct, Rim kus is entitled to a form of adverse inference instruction with respect to deleted emails.
At the same time, it is important that Rimkus has extensive evidence to use in this case. And some of the emails that the defendants deleted and that were later recovered are consistent with their positions in this lawsuit and helpful to their defense. For example, the
Homestead production revealed emails Bell sent to Rim kus clients soliciting business for
U.S. Forensic stating that Bell intended to com ply with his contr actual obligations not to compete with Rimkus. In a November 15, 2006 email to Don Livengood at Fidelity, Bell stated that he would like to meet with Livengood to “go over the insurance coverages, the non com pete agreem ent for Orleans Parish a nd [ the] capacity to do jobs out of state.”
(Docket Entry No. 394, Ex. F). Bell emailed Cary Soileau at Allstate on December 4, 2006 asking for the contact inform ation for two other Allstate em ployees because he “was contractually obligated to leave all client info behind at Rimkus.” (Id.). In an email to Tim
Krueger of Safeco Insurance on December 11, 2006, Bell stated that he was looking for the name of a local claims person, but Bell stated, “[p]lease keep in mind that due to contractual obligations we would not be able to accept any assignments in New Orleans until October
2007.” (Id.).
Given this record, it is appropriate to allow the jury to hear the evidence about the deletion of emails and attachments and about discovery responses that concealed and delayed
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revealing the deletions. The jury will receivean instruction that in and after November 2006, the defendants had a duty to preserve emails and other information they knew to be relevant to anticipated and pending litigation. If the jury finds that the defendants deleted emails to prevent their use in litigation with Rimkus, the jury will be instructed that it may, but is not required to, infer that the content of the deleted lost emails would have been unfavorable to the defendants.34 In making this determination, the jury is to consider the evidence about the conduct of the defendants in deleting em ails after the duty to preserve had arisen and the evidence about the content of the deleted emails that cannot be recovered.
34 Cf. Stevenson v. Union Pac. R.R. Co., 354 F.3d 739, 746 (8th Cir. 2004) (affirming in part an instruction that read that “[y]ou may, but are not required to,assume that the contents of the [destroyed evidence] would have been adverse, or detrimental, to the defendant” but holding that the district court erred in preventing the spoliating party from offering rebuttal evidence (alteration in original));Zimmermann v. Assocs. First Capital Corp., 251 F.3d 376, 383 (2d Cir. 2001) (“If you find that the defendant could have produced these records, and that the records were within their control, and that these records would have been material in deciding facts in dispute in this case, then you are permitted, but not required, to infer that this evidence would have been unfavorable to the defendant. In deciding whether to draw this inference you should consider whether the evidence not produced would merely have duplicated other evidence already before you. You may also consider whether the defendant had a reason for not producing this evidence, which was explained to your satisfaction.”); Cyntegra, Inc. v. Idexx Labs., Inc., No. CV 06-4170 PSG, 2007 WL 5193736,at *6 (C.D. Cal. Sept. 21, 2007) (granting a m otion for spoliation sanc tions in the fo rm of an adverse inference jury instruction, which the defendant proposedshould read: “You have heard that in presenting this case, Cyntegra did not preserve certain materials that IDEXX alleges relate to its defense against Cyntegra’s claims. Where evidence that would properly be part of a case is withinthe control of, or available to, the party whose interest it would naturally be to produce it, and that party fails to do so without a satisfactory explanation, the inference may be drawn that, if produced, such evidence would be unfavorable to that party, which it [sic] the case with Cyntegra.”), aff’d, 322 F. App’x 569 (9th Cir. 2009);Mosaid Techs. Inc. v. Samsung Elecs. Co., 348 F. Supp. 2d 332, 334 (D.N.J. 2004) (approving an adverse inference jury instruction that stated, among other things, “[i]f you find that defendants coul d have produced these e-mails, and that the evidence was within their control, and that thee-mails would have been relevant in deciding disputed facts in this case,you are permitted, but not required, to infer that the evid ence would have been unfavorable to defendants. In deciding whether to draw this inference y ou m ay consider whether these e-m ails would m erely have duplicated other evidence already before y ou. You may also consider whether y ou are satisfied that defendants’ failure to produce this inform ation was reasonable. Again, any inference you decide to draw should be based on all the facts and circumstances of this case.”); 3 KEVIN F. O’MALLEY, JAY E. GRENING & WILLIAM C. LEE, FEDERAL JURY PRACTICE AND INSTRUCTIONS § 104.27 (“If you should find that a party willfully [suppressed][hid][destroyed] evidence in order to prevent its being presented atthis trial, you may consider such [suppression][hiding][destruction] in determining what inferences to draw from the evidence or facts in the case.” (alterations in original)). 76 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 77 of 139
The record also supports the sanction of requiring the defendants to pay Rimkus the reasonable costs and attorneys’ fees required to identify and respond to the spoliation. The defendants agree that this sanction is appropriate. (Docket Entry No. 408 at 26). Rimkus has spent considerable time and money attempting to determine the existence and extent of the spoliation, hampered by the defendants’ inconsiste nt and untruthful answers to questions about internet accounts and retention and destruction practices. The defendants failed to produce documents in compliance with court orders. Rimkus also expended significant time and effort to obtain some of the deleted emails and attachments.
Like an adverse inference instruction, an award of costs and fees deters spoliation and compensates the opposing party for the additional costs incurred. These costs may arise from additional discovery needed after a finding that evidence was spoliated, the discovery necessary to identify alternative sources of information, or the investigation and litigation of the document destruction itself.35 Rimkus is entitled to recover its costs and attorneys’ fees
35 See, e.g., Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, No. 05 Civ. 9016, 2010 WL 184312, at *24 (S.D.N.Y. Jan. 15, 2010) (a warding reasonable costs and attorney s’ fees associated with investigating the spoliation and filing the motion for sanctions);Cache La Poudre Feeds, LLC v. Land O’Lakes, Inc., 244 F.R.D. 614, 636–37 (D. Colo. 2007) (requi ring the defendant to pay the costs associated with the plaintiff taking a deposition and filing a motion for relief after defendant “interfered with the judicial process” by wiping clean computer hard drives); Leon v. IDX Sys. Corp., No. C03-1158P, 2004 WL 5571412, at *5 (W.D. Wash. Sept. 30, 2004) (requiringth e plaintiff to pay the defendant the reasonable expenses it “incurred investigatingand litigating the issue of [the plaintiff’s] spoliation”), aff’d, 464 F.3d 951 (9th Cir. 2006); Zubulake v. UBS Warburg LLC (Zubulake IV), 220 F.R .D. 212, 222 (S.D.N.Y. 2003) (ordering the defendant to “bear [the plaintiff’ s] costs for re-deposing certain witnesses for the lim ited purpose of inquiring into issues raised by the destruction of evidence and any newly discovered e-mails”); Trigon Ins. Co. v. United States, 234 F. Supp. 2d 592, 593–94 (E.D. Va. 2002) (ordering the defendant to pay for the plaintiff’s “expenses and fees incurred in its efforts to discern the scope, magnitude and direction of the spoliation of evidence, to participate in the recovery process, and to follow up with depositions to help prepare its own case and to meet the defense of the [defendant]”). Courts finding bad-faith spoliation also often award the moving party reasonable expenses incurred in moving for sanctions, including attorneys’ fees. See, e.g., Chan v. Triple 8 Palace, Inc., No. 03CIV6048(GEL)(JCF), 2005 WL 1925579, at *10 (S.D.N.Y. Aug. 11, 2005) (“The plaintiffs are also entitled to an award of the costs, including attorneys’ fees, that they 77 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 78 of 139
reasonably incurred in investigating the spoliation, obtaining em ails from third-party subpoenas, and taking the additional depositions of Bell and Cam marata on the issues of email deletion. No later thanMarch 1, 2010, Rimkus must provide affidavits and supporting bills and related documents showing and supporting the amount of those costs and fees.
C. The Perjury Allegations
Rimkus alle ges that Bell and Cam marata perjured them selves during their depositions.36 Perjury is offering “false testim ony concerning a m aterial matter with the willful intent to provide false testim ony, rather than a as result of conf usion, mistake, or faulty m emory.” United States v. Dunnigan, 507 U.S. 87, 94 (1993). Perjury is not established by mere contradictory testimony from witnesses or inconsistencies in a witness’s testimony. See Koch v. Puckett, 907 F.2d 524, 531 (5th Cir. 1990).
Rimkus argues that inconsistencies between Bell’s deposition testim ony a nd documents produced in this case establish that he committed perjury. Rimkus cites Bell’s deposition testimony that he did not take customer information or other confidential Rimkus information when he left the company and emails Bell sent in November and December 2006 soliciting work from individuals he dealt with while at Rimkus. Rimkus also points to the
incurred in connection with this motion.”); Broccoli v. Echostar Commc’ns Corp., 229 F.R.D. 506, 512–13 (D. Md. 2005) (ordering t he defendant to pay “reasonable costs and attorney s’ fees,” including those for “client, third party and intra-office meetings” and “time charged for drafting and editing the m otion” but reducing the amount sought).
36 Rimkus also alleges that DeHarde, Janowsky, and Darren Balentine of U.S. Forensic Associates, LLC, gave false testimony in their deposition s. These individuals are not parties and did not testify as a party representative. The Rule 30(b)(6) w itness for U.S. Forensic was Gary Bell. Rimkus does not allege, and there is no basis to conclude, that DeHarde, Janowsk y, or Balen tine gave testimony on behalf of U.S. Forensic. The testimony of these third parties, falseor not, does not provide a basis for sanctioning the party defendants in this case. 78 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 79 of 139
recently produced April 2008 em ail Bell sent him self that contained Rim kus custom er information that appeared to have been created by Balentine while he was still employed at
Rimkus and Bell’s testimony that he did not use Rimkus customer information in soliciting
U.S. Forensic clients. Rimkus argues that Bell could not have obtained contact information for these individuals without using Rimkus customer lists and that Bell’s “denial of the use of Rimkus’s confidential client information in soliciting clients therefore is outright false.”
(Docket Entry No. 313 at 25).
Rimkus’s arguments do not take into account Bell’s deposition testimony about how he obtained contact information and who he attempted to contact after he left Rimkus. Bell testified that when he first began soliciting business for U.S. Forensic, the internet was his primary source for obtaining contact inform ation. He also used the Casualty Adjuster’s
Guide. Bell testified that he “tried to get work from anybody that would send us work. It didn’t matter to me if they were a Rimkus customer, if they weren’t a Rimkus customer, I --
I had to do it on my own -- and, you know, many of the people that don’t use Rimkus were exactly the people we wanted to target.” ( Id., Ex. D, Deposition of Gary Bell, Vol. II at
62:15–:21). Although many of the emails show that U.S. Forensic focused its solicitation efforts on former Rimkus clients the U.S. Forensic founders knew, which is inconsistent with
Bell’s testimony, the record is not sufficient to show that Bell committed perjury when he stated that he did not take Rimkus’s confidential customer contact information.
Rimkus argues that the April 2008 email Bell sent himself, with Rimkus client-contact information attached, makes Bell’s prior testimony that he did not take or use Rimkus client-
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contact information false. Although the April 2008 email is evidence that Bell had Rimkus client information after he left Rimkus, it does not establish that Bell took the information when he left Rimkus. Rimkus argues that Bell obtained the information from Balentine after
Bell left Rimkus. Nor does it establish that Bellused this client-contact information to solicit
Rimkus custom ers for U.S. Forensic. Sanchez’s affidavit also does not com pel the conclusion that Bell used the contact information contained in the attachments to the April
2008 email because Sanchez’s affidavit and deposition testimony do not show that the only source of the contact information was the information contained in the email attachments or other Rimkus sources.
Rimkus also cites Bell’s deposition testimony about when he began telling potential clients about U.S. Forensic and soliciting business from them. Rimkus a rgues that this testimony is contradicted by the dates of emails from Bell to potential clients. Rimkus points to the following exchange in Bell’s deposition:
Q. Okay. Prior to Novem ber 16th, the date you began formal operations of U.S. Forensic --
A. Uh-huh.
Q. -- did you have communications with any person thatyou knew to provide business to Rim kus Consulting Group about your starting a competing business?
A. I don’t believe so.
Q. Well, you would know; wouldn’t you?
A. No.
Q. So, as you sit here today, you can’t tell the ladies and 80 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 81 of 139
gentlemen of the jury whethe r or not you contacted somebody or not? You just don’t know?
A. I think, I didn’t. We didn’ t have insurance. We didn’t have engineers.
(Id. at 63:13–64:4). Rimkus contrasts this testimony with two November 15, 2006 emails
Bell sent Rimkus clients to tell them he was starting a new company. These emails do not prove perjury. Bell clearly testified that although he did not believe that he had contacted
Rimkus clients about his new company before November 15, 2006, he was not sure. Given
Bell’s uncertainty about when he contacted Rimkus clients on behalf of U.S. Forensic, the fact that two em ails were sent one day before the date Bell was asked about doe s not establish that he intentionally gave false testimony.
Rimkus also argues that Bell falsely testified that he took precautions not to contact customers he knew to be Rimkus clients. Rimkus points to an email from Cammarata telling a former client that if he wanted Cammarata to work on the project to ask Rimkus to send the file but asking him not to forward the em ail to Rimkus and emails Bell sent in Decem ber
2006 to individuals Bell had worked with at Rimkus. (Docket Entry No. 394, Ex. F). These emails do not establish perjury. Bell testified tha t he “generally tried to avoid sending” marketing emails to Rimkus clients. (Docket Entry No. 313, Ex. D, Deposition of Gary Bell,
Vol. II at 57:20). The fact that some of the hundreds of marketing emails Bell sent on behalf of U.S. Forensic were sent to people Bell knew were Rimkus clients is not inconsistent with
Bell’s testimony.
Rimkus also points to a recently produced email dated August 15, 2006, with a letter
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of intent to sublease office space in Louisiana, which states that Bell was in the process of separating from his company and was planning to use the space for four employees and to grow over five years. (Docket Entry No. 410, Ex. Supp. Q). Rim kus points to Bell’s previous testimony that he did not know he was leaving Rimkus and that he did not have a firm plan to form U.S. Forensic until after he left Rimkus. According to Rimkus, the letter of intent establishes that Bell’s earlier testimony that he did not have a firm plan prior to leaving Rimkus was false. (Docket Entry No. 410 at 13–23).
The passages of Bell’s deposition testimony that Rimkus cites do not show perjury.
The testimony Rimkus points to shows that Bell did not provide a firm date on which the lease began or when he found the office space; Bell testified that it was “som ething like”
November 5, but he did not know the exact date. (Docket Entry No. 410 a t 20). Bell responded “maybe so” to a question asking if the lease started in October. (Id. at 21). Bell also testified that even if a lease was in place by October, there still was not a firm plan to form U.S. Forensic. (Id. at 22). Bell’s testimony is insufficient to show perjury.
Finally, Rimkus argues that Bell falsely testified that he did not use personal email accounts for “purposes related to Rimkus or U.S. Forensic” and that he did not try to get rid of evidence. (Docket Entry No. 313 at 27). Bell testifie d that during his “employment at
Rimkus,” he used the Rimkus email system for Rimkus work, not a personal email account.
(Id., Ex. D, Deposition of Ga ry Bell, Vol. I at 17:21–25). When Rim kus completed a forensic analysis of its own computer system, it found a “cookie” showing that Bell accessed his BellS outh e-m ail address on his Rim kus com puter to forward docum ents to
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[email protected]. Bell had previously specifically denied having a Gm ail account.
(Docket Entry No. 314, Deposition of Gary Bell, Vol. II at 247:20–248:1) . Bell was not asked, and did not testify about, whether he used a personal email account for U.S. Forensic business.
When asked about deleting e mails, Bell testified that he “didn’t try to get rid of anything that [he] thought [he] shouldn’t.” (Id., Deposition of Gary Bell, Vol. I at 18:1–13).
Later in his deposition, Bell admitted deleting all U.S. Forensic marketing-related emails.
(Id., Vol. II at 342:3–5). He also testified that he deleted some, but not all, of the emails on his computer to conserve server space, (Id., Vol. I at 55:8), and that his deletion wasn’t “as, you know, planne d as--as it could have been,” ( Id. at 18:3–4). That is inconsistent with
DeHarde’s testimony that some time in the summer or fall 2006, but before November 15,
2006, the founding members of U.S. Forensic agreed to delete all emails after two weeks in part out of space concerns. (Docket Entry No. 313, Ex F, Deposition of Michael DeHarde at 34:21–25, 45:16–25).
Evidence in the record shows that Bell did delete emails relevant to his disputes with
Rimkus, emails that he had a duty to preserve. The deletions occurred after Bell and others had decided to sue Rimkus and continued after they filed suit in Louisiana and were sued in
Texas. The record shows that Bell’s tes timony that he was not trying to delete em ails relevant to this case was inconsistent and included some false information. The testimony delayed discovery and m ade it even m ore difficult and costly for Rim kus to obta in information that Bell deleted and destroyed from other sources. This testim ony provides
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additional support for the adverse inference jury instruction and for the award of Rimkus’s fees and costs in identifying and litigating the spoliation.See, e.g., Belak v. Am. Eagle, Inc.,
99-3524-CIV, 2001 WL 253608, at *6 (S.D. Fla. Mar. 12, 2001) (awarding the defendant the attorneys’ fees incurred in m oving to strike a pleading that contained false testim ony).
Rimkus is entitled to the fees and costs it incurred in attempting to recover the deleted emails from other sources and in redeposing the witnesses after those attempts. In addition, Rimkus is entitled to recover the reasonable costs and attorneys’ fees incurred in m oving for sanctions based on Bell’s false testimony about getting rid of evidence.
Rimkus also alleges that Cam marata com mitted perjury. According to Rim kus,
Cammarata falsely testified that he did not solicit Rim kus customers on behalf of U.S.
Forensic. Rim kus argues that em ails Cammarata sent to clients he worked with while employed at Rim kus show that his testim ony was false. This a rgument is unpersuasive.
Cammarata testified that he has “called people that used to be a client of [his] at Rimkus” since starting U.S. Forensic but that he did not recall sending m arketing emails to such clients. ( Docket Entry No. 314, Deposition of Nickie G. Cam marata at 114:25–115:1;
134:14–17). Cammarata testified that he “communicate[s] with some clients that way. A given client, I might do it regularly, but I don’t regularly communicate with all the clients via email.” (Id. at 134:18–23). The emails Rimkus cites were the subject of specific questions at Cammarata’s deposition. Cam marata testified that the em ails were only to clients for whom he had open files when he resigned from Rimkus. Cammarata testified that after he gave Rimkus his two-week notice, “at lea st two, possibly three clients were pursuing m y
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continuance on these files while I was at Rimkus. And within the two-week period I felt a duty to those clients, on behalf of their interest and Rimkus’ interest, to inform them that by
November 15th I would no longer be with Rimkus.” (Id. at 112:16–23). The emails Rimkus relies on show that the clients contacted Cammarata to discuss open files. (Docket Entry No.
313, Exs. L, M). Cammarata responded by stating that he was with a new company but that if the client wanted him to continue working on the file, it could be transferred from Rimkus if the client contacted Rimkus to make those arrangements. Cammarata gave his new contact information and brief inform ation about U.S. Forensic. These em ails are consistent with
Cammarata’s deposition testimony that he did not recall sending marketing emails to clients but that he did communicate with some existing clients about open files. These emails do not show that Cammarata provided false testimony.
Rimkus also alleges that Bell and Cammarata falsely testified that they did not have concrete plans to start U.S. Forensic until November 2006. Rimkus points to the evidence that before leaving Rimkus, Bell registered U.S. Forensic’s web site, met with his attorney, applied for a tradem ark, created a U.S. Forensic logo, created resum es on U.S. Forensic letterhead, and received a letter of intent to lease office space for U.S. Forensic. Corporate formation docum ents for U.S . F orensic we re filed in October 2006, shortly after Bell resigned. Rim kus asserts tha t this evidence shows “there were definite plans being communicated among the members in direct contradiction to their testimony.” (Docket Entry
No. 313 at 36).
The law is clear that taking preparatory steps to compete with an employer while still
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working for that employer is not actionable. See Navigant Consulting, Inc. v. Wilkinson, 508
F.3d 277, 284 (5th Cir. 2007) (“[U]nder Texas law, an at-will employee may properly plan to go into com petition with his em ployer and may take active steps to do so while still employed. . . . . Even the existence of a fiduciary relationship between em ployee and employer does not preclude the fiduciary from making preparations for a future competing business venture; nor do such preparations necessarily constitute a breach of fiduciary duties.” (quotation marks and citations omitted)); Ameristar Jet Charter, Inc. v. Cobbs, 184
S.W.3d 369, 374 (Tex. App.—Dallas 2006, no pe t.) (holding there was no breach of fiduciary duty when an employee formed a competing business while still employed but did not actually compete with the employer until he resigned); Abetter Trucking Co. v. Arizpe,
113 S.W.3d 503, 510 (Tex. App.—Houston [1st Dist.] 2003, no pet.) (“An at-will employee may properly plan to compete with his employer, and may take active steps to do so while still employed. The employee has no general duty to disclose his plans and may secretly join with other employees in the endeavor without violating any duty to the employer.” (citation omitted)); see id. at 511 (“To form his own company, Arizpe had to incorporate or otherwise establish a business entity, obtain perm its, and obtain insurance. The se were permissible preparations to compete, not breaches of a fiduciary duty.”).
A review of the deposition testim ony Rimkus relies on does not reveal false statements. Bell did not testify that he did not take steps to form U.S. Forensic be fore leaving Rimkus. Bell testified that he and Cammarata, DeHarde, and Janowsky had vague discussions about going into business with one another and that there was no agreement to
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form U.S. Forensic until after Bell had left Rimkus. But there is no evidence that before Bell resigned, he com municated his preparations to Cam marata, DeHarde, or Ja nowsky.
Cammarata testified that he was not asked to take any steps to organize information related to U.S. Fore nsic before leaving Rim kus on November 15, 2006. The record evidence is consistent with the deposition testimony of Bell and Cammarata. Bell took the preparatory steps to form U.S. Forensic. Bell and Cam marata did not testify falsely about when they agreed to form U.S. Forensic.
In sum, with one exception, the grounds Rimkus cites to urge this court to find that
Bell and Cammarata committed perjury do not support such a finding.
D. The Additional Allegations of Failures to Comply with Court Orders and to Respond to Discovery Requests
Rimkus alleges that in addition to the spoliation allegations analyzed above, the defendants failed to com ply with this court’s orders to produce reasonably accessible, relevant, nonprivileged electronically stored inform ation and to determ ine the feasibility, costs, and burdens of retrieving electronically stored information that is not reasonably accessible. At the August 6, 2009 hearing, this court ordered the defendants to search the accessible sources and to produce electronically stored inform ation relating to m arketing efforts on behalf of U.S. Forensic or inform ation obtained from Rimkus. On August 13,
2009, the defendants inform ed the court of their efforts to retrieve the inform ation. This court held a hearing on August 17, 2009, and determ ined that considering the scant likelihood of recovering further responsive electronically stored information, the potential benefits of further retrieval efforts were outweighed by the c osts a nd burdens. The 87 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 88 of 139
defendants complied with this order.
The defendants’ failures to respond to discovery, as outlined in Rimkus’s motion for sanctions, were addressed at several hearings, and orders for further responses entered addressed the defendants’ objections to many of the discovery requests. Those issues were resolved and the defendants m ade further responses. Many of the defendants’ discovery responses were incomplete and untimely. But it is only fair to note that defense counsel was inundated with fourteen sets of requests for production, six sets of interrogatories, and seven sets of requests for adm ission. Some of Rim kus’s discovery requests were repetitive of previous requests. The alleged additional discovery deficiencies support the sanctions already imposed but do not justify additional measures.
E. Conclusion
There is evidence in the record showing that the defendants intentionally deleted emails after a duty to preserve had clearly arisen. There is evidence in the record showing that at least some of this lost evidence would have been relevant and favorable to Rimkus’s case. The loss of the evidence prejudiced Rim kus, though not irreparably. These failures have imposed significant costs on the parties and the court. Sanctions are appropriate.
Accordingly, the court will allow the jury to hear the evidence of the defendants’ deletion of emails and attachments, and inconsistent testim ony about the em ails, the concealment of email accounts, and the delays in producing records and inform ation sought in discovery.
The jury will be instructed that if it decides that the defendants intentionally deleted emails to prevent their use in litigation against Rimkus, the jury may, but need not, infer that the
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deleted emails that cannot be produced would have been adverse to the defendants. Rimkus is also entitled to an award of attorneys’ fees and costs reasonably incurred in investigating the spoliation, obtaining emails from third-party subpoenas, taking additional depositions of
Cammarata and Bell, and moving for sanctions based on the deleted em ails and on Bell’s false testimony.
V. Rimkus’s Motion to Extend the Pretrial Motions Deadline
Rimkus has moved to extend the pretrial motions deadline on the basis that “discovery remains incomplete.” (Docket Entry No. 306 at5). The discovery issues Rimkus complains about have been resolved. Yahoo! produced the subpoenaed information to this court on July
20, 2009. This court’s in camera review of the Yahoo! em ails did not reveal any em ails relevant to the defendants’ preparations to leave Rimkus and form U.S. Forensic or to any marketing or soliciting efforts by the defendants on its be half. Rim kus’s outstanding discovery requests and the de fendants’ responses to them have been fully heard and addressed.
The discovery in this case has been extensive. In addition to the litigation over the deleted emails and attachments, the parties have propounded num erous written discovery requests and taken dozens of depositions. Rim kus does not assert that it will file m ore motions if the deadline for doing so is exte nded or that it needs additional discovery in specific areas. Rimkus did not move for a continuance under Rule 56(f) in response to the defendants’ summary judgment motion. Instead, Rimkus argued that the evidence already in the record is sufficient to create fact issues precluding summary judgment. Since filing
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its motion to extend the pretrial motions deadlines, Rimkus has had additional opportunities to conduct discovery and supplement the summary judgment record. Since the motions for summary judgment were filed in July 2009, this court has held several discovery conferences and allowed further discovery and supplemental briefs and evidence. The record does not provide a basis to grant the relief Rimkus seeks. The motion to extend the pretrial motions filing deadline is denied.
VI. The Defendants’ Motion for Summary Judgment
A. The Legal Standard
Summary judgment is appropriate if no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). “The movant bears the burden of identifying those portions of the record it believes demonstrate the absence of a genuine issue of material fact.” Triple Tee Golf, Inc. v. Nike, Inc., 485 F.3d 253,
261 (5th Cir. 2007) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322–25 (1986)). If the burden of proof at trial lies with the nonm oving party, the m ovant may satisfy its initial burden by “‘showing’—that is, pointing out to the district court—that there is an absence of evidence to support the nonmoving party’s case.” See Celotex, 477 U.S. at 325. While the party moving for summary judgment must demonstrate the absence of a genuine issue of material fact, it does not need to negate the elements of the nonmovant’s case. Boudreaux v. Swift Transp. Co., 402 F.3d 536, 540 (5th Cir. 2005). “A fact is ‘material’ if its resolution in favor of one party m ight affect th e outcom e of the lawsuit under governing law.”
Sossamon v. Lone Star State of Texas, 560 F.3d 316, 326 (5th Cir. 2009) (quotation omitted),
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petition for cert. filed, 77 U.S.L.W. 3251 (U.S. Nov. 2, 2009) (No. 08-1438). “If the ovingm party fails to meet [its] initial burden, the motion [for summary judgment] must be denied, regardless of the nonmovant’s response.” United States v. $92,203.00 in U.S. Currency, 537
F.3d 504, 507 (5th Cir. 2008) (quoting Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th
Cir. 1994) (en banc) (per curiam)).
When the moving party has met its Rule 56(c) burden, the nonmoving party cannot survive a summary judgment motion by resting on the mere allegations of its pleadings. The nonmovant must identify specific evidence in the record and a rticulate how that evidence supports that party’s claim. Baranowski v. Hart, 486 F.3d 112, 119 (5th Cir. 2007). “This burden will not be satisfied by ‘som e m etaphysical doubt as to the m aterial f acts, by conclusory allegations, by unsubstantiated assertions, or by only a scintilla of evidence.’”
Boudreaux, 402 F.3d at 540 (quoting Little, 37 F.3d at 1075). In deciding a sum mary judgment motion, the court draws all reasonable inferences in the light most favorable to the nonmoving party. Connors v. Graves, 538 F.3d 373, 376 (5th Cir. 2008).
B. Claim Preclusion
The defendants argue that this entire suit should be dismissed because of the May 11,
2009 Louisiana state-court decision grantingsummary judgment on Rimkus’s reconventional demand. The defe ndants argue that the Louisiana state-court judgm ent in favor of Bell,
Cammarata, and DeHarde on Rimkus’s claims for breach of the covenant not to take or use
Rimkus’s proprietary or trade secret inform ation, breach of fiduciary duty, and disparagement was based on Texas law. The defendants argue that this decision precludes
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relitigation of any claims that were or could have been raised in Rim kus’s reconventional demands and requires dismissal of this suit.
The Full Faith and Credit Clause of the United States Constitution and its implementing statute, 28 U.S.C. § 1738, govern the preclusive effect of a state-court judgment in a subsequent federal action.37 Final judgments of state courts “have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of such State, Territory or Possession from which they are taken.” 28 U.S.C. § 1738. Under Full Faith and Credit, “[a] final judgment in one
State, if rendered by a court with adjudicatory authority over the subject matter and persons governed by the judgment, qualifies for recognition throughout the land. For claim and issue preclusion (res judicata) purposes, in other words, the judgment of the rendering State gains nationwide force.” Baker ex rel. Thomas v. Gen. Motors Corp., 522 U.S. 222, 233 (1998)
(footnote omitted).
A federal court applies the rendering state’s law to determine the preclusive effect of a state court’s final judgment. See 28 U.S.C. § 1738; Migra v. Warren City Sch. Dist. Bd.
37 The Full Faith and Credit Clause states:
Full Faith an d Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. And the Congress may by general Laws prescribe the Ma nner in which such Acts, Records and Proceedings shall be proved, and the Effect thereof.
U.S. CONST. art IV, § 1. Title 28 U.S.C. § 1738 states in relevant part:
The records and judicial proceedings of any court of any . . . State, Territory or Possession . . . shall have the same full faith and credit in every court within the United States and its Territories andPossessions as they have by law or usage in the courts of suchState, Territory or Possession from which they are taken. 92 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 93 of 139
of Educ., 465 U.S. 75, 81 (1984);see also Norris v. Hearst Trust, 500 F.3d 454, 460–61 (5th
Cir. 2007). This rule applies even if therendering state’s judgment is based on public policy offensive to the enforcing state. Baker , 522 U.S. at 233–34. Because enforcing states decide the scope of a judgm ent, a rendering state can “determ ine the extraterritorial e ffect of its judgment . . . only . . . indirectly by prescribing the effect of its judgments within the State.”
Thomas v. Wash. Gas Light Co., 448 U.S. 261, 270 (1980). “To ve st the power of determining the extraterritorial effect of a State’s own . . . judgments in the State itself risks the very kind of parochial entrenchm ent on th e interests of other States that it was the purpose of the Full Faith and Credit Clause and other provisions of Art. IV of the
Constitution to prevent.” Id. at 272.
The Louisiana res judicata statute states:
Except as otherwise provided by law, a valid and final judgment is conclusive betwe en the sam e parties, except on appeal or other direct review, to the following extent:
(1) If the judgment is in favor of the plaintiff, all causes of action existing at the time of final judgment arising out of the transaction or occurrence that is the subject matter of the litigation are extinguished and m erged in the judgment.
(2) If the judgment is in favor of the defendant, all causesof action existing at the time of final judgment arising out of the transaction or occurrence that is the subject matter of the litigation are extinguished and the judgment bars a subsequent action on those causes of action.
(3) A judgm ent in fa vor of e ither the pla intiff or the defendant is conclusive, in any subsequent action between them, with respect to any issue actually litigated and determined if its determination was essential to that 93 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 94 of 139
judgment.
LA. REV. STAT. § 13:4231. Louisiana courts have observed that this statute “embraces the broad usage of the phrase res judicata to include both claim preclusion (res judicata) and issue preclusion (collateral estoppel).” Am. Med. Enters., Inc. v. Audubon Ins. Co., 2005-
2006, p. 6 (La. App. 1 Cir. 6/8/07); 964 So. 2d 1022, 1028.
Under claim preclusion, the res judicata effect of a final judgment on the m erits precludes the partie s from relitigating matters that we re or could have been raised in that action. Under issue preclusion or collateral estoppel, however, once a court decides an issue of fact or law necessary to its judgment, that de cision precludes relitigation of the sam e issue in a different cause of action between the sam e parties. Thus, res judicata used in the broad sense has two different aspects: (1) foreclosure of relitiga ting m atters that have never been litigated, but should have been advanced in the earlier suit; and (2) foreclosure of relitigating matters that have been previously litigated and decided.
Id. (citing Five N Company, L.L.C. v. Stewart, 02-0181, p.15 (La. App. 1 Cir. 7/2/03); 850
So. 2d 51, 61).
The claim preclusion aspect of res judicata applies under Louisiana law “when all of the following are satisfied: (1) the judgment is valid; (2) the judgment is final; (3) the parties in the two matters are the same; (4) the cause or causes of action asserted in the second suit existed at the time of the final judgment in the first litigation; and (5) the cause or causes of action asserted in the second suit arose out of the transaction or occurrence that was the subject matter of the first litigation.” Smith v. State, 04-1317, p. 22 (La. 3/11/05); 899 So.
2d 516, 529–30.
1. Finality 94 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 95 of 139
Rimkus argues that the summary judgm ent ruling in Louisiana is not final for purposes of preclusion because it is “subject to vacation and revision” on appeal, (Docket
Entry No. 321-1 at 1), “such that this litigation does not constitute an permissibleim collateral attack on a decision already made.” (Id. at 7). Rimkus argues that the Louisianares judicata statute provides that “a valid and final judgm ent is conclusive between the sam e parties, except on appeal or other direct review.” (Docket Entry No. 353 at 2). As a result, according to Rimkus, a state court decision on appeal cannot be a final judgm ent for res judicata purposes.
Courts applying Louisiana law have rejected the argument that a pending appeal from a trial court’s judgment defeats finality for preclusion purposes. In Fidelity Standard Life
Insurance Co. v. First National Bank & Trust Co. of Vidalia, Georgia, 510 F.2d 272, 273
(5th Cir. 1975) (per curiam), the plaintiff sued in federal district court to enforce a judgment against the defendant obtained in Louisiana state court. The federal district court held that the Louisiana judgment was entitled to full faith and credit. Id. On appeal, the Fifth Circuit rejected the contention that the Louisiana judgment was not final for res judicata purposes because it was on appeal in the state courts.Id. The court held that “[a] case pending appeal is res judicata and entitled to full faith and credit unless and until reversed on appeal.” Id.
Similarly, in Energy Development Corp. v. St. Martin, 296 F.3d 356, 360–61 (5th Cir.
2002), the Fifth Circuit analyzed Louisiana’s res judicata statute and held that a state court judgment is final for res judicata purposes when the trial court enters judgment. The Fifth
Circuit relied on comment (d) of the Louisiana statute, which provides that the “preclusive
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effect of a judgment attaches once a final judgment has been signed by the trial court and would bar any action filed thereafter unless the judgment is reversed on appeal.”Id. (quoting
LA. REV. STAT. § 13:4231, comment (d)). In Maples v. LeBlanc, Maples & Waddell, LLC,
No. Civ. A. 02-3662, 2003 WL 21467540 (E.D. La. June 20, 2003), the plaintiff argued that a prior Louisiana state court decision was not final because it was on appeal and the
Louisiana res judicata statute provides that “a valid and final judgment is conclusive between the same parties, except on appeal or other direct review,” id. at *3. The court rejected this interpretation of the statute because it was inconsistent with the case law and with comment
(d) of the Louisiana res judicata statute. Id. at *4.
One Louisiana court has held that a judgment is not final while an appeal is pending.
See Dupre v. Floyd, 01-2399, p. 4 (La. App. 1 Cir. 7/1/02); 825 So. 2d 1238, 1240. But that court relied on “[t]wo older cases under prior law,” Mente & Co. v. Anciens Etablissements
Verdier-Dufour & Cie, 149 So. 492, 493 (La. 1933), and Richmond v. Newson, 24 So. 2d
174, 175 (La. App. 2 Cir. 1945), which involved a narrower version of Louisiana preclusion law. Before the 1991 statutory amendments, Louisiana law onres judicata was substantially narrower than federal law. See Terrebonne Fuel & Lube, Inc. v. Placid Refining Co., 95-
0654 (La. 1/16/96); 666 So. 2d 624, 631. The original Louisiana doctrine of res judicata was based on presuming the correctness of the prior judgment rather than on extinguishing the causes of action that might have been raised in the litigation that led to that judgm ent.
See id. at 631–32. The court in Dupre relied on cases that were based on that presumption of correctness, ignoring the fact that the current version of Louisianares judicata law is more
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like federal law in using the transaction-or-occurrence test to determine the preclusive effect of a prior judgment. Under federal law, a final judgment of a federal trial court is preclusive until that judgment is modified or reversed. “[T]he established rule in the federal courts [is] that a final judgm ent retains all of its res judicata consequences pending de cision of the appeal . . . [.]” Pharmacia & Upjohn Co. v. Mylan Pharms., Inc., 170 F.3d 1373, 1381 (Fed.
Cir. 1999) (third alteration and omission in original) (quoting Warwick Corp. v. Md. Dep’t of Transp., 573 F. Supp. 1011, 1014 (D. Md. 1983), aff’d, 735 F.2d 1359 (4th Cir. 1984)).
The Restatement (Second) of Judgments recognizes this view of finality—that the pendency of an appeal should not suspend the operation of a judgment for purposes of res judicata or collateral estoppel—as “[t] he better view.” R ESTATEMENT (SECOND) OF
JUDGMENTS § 13, cmt. f (1982); see also 18A CHARLES ALAN WRIGHT ET AL ., FEDERAL
PRACTICE AND PROCEDURE § 4433, at 94 (2d ed. 2002) (“Despite the manifest risks of resting preclusion on a judgm ent that is be ing appealed, the alternative of retrying the com mon claims, defenses, or issues is even worse. All of the values served by res judicata are threatened or destroyed by the burdens of retrial, the potential for inconsistent results, and the occasionally bizarre problems of achieving repose and finality that may arise.”).
The cases make clear that a pending appeal does not affect the finality of a Louisiana state trial court’s judgment for res judicata purposes. See Tolis v. Bd. of Supervisors of La.
State Univ., 95-1529 (La. 10/16/95); 660 So. 2d 1206, 1206–07 (per curiam ) (“A final judgment is conclusive between the parties except on direct review. LA. REV. STAT.
13:4231 . . . . Once a final judgment acquires the authority of the thing adjudged, no court
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has jurisdiction, in the sense of power and authority, to m odify, revise or reverse the judgment, regardless of the magnitude of the error in the final judgment.”).38 The part of the
Louisiana res judicata statute that Rimkus quotes—“a valid and final judgment is conclusive between the same parties, except on appeal or other direct review”—means that a trial court’s final judgment has preclusive effect except in those courts reviewing the judgment on direct appeal or collateral challenge. The May 11, 2009 Louisiana state-court judgment dismissing on summary judgment the claims in Rimkus’s reconventional demand is a final judgment for preclusion purposes.
2. Identity of Parties
Rimkus also argues that the parties in the two suits are not the same because U.S.
Forensic, a defendant in this suit, was not involved in the Louisiana state-court litigation.
The defendants respond that U.S. Forensic isin privity with Bell and Cammarata, who were parties to the Louisiana litigation. The identityof parties requirement is satisfied “whenever the same parties, their successors, or others appear, as long as they share the same quality as parties or there is privity between the parties.” Austin v. Markey, 08-381, p. 5 (La. App. 5
Cir. 11/25/08); 2 So. 3d 438, 440 (quoting Smith v. Parish of Jefferson, 04-860 (La. App. 5
Cir. 12/28/04); 889 So. 2d 1284, 1287); see also Burguieres v. Pollingue, 02-1385, p. 8 n.3
(La. 2/25/03); 843 So. 2d 1049, 1054 n. 3. In general, “‘privity’ is the mutual or successive relationship to the same right of property, or such an identification in interest of one person
38 See also Segal v. Smith, Jones & Fawer, L.L.P., 02-1448, pp. 7–8 (La. App. 4 Cir. 1/29/03); 838 So. 2d 62, 66 (“Although SJF argues that the September 12, 2001 judgment is currently on appeal before the First Circuit, the judgment is final for res judicata purposes unless it is reversed on appeal and was, therefore, final at the time the Civil District Court judgment was rendered.”). 98 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 99 of 139
with another as to represent the same legal right.” Five N Company, L.L.C. v. Stewart, 2002-
0181, p. 16 (La. App. 1 Cir. 7/2/03); 850 So. 2d 51, 61. Privity exists for res judicata purposes: “(1) where the non-part y is the successor in interest to a party’s interest in property; (2) where the non-party controlled the prior litigation; and (3) where the non-party’s interests were adequately represented by a party to the original suit.” Condrey v. Howard, No. 28442-CA, p. 5 (La. App. 2 Cir. 8/21/96); 679 So. 2d 563, 567.
The record shows an identity of interest between Bell and Cammarata on the one hand and U.S. Forensic on the other. Bell, Cammarata, and DeHarde, the plaintiffs in the
Louisiana litigation, own 75% of U.S. Forensic. The actions of Bell and Cammarata—the defendants in this federal case—in leaving Rimkus, forming U.S. Forensic, and competing with Rimkus are the basis of both the Louisiana litigation and this case. Rimkus se eks to hold U.S. Forensic liable with Bell and Cammarata for these actions. Bell and Cammarata represented U.S. Forensic’s interests in the Louisiana litigation in seeking to have the noncompetition and nonsolicitation covenants declared unenforceable. The identity of parties requirement for preclusion is met.
3. The Relationship of the Claims
Rimkus contends that the claims in this suit and the Louisiana suit do not arise out of the sam e transaction or occurrence because the Louisiana state-court judgm ent did not involve Rimkus’s federal claims for cyberpiracy and trademark infringement, (Docket Entry
No. 321-1 at 8–9), and the Louisiana court could not dec ide the Texas contract and tort claims Rimkus raised, (Docket Entry No. 324 at 12). Rimkus argues that, notwithstanding
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that both it and Bell and Cammarata argued Texas (as well as Louisiana) law in the briefs they filed on the Bell and Cam marata motion for summary judgment, the Louisiana court
“could not evaluate the issues in dispute under Texas law.” (Id.).
Claim preclusion applies to bar in a subse quent suit all “claim s that were or could have been litigated in a previous lawsuit.” Horacek v. Watson, 06-210, p. 3 (La. App. 3 Cir.
7/5/06); 934 S o. 2d 908, 910 (quoting Walker v. Howell, 04-246, p.2 (La. App. 3 Cir.
12/15/04); 896 So. 2d 110, 112). Under Louisiana law, a defendant is required to “assert in a reconventional demand all causes of action thathe may have against the plaintiff that arise out of the transaction or occurrence that is the subject matter of the principal action.” LA.
CODE CIV. PROC. art. 1061(B). Rimkus asserted its claims for breach of the noncompetition and nonsolicitation covenants in its reconventional demands. The Louisiana court ruled that, despite the Texas forum -selection and choice-of-law provision in the Em ployment
Agreement, Louisiana law applied to invalidate the covenants. Louisiana law prevented
Rimkus from litigating the noncompetition and nonsolicitation claims under Texas law in the
Louisiana court. As this court previously held, the Louisiana court’s ruling that Louisiana law applies in Louisiana to invalidate the Texas forum-se lection and choice-of-law provisions in the Employment Agreement does not invalidate those provisions in all states.
Because Rim kus could not have litigated its Texas-law claim s for breach of the noncompetition and nonsolicitation covenants in the Louisiana state court, claim preclusion does not apply to those claims. The defendants’ motion for summary judgment dismissing this case based on claim preclusion is denied.
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As discussed below, the Louisiana court entered a valid and final judgm ent under
Texas law on Rimkus’s reconventional demand for misappropriation of trade secrets, breach of fiduciary duty, and disparagement, satisfying the Louisiana elements for preclusion. See
Smith v. State, 04-1317, p. 22 (La. 3/11/05); 899 So. 2d 516, 529–30. However, whether analyzed under issue or claim preclusion, the defendants’ spoliation of evidence warra nts applying the Louisiana statutory exception to res judicata. The defendants’ spoliation prevented Rimkus from litigating its misappropriation and related claims in Louisiana. The spoliation justifies granting Rimkus relief from preclusion under the statute.
C. Issue Preclusion
The defendants alternatively argue issue preclusion. Each of the allegedly precluded issues is analyzed below.
1. Noncompetition and Nonsolicitation Covenants
On January 4, 2008, the Louisiana state appellate court ruled that the noncompetition clause in Bell’s Stock Purchase Agreem ent was invalid and unenforceable because it was contrary to Louisiana law and public policy. (Docket Entry No. 309, Ex. N). On March 17,
2008, the Louisiana state trial court ruled that the nonsolicitation of employees clause in the defendants’ employment agreements was unenforceable. Id.( , Ex. Q). The defendants argue that issue preclusion bars relitigation of Rimk us’s claims for breach of these covenants.
Rimkus responds that “[t]his court is obligated to apply Texas law to the enforcement of the non-solicitation of employees provision . . . which is not the same issue that the Louisiana court had to decide in ruling on the enforceability of the provision in the Louisiana action.”
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(Docket Entry No. 324 at 22).
The January and March 2008 Louisiana state-court judgments are entitled to the same preclusive effect as the July 26, 2007 Louisia na state-court judgm ent declaring the noncompetition and nonsolicitation covenants unenforceable under Louisiana law. The
Louisiana court’s determination that in Louisiana, the noncompetition covenant in the Stock
Purchase Agreement and the nonsolicitation of em ployees provision in the Em ployment
Agreement are unenforceable under Louisiana law is entitled to preclusive effect in this court. The Louisiana court’s ruling, however, does not invalidate the noncompetition and nonsolicitation provisions in all states and does not preclude this court from considering the enforceability of the noncompetition and nonsolicitation covenants under Texas law—which the parties specified in their agreem ents—for activities outside Louisia na that allegedly breached those covenants.
2. Misappropriation of Trade Secrets, Breach of Fiduciary Duty, and Disparagement
The defendants argue that Rimkus litigated its claims for misappropriation of trade secrets, breach of fiduciary duty, and disparagement in the Louisiana court and that the May
11, 2009 judgment dismissing Rimkus’s reconventional demand disposed of these claims.
The defendants argue that this judgm ent is entitled to preclusive effect in this court with respect to these issues, which were actually litigated in the Louisiana case. Rimkus responds that issue preclusion does not apply because “there is no way to determ ine what issue or issues the Louisiana court m ust have considered in disposing of Rim kus’ reconventional demand.” (Docket Entry No. 324 at 20). Rimkus contends that the May 11, 2009 Louisiana 102 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 103 of 139
judgment does not show that the claim s for m isappropriation of trade secrets, breach of fiduciary duty, and disparagem ent asserted in Rim kus’s reconventional dem and were
“actually litigated and finally adjudged.” (Id.). Rimkus also argues that the Louisiana court could not have applied Texas law to those claims because that court had previously held that under Louisiana law, the Texas choice-of-law provision in the Employment Agreement was invalid. In its supplemental response, Rimkus argues that the misappropriation claim was not litigated in Louisiana because the reconventional demand did not plead a tort cause of action for misappropriation. Instead, Rimkus contends that the reconventional contract claim was based on a breach of the confidentiality provision in the Em ployment Agreem ent.
Rimkus contends that the reconventional dem and’s factual allegations do “not support a conclusion of a trade secret cause of action being pled” because there are no “allegations enumerating the existence of confidential inform ation or Cam marata’s taking of tha t information.” (Docket Entry No. 362 at 4).
Under Louisiana law, the three requirements for issue preclusion are: “(1) a valid and final judgment; (2) identity of the parties; and (3) an issue that has been actually litigated and determined if its determination was essential to the prior judgm ent.” Sanchez v. Ga. Gulf
Corp., 02-1617, p. 14 (La. App. 1 Cir. 8/13/03);853 So. 2d 697, 706. “Issue preclusion does not bar re-litigation of what might have been litigated and determined, but only those matters in controversy upon which the prior judgment or verdict was actually based.” Goodman v.
Spillers, 28933-CA, p. 10–11 (La. App. 2 Cir. 12/23/96); 686 So. 2d 160, 167 (em phasis omitted).
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Rimkus’s argument that preclusion does not apply because the Louisiana lawsuit involved a breach-of-contract claim and not a tort claim for misappropriation of confidential information is unpersuasive. “Trade secrets are in the nature of property rights that the law protects through both tort and contract principles.”Mabrey v. SandStream, Inc., 124 S.W.3d
302, 310 (Tex. App.—Fort Worth 2003, no pet.). A misappropriation claims may be brought as a claim for breach of a contractual duty, breach of confidence, or in tort. See Murrco
Agency, Inc. v. Ryan, 800 S.W.2d 600, 605 n.8 (Tex. App.—Dallas 1990, no writ) (breach of contract and breach of confidence);Avera v. Clark Moulding, 791 S.W.2d 144, 145 (Tex.
App.—Dallas 1990, no writ) (m isappropriation of trade secrets). “A person is liable for disclosure or use of trade secrets if he either (a) discovers the secret by improper means or
(b) his disclosure or use, after properly acquiring knowledge of th e secret, constitutes a breach of a confidence reposed in him.” Mabrey, 124 S.W.3d at 310.
Whether a misa ppropriation claim is brought in contract or tort, the test for determining whether the information at issue is protectable is the same. Texas courts analyze the six relevant nonexclusive factors set out in the Restatement of Torts: (1) the extent to which the information is known outside the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken to safeguard the secrecy of the information; (4) the value of the information to him and to his competitors;
(5) the amount of effort or money expended in developing the information; and (6) the ease or difficulty with which others could properly acquire or duplicate the information. In re
Bass, 113 S.W.3d 735, 739 (Tex. 2003).
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Contrary to Rimkus’s argument, the Louisiana reconventional demand alleged “the existence of confidential inform ation” and the defendants’ “taking of that inform ation.”
Rimkus a lleged that Bell and Cam marata violated the “Proprietary Inform ation/Trade
Secrets” covenants, which stated that Rim kus client data and workpapers are valuable, confidential, proprietary, or trade secret information and obtained by Rimkus at considerable expense. In the Employment Agreement, Bell and Cammarata agreed not to remove any
Rimkus confidential, proprietary, or trade secret information from the premises except in the performance of their job duties; to return any such information in their possession to Rimkus within twenty-four hours after their em ployment ended; and that “ so long as such confidential information or trade secrets may remain confidential, secret, or otherwise totally or partially protectable or proprietary,” they would “not use or divulge such inform ation.”
To determine whether Bell or Cammarata violated this contractual provision, a court would have to determine whether they took information from Rimkus; whether that information qualified as confidential, proprietary, or tra de secret inform ation; and whether that information was used or divulged in violation of the Employment Agreement. See Murrco
Agency, 800 S.W.2d at 605 (analyzing a misappropriation-of-trade-secrets claim brought as a breach-of-contract action under cases that used common-law standards to decide whether the information at issue was confidential, proprietary, or a trade secret). The legal and factual questions involved—whether the claim is in contract or tort—are the same in both the
Louisiana and Texas lawsuits. Rimkus’s misappropriation claim satisfies the elements of issue preclusion.
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To the extent the breach of fiduciary duty claim against Bell is based on misappropriation, it also satisfies the elements of preclusion. The May 11, 2009 judgment is valid and final and the parties in both suits are the sam e. Rimkus’s argument that the issues were not actually litigated in Louisiana because the Louisiana court applied Louisiana law is not supported by the record. The Louisiana court held applied Louisiana law to “the claims of the plaintiffs”—Cammarata, Bell, and DeHarde. The Louisiana court stated that it invalidated the Texas choice-of-law provision and the noncompetition and nonsolicitation covenants in the Employment Agreement under Louisiana law. But the Louisiana court did not state that it applied Louisiana law to Rimkus’s claims involving the misappropriation of confidential, proprietary, and trade secret information or to the claims for breach of fiduciary duty and disparagem ent. Rim kus asked the Louisiana court to apply Texas law to its reconventional demand. The motion for summary judgment Cammarata, Bell, and DeHarde filed to dism iss the c laims in Rim kus’s reconventional dem and did not deal with noncompetition or nonsolicitation claims, which had been decided by the Louisiana court in
2007, but rather with Rimkus’s claims for misappropriation of trade secrets or proprietary information, breach of fiduciary duty, and disparagement. Both sides briefed these issues in the motion for sum mary judgment under Texas law. In oral argum ent on these issues, counsel relied on Texas law. The Louisiana court’s order states that it was based on a review of “the evidence, the law and the arguments of counsel.” (Docket Entry No. 309, Ex. G).
Rimkus also argues that issue preclusion does not apply because the Louisiana court
“did not express any basis” for its ruling on the misappropriation, breach of fiduciary duty,
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or disparagement claims. Rimkus cites Goodman v. Spillers, 28933-CA, p. 11 (La. App. 2
Cir. 12/23/96); 686 So. 2d 160, 167, in which the court state d that “[i]t is generally not sufficient for purposes of issue preclusion to sim ply prove that a party to prior litigation argued numerous issues and lost his case. Issue preclusion requires the issue to be precluded to have been a dispositive issue which the prior court must have considered in a contest between the same parties.” (Docket Entry No. 324 at 19–20). Rimkus argues that there is no way to determine what issues the Louisiana court considered when it granted the motion for summary judgment on Rimkus’s reconventional demand. Rimkus contends that although it pleaded several claims in its reconventional demand, the defendants have not shown that the these claims were actually litigated and decided in the Louisiana court’s May 11, 2009 judgment. Rimkus also cites Lamana v. LeBlanc, 526 So. 2d 1107, 1109 (La. 1988), which stated that “[a] n issue presented by the pl eadings in a c ause, but elim inated from the judgment of the court, cannot be invoked in support of res judicata.” But issue preclusion does not require that a judgment be accompanied by a statement of the reasons or basis for the decision. And the Louisiana court clearly stated that its decision on these claim s was based on “the arguments of counsel,” which only raised Texas law.
The concerns addressed in the cases Rim kus cites are not present in this case. In
Goodman, a corporation sued its former directors for breach of fiduciary duty. 28933-CV, p. 1; 686 So. 2d at 162–63. One of the directors asserted a reconventional demand for unfair trade practices based on the filing of the suit. 28933-CV, p. 1; 686 So. 2d at 162. The court granted a directed verdict dismissing the unfair trade practices claim. Id. The director then
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brought a separate suit for m alicious prosecution. Id. The corporation argued that issue preclusion applied to essential elements of the malicious-prosecution claim. 28933-CV, p.
9; 686 So. 2d at 166. The court rejected this argument, holding that the directed verdict in the previous suit—which was essentially a finding that no unfair trade practice occurred—did not equate to a finding about whether the co rporation had engaged in fraud, deception, or misrepresentation. 28933-CV, p. 10; 686 So. 2d at 167. The court held that the previous judgment was not entitled to preclusive effect because the court was unable to determine the basis on whic h that litigation was resolved. 28933-CV, p. 11; 686 So. 2d at 167. By contrast, Bell and Cammarata moved under Texas law for summary judgment in Louisiana on Rimkus’s reconventional demand claims for misappropriation of confidential, proprietary, or trade secret inform ation, breach of fiduc iary duty, and disparagem ent. The Louisiana court granted the motion for summary judgment on these claims after reviewing the evidence, the law, and the parties’ arguments, which were all under Texas law. The court stated the basis for its judgment. Rimkus’s reliance on Lamana is also unavailing because in contrast to the facts in that case, the claim s pleaded in Rimkus’s reconventional dem and were not
“eliminated” from the Louisiana court’s judgment.
The Louisiana court expressly granted the motion for summary judgment on all claims asserted in the reconventional demand. But this court is not precluded from reconsidering these issues because a statutory exception applies.
D. Exception to Preclusion under Louisiana Law
In Louisiana, “[a] judgment does not bar another action by the plaintiff . . . [w]he n
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exceptional circumstances justify relief from the res judicata effect of the judgm ent.” LA.
REV. STAT. § 13:4232. 39 This statute was designed to “allow the court to balance the principle of res judicata with the interests of justice.”Id. cmt. 1990; see also Jenkins v. State,
615 So. 2d 405, 406 (La. Ct. App. 1993).
Louisiana’s position is consistent with the Restatement (Second) of Judgments. The
Restatement provides that fraud, concealment, or misrepresentation provide a basis to depart from claim preclusion. See RESTATEMENT (SECOND) OF JUDGMENTS § 26(f); id. cmt. j; see also 18 CHARLES ALAN WRIGHT ET AL ., FEDERAL PRACTICE AND PROCEDURE § 4415, at
359–61 & 360 n.17 (2d ed. 2002). As to issue preclusion, the Restatement states that“[a]lthough an issue is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, relitigation of the issue in a subsequent action between the parties is not precluded” when:
[t]here is a clear and convincing need for a new determ ination of the issue . . . because the party sought to be precluded, as a result of the conduct of his adversary or other special circumstances, did not have a n adequate opportunity or incentive to obtain a full and fair adjudication in the initial action.
RESTATEMENT (SECOND) OF JUDGMENTS § 28(5). Issue preclusion does not apply when one party “conceal[s] from the other information that would materially affect the outcome of the case.” Id. cmt. j. In such circumstances,
the court in the second proceeding m ay conclude that issue
39 Louisiana courts have interpreted “res judicata” in Louisiana statutes to encompass both claim and issue preclusion. See Am. Med. Enters., Inc. v. Audubon Ins. Co., 2005- 2006, p. 6 (La. App. 1 Cir. 6/8/07); 964 So. 2d 1022, 1028. 109 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 110 of 139
preclusion should not apply because the party sought to be bound did not have an adequate opportunity or incentive to obtain a full and fair adjudication in the first proceeding. Such a refusal to give the first judgment preclusive effect should not occur without a compelling showing of unfairness, nor should it be based simply on a conclusion that the first determ ination was patently erroneous. But confined within proper lim its, discretion to deny preclusive effect to a determination under the circumstances stated is central to the fair adm inistration of preclusion doctrine.
Id.; see also Metro. Sav. & Loan Ass’n v. Tarter, 730 S.W.2d 1, 5 (Tex. App.—Dallas 1987, writ granted) (citing § 28(5) for the rule that an issue is not precluded if there is a clear need for redetermination due to misconduct on the part of an opposing party that prevented a full and fair adjudication of the original action), rev’d on other grounds, 744 S.W.2d 926 (Tex.
1988). The Louisiana Suprem e Court has cited the Restatement for the proposition that preclusion40 does not apply, even when the elem ents are m et, “if it is clearly and convincingly shown that the policies favoring preclusion of a second action are overcom e for an extraordinary reason.” Terrebonne Fuel & Lube, Inc. v. Placid Refining Co., 95-0654
(La. 1/16/96); 666 So. 2d 624, 632 (La. 1996) (citing R ESTATEMENT (SECOND) OF
JUDGMENTS § 26).
In the present case, weighing the policies underlying preclusion law a gainst the evidence that the defendants spoliated evidence relevant to the misappropriation claims, this
40 In Terrebonne, the Louisiana Suprem e Court identified th e question as issue preclusion but cited the Restatement (Second) of Judgments section applicable to claim preclusion. See 666 So. 2d at 632. In any event, Louisiana law considers both under the um brella of “ res judicata.” Courts have interp reted “res judicata” in Louisiana statutes to encompass both claim and issue preclusion. See Am. Med. Enters., Inc. v. Audubon Ins. Co., 2005- 2006, p. 6 (La. App. 1 Cir. 6/8/07); 964 So. 2d 1022, 1028. InTerrebonne , the court referred only to the “common law theory of res judicata.” See Terrebonne, 666 So.2d at 632. 110 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 111 of 139
court concludes that exceptional circumstances exist such that preclusion does not apply to those claims. The record shows that the defendants deleted em ails and attachm ents and delayed producing documents in discovery showing information taken from Rimkus and used for U.S. Forensic. The record also shows that the defendants delayed providing information or provided incomplete information that would have revealed the deletions. Rimkus was able to obtain some deleted emails and attachments from third parties. Som e of the recovered documents show that the defendants solicited Rim kus clients, inc luding individuals with whom Bell and Cammarata had worked while atRimkus, shortly after forming U.S. Forensic.
Some of the recovered docum ents support Rim kus’s allegations that the defenda nts had
Rimkus client information, financial information, and copyrighted information and used the information for U.S. Forensic. The Septem ber 30, 2006 em ail Bell forwarded himse lf containing confidential Rimkus information, including income/loss statements for several
Rimkus offices, emails showing that Cammarata forwarded Rimkus reports to a private email account, and the April 6, 2008 email Bell sent himself with attachments containing Rimkus client-contact information are among the items that were only recently discovered, despite
Rimkus’s vigorous efforts to obtain them much earlier. None of this evidence was available to Rimkus to litigate the misappropriation claim in the Louisiana lawsuit.
Generally, newly discovered evidence does not affect the preclusive effect of a judgment. In re Howe, 913 F.2d 1138, 1147 (5th Cir. 1990). The information Rimkus has recently obtained, however, is not m erely “new” evidence. Rather, the record contains evidence that would perm it a reasonable jury to conclude that this newly obtained
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information was previously unavailable to Rimkus because the defendants deleted it in bad faith. By deleting relevant emails, by providinginformation in discovery that concealed their existence and deletion, and by delaying discovery responses, the defendants “conceal[ed] from [Rimkus] information that would m aterially affect the outcom e of the case.” The policies underlying preclusion law—conserving judicial resources and protecting litigants from multiple lawsuits—are not served by applying issue preclusion to the misappropriation and related claims in this case. The defendants’ conduct prevented a full and fair opportunity for Rimkus to litigate the m isappropriation, breach of fiduciary duty, and disparagem ent claims in the Louisiana lawsu it. The facts of this case call for denying the application of issue and claim preclusion. Rimkus’s claims for misappropriation, breach of fiduciary duty, and disparagement are not barred by the May 11, 2009 Louisiana state court judgm ent granting summary judgment on the claims in Rimkus’s reconventional demand.
The defendants have also moved for summary judgment on these claims on grounds other than preclusion. Those grounds are examined below.
E. The Merits of the Defendants’ Motion for Summary Judgment on Rimkus’s Claims
1. Misappropriation of Confidential, Proprietary, and Trade Secret Information
The defendants argue that th e record does not raise a fact issue as to Rim kus’s misappropriation claim. According to the defendants, the names and contact information of
Rimkus’s clients are not confidential, proprietary, or trade secret information because they are generally known or readily accessible in industry guides and publications and on the
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internet. The defendants assert that Rimkus’s pricing information is not entitled to protection because Rimkus shares that information with its clients. The defendants further contend that there is no evidence in the record that they took or used Rimkus’s client, pricing, financial, or business plan information.
Rimkus responds by pointing to this court’s August 13, 2008 opinion, which stated that Rimkus’s “customer database, pricing information, and annual business plan are entitled to trade secret protection.” (Docket Entry No. 159 at 49). Rimkus argues that the contact information for m any of the Rim kus clients the defendants solicite d in Novem ber and
December 2006 was not publicly available at that time. Rimkus contends that the evidence in the record raises a fact issue as to where the defendants obtained the nam es and email addresses and whether that information was entitled to protection as Rimkus’s confidential, proprietary, or trade secret inform ation. Rim kus argues that the evidence in the record, including the September 30, 2006 and April 6, 2008 emails Bell forwarded to himself, raises fact issues as to whether the defendants took and used confidential Rimkus information.
Texas law defines a “trade secret” as a “formula, pattern, device or com pilation of information used in a business, which gives the owner an opportunity to obtain an advantage over his competitors who do not know or use it.” Triple Tee Golf, Inc. v. Nike, Inc., 485
F.3d 253, 261 (5th Cir. 2007) (quoting Taco Cabana Int’l, Inc. v. Two Pesos, Inc., 932 F.2d
1113, 1123 (5th Cir. 1991)). “To state a claim for trade secret misappropriation under Texas law, a plaintiff must (1) establish that a trade secret existed; (2) demonstrate that the trade secret was acquired by the defendant through a breach of a confidential relationship or
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discovered by improper means; and (3) show that the defendant used the trade secret without authorization from the plaintiff.” Gen. Univ. Sys., Inc. v. Lee, 379 F.3d 131, 149–50 (5th Cir.
2004). To determine whether information is a trade secret protected from disclosure or use, a court must examine six “relevant but nonexclusive” criteria: “(1) the extent to which the information is known outside the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken to safeguard the secrecy of the information; (4) the value of the inform ation to him and to his com petitors; (5) the amount of effort or m oney expended in developing the inform ation; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.”
Id. at 150 (citing In re Bass, 113 S.W.3d 735, 739–40 (Tex. 2003));T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 22 (Tex. App.—Houston [1st Dist.] 1998, pet. dism’d). All six factors need not be satisfied “because trade secrets do not fit neatly into each factor every time.” Gen. Univ. Sys., 379 F.3d at 150 (quotingBass , 113 S.W.3d at 740).
Courts in Texas identify trade secrets, proprietary inform ation, a nd c onfidential information separately but provide them similar protection if the requirements—including that of secrecy—are met.41 “Use”of a trade secret refers to “com mercial use” and occurs
41 See, e.g., Gallagher Healthcare Ins. Servs. v. Vogelsang, --- S.W.3d ----, 2009 WL 2633304, at *10 (Tex. App.—Houston [1 Dist.] 2009, no pet. hist.) (“Moreover, a covenant not to compete is enforceable not only to protect trade secrets but also to protect proprietary and confidential information.”); Norwood v. Norwood, No. 2-07-244-CV, 2008 WL 4926008, at *8 (Tex. App.—Fort Worth 2008, no pet.) (m em. op.) (“But a former employee may not use confidential or proprietary information or trade secrets the employee learned in the course of employment for the em ployee’s own advantage and to the detrim ent of the em ployer.”); Bluebonnet Petroleum, Inc. v. Kolkhorst Petroleum Co., No. 14-07-00380-CV, 2008 WL 4527709, at *5 (Tex. App.—Houston [14 Dist.] 2008, pet. denied) (mem. op.) (“The issue, therefore, is whether the mere identity of the potential accounts with which Robinson was working when he left Bluebonnetis a trade secret, or even m erely proprietary information accorded sim ilar protection. To decide whether the inform ation qualifies as a trade secret we must consult the six factors listed above.”);SP Midtown, Ltd. v. Urban Storage, 114 Case 4:07-cv-00405 Document 450 Filed in TXSD on 02/19/10 Page 115 of 139
whenever “a person seeks to profit from the use of the secret.”42
Under Texas law, customer lists may be protected as trade secrets. See Sharma v.
Vinmar Int’l, Ltd., 231 S.W.3d 405, 425 & n.14 (Tex. App.—Houston [14th Dist.] 2007, no pet.) (collecting cases). But “[a] customer list of readily ascertainable names and addresses will not be protected as a trade secret.” Guy Carpenter & Co. v. Provenzale, 334 F.3d 459,
467 (5th Cir. 2003) (citing Gaal v. BASF Wyandotte Corp., 533 S.W.2d 152, 155 (Tex. Civ.
App.—Houston [14th Dist.] 1976, no writ)). 43 Texas courts consider three factors to
L.P., No. 14-07-00717-CV, 2008 WL 1991747, at *5 n.5 (Tex. App.—Houston [14 Dist.] 2008, pet. denied) (mem. op.) (“In its brief, Space Place argues the common law tort ofmisappropriation does not solely depend on the existence ofa trade secret. Essentially, Space Place argues a claim of misappropriation of confidential information can survive even if the information does not constitute a trade secret. We disagree. There is no cause of action for misappropriation of confidential inform ation that is not either secret, or at least substantially secret.”); Shoreline Gas, Inc. v. McGaughey, No. 13-07-364-CV, 2008 WL 1747624, at *7 (Tex. App.—Corpus Christi 2008, no pet.) (mem. op.) (“Examples of such legitimate, protectable interests [in a noncompete covenant] include business goodwill, trade secrets, and other confidential or proprietary information.”); TEX. JUR. Trademark § 54 (“There is no cause of actionfor misappropriation of confidential information that is not either secret or at least substantially secret.”). At least onecourt collapsed them under the heading “trade secret.” See Parker Barber & Beauty Supply, Inc. v. The Wella Corp., 03-04-00623-CV, 2006 WL 2918571, at *14 n.14 (Tex App.—Austin 2006, no pet.) (“The parties alternatively used each of these terms [trade secret and confidential and proprietary information] at various times. For ease, we will refer to such information simply as ‘trade secrets.’”).
42 Gen. Univ. Sys., Inc. v. HAL, Inc., 500 F.3d 444, 450 (5th Cir. 2007) (quoting Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 464 (Tex. App.—Austin 2004, nopet.)). “Use” is “any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant.” Id. at 451 (quoting RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 40). “Any misappropriation of trade secrets, followed by an exercise o f control and domination, is considered a com mercial use.” Carbo Ceramics, Inc. v. Keefe, 166 F. App’x 714, 721 (5th Cir. 2006) (unpublished) (citing Univ. Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 542 (5th Cir. 1974), andGarth v. Staktek Corp., 876 S.W.2d 545, 548 (Tex. App.—Austin 1994, writ dism’d)).
43 See Adco Indus. v. Metro Label Corp., No. 05-99-01128-CV, 2000 WL 1196337, at *4 (Tex. App.—Dallas 2000, no pet.) (not designated for publica tion) (affirming the trial court’s co nclusion that customer lists and other information were not tradesecrets because the defendant was able to purchase a new customer list and duplicate the process he followed at the plaintiff company to yield information); Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 602 (Tex. App.—Am arillo 1995, no writ) (affirming a temporary injunction preventing the use of a customer list even though “some information contained [in the list] may have been susceptible to discovery through independent investigation of public material” because “the record [did] not establish that the appellants so gathered it”); see also Inflight Newspapers, Inc. v.
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determine whether a customer list is a trade secret: “(1) what steps, if any, an employer has taken to maintain the confidentiality of a custom er list; (2) whether a departing employee acknowledges that the customer list is confidential; and (3) whether the content of the list is readily ascertainable.” Guy Carpenter & Co. v. Provenzale, 334 F.3d 459, 467 (5th Cir.
2003). In considering whether information was readily ascertainable, courts have considered the expense of compiling it. See Zoecon Indus. v. Am. Stockman Tag Co., 713 F.2d 1174,
1179 (5th Cir. 1983) (“Even if the names and addresses were readily ascertainable through trade journals as the defendants allege, the other inform ation could be com piled only at considerable expense.”). 44 Other Texas courts focus on the m ethod used to acquire the customer information. Even if the information is readily available in the industry, it will be protected if the competitor obtained it working for the former employer. See Brummerhop,
840 S.W.2d at 633; Am. Precision Vibrator Co. v. Nat’l Air Vibrator Co., 764 S.W.2d 274,
277 (Tex. App.—Houston [ 1st Dist.] 1988, no writ) (“In Texas, courts condem n the
Magazines In-Flight, LLC, 990 F. Supp. 119, 129–30 (E.D.N.Y. 1997) (holding that the plaintiff’s customer lists were not trade secrets because the customer identity could be easily found through publicly available means, such as the internet, trade shows, trade directories, and telephone books, or were imbedded in the defendant’s memory); Millet v. Loyd Crump, 96-CA-639, pp. 5–6 (La. App. 5 Cir. 12/30/96); 687 So. 2d 132, 136 (holding that the trial court erred in concluding that customer lists were trade secrets under the Uniform Unfair Trade Secrets Act becausethe defendant had monthly access to the files to complete an ongoing audit, the defendant could obtain client information when clients contacted her directly, and insurance companies and policy holders also had the information alleged to be confidential).
44 See also Crouch v. Swing Machinery Co., 468 S.W.2d 604, 607 (Tex. Civ. App.—San Antonio 1971, no writ) (“[T]here is evidence to the effect that the important information relates not to the identity of particular businesses which might purchase plaintiff’s products, but the identity of officers or other employees of such concerns who make the decisions concerning the purchaseof such equipment. There is also evidence which at least ten ds to show that ascertaining the identity of such key personnel requires the expenditure of considerable time and money.”). Courts have also considered the difficulty of compiling the customer list to determine whether it is confidential. See M.N. Dannenbaum, Inc. v. Brummerhop, 840 S.W.2d 624, 632 (Tex. App.—Houston [14th Dist.] 1992, writ denied).
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employment of improper means to procure trade secrets. The question is not, ‘How could he have secured the knowledge?’ but ‘How did he?’” (citations and internal quotation arksm omitted)), withdrawn and stayed on other grounds, 771 S.W.2d 562 (Tex. App.—Houston
[1st Dist.] 1989, no writ).45
Based on the evidence prese nted at the injunction hearing held in 2008, this court concluded that Rimkus’s client database, pricing information, and business plan were the type of information that courts had recognized as entitled to trade secret protection. Rimkus claims that its customer lists are trade secrets. The defendants argue that the Rimkus client- contact information is not a trade secret because it is publicly available in industry guides like the Louisiana Casualty Adjuster’s Guide and on the internet. But, as Rim kus points out, nearly all the individuals Bell and Cammarata solicited in November and December 2006 are not listed in the 2006 Louisiana Casualty Adjuster’s Guide. The record also shows that Bell did not have a copy of the Guide until after December 10, 2006, after he had sent multiple solicitation emails on behalf of U.S. Forensic. The full list of recipients of Bell’s December
1, 2006 solicitation email remains unknown. Bell submitted an affidavit showing that many of the insurance adjusters he sent marketing emails to in 2008 had their contact information available on the internet. But there is no evidence that the contact inform ation for these adjusters was available on the internet in 2006. Moreover, theclient-contact information Bell
45 See also Jeter v. Associated Rack Corp., 607 S.W.2d 272, 276 (Tex. Civ. App.—Texarkana 1980, writ ref’d n.r.e.) (“The fact that [the information the plaintiff claimed was confidential] might have been available on the open market is not determinative. The primary issue is whether the [defendants] engaged in a course of conduct to obtain access to confidential business information from the premises of [the plaintiff], without permission in order to facilitate the forming of their new corporation.”).
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was able to find on the internet in 2008 does not account for all the Rimkus clients Bell and
Cammarata emailed in Novem ber and Decem ber 2006. The record shows that Bell and
Cammarata sent multiple solicitation emails on behalf of U.S. Forensic in the first few weeks and months of operation. Nearly all the solicitation emails recovered by Rimkus were sent by Bell or Cammarata to individuals with whom they worked while at Rimkus. The record raises fact issues as to whether the contact information for the clients U.S. Forensic solicited in late 2006 was publicly available and whether the defendants obtained it from client lists and similar information they took from Rimkus.
The defendants’ argum ent that Rim kus’s pricing inform ation is not a trade secret because Rim kus shares that inform ation with its prospective or actual clients is also unpersuasive. Disclosure does not destroy the protection given to a trade secret if, when it is disclosed, the owner of that secret obligates the party receiving it not to disclose or use it.
See Taco Cabana Int’l, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1123–24 (5th Cir. 1991)
(holding that the plaintiff’s disclosure to contractors of the architectural plans for its restaurants did not extinguish the confidential nature of those plans);see also Metallurgical
Indus. Inc. v. Fourtek, Inc., 790 F.2d 1195, 1200 (5th Cir. 1986) (trade secrets rem ained confidential when they were disclosed only to businesses with whom the plaintiff dealt with the expectation of profit). Rim kus did not publicly a nnounce its pricing inform ation, particularly not to its com petitors. Inst ead, Rim kus disclosed the inform ation only to prospective or actual clients and did not reveal how the prices charged to one compared with prices charged to others. Even if Rimkus gave its clients pricing information, Rimkus took
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steps to prevent competitors from learning it. Rimkus’s pricing information, which Rimkus safeguards and which would give a com petitor an advantage, is entitled to trade secret protection. The record raises disputed fact issues m material to determ ining whether the defendants took Rimkus pricing information and used it on behalf of U.S. Forensic.
The record also raises fact issues material to determining whether the defendants took or used Rimkus business plan information, Rimkus financial information, and other Rimkus information. Bell forwarded himself an email containing confidential Rimkus income/loss statements. Bell downloaded other Rimkus financial information from the Rimkus server to his work laptop on the day he resigned. Cammarata emailed himself Rimkus reports. Bell and Cammarata obtained a Rimkus powerpoint from a former Rimkus client and used it in their work for U.S. Forensic. And Cam marata retained m ultiple boxes of docum ents containing Rimkus information and only recently disclosed the existence of these materials.
The evidence in the record raises disputed fact issues precluding summary judgment on the misappropriation claim. The defendants’ m otion for summary judgment on this claim is denied.
2. Breach of Fiduciary Duty
Rimkus alleges that Bell breached his fiduciary duty as an officer of Rim kus by preparing to form U.S. Forensic before heleft Rimkus, misappropriating confidential Rimkus information, and soliciting Rim kus custom ers and em ployees. Under Texas law, the elements of a breach of fiduciary duty claim are: (1) the plaintiff and defendant had a fiduciary relationship; (2) the defendant breached its fiduciary duty to the plaintiffs; and
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(3) the defendant’s breach resulted in injury to the plaintiff or benefit to the defendant.
Navigant Consulting, Inc. v. Wilkinson, 508 F.3d 277, 283 (5th Cir. 2007);see also Jones v.
Blume, 196 S.W.3d 440, 447 (Tex. App.—Dallas 2006, pet. denied). An em ployee may prepare to go into com petition with his em ployer—before resigning—without breaching fiduciary duties owed to that employer. Navigant Consulting, Inc., 508 F.3d at 284.46 But an employee “may not appropriate his em ployer’s trade secrets” or “carry away certain information, such as lists of customers.” Id. at 284 (quotingJohnson v. Brewer & Pritchard,
P.C., 73 S.W.3d 193, 202 (Tex. 2002)). InNavigant Consulting, the court concluded that the defendant’s disclosure of detailed business information to competitors, “including revenue projections, backlog estim ates, margin rates, [and] descriptions of current and potential engagements,” was part of the defendant’s breach of fiduciary duty. Id. at 286.
Contrary to Rimkus’s argument, the evidence of Bell’s preparations to form Rimkus does not, as a m atter of law, provide a basis for a breach of fiduciary duty claim . The evidence of misappropriation does, however, raise disputed fact iissues as to whether Bell breached his fiduciary duty to Rimkus by misappropriating confidential, proprietary, or trade secret information obtained while he was an officer of Rimkus and by using that information
46 Ameristar Jet Charter, Inc. v. Cobbs, 184 S.W.3d 369, 374 (Tex. App.—Dallas 2006, no pet.) (no breach of fiduciary duty when an employee formed a competing business while still employed but did not actually compete with the employer until he resigned); Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 510 (Tex. App.—Houston [1st Dist.] 2003, no pet.) (“An at-will em ployee may properly plan to com pete with his employer, and may take active steps to do so while still employed. The employee has no general duty to disclose his plans and may secretly join with other employees in the endeavor without violating any duty to the employer.” (citation omitted)); see id. at 511 (“To form his own company, Arizpe had to incorporate or otherwise establish a business entity , obtain perm its, and obtain insurance. These were p ermissible preparations to compete, not breaches of fiduciary duty.”).
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to solicit Rim kus customers and com pete against Rim kus. Bell’s m otion for sum mary judgment on this aspect of the breach of fiduciary duty claim is denied.
3. Disparagement
In the am ended complaint, Rimkus alleged that Bell m ade disparaging statem ents about Rimkus to third parties, causing harm to its reputation and a loss of business. Bell argues that there is no evidence in the record to support Rimkus’s disparagement claim. In its initial response to Bell’s summary judgment motion, Rimkus conceded that, at the time, it had no proof that Bell disparaged Rimkus. (Docket Entry No. 321 at 24). Rimkus asserted that it lacked such evidence because Bell had deleted em ails and asked this court to delay ruling on the summary judgment motion until “after the dust settle[d] regarding the email production.” (Id.).
On August 24, 2009, Rim kus filed a supplem ental brief and evidence, including previously undisclosed emails that were belatedly produced pursuant to court order. Rimkus contends that these emails provide evidence of disparagement. Rimkus “believes there are similar documents which Mr. Bell has destroyed and . . . has not produced.” (Docket Entry
No. 374 at 2). Bell replies that Rim kus still lacks evidence to support any elem ents of a business disparagement claim. (Docket Entry No. 377 at 4–6).
Rimkus relies on two email exchanges between Bell and individuals who worked for
Rimkus clients who had worked with Bell while he was at Rimkus.47 The first email, sent
47 Rimkus also submitted email conversations between Bell and other Rim kus employees that allegedly contain disparaging comments. A plaintiff alleging business disparagement must prove that false statements of fact were made to third parties. Advanced Modular Power Sys., Inc. v. E-One N.Y., Inc., No. 01-06-00607-
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on November 5, 2007, states that Bell and other engineers left their “old com panies” to
“create a sm aller, honest, cost effective engineering alternative for the insurance claim s industry that responds to the needs of the clients in terms of cost and timeliness of reports.”
(Docket Entry No. 371; Docket Entry No. 374, Ex. U). Rimkus argues that this sentence is disparaging because it “suggests rather pointedly that Rim kus is neither honest nor cost effective.” (Docket Entry No. 374 at 3). Rimkus argues that it is clear Bell is referring to
Rimkus because he closes the em ail by st ating, “I hope we can work together again.”
(Docket Entry No. 371; Docket Entry No. 374, Ex. U). The second email, which Bell sent to a Rimkus client on August 1, 2007, states: “We have never been a target of the media, the plaintiff’s bar, or investigated by a government entity.” (Docket Entry No. 372; Docket Entry
No. 374, Ex. Z). Bell continues: “[W]e are currently being used by attorneys for [Client] that appreciate the difference between us and the big clearinghouse engineering firm s.” (Id.).
Rimkus argues that this em ail is disparaging because it “im pl[ies] that Rim kus has done something wrong since it has been discussed in the news, that it has been sued – without doubt by a plaintiff, or that the work of its engineers was investigated in the aftermath of
Hurricane Katrina.” (Docket Entry No. 374 at 6).
Under Texas law, business disparagement requires publication by the defendant of statements that are false, maliciously stated, not privileged, and result in special dam ages.
C.P. Interests, Inc. v. Cal. Pools, Inc., 238 F.3d 690, 694–95 (5th Cir. 2001); see KLN Steel
CV, 2008 WL 963007, at *4(Tex. App.—Houston [1 Dist.] 2008, no pet.) (mem. op.) (“The false statement of fact must be published to a third party.”). These emails do not support the disparagement claim.
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Prods. Co. v. CNA Ins. Cos., 278 S.W.3d 429, 438 n.8 (Tex. App.—San Antonio 2008, pet. denied) (“[A] business disparagem ent claim . . . requires proof of four elem ents: (1) the defendant published a false, defamatory statement of fact about the plaintiff, (2) with malice,
(3) without privilege, (4) that resulted in special damages to the plaintiff.” (citingForbes Inc. v. Granada Biosciences, Inc., 124 S.W.3d 167, 170 (Tex. 2003))). Unlike defam ation, a claim for business disparagem ent always requires a plaintiff to prove actual m alice. See
Hurlbut v. Gulf Atl. Life Ins. Co., 749 S.W.2d 762, 766 (Tex. 1987). A plaintiff must show that the defendant knew its statements were false or acted with reckless disregard for their falsity; acted with ill will or with an intent to interfere in the plaintiff’s economic interests; and had no privilege to do so. Id. To prove special dam ages, a plaintiff m ust provide evidence “that the disparaging com munication played a substantial part in inducing third parties not to deal with the plaintiff, resultingin a direct pecuniary loss that has been realized or liquidated, such as specific lo st sales, loss of trade, or loss of other dealings.” Astoria
Indus. of Iowa, Inc. v. SNF, Inc., 223 S.W.3d 616, 628 (Tex. App.—Fort Worth 2007, pet. denied); see also Johnson v. Hosp. Corp. of Am., 95 F.3d 383, 391(5th Cir. 1996); Hurlbut,
749 S.W.2d at 767.
The record, including the recently produced emails, as a matter of law fails to show any basis to find disparagem ent. “To support a claim for business disparagem ent, the published statements must be, at a m inimum, defamatory.” Granada Biosciences, Inc. v.
Forbes, Inc., 49 S.W.3d 610, 616 (Tex. App.—Houston [14 Dist.] 2001, pet. granted), rev’d on other grounds, 124 S.W.3d 167 (Tex. 2003). “[T] o maintain an action for an alleged
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defamatory statement, it must appear that [the plaintiff] is the person with reference to whom the statement was made.” Kaufman v. Islamic Soc’y of Arlington, 291 S.W.3d 130, 144 (Tex.
App.—Fort Worth 2009, pet. denied) (quoting Newspapers, Inc. v. Matthews, 339 S.W.2d
890, 893 (Tex. 1960)). “It is ‘not necessary that the individual referred to be named if those who knew and were acquainted with the plaintiff understand from reading the publication that it referred to [the] plaintiff’; however, the ‘settled law requires that the false statement point to the plaintiff and to no one else.’”Id. (alteration in original) (quotingMatthews , 339
S.W.2d at 894). Whether a plaintiff is referred to in a statement is “a question of law for the court.” Ledig v. Duke Energy Corp., 193 S.W.3d 167, 180 (Tex. App.—Houston [1st Dist.]
2006, no pet.). A “claimed implication” is insufficient to refer to a defamation plaintiff when it is not consistent with the “plain language” and the “full import” of a defendant’s statement.
Matthews, 339 S.W.2d at 894.
Rimkus’s argument that the emails clearly refer to it and it alone as a dishonest and expensive engine ering firm involved in lawsuits and governm ent investigations is unpersuasive. The November 5, 2007 email begins by stating that a “group of us from three different engineering firms left our oldcompanies and formed U.S. Forensic.” (Docket Entry
No. 371; Docket Entry No. 374, Ex. U) (emphasis added). Bell refers to U.S. Forensic as an
“alternative” for the insurance industry and then states that we would put “our guys’ experience up againstanyone else.” (Id.) (emphasis added). The August 1, 2007 email states that attorneys for clients of U.S. Forensic “appreciate the difference between us and the big clearinghouse engineering firms.” (Docket Entry No. 372; Docket Entry No. 374, Ex. Z)
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(emphasis added). Bell does not name Rimkus or any other engineering firm in these emails.
The content and context of these emails show that the purpose of the challenged statements was to highlight the difference between U.S. Forensic and large forensic engineering firms in general, including but not limited to Rimkus. A reasonable reader, including a Rimkus client, would not autom atically a ssociate these statem ents with Rim kus and ignore the reference to m ultiple engineering firm s and com panies in general. There is no basis to conclude that the implications of Bell’s statements “point to [Rimkus] and to no one else.”
In addition, there is no evidence in the record of specia l damages.48 There is no evidence that any of the allegedly disparaging statements played a substantial part in causing third parties not to do business with Rim kus. Rimkus does not assert that it has lost any specific client as a result of Bell’s disparaging statements.
This court’s rulings on spoliation do not change this analysis. The evidence in the record does not show that em ails deleted by the defendants would be relevant to the disparagement claim or that Rim kus has been prejudiced in its ability to litigate the disparagement claim because of the defendants’ spoliation. The emails Rim kus relies on—dated Novem ber 5, 2007 and August 21, 2007—do not provide evidence of disparagement. There is no basis to conclude that any of the unrecovered em ails would contain anything different than the emails Rimkus already has in its possession. Summary
48 For this reason, Rimkus’s supplemental response to the defendants’ summary judgment motion, which contains other similar emails, do not raise a fact issue as to disparagement. (Docket Entry No. 389, Ex. K; Docket Entry No. 392). There is no evidence that thesending of these emails caused Rimkus to suffer special damages.
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judgment is granted on the disparagement claim.
4. Rimkus’s Damages for Breach of the Noncompetition and Nonsolicitation Covenants
Cammarata moved for summary judgment on Rimkus’s claim for damages for the alleged breach of the covenants not to compete and not to solicit customers. Cammarata cites
Texas Business and Commercial Code § 15.51(c) for the proposition that when, as in this case, the court finds that the covenant’s limitations as to time, geographical scope, and the activity to be restrained are unreasonable and greater than necessary to protect the employer’s business interests, damages for breach are only available after the court reforms the covenant.
Cammarata argues that because this court has not reform ed the covenants and the noncompetition period has expired, Rimkus is not entitled to damages for any alleged breach of the covenants not to compete and not to solicit customers.
Rimkus responds that § 15.51(c) does not foreclose dam ages in this case but only requires that reform ation of the noncom petition covenant precede any dam ages award.
Rimkus contends that this court may reform the covenant and award Rimkus damages for breach of the reform ed covenant. Rim kus argues that “the source of . . . dam ages for
Cammarata’s breach of his covenant not to compete is not merely statutory, but contractual as well.” (Docket Entry No. 324 at 52).
Rimkus’s argument that it may rely on the Employment Agreement as a source of its damages, even if the contractual noncom petition clause is overbroad under § 15.51, is unpersuasive. Unde r Texas law, “the procedures and rem edies in an action to enforce a
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covenant not to compete provided by Section 15.51 of [the Texas Business and Commerce
Code] are exclusive and preempt any other criteria for enfor ceability of a covenant not to compete or procedures and remedies in an action to enforce a covenant not to compete under common law or otherwise.” TEX. BUS. & COM. CODE § 15.52 (emphasis added). Under this provision, remedies for breach of a covenant not to com pete are lim ited to the rem edies available under § 15.51(c). See Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 644
(Tex. 1994) (“Section 15.52 makes clear that the Legislature intended the Covenants Not to
Compete Act to largely supplant the Texas common law relating to enforcement of covenants not to compete. Thus, we apply the Covenants Not to Compete Act to the facts of this case, in lieu of ‘any other criteria for enforceability ofa covenant not to compete or procedures and remedies in an action to enforce a covenant not to com pete under com mon law or otherwise.’”), abrogated in part on other grounds by Sheshunoff Mgmt. Servs, L.P. v.
Johnson, 209 S.W.3d 644, 651 (Tex. 2006); Perez v. Tex. Disposal Sys., Inc., 103 S.W.3d
591, 593–94 (Tex. App.—San Antonio 2003, pet. denied) (“Just as the Act’s criteria for enforcing a covenant not to compete preempt other law, so do the remedies provided under the Act.”). Rimkus may only seek damages under § 15.51(c).
Rimkus is not entitled to dam ages under § 15.51(c) for Cam marata’s allealleged breach of the noncom petition and nonsolicitation covenants. That section “precludes a damages award for conduct prior to any necessary reformation of the scope of the covenant.”
Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 855 (Tex. 2009)
(Hecht, J., concurring); see also Safeworks, LLC v. Max Access, Inc., No. H-08-2860, 2009
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WL 959969, at *5 (S.D. Tex. Apr. 8, 2009) (“If a court reforms a covenant not to compete in order to m ake it reasonable and enforceable, ‘the court m ay not award the prom isee damages for a breach of the covenant before its reform ation and the relief granted to the promisee shall be limited to injunctive relief.’” (quoting TEX. BUS. & COM. CODE § 1551(c)));
Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381, 388 (Tex. 1991) (“Since MH obtained no reformation of the covenant before Haass’ actions for which it sought damages, [Texas
Business & Commerce Code § 15.51] would prohibit MH from obtaining damages.”); Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 796 (Tex. App.—Houston [1st Dist.] 2001, no pet.) (“Applying section 15.51 to this case, once the trial judge reform ed the covenant, money dam ages were precluded. No dam ages can be awarded for breach prior to the reformation; after reformation, the current injunction was in place preventing ReGlaze from competing with, and thus, harm ing Arrow.”). “If the covenant m eets the c riteria for enforceability set forth in Section 15.50, a court may award an employer damages, injunctive relief, or both damages and injunctive relief. If the covenant not to compete does not meet the Section 15.50 criteria and the trial court reforms the covenant, a court m ay award an employer injunctive relief only.” Perez v. Tex. Disposal Sys., Inc., 53 S.W.3d 480, 482 (Tex.
App.—San Antonio 2001, pet. granted), rev’d on other grounds, 80 S.W.3d 593 (Tex. 2002).
On August 13, 2008, afte r a n extensive evidentiary hearing, this court held that
“[b]ecause the Em ployment Agreem ent covers m any areas outside Louisiana where
Cammarata did not work while employed by Rimkus, under Texas law the noncompetition covenant is broader in geographical scope than necessary to protect Rim kus’s legitimate
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business interests.” (Docket Entry No. 159, August 13, 2008 Memorandum and Opinion at
36). This court concluded that “to be r easonable, the geographic range of a reform ed noncompetition covenant would be limited to certain cities in Mississippi and Florida.” Id.( at 37). With respect to the nonsolicitation covenant, this court concluded that “[b]ecause the covenant not to solicit customers extends to all Rimkus clients, the covenant is broader than necessary to protect Rimkus’s legitimate business interest in protecting its client base and is unenforceable.” ( Id. a t 46). The record before this court did not “support this court’s reformation of the nonsolicitation covenant” to include Louisiana because “Cam marata’s work for Rimkus involved primarily Louisiana clients and the nonsolicitation prohibition is unenforceable in Louisiana.” (Id.). Because Rimkus had delayed in seeking an injunction and the period for injunctive relief had expired, this court did not exte nd or reform the noncompetition or nonsolicitation covenants. ( Id. at 37, 42). Rimkus’s m otion for a preliminary injunction to enforce the covenants was denied. (Id. at 46).
Under § 15.51(c), the cases interpreting it, and the evidence in this record, Rimkus is not entitled to dam ages for Cam marata’s alleged breach of the noncom petition and nonsolicitation covenants in his Employment Agreement. Cammarata’s motion for summary judgment on Rim kus’s claim for dam ages for breach of the noncompetition and nonsolicitation covenants is granted.
5. Tortious Interference
The defendants argue that Rimkus’s tortious interference claim fails because there is no evidence of a contract with which the defendants interfered. According to the defendants,
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Rimkus does not have a contractual relationship with its clients but rather operates on a job- to-job basis with each client. The defendants assert that none of Rimkus’s clients use it for forensic engineering services on an exclusive basis. The clients are free to use a different forensic engineering firm whenever they choose. The defendants also contend that Rimkus’s tortious interference claims fail because there is no evidence in the record that the defendants acted willfully or in tentionally to interfere with any existing Rim kus contractual or prospective business relationship. Rimkus responds that it “enters into a contract with each one of its clients that governs the terms and conditions upon which Rimkus will perform its work.” (Docket Entry No. 324 at 43–44). Rimkus contends that the evidence in the record shows that the defendants emailed and contacted Rimkus clients after leaving to form U.S.
Forensic, knowing that “their interference with those clients would result in Rimkus [losing] the relationship with the client.” (Id. at 44). Rimkus also argues that it need not show loss of an existing client because a defendant m ay be liable for tortious interference with prospective business relations. (Id.).
To establish tortious interference with an existing contract, a plaintiff ustm show: “(1) an existing contract subject to interference, (2) a willful and intentional act of interference with the contract, (3) that proxim ately caused the plaintiff’s injur y, and (4) caused actual damages or loss.” Prudential Ins. Co. of Am. v. Fin. Review Servs., Inc., 29 S.W.3d 74, 77
(Tex. 2000); see also Amigo Broad., LP v. Spanish Broad. Sys., Inc., 521 F.3d 472, 489 (5th
Cir. 2008). The party alleging tortious interference has the burden of proving each element of the claim. Dunn v. Calahan, No. 03-05-00426-CV, 2008 WL 5264886, at *3 (Tex.
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App.—Austin Dec. 17, 2008, pet. denied) (me m. op.). A cause of action for tortious interference with a contract will not lie in the absence of a contract. Ski River Dev., Inc. v.
McCalla, 167 S.W.3d 121, 140 (Tex. App.—Waco 2005, pet. denied); S&A Marinas, Inc. v. Leonard Marine Corp., 875 S.W.2d 766, 768 (Tex. App.—Austin 1994, writ denied).
A plaintiff alleging tortious interference with contract must produce some evidence that the defendant knowingly induced one of th e contracting parties to breach its contract obligations. See John Paul Mitchell Sys. v. Randalls Food Mkts., Inc., 17 S.W.3d 721, 730
(Tex. App.—Austin 2000, pet. denied); Davis v. HydPro, Inc., 839 S.W.2d 137, 139–40
(Tex. App.—Eastland 1992, writ denied); see also Dunn, 2008 WL 5264886, a t *3. The plaintiff must present evidence that a contract provision was breached.See N.Y. Life Ins. Co. v. Miller, 114 S.W.3d 114, 125 (Tex. App.—Austin 2003, no pet.); Archives of Am., Inc. v.
Archive Litig. Servs., Inc., 992 S.W.2d 665, 667–68 (Tex. App.—Texarkana 1999, pet. denied). Ge neral claims of interference with a business relationship are insufficient to establish a tortious interference with contract claim. See Playboy Enters., Inc. v. Editorial
Caballero, S.A. de C.V., 202 S.W.3d 250, 265 (Tex. App.—Corpus Christi 2006, pe t. denied).
Rimkus has failed to present or identify evidence that could support an inference that the defendants tortiously interfered with an existing contract between Rimkus and a client.
Rimkus has not identified a written or an enforceable oral contract with a client with which the defendants interfered. There is no evidence tha t Rimkus’s customers or clients had a contractual obligation to continue using Rimkus’s services. Nor is there evidence that the
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defendants induced any Rim kus customer or client to breach any such obligation under a contract with Rimkus. The defendants’ motion for summary judgment on Rimkus’s claim for tortious interference with existing contracts is granted.
Tortious interference with contract and tortious interference with prospective business relations are separate causes of action. Wal-Mart Stores, Inc. v. Sturges, 52 S.W.3d 711,
716–21, 725, 727 (Tex. 2001). To establish a claim for tortious interference with prospective business relations, the plaintiff must prove that: (1) there was a reasonable probability that the plaintiff would have entered into a contract; (2) the defendant committed an intentional act, with the purpose of harming the plaintiff; and (3) actual harm or damage resulted from the defendant’s interference, i.e., that the defendant’s actions prevented the relationship from occurring. See Bradford v. Vento, 48 S.W.3d 749, 757 (Tex. 2001);Martin v. Kroger Co., 65
F. Supp. 2d 516, 563 (S.D. Tex. 1999). The plaintiff must show that the defendant’s conduct was either independently tortious or unlawful, that is, that the conduct violated som e other recognized tort duty. See Sturges, 52 S.W.3d at 726;Astoria Indus. of Iowa, Inc. v. SNF, Inc.,
223 S.W.3d 616, 632 (Tex. App.—Fort Worth 2007, pet. denied). The “prevented the relationship from occurring” elem ent requires “at m inimum, that the tortious conduct constitute a cause in fact that prevented the prospective business relationship from coming to fruition in the form of a contractual agreem ent. The test for cause in fact, or ‘but for causation,’ is whether the act or om ission was a substantial factor in causing the injury
‘without which the harm would not have occurred.’”COC Servs., Ltd. v. CompUSA, Inc., 150
S.W.3d 654, 679 (Tex. App.—Dallas 2004, pet. filed) (quotingDoe v. Boys Clubs of Greater
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Dallas, Inc., 907 S.W.2d 472, 477 (Tex. 1995)).
Rimkus relies on the alleged misappropriation of trade secrets by the defendants as the independently tortious act required for a claim of tortious interference with prospective business relations. Misappropriation of trade secrets is a common-law tort cause of action under Texas law. Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 463
(Tex. App.—Austin 2004, pet. denied). Rimkus has alleged that the defendants committed an independently tortious act. The evidence in the record, however, does not raise a fact issue material to determining whether the defendants’ actions prevented a contractual relationship between Rimkus and a customer from forming.
A plaintiff seeking to recover for tortious interference with prospective business relationships must establish proximate causation and dam ages with evidence rising above mere suspicion or speculation. See B. Cantrell Oil Co. v. Hino Gas Sales, Inc., 756 S.W.2d
781, 784 (Tex. App.—Corpus Christi 1988, no writ), superseded by statute on other grounds.49 Absent som e evidence that the defendants’ actions prevented Rim kus from entering into a business relationship with clients who instead did business with the defendants,
Rimkus cannot raise a fact issue as to its claim for tortious inte rference with prospective business relations. Rimkus does not identify a ny evidence of a client with which it would have done business but for the defendants’ conduct. There is no evidence in the summary
49 See also Slaughter-Cooper v. Kelsey Seybold Med. Group P.A., 379 F.3d 285, 292 (5th Cir. 2004) (doctor who had been terminated from a clinic failed to establish that she suffered actual harm or damage when the tortious interference with prospective business relations claim rested on the speculative contention that her patients would have “sought her out” once she opened her own practice four months later had the clinic not represented to former patients that she had resigned to pursue other professional interests).
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judgment record that the defendants’ competition against Rimkus, use of Rimkus’s business information, or solicitation of Rim kus clients resulted in that clie nt giving business to the defendants that it would otherwise have give n to Rimkus. Summa ry judgment is granted dismissing Rimkus’s claim for tortious interference with prospective bubusiness relations.
6. Unfair Competition and Civil Conspiracy
Civil conspiracy is defined as “a combination of two or more persons to accomplish an unlawful purpose, or to accom plish a lawful purpose by unlawful m eans.” Tilton v.
Marshall, 925 S.W.2d 672, 681 (Tex. 1996); Schlumberger Well Surveying Corp. v. Nortex
Oil & Gas Corp., 435 S.W.2d 854, 856 (Tex. 1968). “Unfair competition under Texas law
‘is the umbrella for all statutory and nonstatu tory causes of action arising out of business conduct which is contrary to honest practice in industrial or com mercial matters.’” Taylor
Publ’g Co. v. Jostens, Inc., 216 F.3d 465, 486 (5th Cir. 2000) (quotingAm. Heritage Life Ins.
Co. v. Heritage Life Ins. Co., 494 F.2d 3, 14 (5th Cir.1974)). This tort requires a plaintiff to show that the defendants engaged in an illegal act that interfered with the plaintiff’s ability to conduct its business. Id. “Although the illegal act need not necessarily violate criminal law, it must at least be an independent tort.” Id.
The defendants argue that Rimkus’s claims for unfair competition and civil conspiracy fail as a matter of law because there is no underlying tort liability. Unfair competition and civil conspiracy are derivative torts. See Meadows v. Hartford Life Ins. Co., 492 F.3d 634,
640 (5th Cir. 2007) (civil conspira cy); Taylor Publ’g Co., 216 F.3d at 486 (unfair competition). Because Rim kus’s claim for m isappropriation of trade secrets survives
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summary judgment, the defendants’ argument is moot.
The defendants also argue that the civil conspiracy claim fails because “there is no evidence of any collusion or agreem ent between Mr. Cam marata, Mr. Bell and/or U.S.
Forensic.” (Docket Entry No. 309-2 at 61). This argument is unpersuasive. The record raises fact issues as to whether the defendants agreed to take confidential information from Rimkus to use on behalf of U.S. Forensic. Summary judgment is denied on the conspiracy and unfair competition claims.
VI. The Cross-Motions for Summary Judgment on the Defendants’ Counterclaims for Attorneys’ Fees
Cammarata and Bell counterclaimed for attorneys’ fees under § 15.51 of the Texas
Business and Com merce Code. See TEX. BUS. & COM. CODE § 15.51(c). Under this provision, a court may award costs and attorneys’ fees incurred by an employee in defending an action to enforce covenants not to compete and covenants not to solicit clients if:
(a) the primary purpose of the agreement to which the covenant is ancillary is to obligate the promisor to render personal services;
(b) the em ployer knew, at the tim e the agreem ent was executed, that the agreement did not contain reasonable lim itations as to time, geographical area, and scope of activity to be restrained;
(c) the limitations were unreasonable; and
(d) the em ployer sought to enforce th e agreem ent to a greater extent than necessary to protect its goodwill or business interests.
See id. Rimkus has moved for summary judgment on both counterclaims. Cammarata has also moved for summary judgment on his counterclaim for attorneys’ fees.
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A. Bell’s Counterclaim
Rimkus argues that Bell is not entitled to attorneys’ fees under this statute as a matter of law. When Rimkus filed this suit, it sought to enforce the covenants not to compete and not to solicit clients contained in the July 14, 2005 Com mon Stock Purchase Agreem ent between Rimkus and Bell. The Agreement states in pertinent part:
WHEREAS, for good a nd valuable consideration, the Corporation and the Shareholders have agreed to impose certain restrictions on said capital stock; and
WHEREAS, the Shareholders mutually agree that it is to their mutual benefit and in the best interests of the Corporation to restrict the assignability of the capital stock of the Corporation, to provide for the control and disposition of the Corporation, to provide for the orderly transition of ownership in the event of death, disability or retirem ent of a Shareholde r or other termination of a Shareholder’s interest in the Corporation, to provide for the purchase of a Shareholder’s capital stock under specified conditions and to provide the funds necessary to carry out such purchases.
NOW, THEREFORE, in consideration of the mutual agreements contained herein and for other va luable consideration, the sufficiency and receipt of which is hereby acknowledged, it is mutually agreed by and among the parties to this Agreement as follows . . . .
(Docket Entry No. 302, Ex. 1 at 1). Rim kus asserts that the prim ary purpose of this
Agreement was to place conditions on the sale of Rimkus stock to Bell, not to obligate Bell to render personal services.
Bell responds that Rimkus never sold stock to him. Instead, John Culberson sold Bell the stock. Bell contends that because Rimkus itself did not provide consideration in the form
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of stock for this Agreement, “it can be argued that the primary purpose of the Stock Purchase
Agreement was to obligate [him] to render personal services in the form of the covenant not to compete contained in the Stock Agreement.” (Docket Entry No. 317 at 2).
Bell’s argument is unpersuasive. The primary purpose of the Agreement was not to obligate Bell to work for Rimkus but to place restrictions on the ownership and transferability of the stock Bell was acquiring. The language of the Agreem ent shows that the prim ary purpose was not to obligate Bell to render services to Rimkus. Section 1551(c) states that it applies only if the primary purpose of the agreem ent is to obligate the prom isor to render personal services. Summary judgment is granted dismissing Bell’s counterclaim.
B. Cammarata’s Counterclaim
Rimkus arargues that Cam marata is not entitled to attorneys’ fees under § 15.51(c) because there is no evidence that Rimkus knew that the limitations on time, geographic area, and scope of activity were unreasonable when Cam marata’s Employment Agreement was executed. Rimkus contends that Cammarata has failed to establish that Rimkus knew or was on notice that these covenants were unreasonable. Rimkus cites In re Nolle, 265 S.W.3d 487
(Tex. App.—Houston [ 1st Dist.] 2008, orig. pro ceeding), for the proposition that for an employer to be liable for fees under § 15.51(c), a c ourt or fact finder m ust have first determined that the noncompetition and nonsolicitation covenants were unenforceable.
Cammarata argues that Rimkus was aware of the case law, which was clear in 1996, that an employer cannot enforce a noncompetition agreement against an employee outside the geographical area in which that employee actually worked. Cammarata contends that Rimkus
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knew in 1996 that it had eight offices in four different states and that as a result, Rimkus knew that Cammarata “would never be able to work in every geographical area in which Plaintiff had performed five (5) jobs in the five (5) previous years.” (Docket Entry No. 322 at 10).
Cammarata contends that although Rimkus knew such a limitation was unreasonable, Rimkus required him to sign an em ployment agreem ent restricting postem ployment com petition outside the areas where Cammarata would work during his employment.
Cammarata’s argume nt that Rim kus knew in 1996 that the covenants were unenforceable is not persuasive. Evidence that Rim kus knew about Cam marata’s responsibilities and location is insufficient to establish that Rim kus knew that the noncompetition and nonsolicitation provisions of the Agreem ent contained unreasonable prprovisions. Although Texas case law on noncom petition and nonsolicitation restrictions was clear in 1996, there is no evidence that Rimkus knew that the relevant provisions of
Cammarata’s Employment Agreement were unreasonable under Texas law. See Safeworks,
LLC v. Max Access, Inc., No. H-08-2860, 2009 WL 959969, at *7 (S.D. Tex. Apr. 8, 2009)
(granting summary judgment on a claim for attorneys’ fees under § 15.51 because even though Texas law was clear, there was “no evidence that Safeworks representatives actually knew that the relevant non-solicitation provisions were unreasonable under Texas law”). The reasonableness of the limits in part depended on Cammarata’s work during his employment with Rimkus. Ca mmarata has failed to raise a disputed fact issue m aterial to determining whether Rimkus knew in October 1996 that the posttermination restrictions on competition in his Employment Agreement were unreasonable. This court grants Rim kus’s motion for
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summary judgment dismissing Cammarata’s counterclaim. Cammarata’s motion for summary judgment to recover on his counterclaim is denied.
VII. Conclusion
Rimkus’s motions for sanctions are granted in part and denied in part. Rimkus is not entitled to an order striking the defendants’ pleadings and entering a default judgment. Based on the defendants’ spoliation of evide nce, Ri mkus is entitled to an adverse inference instruction at tr ial. Rim kus is also entitled to the reasonable costs and fees it incurred in investigating the spoliation, obtaining emails via third-party subpoenas, moving for sanctions, and taking the additional depositions of Bell and Cammarata. By March 1, 2010, Rimkus will submit evidence of the costs and attorneys’ fees.
The defendants’ motion for summary judgment is granted in part and denied in part.
Summary judgm ent is grante d dismissing Rim kus’s claim s for disparagem ent, tortious interference, and damages for breach of the noncompetition and nonsolicitation provisions.
Summary judgment is denied on Rimkus’s claims for misappropriation of trade secrets, breach of fiduciary duty to the extent it is based on misappropriation, unfair competition, and civil conspiracy. With respect to the counterclaim for attorneys’ fees, Cam marata’s motion for summary judgment is denied and Rimkus’s motions for summary judgment are granted. A status conference is set for February 26, 2010, at 10:00 a.m.
SIGNED on February 19, 2010, at Houston, Texas.
______Lee H. Rosenthal United States District Judge
139 Case 8:06-cv-02662-MJG Document 377 Filed 09/09/10 Page 1 of 89
THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND * VICTOR STANLEY, INC. * Civil No. MJG-06-2662
Plaintiff, *
v. *
CREATIVE PIPE, INC., ET AL. *
Defendants. *
* * * * * * * * * * * * *
MEMORANDUM, ORDER AND RECOMMENDATION
This Mem orandum, Or der and R ecommendation addresses Plaintiff’s Motion For
Terminating And Other Sanctions Arising Out Of Defe ndants’ Intentional Destruction Of
Evidence And Other Litigation Misconduct (“Pl.’s Mot.”), E CF1 No. 341, which Plaintiff Victor
Stanley, Inc. (“VSI”) filed; Plaintiff’s Supplem ental Mem orandum Relating To Possible
Misconduct By Others That Contributed To Defe ndants’ Spoliation Of Evidence, ECF No. 342;
Defendants Creative Pipe, Inc. (“CPI”) And Mark Pappas’ Opposition To Vi ctor Stanley, Inc.’s
Motion For Sanct ions (“Defs.’ Opp’n”), ECF No. 35 0; Pl aintiff’s Repl y t o Defendant s’
Opposition, ECF No. 368; and Defendants’ Surreply, ECF No. 372.2
1 Court papers form erly were cited as “Paper No.” or “ Doc. No.” The recently-published Nineteenth Edition of The Bluebook provides that electronically-filed documents should be cited as “ECF No.”
2 On December 8, 2006, in accordance with 28 U.S.C. § 636 and Local Rules 301 and 302, Judge Garbis ref erred this ca se to m e to resolve d iscovery disputes and related scheduling m atters. ECF No. 21. Ordinarily, referral of a case to a Magistrate Judge to resolve discovery m atters pursuant to 28 U.S.C. § 636(b)(1)(A) and Loc al Rule 301.5.a contem plates that the Magistrate Judge may order any appropriate relief short of issuing an order that is dispositive of one or more of the pending claim s or defenses. Objections to such non-dispositive discovery orders m ust be Case 8:06-cv-02662-MJG Document 377 Filed 09/09/10 Page 2 of 89
Through four years of discovery, during whic h Defendant Mark Pappas, President of
Defendant CPI, had actual knowledge of his duty to preserve relevant information, Defendants
delayed their electronically stored inform ation (“ESI”) pr oduction; deleted, destroyed, and
otherwise failed to preserve evidence; and repeat edly misrepresented the completeness of their
discovery production to opposing counsel and the Court. Substantial am ounts of the lost
evidence cannot be reconstr ucted. After m aking repeated effo rts throughout disc overy to try to
effect preservation of ESI evidence and obtain relevant ESI evidence to support its claim s,
Plaintiff has identified eight discre te preservation failures, as well as other deletions that did not
permanently destroy evidence, in a byzantin e series of events. These events culm inated in a
succession of requests by Plaintiff to obtain discovery that it consistently maintained Defendants
had not provided despite num erous Court orders. Plaintiff sought permission to file its fourth
motion for sanctions, and the Court held evidentiary hearings on October 29 and December 1 and
2, 2009. Ultimately, Plaintiff received permission and filed the above-re ferenced motion, which
resulted in filings and exhibits exceeding the Manhattan telephone directory in girth, as well as
served and filed within fourteen days of the entry of that order. Loc. R. 301.5.a. If a District Judge contemplates that the disposition of discovery disputes by a Magistrate Judge may involve sanctions that are d ispositive of pending cla ims or def enses, such as those provid ed in Fed. R. Civ. P. 37(b)(2)(A)(v) and (vi), th en the District Judge w ould di rect the Magistrate Judge to propose findings of fac t and recomm endations fo r action to be taken pursuant to 28 U.S.C. § 636(b)(1)(B) and Local Rule 301.5.b. When a Magistrate Judge issues a Report and Recommendation, the parties have fourteen days to serve and f ile objections. Fed. R. Civ. P. 72(b); Loc. R. 301.5.b. Judge Garbis ’s Order of Referral does not state whether it is pursuant to 28 U.S.C. § 636(b)(1)(A) or (B), but to the extent that this Memorandum and Order orders non- dispositive relief, it shall be pursuant to 28 U.S.C. § 636(b)(1)(A); to the extent that it recommends dispositive relief, it shall be pursuan t to 28 U.S.C. § 636(b)(1)(B). Either way, the parties have fourteen days in which to serve and file objections to a ny aspect of this Memorandum, Order and Recommendation. Loc. R. 301.5.
As discussed infra, both non-dispositive and dispositive relief is granted; accordingly the format is a hybrid mem orandum and order and, as to the disp ositive relief sought, a recommendation. See 28 U.S.C. § 363(b)(1). 2
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hearings jointly conducted before the undersigned and Judge Garbis on February 24, 2010; April
26, 2010; and June 25, 2010. At the end of the day, Defendant did not rebut, but indeed
acknowledged, that the m ajority of Plaintiff’s allegations were accura te. Moreover, without
conceding any inappropriate m otive on their part, Defendants stated their willingness to
acquiesce in the entry of a defaul t judgment on Count I (which a lleges copyright infringement),
the primary claim filed against them. That Defendants Pappas and CPI would willingly accept a
default judgm ent for fa ilure to preserve ESI in the prim ary claim filed agains t them speaks
volumes about their ow n expectations with respect to what the unrebutted record shows of the
magnitude of their m isconduct, and the state of mind that must accom pany it in order to sustain
sanctions of that severity.
For t he r easons stat ed her ein, Pl aintiff’s Motion will be GR ANTED IN PART an d
DENIED IN PART, and it furth er is recommended that, in addition to the relief ordered by this
Memorandum and Order, Judge G arbis enter an Order granting a default judgm ent against
Defendants with regard to Count I of the Compla int (which alleges copyr ight infringem ent).
Among the sanctions this m emorandum i mposes is a finding, pursuant to Fed. R. Civ. P.
37(b)(2)(A)(vii), that Pappas’s pervasive and willful violation of serial Cour t orders to preserve
and produce ESI evidence be treated as contempt of court, and that he be imprisoned for a period
not to exceed two years, unless and until he pay s to Plaintiff the attorney’s fees and costs that
will be awarded to Plaintiff as the prevailing party pursuant to Fed. R. Civ. P. 37(b)(2)( C).3 The
3 Im posing contem pt sanctions pursuant to R ule 37(b)(2)(A)(vii), particularly including a sentence of imprisonment, is an extreme sanction, but this is an extreme case. For reasons that are much more fully ex plained below, this sanc tion is not a for m of crim inal contempt, which could not be im posed without compliance with Fed. R. Crim. P. 42, but ra ther a form of civil contempt, inasm uch as Pappas m ay purge him self of his contem pt, and concomitantly avoid imprisonment, by perform ing the affirm ative act of paying Plaintiff’s attorney’s fees and costs incurred in connection with successfully prosecuting this motion. Hicks v. Feiock, 485 U.S. 624, 3
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recommendation that a default judg ment be imposed as to Count I is m ade pursuant to Fed. R.
Civ. P. 37(b)(2)(A)(vi), based on the Defendants’ spoliation of evide nce, as further desc ribed
herein. As noted, Def endants them selves have agreed that such a sa nction is appropriate.
(Defs.’ Opp’n 29.)
I. BACKGROUND
Regrettably, the events unde rlying the pending motions ar e convoluted and cannot be
summarized succinctly. They must be set forth in considerable detail, inasmuch as they spanned
several ye ars, invo lved m ultiple acto rs an d a suc cession of def ense a ttorneys, and a re
memorialized by hundreds of Court filings and affidavits, as well as countless hours of
deposition and hearing testimony. Charting them has consumed, collectively, hundreds of hours
of my time and my law clerk’s time.4 It is unf ortunate that the Court lacks any effective means
to order Defendants to p ay a fine to the Clerk of the Court to recaptu re the cost to the Court of
the tim e m y staff and I spent on this m otion, wh ich prevented us from addressing deserving
631-32 (1988); Buffington v. Baltimore Cnty., Md., 913 F.2d 113, 133 (4th Cir. 1990). These cases are discussed in further detail below. A magistrate judge’s finding of a party in civil contempt as a discovery violation is reviewable by the d istrict court, as is any non-dispositive discovery order, pursuant to Local Rule 301.5.a, wh ich permits a party to file objections to a magistrate judge’s discovery rulings within fourteen days. See, e.g., SonoMedica, Inc. v. Mohler, No. 1:08-cv-230 (GBL), 2009 WL 2371507 (E.D. Va. July 28, 2009).
4 I acknowledge with gratitude the copious-fact checking of Joshua Altman, Ashley Marucci, and Jessica Rebarber; the research assistance of Rignal Baldwin V, Matt Haven, and Ilan Weinberger; and the cite-checking of Eric Kunimoto, Marissa Lenius, and Melissa O’Toole- Loureiro, all of whom interned in my Chambers over the course of the past year. Further, the indispensable assistance of my law clerk, Lisa Yurwit, is gratefully acknowledged.
4
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motions in other pending cases.5 If such a sanction were reasonably available, however, this case would be the poster child demonstrating its appropriateness.
For ease of com prehension, after briefly desc ribing the basis of the underlying lawsuit,
the Background section of this Mem orandum, Order and Recommendation chronicles Pappas’s 6 dogged but unsuccessful attempts to prevent the discovery of ESI evidence against him, because it is relevant to his state of mind at the time of his myriad successful deletions. It then chronicles
Pappas’s successful, perm anent dele tions of countless ES I. In this regard, Plaintiff VSI is fortunate th at Pappas ’s zeal considerably exc eeded his d estructive s kill and his judgm ent in selecting confederates to assist in his efforts to destroy ESI without detection. While Pappas succeeded in destroying a considerable am ount of ESI, Plaintiff was able to document this fact and ascertain the relevance of m any deleted f iles. At the en d of the day, this is the case of the
“gang th at couldn’ t sp oliate s traight.” All in all, in add ition to the attem pted d eletions tha t
5 I note that the Court lacks any “effective” m eans to order Defendants to pay a fine to the Clerk of the Court. Such an order is regarded as a for m of crim inal contempt, which m ay not be imposed without affording Defendants the procedur al protections of Fed. R. Crim. P. 42(b). See Buffington, 913 F.2d at 131-34 (reversing order of distri ct court finding defendants’ attorneys in civil contempt for failing to comply with orders to produce evidence in a civil case and ordering each to pay a fine of nearly $7,000 to the Court, because such a san ction is a form of crim inal contempt that cannot be im posed without com pliance with F ed. R. Cri m. P. 42(b)). While it is technically accurate that a court may, after complying with those procedures, order a party to pay a fine to the Clerk of the Court as a sanction for discovery misconduct that consumed excessive court resources to resolve, it is a rare cas e in which a co urt will do so because Rule 42(b) contemplates a referral to the United States Attorn ey for crim inal prosecution or, if that office declines to prosecute, appointm ent of a privat e prosecutor to bring the case. I seriously considered doing so in this ca se, for reasons explained below, but ultimately decided against it. This case has been pending for m ore than four y ears, and to perpetuate it in another form by initiating a criminal prosecution of Pappas just to impose a fine payable to the Clerk of the Court would be unwarranted , particularly because Fed. R. Civ. P. 37(b)(2)(A)(vii) allows th e imposition of appropriately severe sanctions as a form of civil contempt.
6 For ease of reference I will ref er to Pappas’s actions, but because Pappas controlled CPI at all times relevant to this case, his m isconduct is attr ibutable to him individually as w ell as to his company, CPI. 5
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caused delay but no loss of evidence, there were eight discrete preservation failures: (1) Pappas’s
failure to implement a litigation hold; (2) Pappas’ s deletions of ESI soon a fter VSI filed suit; (3)
Pappas’s failure to preserve his ex ternal hard drive after Plainti ff demanded preservation of ESI;
(4) Pappas’s failure to p reserve files and em ails after Plaintiff demanded their pres ervation; (5)
Pappas’s deletion of ESI after the Court issued its first preservation order; (6) Pappas’s continued deletion of ESI and use of program s to permanently remove files after the Court admonished the parties of th eir duty to p reserve evidence and issued its second preservation order; (7) Pappas’s failure to p reserve ESI when he r eplaced th e CPI server; and (8) Pappas’s further use of programs to perm anently delete ES I after the Court issued num erous production orders. The reader is forewarned that although organized into separate categories to facilitate comprehension of so vast a violation, m any of the events described in the separate categories occurre d concurrently.7
VSI filed a Complaint against CPI, Mark Pappas, Stephanie Pappas (Mark Pappas’s wife
at the time), and “John Doe a/k/a Fred Bass” on October 11, 2006, alleging, inter alia, violations
7 As will be discussed in detail later in th is m emorandum, when a court is evaluating what sanctions are warran ted for a failu re to p reserve ESI, it must evaluate a num ber of factors including (1) whether there is a duty to preserve; (2) whether the duty has been breached; (3) the level of culpability involved in the failure to pr eserve; (4) the relevance of the evidence that was not preserved; and (5) the prejudice to the pa rty seeking discovery of the ESI that was not preserved. There is something of a “Catch 22 ” in this process, however, because after ev idence no longer exists, it often is difficu lt to evaluate its relevance and the prejudice associated with it. With regard to Pappas’s m any acts of m isconduct, the relevance and prejudice associated with some of his spoliation can be established directly, or indirectly through logi cal inference. As to others, the relevance and prejudice are less clear. However, his conduct still is highly relevant to his state of m ind and to dete rmining the over arching lev el of his cu lpability f or all of his destructive acts. When the relevance of lost evidence cannot be proven, willful destruction of it nonetheless is relevant in evaluating the level of culpability with regard to other lost evidence that was re levant, as it tends to d isprove th e possibility of m istake or acciden t, and prov e intentional misconduct. Fed. R. Evid. 404(b). 6
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of copyrights and patents, and unfair com petition.8 (Compl. ¶ 2, ECF No. 1.) Specifically, VS I
claimed that som eone at CPI downloade d VSI design drawings and sp ecifications9 extensively
from VSI’s website, using the pseudonym “Fred Bass,” and that those drawings were used
improperly in competition with VSI. (Id. ¶¶ 17, 20.) The Complaint was served on Mark Pappas
on October 14, 2006. (ECF No. 8.) On Octobe r 23, 2006, Judge Garbis authorized imm ediate
discovery—prior to Defendants’ response to the Complaint—so that V SI could “ascertain the
nature and scope of issues presented with regard to prior use of the Restricted Docu ments,” i.e.,
“VSI product drawings a nd specifications as to which VSI claim s copyright protection.” (ECF
No. 9.) VSI served limited document requests and interrogatories on Defendants on October 24,
2006. (ECF No. 22-1.)
1. Pappas Attempted to Prevent the Discovery of Evidence Against Him
The bulk of this factual background describes Pappas’s successful deletions of ESI. To
understand the gravity of these ev ents, however, it is helpful to place them in the context of
Pappas’s state of mind during discovery. For years, Pappas engaged in a cat and mouse game to
8 According to a February 2, 2009 letter from Pl aintiff’s counsel, “Papp as became a ware that Victor Stanley was contem plating a lawsuit agai nst him and CPI” in July 2006. (Pl’s Mot. Ex. 46, ECF No. 341-46.) Defense couns el acknowledged that “[f]iles ha d been deleted from Mark Pappas’ laptop in July 2006.” (June 9, 2009 Rothschild Ltr. to Court, ECF No. 300.)
Although Stephanie Pappas, Mark P appas’s wife, is also a defendant, Plaintiff seeks no relief against Stephanie Pappas. (Pl.’s Mot. 100 n.105.) References to “Pappas” in this memorandum are to Mark Pappas.
9 VSI “manufactures a broad line of high quality site furnishings used in public and comm ercial sites, such a s litter receptacles, benches, tables and chairs, ash urns, pl anters, tree guards, seats and bollards m ade from steel, cast ductile iron, several special of wood or recycled plastic.” (Compl. ¶ 10.) The design drawings and specifications at issue were from VSI’s “Product Library,” which is posted on VSI’s website, and which includes design drawings and specifications, as well as im ages, for VSI products. ( Id. ¶ 13, 20.) CPI is a com petitor selling similar products. (Id. ¶ 1.)
7
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hide harm ful ESI from production during discovery, repeatedly tr ying to stall or prevent VSI
from discovering ev idence that he im properly accessed o r used VSI’s website o r drawings.
Ultimately, after Plaintiff de monstrated th e in completeness of Pappas’s ESI prod uction, the
Court compelled Pappas to produce the ESI evid ence he had not succeeded in d eleting. This
evidence supported Plaintiff’s claims. Therefore, Pappas’s actions in this regard did not result in
actual prejudice to Plaintiff’s ability to obtai n evidence to support its claim s, although it clearly
resulted in considerable delay in co mpletion of discovery and expense associated with efforts to
discover the nature and extent of the spoliation. Nonetheless, I sha ll c atalog a rep resentative sampling of them because they are probativ e of the intentiona lity an d bad faith of Pappas’s successful deletions.10
Evidence that Pappas used th e pseudonym “Fred Bass” is re levant to and would support
Plaintiff’s claim that Pappas’s im proper downloads of docum ents from VSI’s Product Library
were as “Fred Bass,” and Plaintiff sought such ev idence in discovery. (Pl.’s Second Request for
Prod. of Docs., Pl.’s Mot. Ex. 9, E CF No. 341-9.) Pappas initially denied that he had ever accessed the VSI website (Oct. 20, 2006 Hr’g Tr. 5:8-18, Pl.’s Mo t. Ex. 3, ECF No. 341-3) o r used the pseudonym “Fred Bass.” (Pappas Dep. 29:2-8, 31:24 – 32:2, 148:10-22, Nov. 17, 2006.)
Also, during discovery, Defendants produced only two of 110 known “[email protected] ”
downloads of VSI drawings from a CPI com puter. (Fifth Slaughenhoupt Aff. ¶ ¶ 11-12, Pl.’s
Reply to Opp’n to July 13, 2007 Mot. for Sanc tions Ex. 1, ECF No. 134-1). T hese actions
demonstrate Pappas’s reluctance to produce ev idence supp orting P laintiff’s theo ry that “Fred
10 I note that this case is not Pappas’s m aiden voyage into spoliation. He a ppears to have served his apprenticeship during his divor ce case involving Stephanie, where the Court found that he had deleted evidence relevant to the case. (O ct. 29, 2009 24:10-14 (Pappas Test.).) The Court entered a restraining order against Pappas, prohibiting him from ma king any further data alterations on the CPI computers. ( Id.) This is r elevant to his state of mind in this case as well. Fed. R. Evid. 404(b). 8
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Bass” was a CPI em ployee. Moreover, after VSI filed suit, Pappas asked a business contact in
Argentina who had been hired to prepare CPI design drawings based on the downloaded VSI
drawings, identified only as “Federico,” to “destr oy . . . all e-m ail references” to VSI drawings,
and he attempted to delete over 5,000 files that included em ail corres pondence with Digican,
Federico, and Steven Hair (CP I’s business contacts that would have been inv olved in th e
production and importation of VSI products under the CPI nam e). 11 (Pappas em ails, Pl.’s Mot.
Ex. 13; Dec. 1, 2009 Hr’g Tr. 76:2-25 (Spruill Test.), Pl.’s Mot. Ex. 26, ECF No. 341-26.)
Pappas claimed to have moved the emails to a deleted items folder for “storage purposes,” (Feb.
16, 2010 Pappas Aff. ¶ 7), a claim that, consideri ng all the evidence, cannot be regarded as
credible. In deed, it is h ard to imagine that any one would claim , with a straight face, that he
deleted emails in order to “store” them in a deleted items folder. The more credible inference to
be drawn is that Pappas wanted to destroy any evidence that w ould belie his sworn statem ents.
The evidence that Defendants ultimately produced after Plaintiff filed motions to compel and for
sanctions, and the Court repeated ly ordered production, strongly de monstrates Pappas’s use of
the “Fred Bass” pseudonym, and Pappas eventually admitted that he accessed the VSI Library to
look at the VSI drawings, and th at he downloaded “som e” of VSI’s files. (Oct. 29, 2009 Hr’g
Tr. 64:2-4 (Pappas Test.).) Also, the 5,000 files ultimately were recovered.12 (Dec. 1, 2009 Hr’g
Tr. 81:7-9 (Spruill Test.).) Thus , Pappas’s efforts to subvert this evidence did not result in the
11 Digican was CPI’s con nection to a Chinese su pplier tha t manufactured CPI’s products that competed with VSI’s products. Th e emails that were destroyed related to VSI. (P appas Dep. 88:19 - 91:6-21.) Hair was CPI’s shipping agen t involved in CPI’s im port of Chinese-m ade products that CPI subsequently sold under a fals e claim that they were “Made in the USA.” (Slaughenhoupt Aff. ¶ 42.) CPI sold these produc ts in competition with VSI’s products, which are manufactured in Maryland. (Id.)
12 As discussed infra, in Section I.3, although Pappas’s em ail deletion instructions to Federico were available for discovery, any em ails that Federico m ay have destroyed per Pappas’s directions have not been produced. 9
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loss of this evidence, although his efforts to elim inate it caused considerable delay and expense
to VSI.
Additionally, Pappas delayed in producing releva nt ESI after Plaintiff identified it and
requested it in discovery, and he lied about the completeness of Defendants’ ESI production. For
example, Pappas swore on Septem ber 27, 2007 that “Defendants have produ ced to Plaintiff all
non-privileged ESI sought by Plaintiff in its Ru le 34 production requests.” (Sept. 27, 2007
Pappas Aff. 2, ECF No. 150.) Yet, Defendants had not produced 2,477 fully intact “deleted
emails,” 1,589 of whic h were between CPI and Digican, which Defendants, through their
attorney at the tim e, Christopher Mohr, 13 had been aware of si nce at least May 2007.
Defendants ultimately produced 1,199 of the em ails, but n ot until Aug ust 5, 2009, nearly two years later, and only after P laintiff identif ied the em ails, with no help from Defendants, and repeatedly requested their production. (Feb. 9, 2009 Turner Report 2, Pl.’s Mot. Ex. 35, ECF No.
341-35; Dec. 2, 2009 Hr’g Tr. 87:1 – 88:25 (Turne r Test.); Ninth Slaugh enhoupt Aff. ¶¶ 27-28;
Aug. 12, 2009 Ogg Ltr., ECF No. 341-36.) Defendant s concede, as they m ust, that the em ails
“should have been produced with the ESI produced to VSI in Septem ber/October 2007.” (Defs.’
Opp’n 19.) Also in May 2007, Defendants, through M ohr, were aware of a deleted internet form
using the name “Fred Bass” on Pappas’s hom e computer, but the for m neither came to light nor
was produced until Decem ber 2009. (Dec. 2, 2009 Hr’g Tr. 89:9-17, 93:1-13, 153:1 – 155:2
(Turner Test.).) These instances of Defendants’ delayed production, coupl ed with the Court’s need to order repeatedly that Defendants preserve relevant ESI in its n ative fashion and turn it
13 Counsel who currently represent Defendants, James Rothschild and Joshua Kaufman, were not counsel to Pappas or CPI during the tim es wh en the m isconduct resulting in spoliation of evidence took place. 10
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over to VSI, (Oct. 3, 2007 Hr’g Tr. 19:10 – 20:5 (Ct. order), Pl.’s Mot. Ex. 45, ECF No. 341-45),
further evidence Pappas’s efforts to thwart producing ESI that supported Plaintiff’s case.
Moreover, at least two of Pappas’s successful larger deletions of ESI occurred on the eve
of scheduled discovery regardi ng the contents of Pappas’s work computer. F irst, the Court
scheduled a discovery hearing for February 1, 2007, and the afternoon before, Pappas deleted
9,234 files from his wor k computer, a password- protected laptop. (ECF No. 42; July 22, 2009
Spruill Report 3, ¶ 3.) Som e, but not all, of these files reapp eared in the m iddle of 2009, well after Plaintiff filed repeated motions to compel and the Court issued numerous orders to produce the evidence, as discussed infra. Second, an imaging of Pappas’s work computer was scheduled for the week of February 21, 2007. Pappas dele ted almost 4,000 files on February 16 and 17,
2007, and som eone ran Microsof t W indow’s Disk Defragm enter program immediately afterward, rendering the files unrecoverable. 14 (Oct. 29, 2009 Hr’g Tr. 153:12-17, 161:8-11
(Pappas Test.); July 22, 2009 Spru ill Report 4.) Despite the af orementioned motions and Court orders, these files were never produced. (July 22, 2009 Spruill Report 4.) The obvious relevance of the files deleted on January 31 and Febr uary 16 and 17, 2007 is discussed in detail, infra, in
Sections I.6-7. The fact that Pappas undertook to delete these inculpator y files from his work computer on the eve of a discovery hearing and only days before a sche duled imaging of his
14 Disk Def ragmenter, Microsof t W indow’s disk defragmentation prog ram, is a system utility that “consolidates fragmented files and folders on [a] computer’s hard disk, so that each occupies a single, contiguous space” in th e system. http://www.m icrosoft.com/resources/documentation /windows/xp/all/proddocs/en-us/snap_defrag.mspx?mfr=true. To consolidate fragm ented files, the program moves the file fragm ents together by “overwriting all tho se places” where space in the system was occupie d by delete d f iles. As a result, “ the ability to recover d eleted item s virtually . . . disappears” because th e same is occupied by other files. (Dec. 1, 2009 Hr’g Tr. 43:1 – 44:18 (Spruill T est.).) Cutting through all the techno-spea k, it is foreseeable that the running of a disk defragmentation program, colloquially referred to as “defragging,” can result in the loss of files that were recoverable before the defragmentation occurred. 11
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work computer’s contents com pels the conclusi on that he was knowingly engaged in efforts to destroy evidence that he regarded as harmful to Defendants and beneficial to Plaintiff.
2. Pappas Failed to Implement a Litigation Hold
Before litigation began, CPI stored a ll of its data on its server and backed up the data on ten backup tapes. (DeRouen Dep. 17:9-12, June 29, 2007, ECF No. 341-17.) Each tape would run for a day, and then someone at CPI would replace it with the next tape. (Id. at 46:10-19.) At the end of a two-week period, the process began again with the first tape, which was “am ended” to incorporate any changes to the s erver since it last was recorded. ( Id.) As to th e reliability of the backup system, Evan DeRouen, Pa ppas’s computer consultant of the past six years, testified that the sys tem failed “[a]t l east on ce or twice a week” w hen someone forgot to replace the backup tape. ( Id. at 45:13-17, 46:1-3.) DeRouen added that sometimes a week went by before someone replaced the tape. ( Id.) Additiona lly, all users h ad the ability to alter or delete data.
(Id. at 90:20-91:25.) Therefore, w ithout a litigation hold, E SI could be lost or m odified at any time; without a change to the backup system , ESI would be lost or modified biweekly, under the best of circumstances.
The record is devoid of any evidence that Defendants considered, let alone implemented, a litigation hold af ter Plaintiff filed suit o r after the Court is sued preservation orders, discussed infra. To the contrary, DeRouen testified that after suit was filed, nothing was done to address the system’s deficiencies and to ensure the preservation of relevant ESI; Pappas did not ask him to take any steps, nor did he ta ke any steps, to prevent users from deleting files from the server, or even to advise them not to delete files. (Id.) VSI’s ESI expert, Andreas Spruill of Guidance
Software, observed that “m ultiple users who ha[d] accounts on the server [were] adding,
12
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deleting, creating, just carrying on business as usual.” (Dec. 1, 2009 Hr’g Tr. 123:25 – 124:75.)
Although Defendants retained Genevieve Turner 15 as an ESI litigation consultan t between
December 2006 and Jan uary 2007 and asked her to p reserve some data, they did no t consult her
specifically about im plementing an ESI preser vation plan or a litig ation hold. (Oct. 29, 2009
Hr’g Tr. 118:20 – 119:13 (Pappas Test.); D ec. 2, 2009 Hr’g Tr. 10:13-18, 12:1-22, 21:1-14,
101:12 – 102:3 (Turner Test.).)
DeRouen te stified in 20 07 tha t Pap pas and /or Mohr, Defendants’ counsel at the tim e, instructed him to retain the exchange server logs and not to delete anything. (DeR ouen Dep.
87:4-25.) He stated that he theref ore “rem oved the . . . function that allowed the [exchange server] logs to be purged once they’re backed up” and ensured that “the backups are done.” ( Id. at 88 :21 – 89:4.) However, Spru ill testifie d in Decem ber 2009 that he had not “seen an y exchange server logs that ha[d] been preserve d or produced.” (Dec. 1, 2009 Hr’g Tr. 122:20 –
123:5.) Nor had he seen any evidence that DeRouen prevented the logs from being purged, as he said he had. ( Id. at 123:6-24.) Spruill s tated in his affidavit that he “saw no evidence of any litigation hold having been im plemented in rega rds to CPI’s ESI as that term is commonly understood. No reasonable m easures were taken to prevent potentia lly relevant data stored on any of CPI’s computer systems from being modified, overwritten, or deleted.” (Third Spruill Aff.
¶ 31.) Moreover, Defendants have produced only ten backup tapes, which contain only data from November 15, 2006, and Jan uary 17, 2007. (July 22, 2009 Spruill Repo rt 4.) This h ardly evidences an effective litigation hold.
15 There is no evidence to suggest that Ms. Turner was involved in any of the m isconduct described in this memorandum. She testified credibly during the hearing and her testimony wa s helpful. 13
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In evaluating the weight to be given to DeRouen’s testim ony, I cannot overlook his
dependence on his wife’s incom e, paid by CPI, a nd his qualifications as an ESI expert leave
much to be desired, as he has not taken any college-level com puter courses o r passed any
Microsoft proficiency tests. 16 In contras t, Plaintiff’s ESI e xpert, Spruill, has passed Microsoft tests, teach es a colleg e-level computer fore nsics cours e, and has worked on com puters professionally since 1993. (A pr. 26, 2010 Hr’g Tr. 149:17 – 1 50:22 (Spruill Test.).)
Accordingly, I found his testimony to be credible at the December 2009 and April 2010 hearings.
Apart f rom the r elative m erits of th eir “exper t,” Defendants adm it that “between O ctober 14,
2006 and February 17, 2007 thousands of files we re deleted from Pa ppas’ laptop com puter”
(Defs.’ Opp’n 5), an admission that would not have been necessary or possible had there been an appropriate litigation hold. The running of the Disk Cleanup, Disk Defragmenter, Easy Cleaner, and CCleaner programs, discussed later, further demonstrate that Defendants failed to implement an effective litigation hold. I f ind that Sp ruill’s assessment that Defendants failed to tak e any
“reasonable measures” to preserve data is accura te. The evidence of record is abundantly clear that Defendants did not im plement any system to prevent users from deleting files from the server or to stop the backup system from being overwritten. (DeRouen Dep. 91:4-10.) The following discussion of Defendants’ deletions demonstrates the prejudice caused by Defendants’ failure to implement a litigation hold to prevent such deletions.
16 DeRouen testified that his wife, Christie DeRouen, has worked for CPI for more than a decade as an office manager and earns about $68,000 annually, which represents approximately 75-80% of their family income. (Apr. 26, 2010 Hr’g Tr. 27:6-19.) With regard to his expertise, DeRouen is “ce rtified f rom HP to repair the ir pr inters and com puters,” but failed the one Microsof t examination he took. (Id. 67:25 – 68:7.) 14
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3. Early Evidence of Pappas’s Failure to Preserve ESI
An exam ination of the CPI System Regi stry conducted during discovery showed 353 user-initiated deletions of files from Mark Pappas’s work computer, a password-protected laptop, commencing soon after VSI filed suit, i.e., between October 11, 2006, and Nove mber 17, 2006.
(July 22, 2009 Spruill Report 2- 3, Pl.’s Mot. Ex. 14, ECF No. 341-14; Defs.’ Opp’n 5.) In addition, on October 19, 2006, Pappas se nt a series of emails instructing Federico, the Argentine contact, to destroy various emails and attachments relating to the VSI dr awings that Pappas had sent to Federico for “conversion” to CPI drawi ngs. (Pappas e mails, Pl.’s Mot. Ex. 13, ECF No.
341-13.) Defendants have neither denied nor rebutted the evidence of these deletions and instructions to delete d uring the p roceedings related to th e pending motions. Nor have they produced the 353 files deleted from Pappas’s work computer or any files or emails that Federico destroyed per Pappas’s instruction.
Because Defendants had notice of the exis ting lawsuit at th e time of the deletions, they clearly were under an obligation to preserve these potentially relevant files. Defendants, through their cu rrent a ttorney, Jam es Rothschild, claim ed that the files deleted from Pa ppas’s work computer were preserved because the computer “was synchronized to th e CPI server,” such that the files were copied to the serv er and “still exist on th e server.” (Oct. 28, 2009 Rothschild L tr.,
ECF No. 324.) However, the more believable evidence is to the contrary. As discussed in detail infra, CPI replaced its “Old Server” w ith a “New Server” in April 200 7. DeRouen stated in an affidavit that before the server exchange in April 2007, “m ost of the files from Mark Pappas’ workstation were not m apped [i.e., copied] to th e server,” (DeRouen Aff. ¶ 3), and he later testified in April 2010 that hi s affidavit was accurate. (A pr. 26, 2010 Hr’g Tr. 38:11-17.)
DeRouen also stated th at Pappas “was aware” th at his files generally we re no t c opied to th e
15
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server before April 2007. ( Id. at 70:17-22.) Further, DeRouen te stified that “some” of the files on Pappas’s work computer “would not be found” on the Old Server because it could no t accommodate all of Pap pas’s files. ( Id. at 69:13 – 70:3.) DeRouen e xplained that f or files on
Pappas’s work computer to be copied to either server, Pappas would “have to put it in the folder that gets sy nchronized” because on ly “ce rtain folders” were synchron ized. ( Id. at 117:20 –
118:6.) Defendants did not offer any evidence that Pappas put the deleted files into the synchronized folders so that they would be copied to th e Old Server o r the New Server. And, even if the files were co pied to the Old Serv er, by the tim e VSI received the Old Server, it had become corrupted and could not be search ed. (Apr. 26, 2010 Hr’g Tr. 153:16-20, 155:11-16
(Spruill Test.).) Given that Plaintiff has shown that the ESI evidence was deleted, Defendants’ claims to have preserved it are not credible.
Turner, CPI’s ESI litigation consultant, m ade an image (i.e., copy) of CPI’s New Server in July 200 7, and Rothschild s tated that “ the im age of the new server contains copies of the deleted files.” (Oct. 28, 2009 Rothschild Ltr. ) Again, the evidence does not support this assertion. As noted above, not all of Pappas’ s files were copied to the New Server, and therefore, they would not appear on an im age of the New Server. Also, Turner tes tified that she
“did not image” the New Server in its entirety; instead, she took a “targeted collection” of user files, folders, and em ails, without imaging “una llocated space” where de leted files most likely would appear. (Dec. 2, 2009 Hr ’g Tr. 105:15 – 107:22; Feb. 9, 2009 Turner Report 3.)
Moreover, the files in question predated the New Server, and therefore only would appear on the
New Server if they had been copied to the Old Server in the first p lace and then s uccessfully transferred to the New Server. 17 Thus, Defendants have not show n that copies of any of these
17 The incompleteness of the data transfer between servers is discussed in further detail below. 16
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deleted files were produced with the image of the New Server. Nor have they shown that any of the files later were restored and produced. Defenda nts failed to meet their obligation to preserve these files.
The relevance of any files or em ails that Federico deleted pursuant to Pappas’s instructions is read ily apparent from Pappas’s em ails to Federi co, which were preserved. They would have de monstrated the truth of VSI’s core contention—that Pappas accessed VSI’s website under a fictitious name on numerous occasions to download multiple design drawings of
VSI and, in violation of the lim ited licensing ag reement on the VSI website that had to be accepted before the drawings could be downloaded, sent them out of the count ry to be copied as
CPI design drawings, sans any reference to their true origin, so that Pappas then could subm it them as part of bid docum ents for the type of jobs for which CPI com peted with VSI. If this is not “smoking gun” evidence, one wonders what is. That D efendants, despite their protests of innocent intent and conduct, pr oduced no evid ence in reb uttal, and h ave “acqu iesced” in the entry of a default judgm ent with regard to Plain tiff’s flagship claim, suggests that they too view this deleted ESI f or what it is—cr itical evidence proving the guts of Plainti ff’s liability claims.
Equally clearly, the absence of these em ails referring to the unauthorized conversion of VSI drawings to CPI files is prejudici al to Plaintiff’s case. With regard to the 353 deleted files, although their contents are unknown, the only rational conclusion that can be drawn is that VSI suffered prejudice from the loss of these files, based on Pappas’s bad faith, willful m isconduct and the fact that the large quantity of deletions occurred shortly after VSI filed suit. Defendants have not offered any evidence to rebut this conclusion. To the contrary, they acquiesced in the entry of a default judgment on the copyright claim, essentially conceding the prejudice to VSI of the loss of the deleted files.
17
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4. Pappas Failed to Preserve His External Hard Drive Despite Plaintiff’s Demand that
Defendants Preserve ESI
Pappas was deposed on Novem ber 17, 2006, and, at the conclusion of the deposition,
VSI’s counsel gave notice to Defendants that VSI would be filing a request to have the CPI hard
drives imaged, and explicitly dem anded that no f iles be deleted and that no data be scrubbed.
(Pappas Dep. 148:23-2 5 – 149:1-9. ) Pappas later adm itted he was aware this request had been
made. (Oct. 29, 2009 Hr’g Tr. 89:25 (Pappas Test.), Pl.’s Mot Ex. 12, ECF No. 341-12.)
Subsequent forensic examination of Pappas’s work computer revealed the existence of a
SimpleTech “Simple Drive”™ external hard driv e (“EHD”) that last was plugged into Pappas’s
work computer on November 7, 2006, and last us ed on November 20, 2006 (just days after VSI
notified Defendants to preserve ESI), when the backup feature for the EHD was run and then the
software for the EHD was “uninstalled” from Pappas’s work com puter. (July 22, 2009 Spruill
Report 2, ¶¶ 3-6.) A subsequent examination of Pappas’s work computer led Spruill, VSI’s ESI
expert, to conclude that the EHD must have been connected to it continuously from November 7
to November 20, 2006. (Id. at 2, ¶ 5.) Therefore, the EHD still was in Pappas’s possession after
VSI filed this lawsuit, and it also was in Pappas’s possession on and after Novem ber 17, 2006, when Pl aintiff i nformed Defendan t t hat it would be requesting im aging of Defendants’ computers.
The EHD contained 62,071 files that were transf erred to it from Pappas’s work com puter on July 10, 2006, shortly befo re suit was filed. ( Id. at 2, ¶ 3; Defs.’ Opp’n 4.) Based on a log created on Pappas’s work com puter at the tim e of the transfer, V SI’s IT director, Bryan
Slaughenhoupt, concluded that the transferred file s likely w ere relevant because the file nam es
18
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corresponded with search term s contained in the Joint Search Protocol. 18 (Ninth Slaughenhoupt
Aff. ¶ 49 & Ex. E). For exam ple, Slaughenh oupt identif ied the file nam es “digicanCAD,”
“digicanchina,” “nancadhistory,” “bas squote,” “Chicago.doc,” fuvista-vs.zip, 19 [email protected][1].txt, and vict orstanley[1].htm, and a folder nam ed
“CompetitorCAD” with “hundreds o f files.” ( Id. ¶¶ 49, 54.) I mportantly, as noted below, the
EHD never has been produced by Defendants duri ng discovery, despite the obvious relevance of the data it contained. The prejudice its loss caused to Plaintiff is unquestionable.
Pappas testified that he presum ed that , even though the E HD was not produced, the information on the EHD had been, because the se rver was p roduced and it contained the sam e information. (Oct. 29, 2009 Hr’g Tr. 175:20 – 176:1.) However, as discussed above, at the tim e that the EHD was connected to Pappas’s work computer, not all of the files on that com puter regularly w ere cop ied to the s erver. Moreov er, as noted, the Old Se rver was co rrupted and unsearchable when VSI received it. (Apr . 26, 2010 Hr’g Tr. 153:16-20, 155:11-16 (Spruill
Test.).) And, because Defendants did not disc lose the existence of the EHD to Geneviev e
Turner, their ESI litigation consultant who worked with Plaintiff’s ESI consultant to develop and implement the Join t Se arch Pro tocol f or ESI, she d id no t im age the EHD or s earch it for
18 After discovery commenced, the parties’ ESI consultants conferred and developed a Joint Search Protocol for ESI, dated June 28, 2007 (Pl.’s Mot. Ex. 41, ECF No. 341-41), in accordance with the Court’s Order (June 14, 2007 Conf. Tr . 16:14-21, Pl.’s Mot. Ex. 40, ECF No. 341-40). The Joint Search P rotocol was am ended in Ma y 2009. (May 29, 2009 Spruill and Turner L tr., ECF No. 299-1.) It w as intend ed to f acilitate VSI’s discovery of relevant ESI at a cost and burden proportional to what is at stake in this case.
19 CPI named one of its product lines the “Fuvis ta” line. Papp as admitted during discovery that “Fuvista” stood for “Fuck you Victor Stanley,” (Pappas Dep. 22:20-24, Pl .’s Mot. Ex. 5, ECF No. 341-5), demonstrating that Pappas’s wit transcended sophomoric pranks such as logging into VSI’s web site as “Fred Bass” and extended to inventing insulti ng acronym s to nam e his competing products. When disclosed, the meaning of this acronym removes any doubt about his motive and intent. No doubt Pappas regarded this as hilarious at the time. It is less likely that he still does. 19
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responsive ESI. (Dec. 2, 2009 H r’g Tr. 55:19 - 56:5 (Turner Test .), Pl.’s Mot. Ex. 19, ECF No.
341-19). Again, the prejudice to Plaintiff is clear.
According to Defendants, Pappas did not “intentionally” dispose of the EHD “to keep the
files on it from being subject to discovery.” (Defs.’ Opp’n 5.) Th is argument is absurd. Pappas purchased the EHD; attached it to h is work computer immediately before suit was f iled; used it for m onths, including after suit was filed an d Plaintiff had dem anded preservation of ESI; transferred 62,071 files to it, whic h included m any files with nam es that render their relevance readily apparent; and kept its ex istence secret even from hi s own ESI litigation expert. He
testified that he returned the EHD in N ovember 2006—without having som eone back up its
contents—to “Bob from Office Max” because he was “frustrated” by its autom atic backup features that “would flash m essages and interr upt [his] work.” (Oct. 29, 2009 Hr’g Tr. 18:13 –
19:11.) Defendants failed to produce any docum entation corroborating Pappas’s testim ony that the EHD was retu rned to Office Max, such as an affidavit from “Bob,” a receipt from Office
Max, or documents showing the crediting of the pur chase price of the E HD back to CPI after it
was returned. Yet Pap pas expects the Court to accept his doe-eyed ex planation at face value,
rather than the untruth that it m anifestly is. Ev en if true, this is of little moment, as Defendants
concede that the EHD “should not have been dis posed of since it was in existence after the
lawsuit had been filed.” (Defs.’ Opp’n 5.) Moreover, the EHD and its contents never were made
available for forensic exam ination during discov ery and rem ain unavailable today. It does not
require Napoleonic insight to recognize with a casual glance at the names of the unavailable files
that what was lost was relevant to Plaintiff’s claims, and the absence of such a large quantity of
clearly relevant files was prejudicial.
20
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5. Pappas Also Failed to Preserve Files and Emails Immediately Following Plaintiff’s
Demand that Defendants Preserve ESI
On November 17, 2006, the very sam e day Defendants were put on notice not to destroy evidence relevant to this lawsuit, C urtis Edmondson, a lawyer who previously had done legal work for Pa ppas (and who is an engineer whos e training emphasized “com puter architecture”), visited the CPI offices to review CPI’s computer systems in regard to this litigation. (Edmondson website & invoice, Pl.’s Mot. Exs. 20-21, ECF Nos. 341-20 & 341-21.) Pappas testified that
Edmondson accessed information on Pappas’s work computer. (Oct. 29, 2009 Hr’g Tr. 121:8-9.)
Thereafter, between No vember 18, 2006 and D ecember 22, 2006, th e CPI System Registry fo r that computer showed thirteen user-initiated de letions of files. (July 22 , 2009 Spruill Report 3. )
Defendants’ contention that the files were preserved on the se rver does not hold water, as discussed above. Therefore, Defendants breached their du ty by failin g to preserv e these files .
Given that, shortly before these deletions, Pappas was put on notice to preserve relevant ESI and
Edmondson visited CPI on the same day, and Pa ppas attempted to delete about 5,000 largely responsive emails around the sam e time, (Dec. 1, 2009 Hr’g Tr. 76:2-5 (Spru ill Test.); July 22,
2009 Spruill Report 4), the only logical inference to dr aw is that these files were relevant to this lawsuit and, when viewed with all the other ev idence of Pappas’s willful destruction of relevant
ESI, that their loss caused prejudice to Plaintiff.
21
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6. The Court Issued a Preservation Order and Pappas Continued to Delete ESI
On Dece mber 7, 2006, VSI served a second Request for Production of Docum ents on
Pappas and CPI. 20 (Pl.’s Second Request for Prod. of Docs., Pl.’s Mot. E x. 9, ECF No. 341-9.)
Defendants, by then having retained new counsel, moved for a two-week extension of time to
file their responses and for a stay of discovery during that tim e. (ECF No. 38.) On Dece mber
22, 2006, I entered an order staying all discovery (e xcept for an existing or der that the parties
meet and confer regarding discovery disputes, which had begun to multiply) until after a hearing
scheduled for January 18, 2007. (E CF No. 41.) That order cau tioned: “[B]oth parties are
reminded of their substantive duty to preserve evidence, including electronic ev idence, that is relevant to the case.”21 (Id.) Pappas later admitted that he received that order the following day
and that he understood what it m eant. (Oct . 29, 2009 Hr’g Tr. 117:18 - 118:2 (Pappas Test.).)
The Court rescheduled the discovery hearing for February 1, 2007. (ECF No. 42.)
Subsequent forensic examination of Defendants’ computers showed that the CPI System
Registry reflected 9,282 user-initiated deletions of files from Pappas’s work computer between
my December 22, 2006 order and the February 1, 2007 discovery hearing. (July 22, 2009 Spruill
Report 3, ¶ 3.) The file s, with nam es like “bolla rdcad8.doc,” “China-6.zip,”
“nancadsamples.zip,” “UBBENCHCAD.doc,” and “vic tor.zip,” “appear to be related to ‘VSI-
20 At the parties’ initial Fed. R. Civ. P. 26(f) planning m eeting on January 18, 2007, VSI reiterated its request for im aging of Defendants’ drives. (Joint Rule 26 Report of the Parties 3, ECF No. 51.) 21 For the purpose of sanctions pursuant to Fe d. R. Civ. P. 37(b)(2) for failure to obey a discovery order, it was in the December 22, 2006 Order that I first made the duty to preserve part of a Court order in this case. However, it was not the only preservation order. As discussed below, I issued another preservation order on February 1, 2007. Additionally, on August 1, 2007, August 30, Septem ber 21, and October 3, 2007, I or dered Defendants to produce all relevant, non-privileged ESI and a privilege log to Plaintiff. (ECF Nos. 131, 145, 149, 164, 341-45.) 22
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like’ site furnishing, sale of products m ade in China, Nancad (the com pany in Argentina with
which Federico was af filiated), Digican, Victor Stanley products, Ecklund (a company that CPI
used to m anufacture site furnishings) and CAD drawings.” (Ninth Slaughenhoupt Aff. ¶ 33.)
Almost all of the deletions occurred on Janua ry 31, 2007, the eve of the discovery hearing. ( Id.
¶¶ 31, 44.) Pappas knew that the discovery heari ng would be held the ne xt day and that VSI’s interest in im aging his com puters “was at issue.” (Oct. 29, 2009 Hr’g Tr. 123:15 & 125:8-12
(Pappas Test.).)
Pappas testified that he believed that DeR ouen, CPI’s computer consultant, m ade the
January 31, 2007 deletions. (Id. at 33:3-4.) In a February 2010 affidavit, undoubtedly drafted by counsel, DeRouen stated that he deleted a folder on Pappas’s work computer containing the files in question because the folder was “a copy of a copy” of a folder that still existed on the server.
(DeRouen Aff. ¶ 7.) However, previously, in a June 2007 deposition, DeRouen had denied that he had ever deleted files from any CPI com puter. (DeRouen Dep. 42:17-19.) Moreover, in rebuttal to DeRouen’s February af fidavit, Plain tiff’s ESI consultant, Spruill, testif ied that th e deleted files could not have been a set of copies because, if that were the case, the files would have had been created m inutes or seconds apart, whereas in reality, the f iles were created years apart. (April 26, 2010 Hr’g Tr. 133:16 – 134:13.) Additionally, Spru ill testified that thos e deletions were not done by som eone who logged in rem otely (Dec. 1, 2009 Hr’g Tr. 166:2 –
168:21), m eaning that Pappas or someone at CPI deleted the da ta. In this regard, Pappas admitted he was present at the CPI o ffices on January 31, 20 07. (Oct. 29, 2009 Hr’g Tr. 122:2-
11 (Pappas Test.).) And, emails were sent from Pappas’s email account using that computer (not via remote access) just prior to and just afte r these deletions. (Ninth Slaughenhoupt Aff. ¶¶ 31-
32; Dec. 1, 2009 Hr’g T r. 167:8-25 (Spruill Test.).) Once again, the only rational conclusion to
23
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be drawn is that Pappas him self deleted the near ly ten thousand files during the discovery stay.
He did so with f ull awareness that I had issued a preservation order and that there was to be a
hearing to address, inter alia, Pla intiff’s com plaints rega rding the sufficiency of Defendants’
compliance with their discovery obligations. Thus , Pappas not only deleted the files, but did so
intentionally and willf ully. That he was willin g to do so in def iance of a Court preserv ation
order com pels the conclusion th at he viewed the files as both relevant and prejudicial to his
position in the litigation. Their unavailability for Plaintiff’s use is prejudicial to Plaintiff’s case.
Incredulously, Defendants again contend that these de leted f iles were “p reserved”
because they had been copied to the server. (Oct. 28, 2009 Rothschild Ltr.) Spruill testified that
“some” of the files deleted on January 31, 2007 “did reappear” in the middle of 2009, in a folder
called “Mark Copy” that appeared on the Ne w Server. (April 26, 2010 Hr’g Tr. 142:12-18.)
However, according to Spruill, the “Mark Cop y” folder did not conta in all of the deleted files
and, because someone ran the Disk Defragm enter program, as discussed below, he “was unable
to recover” the files th at did not reappear “i n any intelligible form .” (July 22, 2 009 Spruill
Report 4.) Also, as dis cussed, Spruill could n ot search the Old Serve r because it had become
corrupted. (Apr. 26, 2010 Hr’g Tr. 153:16-20, 155:11-16 (Spruill Test.).) Thus, I find that
Pappas deleted the files, and th e timing of the bulk of the dele tions immediately prior to the
scheduled discovery hearing suggests to m e that he deleted the files to prevent their discovery.
Given the file nam es, it is evident that th e files were relevant and would have supported
Plaintiff’s case, and I conclude th at Defendan ts breached thei r duty to preserve potentially relevant ESI.
24
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7. The Court Again Admonished Defendants of Their Duty to Preserve and Issued
Another Preservation Order, and Pappas Deleted Files and Used Programs to
Overwrite the Files
At the February 1, 2007 discovery hearing, noting that “certain em ails have been
deleted,” I again adm onished the p arties of thei r duty to preserve relevant ESI and instructed
counsel to explain to their clients the duty to preserve “all information that may . . . be relevant to
the claims and defenses.” (Feb. 1, 2007 Conf. Tr. 18:18-24- 19:1-3, 23:8, 24:3-5, Pl.’s Mot. Ex.
15, ECF No. 341-15.) I rem inded counsel that th e parties had a “duty to intervene and to
suspend any operations as part of an electronic records m anagement system that m ight need to
override [sic] or cause the loss and destruction [of ESI] that might be relevant.” (Id. at 18:18-23,
25:19 – 26:3.) Christopher Mohr, defense counsel at th e tim e, stated on the record that he
understood the Court’s admonitions and orders given durin g the discovery conference. ( Id. at
25:11, 25:14.) Further, Pappas ad mitted that Mohr spoke with him regarding m y instructions.
(Oct. 29, 2009 Hr’g Tr. 130:14 – 133:20 (Pappas Test.).)
Additionally, on February 1, 2007, I issued a wr itten Preservation Order that required the
parties to “m eet and confer . . . to narrow the range of inform ation sought” and stated that the
parties had been adm onished at the hearing of their “su bstantive duty to preserv e evidence
potentially relevant to the case, and . . . ordered to do so by the Court.” (Feb. 1, 2007 Order 2,
ECF No. 56.) Pappas later acknowledged learn ing of that Order, and he adm itted that there was
nothing about the Order that he did not understand, and that the C ourt’s statement regarding the duty to preserve “was very clear .” (Oct. 29, 2009 Hr’g Tr. 139:10 – 140:19 (Pappas Test.).) He stated that he “understood this Order to m ean that [he] had to m aintain a version/copy of [his] files that were related to the case.” (Feb. 16, 2010 Pappas Aff. ¶ 8.)
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During a February 2, 2007 conference, Defens e counsel agreed that Defendants would
follow “the two tier approach” out lined in this Court’s Suggested Protocol for Discovery of
Electronically Stored Infor mation (ECF No. 56-1) (“Suggested ESI Protocol”), 22 and that
“accessible files should be search ed and produced first.” (Feb. 2, 2007 Mohr Ltr. 3, Pl.’s Mot.
Ex. 22, ECF No. 341-22.) Defendants further agreed that the ESI would be produced in its
native format, an agreement that counsel conf irmed on several occasions. (Apr. 3 , 2007 Moh r
Ltr. 2, Pl.’s Mot. Ex. 23, ECF No. 341-23; Ap r. 19, 2007 Mohr Ltr. 1, P l.’s Mot. Ex. 24, ECF
No. 341-24.) ESI in its native format would include metadata, which would assist in establishing
who at CPI downloaded or altered the files at issue, and when and how they were altered.
Despite the discussion of preservation obl igations during the discovery hearing and conference and in the February 1, 2007 Order, in the weeks that followed, as described in further
detail below, a user logged into Pappas’s work computer as Pappas, ran a Disk Cleanup progra m
on it, deleted files, accessed the Registry Ed itor, and ran the system ’s Disk Defragm enter
program on the com puter. The Di sk Cleanup program e mpties the Recycle Bin and deletes
temporary internet files, i.e., records of web sites visited. (Dec. 1, 2009 Hr’g Tr. 52:20-25, 53:16
– 55:15, 57:1-3 (Spruill Test.).) Once deleted, a file can be overwritten by Disk De fragmenter, such that th e data is “lo st.” ( Id.) Indeed, defragm entation is som etimes used as “a m ethod to cover up deletions of data by elim inating all traces of deleted data.” RKI, Inc. v. Grimes, 177 F.
Supp. 2d 859, 870 (N.D. Ill. 2001 ). Addition ally, through the Regis try Edito r, a user m ay
“modify [and/or] delete . . . any of the settings w ithin the registry . . . . to rem ove or obfuscate data.” (Dec. 1, 2009 Hr’g Tr. 58:1-20 (Spruill Test.).) For this reason, Microsoft highly
22 Suggested Protocol for Discovery of Electronically Stored Information (“ESI”), www.mdd.uscourts.gov/news/news/ESIProtocol.pdf.
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discourages use of the Registry Editor. (Id. at 57:8-10, 58:8-9.) Thus, the net effect of accessing
the Registry Editor and running th e Disk Defragmenter program after deleting files and running the Disk Cleanup program was to ensure that deleted files could not be recovered.
The person who signed in as “Pappas” ran the Disk Cleanup program on Defe ndant
Pappas’s work computer on February 7, 2007; CPI ha d not used this progra m in the past. (Dec.
1, 2009 Hr’g Tr. 52:20-25, 53:16 – 55:15, 57:1-3 (Spruill Test.).) Between February 2, 2007 and
February 23, 2007, this user de leted 4,316 user-content files from Pa ppas’s work com puter.
(July 22, 2009 Spruill Report 3-4.) Almost all (3,969) of the deletions occurred between noon on
Friday, February 16, 2007, and early m orning on Saturday, Fe bruary 17, 2007. ( Id.; Feb. 16,
2010 Pappas Aff. ¶ 9) Additionally , on the ni ght of February 16, 2007, the user access ed the computer’s Registry Editor. (Dec. 1, 2009 Hr’g Tr. 58:1-20 (Spruill Test.).) Th ereafter, during the late morning of Saturday, February 17, 2007, this user successfully initiated an execution of the system’s Disk Defragmenter program. (July 22, 2009 Spruill Report 4.) Over 200 files were deleted on February 17, 2007, and as of that date, Pappas ha d permanently deleted over 1,000 files from the Recycle Bin. ( Id. at 3-4.) On July 1, 2009, Spruil l provided Defense counsel and
Defense ESI litigation consultant Turner with a list of the files that Pappas had deleted from his work computer and pro of that the Disk De fragmenter program had be en executed. ( Id.) The relevance of at lea st so me of the d eleted f iles is ev ident f rom the f ile names, which inc luded victor.zip, victordoor.zi p, victordoorall.zip, vict orhinge.jpg, victorlatc h.jpg, and sim ilar file names. (Ninth Slaughenhoupt Aff. ¶ 55.)
This was the first and only user-executed de fragmentation on Pappas’s work com puter.
(July 22, 2009 Spruill Report 4.) Importantly, the defragmentation was done just ahead of the scheduled imaging of Pappas’s work com puter during the week of Februa ry 21, 2007. (Oct. 29,
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2009 Hr’g Tr. 153:12-17, 161:8-11 (Pappas Test.).) Following the defragm entation, Plaintiff’s
ESI experts at Guidance Software were unable to recover any of the deleted files from Pappas’s
work computer “in any intellig ible form.” (July 22, 2009 S pruill Report 4.) Also, because the files were purged through the use of the Disk Cleanup and Disk Defr agmenter programs, they were not preserved on the server, despite Defendants’ contentions to the contrary.
DeRouen, CPI’s com puter consultant, testifie d that he probably ran the program s and deleted th e files as part of the sys tem “m aintenance” h e ran while working on Defendants’ computers from a rem ote location. (Apr. 26, 2010 Hr’g Tr. 31:13-25.) Yet, when questioned,
DeRouen agreed with Plaintiff’s counsel that he would not have selectively ope ned, examined, and deleted files as part of routine maintenance, as Plaintiff’s evidence demonstrates happened in this case. (Id. at 32:1-5.) Nonetheless, DeRouen claim ed that any files that were d eleted “were backed up on the server in two places.” (Id.)
Not so, according to Spruill, whose testim ony was far more cred ible than DeRouen’s.
Spruill testif ied that th e person who ran the Disk Def ragmenter pro gram was not working remotely (Dec. 1, 2009 Hr’g Tr. 166:8-25), and Pappas admitted he was the only person present at CPI’s offices at the tim e the Disk Defragm enter program was run. (Oct. 29, 2009 Hr’g Tr.
167:1 – 168:21 (Pappas Test.); see Ninth Slaughenhoupt Aff. ¶ 39.) The evidence of record convinces m e that Pappas was the person w ho deleted the files and executed the Disk
Defragmenter program, but if he did not, then it was DeRouen, the computer consultant Pappas retained and whose wife is a longstanding CPI office manager.
As the above factual summary amply demonstrates, much of what was deleted took place after I adm onished Defense counsel of the duty to preserve relevant evidence and after I had
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issued a written Preservation Order. Further, the occurrence of thes e deletions imm ediately before the scheduled im aging of Pappas’s com puter evidences purposeful violation of this
Court’s preservation orders, and a knowing violation of the duty to preserve potentially relevant evidence. These circumstances, combined with the purposeful destruction by Pappas of ESI that included files with n ames that make their relevance manifest, convince me that, as with oth er deletions already discussed, this was prejudicial to Plaintiff.
8. Pappas Failed to Preserve ESI When CPI Switched from the Old Server to the New
Server
Defendants ordered a new server on October 30, 2006, two weeks after this action began, and installed it in April, 2007. (Apr. 26, 2010 Hr’g Tr. 92:22 – 93:2 (DeRouen Test.).) DeRouen transferred the data on the “Old Server” to the “New Server” on April 21, 2007. ( Id. at 96:24 –
97:9.) It is unclear wh y Defendants replaced the Old Serv er. Acco rding to Papp as, the Old
Server “got corrupted.” (Oct. 29, 2009 H r’g Tr. 178:10-14, 181:11-15.) Ac cording to
DeRouen’s June 2007 testim ony, the Old Server was nearing its capacity when it w as replaced.
(DeRouen Dep. 16:15-16.) Spruill stated in a swor n affidavit, based on his exam ination of the
Old Server, that that th ere was no apparen t operational reason for ex changing servers in the middle of the ESI collection process that was taking place as part of the discovery in this cas e.
(Third Spruill Aff. ¶ 9.)
More fundam entally, Spruill stated that exchanging servers and failin g to preserv e the data on the Old Server would “cau se the irretrievable loss of some content and records of user activities th at would o therwise b e avai lable for recovery and analysis.” ( Id. ¶¶ 4-5.) Spruill specified that if a user moved deleted em ails from the deleted item s folder to the “ ‘Trash Bin,’”
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as “Mr. Pap pas testified that he rep eatedly did,” those items would not be m oved to the New
Server. (Id. ¶ 5.) Spruill stated that, to preserv e ESI that would be lost in the tran sfer, the Old
Server should have been—but was not—backed up before the data transfer. (Id. ¶ 6.)
DeRouen acknowledged that he had not transferred any deleted ESI. (Apr. 26, 2010 Hr’g
Tr. 101:5-20 (DeRouen Test.).) Nonetheless, he testified that the de leted ESI was preserved because it still exis ted on the Ol d Server, which was sent to Plain tiff. ( Id. a t 101:5-20.)
However, VSI did not receive the Old Server imm ediately; VSI a nd th e ESI litiga tion consultants, Turner and Spruill, d id not even le arn that th ere had been a server exch ange until
June 29, 2007, when DeRouen was deposed. (Def.’ s Resp. to Pl.’s Second Set of Interrog. #11,
Pl.’s Mot. Ex. 92, ECF No. 341-92; Dec. 2, 2009 Hr’g Tr. 29:21-25, 83:10-25, 142:18-24
(Turner Test.).) By the time VSI received the Old Server, it had become corrupted and could not be searched, and Spruill had to rely instead on a n image that Turner m ade of the Old Server on
July 13, 2007. (Apr. 26, 2010 Hr’g Tr. 153:16-2 0, 155:11-16 (Spruill Test.); Dec. 2, 2009 Hr’g
Tr. 85:3 – 86:4, 105:15 – 107:22 (Turner Test.).)
The com pleteness of T urner’s im age of the O ld Server, like the completen ess of her image of the New Server, is questionable. In he r February 9, 2009 report, Turner stated that the
Old Server “was not responsive to the im aging process,” so she created a targeted collection instead of imaging it in its entirety, and the ta rgeted collection did not include the unallocated spaces where deleted files would be stored. (Feb. 9, 2009 Turner Rep ort 3.) Notably, Pappas testified that he stored files in a deleted state; all files in a deleted state when Turner imaged the
Older Server would have been excluded. And, according to Spruill, th e Old Server had been purged before Turner had the opportunity to im age it, such that she could not have captured the deleted files if she had t ried. (Apr. 26, 2010 Hr ’g Tr. 153:24 – 154:20.) Although, as noted, a
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folder containing som e—but not all—of the files deleted on January 31, 2007, inexplicably
“reappeared” on the New Server, and ESI dele ted on January 17, 2007 was recovered from a
backup tape and produced for Plaintiff, that backup tape was the m ost recent backup tape
produced for the Old S erver. Therefore, other than those files in the folder that “r eappeared,”
Defendants failed to preserve any E SI deleted between Janu ary 18, 2007 and April 21, 2007,
when the Old Server was rep laced. The relevan ce of some of the files —those that were d eleted
permanently on January 31, 2007—is evident from their nam es, which include
“bollardcad8.doc,” “China-6.zip,” “nanca dsamples.zip,” “UBBENCHCAD.doc,” and
“victor.zip,” as discussed a bove. (Ninth Slaughenhoupt Aff. ¶ 33.) Although the contents,
quantity, and relevance of the other lost files are unknown, Defe ndants have failed to
demonstrate that what was not preserved was irrelevant, or its loss benign. The events
surrounding the switch from the Old to New Server, viewed in the context of everything else that
occurred, convince m e that what was lost included relevant ev idence, the absence of which
prejudices Plaintiff.
9. The Court Repeatedly Ordered the Production of ESI, and Pappas Used Programs
Called Easy Cleaner and CCleaner to Delete It
On August 1, 2007, August 30, 2007, September 21, 2007, and October 3, 2007, I
ordered Defendants to “produce all relevant, non-pr ivileged ESI” to Plaintif f’s counsel. (ECF
Nos. 131, 145, 149, and 164.) Non etheless, at the Decem ber 1, 2009 hearing, Plain tiff offered
evidence that someone at CPI used a program called Easy Cleaner to “scrub” or delete data from
Defendants’ computers and another called CCleaner “to clear up file content in sp ecific areas,
and . . . to go through the registry . . and clear out . . . dead registry entries” from the New Server
in July 2008 and August 2009, m onths after my seri es of orders, and over a year after m y two
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initial preservation orders. (Dec. 1, 2009 H r’g Tr. 118:6 – 119:14, 120:18- 22 (Spruill Test.);
Dec. 2, 2009 Hr’g Tr. 63:13-20 (T urner Test.).) DeRoue n, Defendants’ com puter consultant
over the past six y ears, admitted that he used the programs “for maintenance with all [ of his]
clients,” and he acknowledged that he had “installed CCleaner and Easy Cleaner on the New CPI
server,” even though he knew that litiga tion was ongoing and that both program s would
eliminate files like internet history files and temporary internet files. (DeRouen Aff. ¶ 14; April
26, 2010 Hr’g Tr. 112:2-25 (DeRouen Test.).)
Spruill testified that the only purpos e for us ing the Easy Cleaner was “ to permanently
destroy data,” and that “[t]he re’s absolutely no reason wh atsoever” f or a business under a preservation order to run a “scrubbing program ” such as Easy Cleaner. (April 26, 2010 Hr’g Tr.
119:1 – 121:14.) Spruill added that it was extrem ely difficult to perform a forensic examination of any computer system after Easy Cleaner had been used on it. ( Id. at 120:5-6.) DeRouen testified that CCleaner may have run “autom atically” in July and that h e did not “know why” i t
was run in August. (Apr. 26, 2010 Hr’g Tr. 107:20 – 110:6, 111:20-23.) Pappas stated that
CCleaner was run in August “without any instruc tion from [him] and without [his] knowledge.”
(Feb. 16, 2010 Pappas Aff. ¶ 13.) However, ne ither Pappas nor DeRouen provided credible testimony. Instead, I accept as credible Spruill’s version of the ev ents. Regardless of the “spin”
Defendants attempt to put on it, following a series of ESI preservation and production orders by
the Court, Defendants allowed th eir com puter consultan t to run p rograms that elim inated
temporary internet files. (Apr. 26, 2010 Hr’g Tr. 113:1-24 (DeRouen Test .).) It cannot be
ignored that this occurred in a case the essence of which involves surreptitious entry to Plaintiff’s
website for the purposes of downloading design drawings that Defendants then pirated and
misrepresented to be their own in order to com pete with Pla intiff. It is no coincide nce that th e
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deleted files included those s howing the inte rnet s ite tha t Defendants had accessed. I a m persuaded that these files were relevant, and that their loss caused prejudice to Plaintiff.
10. Plaintiff Moves for Spoliation Sanctions
Plaintiff filed its fourth motion for sanctions, the subject of this Memorandum, Order and
Recommendation, alleging “CPI and Pappas’ destru ction of the key evidence and other form s of misconduct” and seeking a default judgm ent as “the only effective m ethod to punish such egregious conduct, deter others, and fully mitigate the prejudice to VSI and the judicial process.”
(Pl.’s Mot. 45.) Plaintiff also seeks a civil fine and a “referral for criminal prosecution against
Pappas”; and attorney’s fees and costs, including costs related to all of Plaintiff’s ESI m otions and efforts to “uncover[] De fendants’ discovery abuses.” ( Id. at 97-98.) Alternatively, Plaintiff seeks leave to amend its Rule 26 disclosures and reports, and asks the cour t to reopen discovery and “to enter a perm anent injunction against Pappas and CPI as requested in the Verified
Complaint.” (Id. at 98.)
In their Opposition, Defendants adm it that “certain CPI ESI was deleted by Pappas and
CPI’s Computer Engineer Evan DeRouen and/or others after CPI was served with the lawsuit and after a preservation order was issued,” although they “deny th at the deletions were done for the purpose of withholding ESI from VSI.” (Defs.’ Opp’n 2.) Defendants also admit that fifteen
CPI products were based on VSI designs. (Defs.’ Surreply 5.) Defendants state that they “are willing to accept as a sanction . . . a consent judgment on liability for copyright infringement and a consent injunction on Plainti ff’s copyright claim .” (Defs. ’ Opp’n 29.) In their view,
“[c]opyright infringement has always been the heart of [VSI’s] case.” (Defs.’ Surreply 1.)
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As will be discussed in greater detail be low, assessing app ropriate sanctions for proven failure to preserve evidence, whether ESI or not, is a complex task, made so in large part by the need to evaluate the relevance of the evidence lost and the prejudice to the party claiming injury because of the spoliation. In the sections above I have described eight ways in which Defendants willfully an d perm anently de stroyed evidenc e rela ted to this lawsuit, as well as their f ailed attempts to destroy evid ence that later was re covered. In each section I have explained th e relevance of the evidence lost and why the loss caused p rejudice to P laintiff in prosecuting its case. Taken individually, each section dem onstrates in tentional m isconduct do ne with the purpose of concealing or destroyin g evidenc e. Collec tively, they con stitute the s ingle m ost egregious example of spoliation that I have encountered in any case that I have handled or in any case described in the legion of spoliation cases I have read in nearly fourteen years on the bench.
When reading other spoliation cases, it appears that frequently the Court finds culpable conduct, often gross negligence or intent ional wrongdoing, but there is real ly no convincing showing that what was lost was harmful or that, despite the obvious frustration and c onsiderable expense of chasing down the facts to prove the spoliation, th e party that proved the spoliation was actually handicapped in proving its case in any significant way. In Rimkus Consulting Group, Inc. v.
Cammarata, 688 F. Supp. 2d 598, 607-08 (S.D. Tex. 2010), for exa mple, the defendants were found to have comm itted inten tional destructio n of ESI, but what was lost in cluded evidence helpful to the spoliators, as well as harmful. Faced with bad conduct but m inimal prejud ice, courts are understandably reluct ant to im pose the m ost severe sanctions, especially case- dispositive ones.
But this case is in an entir ely different posture. Plaintiff has proved grave m isconduct that was undertaken for the pu rpose of thwarting Plaintiff’s ability to p rove its c ase and f or the
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express purpose of ha mstringing this Court’s abil ity to effect a just, speedy, and inexpensive
resolution of a serious commercial tort. The prejudice to Plaintiff is clear and has been described
in each of the sections above. It is helpful, but of little co mfort, that Defendants them selves
agree with my assessm ent that the lost or de stroyed ESI was relevant, and its absence as
evidence prejudicial to Plaintiff. At the he aring held on June 25, 2010, counsel for Defendants
stated:
[W]e’ve given up on prejudice . . . . [with regard to Plaintif f’s copyright claim] which I th ink was the appropr iate thi ng to do. W e gave up on the issue of relevance, and so I would think that th e Court would decide what the profits should be from those 15 products, and then the Court . . . w ould determine what would be the appropriate attorneys’ fees . . . . (June 25, 2010 Hr’g Tr. 3:16-22.) Having chronicled what happened and the effect that it had on
Plaintiff’s ability to pro secute its claims and the C ourt’s ability to ensu re a f air trial, I will turn
now to a discussion of the law governing where we go from here, given what we know.
II. DISCUSSION
Plaintiff asks the Court to sanction Defendants for their23 spoliation of evidence, which is
“the destruction or m aterial al teration of evidence or . . . the failure to preserve property for
23 VSI alleges that “Defendants’ m isconduct and their three year evasion of their [prior] discovery obligations have been further aide d and abetted by questio nable conduct by their [former] counsel at various tim es and by DeRouen.” Pl.’s Mot. 73. Insofar as Plaintiff alleges spoliation b y the attorn eys who r epresented D efendants e arlier in this litigation, Defendants’ previous attorneys acted as Defendants’ agen ts. See Link v. Wabash R.R., 370 U.S. 626, 633-34 (1962) (stating that attorney is a “freely selected agent” such that there was “no m erit to the contention that dism issal of petitioner' s clai m because of his coun sel's unexcused conduct imposes an unjust penalty on the client”); Rouse v. Lee, 339 F.3d 238, 249 (4th Cir. 2003) (“Former counsel's errors are attributable to [pla intiff] not because he participated in, ratified, or condoned their decisions, but because they were his agents, and their actions were attributable to him under s tandard principles of agency.”). Ther efore, any such spoliation is attributable to Defendants. See Goodman v. Praxair Servs., LLC, 632 F. Supp. 2d 494, 522 n.16 (D. Md. 2009) (“A party may be held responsible for the spo liation of relevant evidence done by its agents. See N.J. Mfrs. Ins. Co. v. Hearth & Home Techs., Inc., No. 3:06-CV-2234, 2008 WL 2571227, at *7 35
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another's us e as ev idence in p ending or reaso nably fores eeable litig ation.” Silvestri v. Gen.
Motors Corp., 271 F.3d 583, 590 (4th Cir. 2001); see Goodman v. Praxair Servs., Inc., 632 F.
Supp. 2d 494, 505 (D. Md. 2009); Sampson v. City of Cambridge, 251 F.R.D. 172, 179 (D. Md.
2008); Broccoli v. Echostar Commc’ns Corp., 229 F.R.D. 506, 510 (D. Md. 2005); Thompson v.
U.S. Dep’t of Hous. & Urban Dev., 219 F.R.D. 93, 100 (D. Md. 2003); T HE SEDONA
CONFERENCE, THE SEDONA CONFERENCE GLOSSARY: E-DISCOVERY & DIGITAL INFORMATION
MANAGEMENT 48 (2d ed. 2007), available at http://w ww.thesedonaconference.org/content/ miscFiles/TSCGlossary_12_07.pdf (“S EDONA CONFERENCE GLOSSARY”) (“Spoliation is th e destruction of records or prope rties, such as m etadata, that m ay be relevant to ongoing or anticipated litigation, government investigation or audit.”).
Motions seeking sanctions for spoliation stem from alleged destruc tion of or f ailure to preserve potentially rele vant evidence. W hen the spoliation involves ESI, the related issues of whether a party properly preser ved relevant ESI and, if not, what spoliation sanctions are appropriate, have proven to be one of the most challenging tasks for judges, lawyers, and clients.
Recent decisions, discu ssed below, have gene rated concern througho ut the coun try am ong lawyers and institutional clients regarding the lack of a uniform natio nal standard governing
(M.D. Pa. June 25, 2008) (‘A party to a law suit, and its agents, have an affir mative responsibility to preserve relevant evidence. A [party] ... is not relieved of this responsibility merely because the [ party] did not itself act in bad faith and a third party to whom [the party] entrusted the evidence was the on e who disca rded or lost it.’) (citations omitted). Thus, agenc y law is directly applicable to a spoliation m otion, and the level of culpability of the agent can be imputed to the m aster. See, e.g., Nucor Corp. v. Bell, 251 F.R.D. 191, 198-99 (D .S.C. 2008) (agent's willful ‘alteration or de struction of relevant data’ on laptop was directly attributable to defendant); Connor v. Sun Trust Bank, 546 F. Supp. 2d 1360 (N.D. Ga. 2008) (agent' s bad faith destruction of email was attributable to defendant).”); accord Silvestri v. Gen. Motors Corp., 271 F.3d 583, 592 (4th Cir. 2001) (concl uding that later-disch arged attorney’s actions could be imputed to plaintiff). Because Defendants’ previous a ttorneys an d DeRouen, Defendants’ computer consultant, are not partie s to this action, any claims against them as individuals, rather than agents of Defendants, would have to be brought as a separate action. 36
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when the d uty to pre serve po tentially releva nt eviden ce comm ences, the level of culpab ility
required to justify sanctions, the nature and seve rity of appropriate sanctions, and the scope of the duty to preserve evidence and whether it is tem pered by the sam e principles of proportionality that Fed. R. Civ. P. 26(b)(2)(C) applies to all discovery in civil cases. 24
Moreover, concern has been expressed by som e commentato rs th at c ourt decisions finding spoliation and imposing sanctions have, in some instances, imposed standards approaching strict liability for loss of evidence, without adequately taking into accou nt the difficulty— if not impossibility—of preserving all ESI that m ay be relevant to a lawsuit, th e reasonableness of the measures that were tak en to try to preserve re levant ESI, or whether the costs that would be incurred by m ore com plete preservation would be disprop ortionately great when com pared to what is at issue in the case.25 The lack of a national standard , or even a consensus am ong courts
in different jurisdictions about what standa rds should govern preservation/spoliation issues,
appears to have exacerbated this problem. It is not an exaggeration to s ay that many lawyers, as
well as institutional, organizational, or governm ental litigants, view preservation ob ligations as
24 See Lawyers for Civil Justice, et al., Reshaping the Rules of Civil Procedure for the 21st Century: The Need for Clear, Concise, and Meaningful Amendments to Key Rules of Civil Procedure (2010 Conf. on Civil Litig., May 2, 2010); Da n H. W illoughby, Jr. & R ose Hunter Jones, Sanctions for E-Discovery Violations: By the Numbers (2010 C onf. on Civil Litig., May 2010); Thom as Y. Allm an, Amending the Federal Rules: The Path to an Effective Duty To Preserve 5 (2010 Conf. on Civil Litig., June 15, 2010); Paul W. Grimm, Michael D. Berm an, Conor R. Cr owley, Leslie W harton, Proportionality in the Post-Hoc Analysis of Pre-Litigation Preservation Decisions, 37 U. Balt. L. Rev. 381, 388 (2008). The 2010 Conference on Civil Litigation papers are availab le on the Conf erence’s website a t http://civilconference.uscourts.gov/LotusQuickr/dcc/Main.nsf/h_RoomHome/4df38292d748069 d0525670800167212/?OpenDocument, under the links for Papers and Empirical Research.
25 See Robert E. Shapiro, Conclusion Assumed, 36 LITIG. 59 (ABA Spring 2010). 37
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one of the greatest con tributors to the cos t of litigation be ing disproportionately expensive in cases where ESI will play an evidentiary role.26
Nothing in this m emorandum should add to this collective anxiety. Defendants do not dispute that spoliation took place, relevan t ev idence was lost, and Plaintiff wa s prejud iced accordingly; that Defendants’ m isconduct was suffi ciently egregious to warrant sanctions; an d that the sanctions warranted are serious. Nor is this a case where Defendants have claim ed or demonstrated that what they did was reasonabl e and involved effort and expense that were proportionate to what is at stake in the litigation. In such an instance, the Court could be excused for sim ply acknowledging Defenda nts’ concessions and applying the applicable law of the
Fourth Circuit without consider ing the broader legal context in which preserva tion/spoliation issues are playing out in litigation a cross the country. W hile justified, such a narrow analysis would be of little use to lawyer s and their clients who are forced, on a daily basis, to m ake important decisions in their cases regarding preservation/spoliation issues, and for whom a more expansive examination of the broader issue m ight be of som e assistance. Accordingly, I will attempt to s ynthesize not only the law of this Dist rict and Circuit, bu t also to put it with in the context of the state of the law in other circuits as well. I h ope that th is analys is will p rovide counsel with an analytical fram ework that m ay enable them to resolve preservation/spoliation issues with a greater level of comfort that their actions will no t expose them to disproportionate costs or unpredictable outcomes of spoliation motions.27
26 See articles cited at note 24, supra.
27 In this regard, I have attached as an appe ndix to this m emorandum a chart that contains citations to cases d iscussing preservation and sp oliation in e ach of the circuits and a ttempts to break them down into discre te sub-issues to facilitate comparison of the position s taken by the circuits, and where applicable, districts within a particular circuit. 38
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A. The Court’s Authority to Impose Spoliation Sanctions
To resolve the issue of appropriate sanctions for spoliation, the court must consider the
source and nature of its author ity to im pose such sanctions. Two “m ain” sources supply the
court with authority to impose sanctions ag ainst a party for spoliation of evidence. Goodman,
632 F. Supp. 2d at 505.
First, the re is the “ court's inheren t pow er to c ontrol the j udicial process and litigation, a power that is necessary to re dress conduct ‘which abuses th e judicial process.’” United Med. Supply Co. v. United States, 77 F ed. Cl. 257, 263-64 (2007) (quoting Chambers v. NASCO, Inc., 501 U.S. 32, 45-46, 111 S. Ct. 2123, 115 L. Ed. 2d 27 (1991)); accord Thompson, 219 F.R.D. at 100 (quoting Silvestri, 271 F.3d at 590); see also Adkins v. Wolever, 554 F.3d 650, 652 (6th C ir. 2009); Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006); Flury v. Daimler Chrysler Corp., 427 F.3d 939, 944 (11th Cir. 2005); In re NTL, Inc. Secs. Litig., 244 F.R.D. 179, 191 (S.D.N.Y. 2007). Second, if the spoliation violates a specific court order or disrupts the court' s discovery plan, sanctions also m ay be imposed under Fed. R. Civ. P. 37. United Med. Supply Co., 77 Fed. Cl. at 264, cited in Sampson, 251 F.R.D. at 178. Id. at 505-06 (some citations omitted). The court’s inherent authority arises “when a party deceives a court or abuses the process at a level that is utterly inconsistent with the ord erly administration of justice or undermines the integrity of the process.” United States v. Shaffer Equip. Co., 11 F.3d 450, 462 (4th Cir. 1993).
For almost two centuries, it has been established that “[c]ertain implied powers must necessarily result to our Courts of justice from the nature of their instituti on. . . . because they are necessary to th e exercise of all others” and they enab le c ourts “ to pr eserve [t heir] own existence and promote the end and object of [their] creation.” United States v. Hudson, 11 U.S. (7 Cranch) 32,
33-34 (1812); see Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991) (quoting Hudson, 7 Cranch at 34); Roadway Exp., Inc. v. Piper, 447 U.S. 752, 764 (1980) (same), superseded on other
grounds by statute as stated in Morris v. Adams-Millis Corp., 758 F.2d 1352, 1357 n.7 (10th Cir.
1985); Shaffer Equip. Co., 11 F.3d at 462 (“This power is organi c, without need of a statute or
39
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rule f or its def inition, and it is necessa ry to the exercise of all other powers.”). Thus,
undergirding this authority “is the need to preserve the integrity of the judicial process in order to
retain confidence that the pro cess works to uncover the truth.” Pension Comm. of Univ. of
Montreal Pension Plan v. Banc of Am. Sec., 685 F. Supp. 2d 456, 465 (S.D.N.Y. 2010).
Pursuant to their inherent authority, cour ts may im pose fines or prison sentences for
contempt and enforce “the observance of order.” Hudson, 7 Cranch at 34. Additionally, they may “prevent undue delays in the disposition of pending cases and . . . avoid congestion in the calendars of the District Courts,” such as by dism issing a case. Roadway Exp., 447 U.S. at 765
(discussing inherent authority of co urt to d ismiss cas e f or f ailure to p rosecute); see Link v.
Wabash R.R., 370 U.S. 626, 629-30 (1962) (sam e); see also Shaffer Equip. Co., 11 F.3d at 462
(noting court’s authority to dismiss for abuse of judicial pr ocess). And, the courts may “im pose
order, respect, decorum, silence, and compliance with lawful mandates.” Shaffer Equip. Co., 11
F.3d at 461.
However, the court’s inherent authority onl y m ay be exercised to sanction “bad -faith
conduct,” Chambers, 501 U.S. at 50, and “m ust be exercised with restraint and discretion,” id. at
44; see Shaffer Equip. Co., 11 F.3d at 461-62 (the court’s i nherent power “m ust be exercised
with the greatest restraint and caution, and then only to the extent necessary”). “‘[ I]ts reach is
limited by its ultimate source—the court’s need to orderly and expeditiously perform its duties.’”
Rimkus Consulting Group, Inc. v. Cammarata, 688 F. Supp. 2d 598, 611 (S.D. Tex. 2010)
(quoting Newby v. Enron Corp., 302 F.3d 295, 302 (5th Cir. 2002). Thus, the court relies instead
on statutory authority or rules when applicable. Id. at 611-12.
Rule 37(b)(2), pertaining to sanctions for failure to comply with a court order, provides:
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(A) For Not Obeying a Discovery Order. If a party or a party' s officer, director, or m anaging agent—or a witn ess designated under Rule 30(b)(6) or 31(a)(4)—fails to ob ey an order to provide or pe rmit discovery, including an order under Rule 26(f), 35, or 37(a), the court where the action is pending m ay issue further just orders. They may include the following: (i) d irecting that th e m atters embraced in the order o r other designated facts be taken as establis hed for purposes of the action, as the prevailing party claims; (ii) prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated m atters in evidence; (iii) striking pleadings in whole or in part; (iv) staying further proceedings until the order is obeyed; (v) dismissing the action or proceeding in whole or in part; (vi) rendering a default judgment against the disobedient party; or (vii) treating as contempt of c ourt the failure to obey any order except an order to submit to a physical or mental examination. . . . . (C) Payment of Expenses. Instead of or in addition to the orders above, the court must order the disobedient party, the attorney advi sing that party, or both to pay the reasonable expenses, including attorney's fees, caused by the failure, unless the f ailure was substantia lly justif ied o r other circ umstances m ake an award of expenses unjust. In this case, I issued a s eries of ord ers to preserve eviden ce, including ESI, and ano ther series of orders to produce ESI evidence, all of which were violated. As discussed above, after each of them, Pappas and CPI destroyed ESI evidence:
1. On Dece mber 22, 2006, I issued an order st aying discovery until after a discovery
hearing scheduled for January 18, 20 07, and included in it an admonition that the parties
had a duty to preserve evidence, incl uding ESI. ECF No. 41. P appas had actual
knowledge of the order and understood its import. Between the issuance of my order and
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the hearing, Pappas deleted 9,282 files from his work computer, most of them on the eve
of the discovery hearing. 28
2. On February 1, 2007, I orally admonished couns el of their clients’ duty to preserve
relevant ESI, and ordered counsel to explain this duty to their clients. I followed this up
the sam e day with a written prese rvation order, ECF No. 56, which Pappas knew had
been issued. Between F ebruary 2 and 23, 2007 , Pappas ran or caused to be run a Disk
Cleanup program on his work com puter, deleted files, entered his com puter’s Registry
Editor, and ran the system’s Disk Defragmenter program on the computer. This occurred
shortly before the scheduled imaging of Pappas’s work computer.29
3. I issued orders on the following dates to produce or permit discovery: August 1 and 30,
September 21, and October 3, 2007. ECF Nos. 131, 145, 149, and 164. After those
orders were issued, between July 2008 and August 2009, Pappas or DeRouen ran the
CCleaner and Easy Cleaner programs on CPI’s New Server and scrubbed (deleted) ESI.30
While it is clea r that I have authority pursuant to Rule 37( b)(2)(A) to im pose sanctions for the violation of m y four or ders to produce discovery, it must be determ ined whether I have authority to do so for vi olation of my three pres ervation orders, in which I ordered that ESI be preserved, but did not at that tim e order its actual production. For the reasons that follow, I conclude that I do.
On its face, Rule 37(b)(2) perm its sanctions for disobedience of “an ord er to provide or permit discovery, including an order under Rule 26(f), 35, or 37(a).” (Em phasis added.) The
28 See discussion, supra, in Section I.6, at pages 21-24.
29 See discussion, supra, in Section I.7, at pages 24-28.
30 See discussion, supra, in Section I.9, at pages 31-32. 42
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rule does not define what is m eant by “pr ovide or perm it” discove ry, but the advisory committee’s notes to R ule 37 reflect that subs ection (b) was am ended in 1970 to broaden the ability of a court to sanction for a violatio n of discovery. Fed. R. Civ. P. 37 advisory committee’s note to the 1970 amendment to subdiv. (b). The Advisory Committee observed that
“[v]arious rules authorize orders for discovery— e.g., Rule 35(b)(1), R ule 26(c) as revised, Rule
37(d). Rule 37(b)(2) should provide com prehensively for enforcem ent of all these o rders.” Id.
The advisory comm ittee’s note following the 1980 a mendment to Rule 37 refers to newly-
enacted Rule 26(f), which governs discovery conferences, and states that Rule 26(f) requires “an
order respecting the subsequent conduct of discovery” following such a meeting. Fed. R. Civ. P.
37 advisory comm ittee’s note to the 1980 am endment to subdiv. (b)(2). This reference is
particularly im portant because, as am ended in 2006, Rule 26(f) specifically contemplates th at
when the parties m eet and confer to discuss discovery, they must, inter alia, “discuss any issues
about preserving discoverable information.” Thus, it cannot seriously be questioned that a court
order to preserve inform ation, including ESI, ha s as its core purpose the objective of ensuring
that the ESI can be “provided” du ring discovery, and is intended to “permit” that discovery. It would clearly violate the purpose of Rule 37(b) if a court were unable to sanction a party for violating the court’s order to preserve evidence simply because that ord er did not also order th e production of the evidence. As will be discussed below, the duty to preserve relevant evidence is
a common law duty, not a rule-based duty. It therefore is no surprise that Rule 37(b)(2) does not
specifically refer to court orders to “ preserve” evidence. The reference to Rule 26(f), however,
which does specif ically refer to preservation obligations, m akes it cl ear that cou rt orders issued
to enforce discovery p lans ag reed to by the pa rties, which include pr eservation obligations,
would be enforceable by Rule 37(b)(2) s anctions. If so, then it is e qually com pelling that a
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preservation order issued by the court sua sponte, and designed to govern the discovery process by ensuring that the evidence to be preserved, if within the scope of discoverable information,
may be provided in response to an appropriate discover y request, also is an order to “perm it
discovery.” To reach a contrary conclusion would be to exalt form over substance.
Moreover, it is clear that courts have broa dly interpreted the authority granted by Rule
37(b)(2) to perm it sanctions for failures to obey a wide variety of ord ers intended to “p ermit
discovery.” See, e.g., Hathcock v. Navistar Int’l Transp. Co., 53 F.3d 36, 40 (4th Cir. 1995)
(holding that a trial court had the authority to im pose a defau lt jud gment as a sanction f or violating a Rule 16 scheduling order, pursuant to Rule 37(b)(2); stating “we agree with the basic premise that a default sanction can, under certain circumstances, be an appropriate response to a violation of a Rule 16 order. After all, the express terms of Rule 37 permit a trial court to impose sanctions when a party fails to obey an order to provide or permit discovery”); Quela v. Payco-
Gen. Am. Creditas, Inc., No. 99-C-1904, 2000 W L 656681, at *6 (N.D. Ill. May 18, 2000)
(“Although the language of Rule 37 requires viola tion of a judicial order in order to im pose sanctions, a f ormal, written order to com ply with discovery is not requir ed. Courts can broadly interpret what cons titutes an o rder f or purposes of im posing sanctions.”) (citing Brandt v.
Vulcan, Inc., 30 F.3d 752, 756 n.7 (7th Cir. 1994) (“W hile courts have only applied Rule
37(b)(2) w here parties have violated a court or der, c ourts ha ve broa dly inte rpreted what constitutes an “order” for purposes of imposing sanctions.”)); REP MCR Realty, L.L.C. v. Lynch,
363 F. Supp. 2d 984, 998 (N.D. Ill. 2005) (quoting Quela, 2000 W L 656681, at *6), aff’d, 200
Fed. App’x 592 (7th Cir. 2006). Indeed, courts have stated summarily that Rule 37(b)(2) sanctions may stem from failure to com ply w ith a preservation order, or operated under that assumption. See Pitney Bowes Gov’t Solutions, Inc. v. United States, 93 Fed. Cl. 327, 336 (2010)
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(“Spoliation m ay result in sanctions . . . gr ounded in contravention of specific discovery or
document-preservation orders.”) (emphasis added); United Med. Supply Co. v. United States, 77
Fed. Cl. 257, 271 (2007) (ordering sanctions for spoliation pursuant to court’s inherent authority,
for spoliation predating court’s first preservation order, and Ru le 37(b), for spoliation following
the date on which “the c ourt ordered defendant to be prepared to specify the steps that would be
taken to prevent further spoliation, or, at th e latest, Decem ber 5, 2005, when, as describ ed in
greater detail below, the cour t warned defendant that any fu rther document destruction would
lead to sanctions”); Treppel v. Biovail Corp., 249 F.R.D. 111, 119-20 (S.D.N.Y. 2008) (“‘W here
a party vio lates an ord er to pres erve eviden ce or f ails to com ply with an o rder com pelling
discovery because it has destroyed the evidence in question, it is subject to sanctions under Rule
37(b) of th e Feder al R ules of Civ il Pro cedure f or f ailure to com ply with a co urt o rder.’”)
(quoting In re WRT Energy Sec. Litig., 246 F.R.D. 185, 194 (S.D.N.Y. 2007); Wm. T. Thompson
Co. v. Gen. Nutrition Corp., 104 F.R.D. 119, 121 (C.D. Cal. 1985) (concluding that “oral
document preservation order” that later “was re duced to writing and filed” was an order “to
provide or perm it discovery . . . upon which m onetary sanctions m ay be awarded under Rule
37(b)”). For these reasons, I conclude that this Court has th e authority to impose Rule 37(b)(2)
sanctions, if otherwise appropriate , for violations of a Court-issu ed preservation order, even if
that order does not actu ally order the actual production of the evidence to be preserved.
Additionally, of course, the Court’ s authority to im pose Rule 37(b)(2) sanctions for violation of its serial orders to actually produce ESI, is equally clear.
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B. Proof of Sanction-Worthy Spoliation
In the Fourth Circuit, to prove spoliation that warrants a sanction, a party must show:
“(1) [T]he party having control over the ev idence had an obligation to preserve it when it was destroyed or altered; (2) the destruction or loss was accompanied by a “culpable state of m ind;” and (3) th e evidence that was destroyed or altered was “relevant” to the claim s or defenses of the party that sought the discovery of the spoliated evidence, to th e extent tha t a reasonable factfinder could conclude that the lost evidence would have supported the claim s or de fenses of the party that sought it.” Goodman, 632 F. Supp. 2d at 509 (quoting Thompson, 219 F.R.D. at 101). Di strict courts in the
Second, Fifth, Sixth, Seventh, and Ni nth Circuits have identified the same factors for sanction- worthy spoliation. 31 See Jones v. Bremen High Sch. Dist. 228, No. 08-C-3548, 2010 W L
2106640, at *5 (N.D. Ill. May 25, 2010); In re Global Technovations, Inc., 431 B.R. 739, 778
(Bankr. E.D. Mich. 2010); Pension Comm., 685 F. Supp. 2d at 467; Rimkus, 688 F. Supp. 2d at
615-16; Melendres v. Arpaio, No. CV-07-2513-PHX-GMS, 2010 WL 582189, at *4 (D. Ariz.
Feb. 12, 2010). The first elem ent involves both the dut y to preserve and the breach of that duty through the destruction or alte ration of the evidence. See Jones, 2010 WL 2106640, at *5 (“T o
31 The same factors can be culled from the case law in most other circuits. See, e.g., D’Onofrio v. SFX Sports Grp., Inc., No. 06-687 (JDB/JMF), 2010 WL 3324964, at *5 (D.D.C. Aug. 24, 2010) (stating th e sam e f actors in the con text of an adverse inference specifically ); Managed Care Solutions, Inc. v. Essent Healthcare, Inc., No. 09-60351-CIV, 2010 WL 3368654, at *4 (S.D. Fla. Aug. 23, 2010) (also requiring that lost evidence have been “crucial to the m ovant being able to prove its prima facie case or defense”). However, some courts address the factors in the context of two separate issues: was there spolia tion, and if so, what sa nctions are appropriate, with state of m ind only figuri ng into the s econd issue. See, e.g., Turner v. Pub. Serv. Co. of Colo., 563 F.3d 1136, 1149 (10th Cir. 2009); Wright v. City of Salisbury, No. 2:07CV0056 AGF, 2010 WL 126011, at *2 (E.D. Mo. Jan. 7, 2010); Bensel v. Allied Pilots Ass'n, 263 F.R.D. 150, 152 (D.N.J. 2009); Velez v. Marriott PR Mgmt., Inc., 590 F. Supp. 2d 235, 258 (D.P.R. 2008); Hofer v. Gap, Inc., 516, F. Supp. 2d 161, 170 (D. Mass. 2007). The Fede ral Circuit “applies the law of the regional circuit from which the cas e arose” wh en reviewin g sanction orders. Monsanto Co. v. Ralph, 382 F.3d 1374, 1380 (Fed. Cir. 2004).
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find that sanctions for spoliation are appr opriate, the Court must find the following: 1) that there
was a duty to preserve the specific documents and/or evidence, 2) that the duty was breached, 3)
that the other party was harm ed by the breach, and 4) that the breach was caused by the
breaching party's wilfulness, bad faith, or fault.”) (emphasis added).
1. Duty to Preserve Evidence and Breach of that Duty
The first co nsideration is whether the allege d spoliator had a duty to preserve the lost
evidence and breached that duty. “Absent some countervailing factor, there is no general duty to
preserve documents, things, or information, whether electronically stored or otherwise.” Paul W.
Grimm, Michael D. Berm an, Conor R. Crowley, Leslie W harton, Proportionality in the Post-
Hoc Analysis of Pre-Litigation Preservation Decisions, 37 U. BALT. L. REV. 381, 388 (2008).
Yet, it is well established that “[a] formal discovery request is not necessary to trigger the duty to preserve evidence.” Krumwiede v. Brighton Assocs., L.L.C., No. 05-C-3003, 2006 WL 1308629, at *8 (N.D. Ill. May 8, 2006). Rather, the duty “ may arise from statutes, regulations, ethical rules, court orders, or the comm on law. . . . , a contract, or another sp ecial circum stance.”
Grimm, 37 U. BALT. L. REV. at 390. Thus, any preservation order that the Court m ay issue obligates th e parties to preserv e evidence, an d the Court has the au thority to enforce that obligation under Rule 37, as discussed supra. But, the obligation existed prior to the order; only its mechanism of enforcement changes with the Court order.
The common law im poses the obligation to p reserve ev idence from t he m oment that litigation is reasonably anticipated. See Silvestri, 271 F.3d at 591 (“The duty to preserve material evidence arises not only during litigation bu t also extends to that p eriod bef ore the litiga tion when a party reasonably should know that the evidence m ay be rele vant to anticipated
litigation.”); Goodman, 632 F. Supp. 2d at 509 (sam e); Pension Comm., 685 F. Supp. 2d at 466 47
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(same); Grimm, U. BALT. L. REV. at 390 n.38 (“‘All circuits recognize the duty to preserve
information relevant to antic ipated or existing litigation.’”) (citation omitted); see also Leon v.
IDX Sys. Corp., 464 F.3d 951, 959 (9th Cir. 2006) (duty to preserve exists when party had
“‘some notice that the docum ents were potentially relevant to the litigation before they were destroyed’”) (citation omitted). Moreover, “this duty arises at the point in time when litigation is reasonably anticipated w hether the organization is the initiator or the targ et of litigation.” T HE
SEDONA CONFERENCE, THE SEDONA CONFERENCE COMMENTARY O N LEGAL HOLDS: THE
TRIGGER AND THE PROCESS 3 (public cm t. ed. Aug. 2007), available at
http://www.thesedonaconference.org/content/miscFiles/Legal_holds.pdf (“Le gal Holds”). For
example, in Sampson, 251 F.R.D. at 181, the defendant’s duty arose no later than the date when
plaintiff’s counsel, prior to filing the complaint, asked the defendant by letter to preserve relevant
evidence. However, a future litigant is not required to make such a request, “and a fa ilure to do so does not vitiate the independent obligation of an adverse party to preserve such inform ation” if the adverse party knows or s hould know of impending litigation. Thompson, 219 F.R.D. at
100. Thus, the duty exists, for a defendant, at the latest, when the defendant is served with the complaint. See Nucor Corp. v. Bell, 251 F.R.D. 191, 197 (D.S.C. 2009) (stating that “defendants
each had a duty to pres erve the data beginning no later th an those dates” on which plaintiff
served the com plaint o n each d efendant); see also Cache La Poudre Feeds, LLC v. Land
O’Lakes, Inc., 244 F.R.D. 614, 621 (D. Colo. 2007) (“In m ost cases, the duty to preserve
evidence is trigg ered by the f iling of a lawsuit.” ); Krumwiede, 2006 W L 1308629, at *8 (“The
filing of a complaint may alert a party that certain information is relevant and likely to be sought
in discovery.”).
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The duty to preserve evidence “includes an obligation to identify, locate, and m aintain,
information that is re levant to spe cific, pred ictable, and identif iable litig ation.” Legal Holds,
supra, at 3. It is well established that the duty pertains only to relevant documents. See Pension
Comm., 685 F. Supp. 2d at 464. Relevant documents include:
[A]ny documents or tangible things (as de fined by [Fed. R. Ci v. P. 34(a))] m ade by individuals “likely to have discoverabl e information that the dis closing party may use to support its claim s or defens es.” T he duty also includes docum ents prepared for those individuals, to the extent those documen ts can be readily identified (e.g., from the “to” field in e-m ails). The duty also extends to information that is relev ant to the c laims or defenses of any party, or which is “relevant to the subject m atter involved in the action.” Thus, the duty to preserve extends to those em ployees likely to have relevant inform ation-the “key players” in the case. Zubulake v. UBS Warburg LLC (Zubulake IV), 220 F.R.D. 212, 217-18 (S.D.N.Y. 2003)
(footnotes omitted); see Broccoli, 229 F.R.D. a t 510 (“The duty to preserve encompasses any
documents or tangible item s authored or m ade by individuals likely to have discoverable
information that the disclosing party may use to support its claim or defenses.”).
Beyond these basics, the duty to preserve ev idence should not be analyzed in absolute
terms; it requires nuance, because the duty “‘can not be defined with precision.’” Grimm, 37 U.
BALT. L. REV. at 393 (quoting S HIRA A. SCHEINDLIN, MOORE’S FEDERAL PRACTICE E-
DISCOVERY: THE NEWLY AMENDED FEDERAL RULES OF CIVIL PROCEDURE 7 n.28 (2006)).
Proper analysis requires the Court to dete rmine reasonableness under the circum stances—
“reasonable and good faith efforts to retain info rmation that m ay be relevant to pending or
threatened litig ation.” T HE SEDONA CONFERENCE, THE SEDONA PRINCIPLES: BEST PRACTICES
RECOMMENDATIONS & PRINCIPLES FOR ADDRESSING ELECTRONIC DOCUMENT PRODUCTION ii (2d
ed. 2007), available at http://www.thesedonaconference.org/content/miscFiles/ (follow link); see
Jones, 2010 WL 2106640, at *5. It “is neither absolute , nor intended to cripple organizations.”
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Grimm, 37 U. BALT. L. REV. at 385. Thus, “[w]hether pres ervation or discovery conduct is
acceptable in a case d epends on w hat is reasonable, and that in tu rn depends on whether what
was done—or not done—was proportional to that case an d consistent with clear ly established
applicable standards.” Rimkus, 688 F. Supp. 2d at 613 (em phasis in Rimkus); see Legal Holds,
supra, at 3 (“In determining the scope of information that should be preserved, the nature of the
issues raised in the m atter, experience in sim ilar circumstances and the am ount in c ontroversy
are factors that m ay be considered.”). Put another way, “the scope of preservation should
somehow be proportional to the a mount in c ontroversy and the costs and burdens of
preservation.” Grimm, 37 U. BALT. L. REV. at 405. Although, with few exceptions, such as the
recent and highly instructive Rimkus decision,32 courts have tended to overlook the importance of
proportionality in determining whether a party has complied with its duty to preserve evidence in
a particular case, this should not be the case because Fed. R. Civ. P. 26(b)(2)(C) cautions that all
permissible discovery must be m easured against the yardstick of proportionality. See Procter &
Gamble Co. v. Haugen, 427 F.3d 727, 739 n.8 (10th Cir. 2005) (requiring district court to
consider Rule 26(b)(2)(C)(iii) before ordering spoliation sanctions to ensure against “‘the burden
or expense of the proposed discovery outw eigh[ing] its likely benefit’”) (quoting Rule).
Moreover, the perm issible scope of discovery as set fort h in Rule 26(b) includes a
proportionality component of sort s with respect to di scovery of ESI, beca use Rule 26(b)(2)(B)
permits a party to refuse to p roduce ESI if it is not reasonably accessible without undue burden and expense. Similarly, Rule 26(g)(1)(B)(iii) requires all parties seeking discovery to certify that
32 See also Canton v. Kmart Corp., No. 1:05-cv-143, 2009 WL 2058908, at *3 (D.V.I. July 13, 2009) (Conduct is cu lpable if a “‘party [with] notice that evidence is re levant to an action . . . either proceeds to destroy that evidence or allows it to be destroyed by failing to take reasonable precautions’” (quoting Mosaid Techs., Inc. v. Samsung Elecs. Co., 348 F. Supp. 2d 332, 338 (D.N.J. 2004)) (emphasis added).
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the request is “neither unreas onable nor unduly burdensome or expensive, considering the needs of the case, the am ount in contr oversy, and the importance of the i ssues at stake in the action.”
Thus, assessment of reasonableness and proportionality should be at the forefront of all inquiries into wheth er a pa rty h as f ulfilled its du ty to preserv e r elevant ev idence. Jones, 2010 WL
2106640, at *6-7 (“[R]easonableness is the key to determ ining whether or not a party breached its duty to preserve evidence.”).
Case law has developed guidelines for what the preservation duty entails. Unfortunately, in term s of what a party m ust do to preserve potentially relevan t evid ence, cas e law is not consistent across the circuits, or even within indi vidual di stricts. Thi s i s what causes such concern and anxiety, particularly to institution al clients s uch as corporations, businesses or governments, because their activities—and vulnerability to being sued—often extend to multiple jurisdictions, yet they cannot look to any single standard to m easure the appropriateness of their preservation activ ities, or their exposure or pot ential liability for failure to fulfill their preservation duties. A national corporation canno t have a different preservation policy for each federal cir cuit and s tate in which it oper ates. How then do such corporations develop preservation policies? The only “safe” way to do so is to design one that complies with the most demanding requirements of the toughest court to ha ve spoken on the issue, despite the fact that the highest standard may impose burdens and expenses that are far greater than what is required in most other jurisdictions in which they do business or conduct activities.
For exam ple, as noted, parties m ust preser ve potentially relevant evidence under their
“control,” and in the Fourth Circuit and the Sec ond Circuit, “‘docum ents are considered to be under a party’s control when that party has the ri ght, authority, or practical ability to obtain the documents from a non-party to the action.’” Goodman, 632 F. Supp. 2d at 515 (quoting In re
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NTL, Inc. Sec. Litig., 244 F.R.D. 179, 195 (S.D.N.Y. 2007)). And, in this circuit, as well as the
First and S ixth Circuits, the preservation duty applies no t only when the eviden ce is in the party’s control; there is also a duty to notify th e opposing party of evidence in the hands of third
parties. See Silvestri, 271 F.3d at 590; Velez v. Marriott PR Mgmt., Inc., 590 F. Supp. 2d 235,
258 (D.P.R. 2008); Jain v. Memphis Shelby Airport Auth., No. 08-2119-STA-dkv, 2010 W L
711328, at *2 ( W.D. Tenn. Feb. 25, 2010). In contrast, district courts in the Third, Fifth, and
Ninth Circuits have held that the preservation duty exists onl y when the part y controls the evidence, without extending that duty to evidence controlled by third parties. Bensel v. Allied
Pilots Ass’n, 263 F.R.D. 150, 152 (D.N.J. 2009); Rimkus, 688 F. Supp. 2d at 615-16; Melendres,
2010 WL 582189, at *4. So, what should a com pany that conducts business in the First, Second,
Third, Fourth, Fifth, Sixth, and Ni nth Circuits do to develop a preservation policy that com plies with the inc onsistent ob ligations imposed by th ese circu its? This is th e question f or which a suitable answer has proven elusive.
It generally is recognized that when a co mpany or organization has a docum ent retention or destruction policy, it “i s obligated to suspen d” that po licy and “implement a ‘litigation hold’ to ensure the preservation of re levant documents” once the preservation duty has been triggered.
Goodman, 632 F. Supp. 2d at 511 (quoting Thompson, 219 F.R.D. at 100 (quoting Zubulake IV,
220 F.R.D. at 218)); see Pension Comm., 685 F. Supp. 2d at 466 (sam e); School-Link Tech., Inc. v. Applied Res., Inc., No. 05-2088-JWL, 2007 WL 677647, at *3 (D. Kan. Feb. 28, 2007) (same).
But, a litigation hold m ight not be necessary under certain circumstances, and reasonableness is still a consideration. Jones, 2010 WL 2106640, at *7; see Thomas Y. Allm an, Amending the
Federal Rules: The Path to an Effective Duty To Preserve 5 (2010 Conf. on Civil Litig., Jun e
15, 2010), http://civilconference.uscourts.gov/LotusQuickr/dcc/Main.nsf/h_Toc/47B91A2AC603
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E0340525670800167201/?OpenDocument (“Allman, Amending the Rules”) (suggesting that “if a litig ation hold pro cess is em ployed, that fact should be treat ed as prim a facie evidence that
reasonable steps were u ndertaken to notify rele vant custodians of preservation obligations” and that “intervention in routine operatio ns [should be] unnecessary unless the failure to do so [was] intended to deprive another of the u se of re levant ev idence”) (em phasis added); L egal Holds,
supra, Guidelines 2-3 (stating that conduct that “demonstrates reasonableness and good faith in
meeting preservation obligations” includes “adopti on and consistent im plementation of a policy
defining a docum ent retention decision-m aking process” and the “use of established procedures
for the reporting of information relating to a potential threat of litigation to a responsible decision
maker”). However, as discussed in detail below, courts dif fer in the fault they as sign when a
party f ails to im plement a litig ation hold. Compare Pension Comm., 685 F. Supp. 2d at 466
(stating that failure to implement a written litigation hold is gross negligence per se) with Haynes
v. Dart, No. 08 C 4834, 2010 WL 140387, at *4 (N.D. I ll. Jan. 11, 2010) (“The failure to
institute a docum ent retention polic y, in the f orm of a litigation hold, is relevan t to the court' s
consideration, but it is not per se evidence of sanctionable conduct.”) (citation omitted).
Although it is well established that there is no obligation to “‘preserve every shred of
paper, every e-mail or electronic document, and every backup tape,’” Consol. Edison Co. of N.Y.,
Inc. v. United States, 90 Fed. Cl. 228, 256 (F ed. Cl. 2009) (quoting Zubulake IV, 220 F.R.D. at
217), in some circumstances, “[t]he general duty to preserve may also include deleted data, data
in slack spaces, backup tape s, legacy system s, and m etadata.” Grimm, 37 U. B ALT. L. REV. at
410 (em phasis added). Unlike most courts, wh ich have not addressed directly retention
requirements for multiple copies or backup tapes specifically, the United States District Court for
the Southern District of New Yor k has provi ded an in-depth discussion of the topic. See
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Zubulake IV, 220 F.R.D. 220. In Zubulake IV, the court explained that the duty is to preserve
“unique, relevant evidence that m ight be useful to an ad versary.” Id. at 217. It stated that although “[a] party or anticipated party must retain all relevant documents,” it need not “preserve all backup tapes even when it reasonably an ticipates litig ation” o r retain “m ultiple iden tical copies.” Id. at 217-18. The parties m ay decide how to select am ong multiple identical copies, id. at 218:
[A] litigant could choos e to retain all th en-existing backup tapes for the relev ant personnel (if such tapes store data by indi vidual or the contents can be identified in good faith and through reasonable effo rt), and to catalo g any later-created documents in a separate electronic file . That, along with a m irror-image of the computer system taken at the tim e the dut y to preserve atta ches (to preserve documents in the state they existed at that time), creates a complete set of relevant documents. District courts in the Fifth and Sixth Circuits have relied on Zubulake IV’s discussion of backup tape preservation. See Maggette v. BL Devel. Corp., Nos. 2:07CV181-M-A, 2:07CV182-M-A,
2009 WL 4346062, at *2 (N.D. Miss. Nov. 24, 2009); Forest Labs., Inc. v. Caraco Pharm., No.
06-CV-13143, 2009 WL 998402, at *4-5 (E.D. Mich. April 14, 2009); Toth v. Calcasieu Parish,
No. 06-998, 2009 W L 528245, at *2 (W .D. La. Mar. 2, 2009). However, because such discrepancies exist among circuits on other topics , it is not clear for litigants how uniform ly the
Zubulake IV opinion will be applied.
Breach of the pres ervation duty, als o, is p remised on reaso nableness: A party b reaches its duty to p reserve relevant evidence if it f ails to act reasonably by ta king “positive action to preserve material evid ence.” See Jones, 2010 W L 2106640, at *6. The action m ust be
“‘reasonably calculated to ensure that relevan t materials will be preserve d,’ such as giving out specific criteria on what should or should not be saved for litigation.” Id. (quoting Danis v. USN
Commc’ns, Inc., No. 98 C 7482, 2000 WL 1694325, at *38 (N.D. Ill. 2000)).
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Before turning to the rem aining elements of a spoliation claim, it is helpf ul in analyzing
the existence of the duty to p reserve evidence and its breach to keep in mind the entity to whom that du ty is owed, bec ause th is is im portant in determ ining an appropriate sanction when spoliation is found. W hat heretofore usually ha s been implicit—but seldom stated—in opinions concerning spoliation is that, with the exception of a few jurisdictions that consider spoliation to be an action able tort, 33 the duty to preserve ev idence relevant to litig ation of a claim is a duty
owed to th e court, not to a party’s adversary. E.g., Nat’l Ass’n of Radiation Survivors v.
Turnage, 115 F.R.D. 543, 556 (N.D. Cal. 1987) (order ing, in ad dition to costs and fees,
defendant’s payment of “$15,000.00 to the clerk of this court for the unnecessary consumption of
the cou rt’s tim e and res ources,” after noting that “t he defendant em ployed an unconscionably
careless procedure to handle discovery m atters, suggesting a callous disregard for its obligations
as a litigant” and that defendant had a “profound disrespect for its responsibilities in this
litigation”) (emphasis added); see also, e.g., Metro. Opera Ass’n v. Local 100, Hotel Employees
& Rest. Employees Int’l Union, 212 F.R.D. 178, 228 (S.D.N.Y. 2003) (quoting Turnage, 115
F.R.D. at 556); Krumwiede, 2006 WL 1308629, at *11 (concluding that default judgm ent on
33 See Foster v. Lawrence Mem’l Hosp., 809 F. Supp. 831, 836 (D. Kan. 1992) (stating the Kansas recognizes torts of neglig ent and intenti onal spoliation); Hazen v. Municipality of Anchorage, 718 P.2d 456, 463 (Alaska 1986) (In Alaska, there exists “a co mmon-law cause of action in to rt f or intentional in terference with prospective civil action by spoilation [sic] of evidence.”); Rodgers v. St. Mary's Hosp. of Decatur, 597 N.E.2d 616, 620 (Ill. 1992) (concluding that private cause of action existed in Illinois for spoliation under statute requiring preservation of x-rays when hospital was notified of relevant pending litigation); Thompson ex rel. Thompson v. Owensby, 704 N.E.2d 134, 139 (Ind. Ct. App. 1998 ) (stating that cause of action existed in Indian a for “neglige nt failure to maintain evidence”); Hirsch v. Gen. Motors Corp., 628 A.2d 1108, 1115 (N.J. Law Div. 1993) (stating that “New Jersey recognizes a tort analogous to intentional spoliation of evidence ” called “fraudulent co ncealment of evidence”) (modified on other grounds by Rosenblit v. Zimmerman, 766 A.2d 749 (N.J. 2001)); Henry v. Deen, 310 S.E.2d 326, 334-35 (N.C. 1984) (stating that there is a cause of action for spoliation of evidence in North Carolina); Smith v. Howard Johnson Co., Inc., 615 N.E.2d 1037, 1038 (Ohio 1993) (In Ohio, “[a] cause of acti on exists in tort fo r interference with or destruction of evidence.”). 55
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defendant’s counterclaim s was the only rem edy for plaintiff’s spolia tion and perjury, which showed “blatant contempt for th[e] Court and a f undamental disregard for the judicial process”).
See generally Quela, 2000 WL 656681, at *7 (“‘[P]arties w ho wish to use the judicial system to settle disputes have certain obliga tions and responsibil ities.’”) (quoting Rodriguez v. M &
M/Mars, No. 96 C 1231, 1997 W L 349989, at *2 (N.D. Ill. June 23, 1997)). For the judicial process to function properly, the court must rely “in large part on the good faith and dilig ence of counsel and the parties in abiding by these rules [of discovery] and conducting them selves and their judicial business honestly.” Metro. Opera Ass’n, 212 F.R.D. at 181 (emphasis added). The court’s inherent authority to impose sanctions for spoliation of evidence is a means of preserving
“the integrity of the judicial process” so that litigants do not lose “confidence that the process works to uncover the truth.” Silvestri, 271 F.3d at 590.
The civil ju stice system is designed for courts to decide cases on their m erits, and to do so, the fact-finder m ust review th e facts to discern the truth. See Barnhill v. United States, 11
F.3d 1360, 1367 (7th Cir. 1993) (“In the norm al cour se of events, justice is dispensed by the hearing of cases on their m erits.”); Metro. Opera Ass’n, 212 F.R.D. at 181 (“‘A lawsuit is supposed to be a search for the truth.’”) (quoting Miller v. Time-Warner Commc’ns, Inc., No. 97
Civ. 7286, 1999 WL 739528, at *1 (S.D.N.Y. Sept. 22, 1999)). While the fact-finder can review only the docum ents that the parties produce, and production and preservation are not synonymous, production is possible only if doc uments are preserved. See generally Richard
Marcus, Only Yesterday: Reflections on Rulemaking Responses to E-discovery, 73 F ORDHAM L.
REV. 1, 14 (2004) (noting that the duty to preserve does not mean that all preserved infor mation must be pro duced, but it “ensure[s ] that a judge will be ab le to make that determ ination” about what should be produced). Thus, the truth cannot be uncovered if information is not preserved.
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That th e du ty is owed to th e court, and not to the party’ s adversary is a subtle, but consequential, distinction. A pr oper appreciation of the distincti on informs the Court’s decision regarding appropriate s poliation sanctions. Where intenti onally egregious c onduct le ads to spoliation of evidence but causes no prejudice because the evidence des troyed was not relev ant, or was merely cumulative to readily available ev idence, or because the same evidence could be obtained from other sources, then the integrity of the judicial system has been injured far less than if sim ple neglige nce resu lts in the tota l loss of evidence ess ential for an adversary to prosecute or defend against a claim. In the former instan ce, the a ppropriateness of a case- dispositive sanction is questionable despite the magnitude of the culpability, because the harm to the truth-finding process is slight, and lesser sanctions such as m onetary ones will suffice. In contrast, a sympathetic though negligent party whose want of diligence elim inates the ability of an adversary to prove its case may warrant case-dispositive sanctions, because the damage to the truth-seeking process is absolute. Si milarly, certain sanctions m ake no logical sense when applied to particular breaches of t he duty to preserve. For exam ple, an adverse inference instruction makes little logical sense if given as a sanction for negligent breach of the duty to preserve, because the in ference that a party failed to p reserve evidence because it b elieved that the evidence was harmf ul to its ca se does not f low f rom mere negligence—par ticularly if the destruction was of ESI and was caused by the a utomatic deletion function of a program that the party negligently failed to disab le once the du ty to preserve was triggered. The m ore logical inference is that the p arty was d isorganized, or distracted, or technically challenged, or overextended, not that it failed to preserve evidence because of an awareness that it was harmful.
In short, matching the appropriate sanction to the spoliating conduct is aided by remembering to whom the duty to preserve is owed.
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Failures to preserve evidence also cause another, less widely discussed, injury to the civil justice system. “ When spoliation issues are litig ated, ‘more attention is focused on e-discovery than on the m erits, with a m otion for sa nctions an increasingly com mon filing.’” Allman,
Amending the Rules 1) (quoting Dan H. W illoughby, Jr. & Rose Hunter Jones, Sanctions for E-
Discovery Violations: By the Numbers (2010 Conf. on Ci vil Liti g., May 2010), available at http://civilconference.uscourts.gov/LotusQuickr/dcc/Main.nsf/h_RoomHome/4df38292d748069 d0525670800167212/?OpenDocument, under the links for Papers and E mpirical Research); see
Rimkus, 688 F. Supp. 2d at 607 (“Spoliati on allegations and sanctions motions distract from the merits of a case, add co sts to d iscovery, and dela y resolution.”). Allega tions of spoliation and the motions practice that ensues interfere with the court’s administration of justice in general by crowding its docket and delaying the resolution of cases. See, e.g., Leon v. IDX Sys. Corp., 464
F.3d 951, 958 n.5 (9th Cir. 2006) (noting that pl aintiff’s “destruction of 2,200 files on his employer-issued com puter ‘greatly im peded reso lution of the case’ by obscuring the factual predicate of the case and consum ing months of sanction-related litigation” and concluding that
“there was am ple evidence of the tim e and res ources sp ent in inv estigating and r esolving the spoliation issues,” which suppor ted dismissal of the case); Pension Comm., 685 F. Supp. 2d at
471 n.56 (“I, together with two of my law clerks, have spent an inordinate amount of time on this motion. We estimate that collectively we have s pent close to three hundred hours resolving this motion. I note, in passing, that our blended hourly rate is approximately thirty dollars per hour (!) well below that of the most inexperienced paralegal, let alone lawyer, appearing in this case. My point is only that sanctio ns motions, and the behavior that caus ed them to be m ade, divert court time from other im portant duties—namely deciding cases on the m erits.”); State Farm Fire &
Cas. Co. v. Broan Mfg. Co., 523 F. Supp. 2d 992, 997 (D. Ariz. 2007) (noting that the fact that
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“the Court has spent significant resources inve stigating a nd resolv ing the spolia tion is sues”
supported dism issal); Gutman v. Klein, No. 03 Civ. 1570 (BMC), 2009 W L 3296072, at *8
(E.D.N.Y. Oct. 13, 2009) (noting that, with rega rd to spoliation sancti ons, “defendants have
raised pettifogging objections at nearly every stage of the litigation, trying the court’s patience . . .”); Zubulake v. UBS Warburg LLC (Zubulake V), 229 F.R.D. 422, 440 (S.D.N.Y.
2004) (stating that “[t]he tedious and difficu lt fact finding encom passed in this opinion
[regarding the duty to reserve ES I] and others like it is a gr eat burden on a court’s lim ited resources”). Interes tingly, this bur den is the sam e regardless of whether the culpability underlying the spoliation was negligent, grossly negligent, or intentional.
What frustrates courts is the inability to fashion an effective sanction to address the drain on their resources caused by havi ng to wade through voluminous filings, hold lengthy hearings,
and then spend dozens, if not hundreds, of hours painstakingly setting forth the underlying facts
before turning to a legal analys is that is multi-factored and involved . Adverse inference
instructions do not com pensate for the expenditure of court re sources to resolve a spoliation
dispute, nor do awards of attorney’s fees and costs to the prevailing party in the dispute. Further,
dispositive sanctions, the appellate courts tell us, are only appropriate where lesser sanctions will
not suffice. Silvestri, 271 F.3d at 590 (4th Cir. 2001); West v. Goodyear Tire & Rubber Co., 167
F.3d 776, 779 (2d Cir. 1999). Indeed, it is questionable whether the interests of justice truly are
served if a court im poses case-d ispositive sancti ons for clearly cu lpable conduct resulting in
spoliation of evidence absent a finding that the failure to preserve evidence resulted in the loss of
evidence that was relevan t, or caused p rejudice to the spo liating party’s adversary,
notwithstanding the amount of tim e it took the cour t to resolve the spo liation issue, or the
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concomitant “opportunity cost” to the court occasi oned by its inability to work on other pressing
matters because of the need to resolve the spoliation motion.
While some trial courts have ordered the paym ent of money to the clerk of the court as a
sanction for unnecessarily prolonging and increasi ng litigation expense, or as a fine for
unnecessarily consuming court resources, e.g., Pinstripe, Inc. v. Manpower, Inc., No. 07-cv-620-
GKF-PJC, 2009 W L 2252131, at *4 (N.D. Okla. July 29, 2009); Claredi v. Seebeyond Tech.
Corp., No. 4:04CV1304 RWS, 2007 W L 735 018, at *4 (E.D. Mo. Mar. 8, 2007); Wachtel v.
Health Net, Inc., 239 F.R.D. 81, 111 (D.N.J. 2006); Turnage, 115 F.R.D. at 559, those rulings were from trial courts and were not appealed. It is far from clear that, had they been appealed , they would have been affir med. See Bradley v. Am. Household, Inc., 378 F.3d 373, 377-79 (4th
Cir. 2004) (vacating an d remanding district co urt order that imposed substantial monetary fine against defendant ($200,000) and at torney ($100,000) for discovery violations including failure to preserve and produce evidence; concluding th at the fines were criminal because (a) they were payable to the court ra ther than to the com plaining party ; (b) they we re not cond itioned on compliance with a court order; (c) they were not tailored to com pensate the com plaining party; and (d) they were im posed for punitive purposes); Buffington v. Baltimore Cnty., Md., 913 F.2d
113, 133 (4th Cir. 1990) (vacating sanctions impos ed by trial court as “civil contem pt” for violation of discovery ob ligations; observing that fines were ordered payable to the court, rather than to the complaining party; concluding that the fines were a form of criminal contempt, which could not be im posed without compliance with due process procedures required for cri minal contempt proceedings); Law v. Nat’l Collegiate Athletic Ass’n, 134 F.3d 1438, 1442-44 (10th
Cir. 1998) (holding that 25% surcharge added to fees that otherwise would be compensatory was a crim inal contem pt sanction, even though it w as payable to the advers e party and not to the
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court; rev ersing ord er f or sanctions because co urt d id not follow procedural requ irements for criminal contempt).
The bottom line is that resolution of spoliation motions takes a toll on the court, separate from that extracted from the litigants, for which there is no s atisfactory remedy short of criminal contempt proceedings, which are unlikely to be in itiated absent extraordinary circumstances. In fact, research has revealed only on e instance to date in w hich a cou rt has initia ted crim inal contempt proceedings against a p arty for spoliation of ESI in a civil cas e. See SonoMedica, Inc. v. Mohler, No. 1:08-cv-230 (GBL), 2009 W L 2371507, at *1 (E.D. Va. July 28, 2009) (“The
Court further holds that this case will be ref erred to the United Sta tes Attorney to investigate criminal contempt proceedings bec ause the Cou rt finds that the [third pa rty witnesses] willfully violated a court o rder by failing to produce do cuments in accordance with the court order, [one of the third party witnes ses] failed to tell the tr uth during [ a] deposition and f or spoliation of certain files on their computer which were subj ect to production under th e [court’s] Order to
Compel.”). Courts should not shy away from th eir authority to initiate crim inal contem pt proceedings when the circumstances warrant such measures. However, in reaching this decision, they cannot ignore the f act that doing so involves com pliance with Fed. R. Crim . P. 42, which requires various procedural safeguards, such as referral to the United States Attorney, notice, and a hearing, as discussed below. It seem s clear that courts, even those faced with cases involving serious spoliation of evidence, will be reluc tant to proceed with crim inal contempt proceedings in most instances.
In this case, as the d iscussions above on pages 7 and 46-48 shows, Defendants clearly were under a duty to preserve ESI relevant to Plaintiff’s claim s on October 14, 2006, if not earlier, and that, in an unabated destruction continuing for years, failed to comply with that duty.
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While I h ave ackno wledged th at cou rts mu st consider issues of proportionality an d
reasonableness of the alleged spoliator’s conduct in determining whether there has been a breach
of the preservation duty, neither is at issue in this case.
Proportionality and reasonableness are not at issue because Defendants have never
alleged that it would have been an undue burden fo r them to preserve the ESI they destroyed.
Neither is this a case where a hapless party took objectively reasonable steps to preserve ESI, but
it nonetheless was destroyed or lost. Defendan ts candidly adm it that “certain CPI ESI was deleted by Pappas and CPI’s Com puter Engineer Evan DeRouen and/or o thers a fter CPI wa s
served with the lawsuit and after a preservation order was issu ed,” and they “take responsibility”
for those deletions. Defs.’ Opp’n 2. Defenda nts adm it that “between October 14, 2006 and
February 17, 2007 thousands of files were deleted from Pappas’ laptop com puter,” id. at 5; that
“Pappas m ade deletions on his laptop” on February 16 and 17, 2007, id. at 2, 7; and that, consistent with Pappas’s testim ony, “he would put e-mails into a ‘Deleted Item s’ folder on his laptop” for what Defendants charac terized as “storag e pu rposes,” id. at 8 (c itation om itted).
Acknowledging that the EHD “should not have been disposed of sinc e it was in existence after the lawsuit had been filed,” id. at 5, they “take responsibility for . . . the failure to preserve files
on the Sim pleDrive [ EHD],” id. at 2. Defendants also “recogni ze[] that there has been . . .
contradictory testimony about its computer stores, and contradict ory testimony about the use of
the nam e Fred Bass.” Defs.’ Surreply 19. T hus, in this case, the i ssue is not whether the
preservation duty was triggered, or whether Defendants took reasonable and proportional steps to
preserve it, or whether the duty was breached. The issue is what sanctions are appropriate, given
the nature of Defendants’ conduct , the relevance of the ES I that was lost or destroyed, and the
prejudice suffered by Plaintiff. See Goodman, 632 F. Supp. 2d at 509.
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2. Culpable State of Mind
The second consideration for resolving a s poliation motion is to determ ine whether the
alleged spoliator acted culpably. “Each case will turn on its own facts and the varieties of efforts
and failures is infinite.” Pension Comm., 685 F. Supp. 2d at 465. The inform ation may have
been lost or destroyed inadvertently, “for reas ons unrelated to the litig ation,” or the loss m ay
result from intentional acts, calcu lated to p revent the other party from accessing the evidence.
Rimkus, 688 F. Supp. 2d at 613. Therefore, it has been suggested that the court m ust rely on its
“gut reaction based on years of e xperience a s to whe ther a litigan t has com plied with its
discovery obligations and how ha rd it worked to com ply.” Pension Comm., 685 F. Supp. 2d at
471. As with the elements of duty and breach , the variety of standards em ployed by courts
throughout the United States and the lack of a uniform or cons istent approach have caused
considerable concern among lawyers and clients re garding what is requir ed, and the risks and
consequences of noncompliance.
“Courts differ in the ir interpretation of the level of intent required before sanctions m ay
be warranted.” SEDONA CONFERENCE GLOSSARY, supra, at 48. In United Medical Supply Co. v.
United States, 77 Fed. Cl. 257, 266 (Fed. Cl. 2007), the court noted that a “distinct m inority” of courts “require a showing of ba d faith before any form of sanc tion is applied”; som e courts require a showing of bad f aith, but only “f or the imposition of certain more ser ious sanctions”; some do not require bad faith for sanctions, bu t requ ire more than ne gligence; and others
“require merely that there be a showing of fault. ” In the Fourth Circu it, for a court to im pose some form of sanctions for spoliation, any fault—be it bad faith, willfulness, gross negligence, or ordinary negligence—is a sufficiently culpable mindset. Goodman, 632 F. Supp. 2d at 518, 520;
Thompson, F.R.D. at 101; see Pandora Jewelry, LLC v. Chamilia, LLC, No. CCB-06-3041, 2008
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WL 4533902, at *9 (D. Md. Sept. 30, 2008). Under ex isting case law, the nuanced, fact-specific differences am ong these states of m ind becom e significant in determ ining wha t sanctions are appropriate, as discussed infra. See Sampson, 251 F.R.D. at 179 (“Although, som e courts require a showing of bad faith before im posing sanctions, the Fourth C ircuit requires only a showing of fault, with the degree of fault impacting the severity of sanctions.”) (citing Silvestri,
271 F.3d at 590).
Negligence, or “cu lpable carelessness,” is “[t]he failure to exercise the standard of care that a reasonably prudent person w ould ha ve exercis ed in a si milar situation[.]” Black’s Law
Dictionary 846 (Bryan A. Garner ed., abridged 7th ed., West 2000). Negligence is contrasted with “condu ct that is in tentionally, wantonly, o r willfully d isregardful of others’ rights.” Id.
With regard to preservation of evidence, if either the failure to collect or preserve evidence or the sloppiness of the review of evidence causes the loss or destruction of relevant inform ation, the spoliator’s actions may amount to negligence, gr oss negligence, or even intentional m isconduct.
See Pension Comm., 685 F. Supp. 2d at 464 (stating that such acts are “surely” negligence, if not more); Jones, 2010 WL 2106640, at *6 (stating th at failure to im plement a litigation hold is not negligence per se; reas onableness must be co nsidered). Failure “to assess the accuracy and validity of selected search term s” also could be negligen ce. See Pension Comm., 685 F. Supp.
2d at 465 (citing Victor Stanley, Inc. v. Creative Pipe, Inc., 250 F.R.D. 251, 259-62 (D. Md.
2008), in which the Court discu ssed reasonableness of a sear ch to identify and withhold privileged documents).
Gross negligence, which is som ething m ore than carelessness, “‘differs from ordinary negligence only in degree, and not in kind.’” Pension Comm., 685 F. Supp. 2d at 464 (quoting
Prosser & Keeton on Torts § 34 at 212 (citations omitted)). In Jones, 2010 WL 2106640, at *9,
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the defendant “did not reasonably prevent employees from destroying [relevant] documents” and
“failed to a dequately supervise those employees who were asked to preserve docum ents, such
that documents were “probably” lost. The United States District Court for the North ern District
of Illinois, emphasizing reasonableness in its analysis in Jones, concluded that the defendant was
grossly negligent. Id. The court said that its conclusion did not rise above gross negligence because there was no evidence of “deliberate atte mpts to ‘wipe’ hard drives or to destro y relevant evidence by other technological or manual means.” Id. In Pandora Jewelry, 2008 WL
4533902, at *8-9, this Court concluded that it wa s grossly negligent of the defendants to
exchange servers during litigation and to fail to institute a litigati on hold even though their
emails were autom atically archived or de leted after ninety da ys. This Court in Sampson, 251
F.R.D. at 181-82, concluded that th e defendant was negligent, but not grossly negligent, when it
failed to im plement a litigation hold, because it instructed the em ployees most involved in the
litigation to reta in doc uments. In m arked co ntrast, the United Sta tes District Court for the
Southern District of New York has concluded that conduct such as the failu re to issue a written
litigation hold am ounts to gross negligence per se. Pension Comm., 685 F. Supp. 2d at 471
(stating that “the following fa ilures support a finding of gross negligence, when the duty to
preserve has attached: to issue a written litiga tion hold; to id entify all of the key pla yers and to
ensure that their electron ic and paper records are preserved; to cease the deletion of em ail or to
preserve the records of former employees that are in a party's possession, custody, or control; and
to preserve backup tapes when th ey are the sole source of releva nt inf ormation or when they
relate to ke y players, if the r elevant information maintained by those pl ayers is not obtainable
from readily accessible sources”).
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Willfulness is equ ivalent to in tentional, pu rposeful, or de liberate cond uct. Buckley v.
Mukasey, 538 F.3d 306, 323 (4th Cir. 2008). In Goodman, 632 F. Supp. 2d at 523, this Court
held that th e def endant “willf ully destroyed e vidence tha t it knew to be relevant” because its
chief executive officer d eleted her em ails, and the defendant destroyed the officer’s computer.
Conduct that is in bad faith m ust be willful, but c onduct that is willful need not rise to bad faith
actions. See Buckley, 538 F.3d at 323; Vodusek v. Bayliner Marine Corp., 71 F.3d 148, 156 (4th
Cir. 1995); Goodman, 632 F. Supp. 2d at 520. W hile bad fa ith requires “destruction for the
purpose of depriving the adversary of the evidence,” Powell v. Town of Sharpsburg, 591 F. Supp.
2d 814, 820 (E.D.N.C. 2008), for willfulness, it is sufficient that the actor intended to destroy the
evidence. See Goodman, 632 F. Supp. 2d at 520; see also United Med. Supply Co., 77 Fed. Cl. at
268 (distinguishing bad faith and willfulness).
Nevertheless, courts of ten com bine their ana lysis of willf ulness and bad f aith. E.g.,
Metro. Opera Ass’n, 212 F.R.D. at 224-25; Rimkus, 688 F. Supp. 2d at 644; Krumwiede, 2006
WL 1308629, at *9-10. Thus, the following factors supported a finding of intentionality and bad
faith in the Fifth Circuit:
[t]he evidence that the defendants knew a bout the litigation with Rimkus when they deleted the em ails; the incon sistencies in the explana tions f or dele ting th e emails; the failure to disclose information about personal email accounts that were later rev ealed as having been used to obtain and dissem inate inform ation from Rimkus; and the fact that som e of the em ails reveal what the defend ants had previously denied. Rimkus, 688 F. Supp. 2d at 644. And, in the Second Circui t, the following facts lead the district
court to the same conclusion: defendants “failed to comply with several court orders”; destroyed
evidence; failed to search for and produce documents; and lied about “simple but material factual
matters.” Metro. Opera Ass’n, 212 F.R.D. at 224-25.
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In Krumwiede, 2006 WL 1308629, at *9-10, the United St ates District Court for the
Northern District of Illinois found “willful and bad faith spolia tion of evidence.” Notably,
immediately after the defendant in that case sen t a p reservation letter to Krum wiede’s attorney,
referring in particula r to a la ptop in Kruwiede’s po ssession, and again af ter the co urt o rdered
Krumwiede to return the laptop, the laptop “experien ced a spike in activity . . . that resulted in
the alteration, m odification, or de struction of thousands of poten tially relevant files and their
metadata.” Id. at *9. Also, “Krumwiede lied to th[e] C ourt when he testifie d that he did not
receive notice of the Se ptember 15, 2005 order until September 16, 2005,” and “continued [to ] obstruct[] discovery even after reli nquishing control of [the] laptop.” Id. at *9-10. The court
reached its conclusion based on “the volume and timing of Krumwiede’s activities.” Id.
Here, the parties disagree about Defendants’ level of culpability. Plaintiff characterizes
Pappas’ behavior as “egregious” and perjurous, and it insists that “Pappas has exhibited a pattern of litig ation abuse and a persis tent dis respect for the ju dicial p rocess.” Pl. ’s Mot. 56, 6 9.
According to Plain tiff, “the reco rd is r eplete w ith m ultiple consciou s and af firmative ac ts by
Pappas that led to th e deliberate destruction of relevant evidence. Pl.’s Reply 1. Defendants acknowledge wrongdoing but insist that their “culpa ble state of m ind was negligence.” Defs.’
Opp’n 25. Moreover, according to Defendants, Pappas’s Septem ber 27, 2007 Rule 37 certification was not fal se because he was not aware that his production was incomplete. Id. at
9-10. They insist that Plain tiff’s alleg ations that Defendants “m anufactured evid ence” an d removed data instead of producing all ESI are “unfounded.” Id. at 14-16. I disagree.
I find the circumstances of this case to be indistinguishable from other cases in which the spoliating party was found to have ac ted in bad faith. The discussion supra at Sections I.1–I.9 convincingly de monstrates that Pappas, and th rough him CPI, directly and with the aid of
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DeRouen and “Federico,” set out to delete, destroy, or hide thous ands of files containing highly relevant ESI pertaining to Plaintiff’s claims. Suffice it also to say that in both Krumwiede, 2006
WL 1308629, at *9-10, and Rimkus, 688 F. Supp. 2d at 607, 629, 644, as well as in this case, the spoliating parties lied about their ESI produc tion; obstructed the discovery process; and intentionally destroyed evidence when they were aware o f the lawsuit. As in Rimkus, 688 F.
Supp. 2d 598, Pappas disposed of an entire hard drive, despite his knowledge of the lawsuit, and provided wildly inconsistent explanations of his ESI deletions. Id. at 607, 644. As i n
Krumwiede, 2006 WL 1308629, at *9-10, “the volum e and timing” of Defendants’ spoliation is telling: Defendants deleted thousan ds of files and ran program s to ensure their perm anent loss immediately following preservati on requests and orders, and im mediately before scheduled discovery ef forts. And, as in Metropolitan Opera Ass’n, 212 F.R.D. at 224-25, Defendants’ destruction of evidence was compounded by their failure to com ply with numerous court orders.
In sum, Defendants took repeated, deliberate measur es to prevent the discovery of relevant ESI, clearly acting in bad faith, and if affidavits, depositions, and in open cour t, Pappas nonchalantly lied about what he had done.
3. Relevance of Lost Evidence and Resulting Prejudice
The third consideration is the relevance of the lost evidence. In the context of spoliation, lost or destroyed evidence is “relevant” if “a reas onable trier of fact could conclude that the lost evidence would have supported the claim s or defenses of the pa rty that sought it.” Thompson,
219 F.R.D. at 101; see Goodman, 632 F. Supp. 2d at 509 (sam e). It is not enough for the evidence to have been “suffi ciently probative to satisfy Rule 401 of the Federal Rules of
Evidence,” i.e., to have ‘any tendency to make the existence of any fact that is of consequence to the determ ination of the action m ore probable or less probable than it would be without the
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evidence.’” Pension Comm., 685 F. Supp. 2d at 467 (quoting Fed. R. Evid. 401). Moreover, for
the court to issue sanctions, the absence of the evidence must be prejudicial to the party alleging
spoliation of evidence. Id.; see Consol. Aluminum Corp. v. Alcoa, Inc., 244 F.R.D. 335, 346
(M.D. La. 2006) (noting that, in determ ining wh ether an adverse inference is warranted, the
“‘relevance’ factor” involves not only relevance but also “whether the n on-destroying party has
suffered prejudice from the dest ruction of the evidence”); see also Rimkus, 688 F. Supp. 2d at
616 (quoting Consol. Aluminum Corp., 244 F.R.D. at 346). Put a nother way, a finding of
“relevance” for purposes of spoliation sanctio ns is a two-pronged finding of relevance and
prejudice.
Spoliation of evidence causes prejudice whe n, as a result of the spoliation, the party
claiming spoliation cannot pres ent “evidence essential to its underlying claim .” Krumwiede,
2006 WL 1308629, at *10 (noting that even if the f iles were only modified and not deleted, “the
changes to the f ile metadata call the authenticity of the files and their content into question and
make it impossible for [the defendant] to re ly on them ”). “Prejudice can range along a
continuum from an inability to prove claims or defenses to little or no impact on the presentation
of proof.” Rimkus, 688 F. Supp. 2d at 613. Generally, cour ts find prejudice where a party’s
ability to p resent its ca se or to defend is comprom ised. E.g., Silvestri, 271 F.3d at 593-94
(significant prejudice resulted when plaintiff’s failure to p reserve vehicle after accident giving rise to litigation “substantially denied the defendant the ability to defend the claim ”). However, at least one court has found that the delayed production of evidence causes prejudice. See Jones,
2010 WL 2106640, at *8-9 (noting that the defenda nt’s one-year delay in producing docum ents
caused prejudice to the plaintiff). The court cons iders prejudice to the party and “prejudice to
the judicial system.” Krumwiede, 2006 WL 1308629, at *11.
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When the party alleging spolia tion shows that the other party acted willfully in failing to preserve evidence, the relevance of that ev idence is pre sumed in the Fo urth Circuit. Sampson,
251 F.R.D. at 179; Thompson, 219 F.R.D. at 101. Negligent or even grossly negligent conduct is not sufficient to give rise to the presumption; in the absence of intentional loss or destruction of evidence, the party “must establish that the lost documents were relevant to her case.” Sampson,
251 F.R.D. at 179; see Thompson, 219 F.R.D. at 101. Similarly, in the Seventh Circuit, unintentional conduct is insufficient fo r a presumption of relevance. In re Kmart Corp., 371
B.R. 823, 853-54 (Bankr. N.D. Ill. 2007). Howeve r, in the Second Circuit, in the court’s discretion, “[r]elevance and prejud ice may be presum ed when the spoliating party acted in bad faith or in a grossly negligent manner.”34 Pension Comm., 685 F. Supp. 2d at 467 (em phasis added). Also, “[t]he Fifth Circuit has not explicitly addr essed whether ev en bad-faith destruction of evidence allows a court to presume that the destroyed evidence was relevant or its loss prejudicial.” Rimkus, 688 F. Supp. 2d at 617-18. W here there is a presum ption, the spoliating party m ay rebut this presum ption by showing “that the innocen t par ty ha s not be en prejudiced by the absence of the m issing information.” Pension Comm., 685 F. Supp. 2d at 468.
If the spoliating party makes such a showing, “the innocent party, of course, may offer evidence to counter that proof.” Id. As with the other elements, the lack of a uniform standard regarding the level of culpability required to warrant spoliation sanctions has created uncertainty and added to the conc ern tha t ins titutional and organizational en tities have expressed regarding how to conduct themselves in a way that will comply with multiple, inconsistent standards.
34 This distinction is a ll the m ore significant because, as no ted, in the S econd Circuit, certain conduct is considered gross negligence per se. Pension Comm., 685 F. Supp. 2d at 471. Thus, for example, if a party f ails to issu e a written litigation hold, the court f inds that it is grossly negligent, in which case relevance and prejudice are presumed. Point. Game. Match. 70
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Here, Plain tiff alleges that “Defendants’ m assive and inten tional destruction of em ails
and docum ents has substantially prejudiced, to vari ous de grees, its ab ility to prov e all of its
claims, both in term s of liability an d the extent of da mages.” Pl.’s Reply 43. According to
Plaintiff, Defendants’ actions caused prejud ice b ecause the ESI that Defendants “irretrievab ly
deleted, destroyed and spoliated . . . contained the very information and ‘fingerprints’ that would
establish all or m ost of the elem ents of Count s I, II, VII, and VIII.” Pl.’s Mot. 76 . Although
Plaintiff concedes that “many of the known deletions . . . were eventually recovered in whole or
in part,” id., significant numbers of files were perm anently destroyed. On the record before m e,
the evidence of prejudice to Plaintiff is manifest.
Defendants’ willf ul, ba d f aith con duct a llows this Court to pr esume re levance and
prejudice. Defendants utterly fa il to rebut this presum ption through their inconsistent and incredible explanations for thei r destruction of ESI. Moreover, as painstakingl y discussed in
Sections I.2–I.9, supra, it is obvious that the perm anent loss of thousands of relevant files that
proved that Defendants i mproperly accessed and us ed Plaintiff’s proprie tary inf ormation is
prejudicial, because, ev en if the files were cu mulative to som e extent, Plaintiff’s case again st
Defendants is weaker when it cannot present the overwhelming quantity of evidence it otherwise
would have had to support its case. Defendants themselves cannot seriously believe that their
willful m isconduct did not cause p rejudice, because th ey acquies ced to the entry of a default
judgment on Count I, Plaintiff’s core claim, a clear concession that the spoliated documents were
relevant to that claim a nd their destruction caused prejudice. And, lest there be any doubt,
Defendants affir matively stated with regard to the copyright claim: ““[W ]e’ve given up on
prejudice . . . . which I think was the approp riate thing to do. W e ga ve up on the issue of
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relevance . . . .” June 25, 2010 Hr’g Tr. 3:16-2 2. Thus, the loss of E SI deprived Plaintiff of relevant evidence, and this loss was prejudicial.
C. Sanctions In determ ining what sanctions are appropria te, the Cou rt must consid er th e ex tent o f prejudice, if any, along with the degree of culpab ility, and, as with the other elem ents, possible sanctions vary by jurisdiction. See Nucor Corp. v. Bell, 251 F.R.D. 191, 201 (D.S.C. 2009);
Rimkus, 688 F. Supp. 2d at 613-15. The harshest sanctions may apply not only when both severe prejudice and bad faith are present, but also when, for example, culpability is minimally present, if there is a considerable showing of prejudice, or, alternatively, the prejudice is minimal but the
culpability is great, as d iscussed infra. For example, in som e, but not all, circuits, conduct that
does not rise above ordinary negligence may be sanctioned by dismissal if the resulting prejudice
is great. Silvestri, 271 F.3d at 593 (stating that dism issal may be an appropriate sanction for
negligent conduct “if the prejudice to the defendant is extr aordinary, denying it the ability to
adequately defend its case” and dism issing case without concluding whet her plaintiff’s conduct
rose above negligence); see Rimkus, 688 F. Supp. 2d at 614-15 (“The First, Fourth, and Ninth
Circuits hold that bad faith is not essential to im posing severe san ctions if there is s evere
prejudice, although the cases often emphasize the pres ence of bad faith. In the Third Circuit, the
courts balance the degree of fault an d prejudice.”) (footnotes omitted). Conversely, absence of either intentional conduct or significant prejudice may lessen the potential appropriate sanctions.
In the Fifth and Eleventh Circuits, for exam ple, courts m ay not im pose severe sanctions absent
evidence of bad faith. See Rimkus, 688 F. Supp. 2d at 614; Managed Care Solutions, Inc. v.
Essent Healthcare, Inc., No. 09-60351-CIV, 2010 WL 3368654, at *12-13 (S.D. Fla. Aug. 23,
2010). The different approaches am ong the Circuits regarding the le vel of culpability that m ust
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be shown to warrant imposition of severe sa nctions for spoliation is ano ther reason why commentators hav e exp ressed such concern about the lack of a consensus standard and the uncertainty it causes.
Sanctions that a federal court may impose for spoliation include assessing attorney’s fees and costs, giving the jury an adverse inference instruction, precluding evidence, or imposing the harsh, case-dispositive sanctions of dismissal or judgment by default. Goodman, 632 F. Supp. 2d at 506; In re NTL, Inc. Secs. Litig., 244 F.R.D. at 191. The court m ay also “treat[] as contem pt of court the f ailure to ob ey” a court order to provide or perm it discovery of ESI evidence. See
Fed. R. Civ. P. 37(b)(2)(A)(vii). “While a distri ct court has broad discretion in choosing an appropriate sanction for spoliation, ‘the applicable sancti on should be m olded to serve the prophylactic, punitive, and rem edial rationale s underly ing the spoliatio n doctrine. ’” Silvestri,
271 F.3d at 590 (quoting West, 167 F.3d at 779). Put another way, appropriate sanctions should
“(1) deter parties from engaging in spoliation; (2) place the risk of an erroneous judgment on the party who wrongfully created the ris k; and (3) restore ‘the prejudiced party to the sam e position he would have been in absent the wrongful de struction of evidence by the opposing party.’”
Thus, the range of available sanctions serv e both norm ative—designed to pun ish culpab le conduct and deter it in others—and com pensatory—designed to put the party adversely affected by the spoliation in a position that is as close to what it would have been in had the spoliation not occurred—functions. Because, as noted above, the duty to preserve relevant evidence is owed to the cou rt, it is a lso app ropriate f or a cour t to consider whether the sa nctions it imposes will
“prevent ab uses of the judicial sys tem” and “prom ote the efficient ad ministration of justice.”
Jones, 2010 W L 2106640, at *5. The court must “i mpose the least harsh sanction that can
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provide an adequate rem edy.” Pension Comm., 685 F. Supp. 2d at 469; see Rimkus, 688 F.
Supp. 2d at 618.
In this case, Plaintiff has urged this C ourt to im pose the m ost severe of sanctions, including entry of a default judgm ent as to all rem aining counts—Counts I (copyright infringment), II (unf air competition), VII (Lanham Act violations, nam ely false advertising and reverse palming off), and VIII (patent violations)—for both liability and damages; assessment of attorney’s fees and costs for what likely will amount to most of the litigation costs tha t Plaintiff has incurred; assessment of a civil f ine; and referral of the matter to the United Sta tes Attorney for initiation of criminal proceedings against Pappas for “criminal contempt of Court, obstruction of justice, and perjury.” Pl.’s Mot. 97, 98, 99. On the record before m e, Plaintiff hardly can be blamed for tak ing such an ex treme position . Indeed, as exhau stively inventoried above,
Defendants’ willful m isconduct has had a cons iderable adv erse im pact on the Court’s pretrial schedule, imposed substantial burden on two judges of this Court and their staffs, and Pappas has essentially thum bed his nose at the Court’s effo rts to ov ersee a pretri al process that would facilitate a f air and tim ely reso lution of this case on its m erits. Nonetheless, in fashioning spoliation sanctions, Courts m ust strive to issue orders that genera te light, rather than heat, and without ignoring the magnitude of willful m isconduct and prejudice, must fashion remedies that strike the appropriate balance between those that are normative and those that are compensatory.
With this in mind, I will turn to what sanctions are appropriate in this case.
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1. Dismissal or Default Judgment35
Courts m ay order a default judgm ent or di smissal to “send a strong message to other litigants, who scheme to abuse the discovery process and lie to the Court, that this behavior will not be tolerated and will be severely sanctioned.” Krumwiede, 2006 WL 1308629, at *11. In the
Fourth Circuit, to order these harshest sanctions, the court must “‘“be able to conclude either (1) that the spoliator’s conduct was so egregious as to amount to a forfeiture of his claim, or (2) that the effect of the spoliator' s conduct was so prejudi cial that it substantially denied the defendant the ability to defend the claim .”’” Goodman, 632 F. Supp. 2d at 519 (quoting Sampson, 251
F.R.D. at 180 (quoting Silvestri, 271 F.3d at 593)) (emphasis in Goodman). To conclude that the second prong was m et, i.e., that there was suffici ent prejudice to warrant dism issal or a default judgment, “the Court must exam ine the record th at remains to determine whether it contain[ed] enough data” for the aggrieved party to build its case or defense, and “the Court must decide whether a lesser sanction than di smissal [ or d efault judg ment] w ould level the playing field.”
Erie Ins. Exch. v. Davenport Insulation, Inc., 659 F. Supp. 2d 701, 707 (D. Md. 2009); see
Sampson, 251 F.R.D. at 180 (stating that second prong requires proof that “plaintif f was highly prejudiced and denied the only means to establish her case.”).
35 As this Court noted in Sampson, 251 F.R.D. at 180 n.11:
Most of the Fourth Circuit cases involving sanctions for spoliation of evidence arise in the co ntext of a defendant as king for dism issal of a plain tiff's claims because of destruction of evidence by the plaintiff. As the Fifth Circuit has noted, “[b]ecause ... ren dering default judgment is equally as harsh a san ction as dismissing the case of a plain tiff with pr ejudice, we cite cases invo lving these sanctions interchangeably.” Pressey [v. Patterson, 898 F.2d 1018, 1021 n.2 (5th Cir. 1990)]. The court here cites cases involving requests for default judgment and for dismissal interchangeably. 75
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Although “Silvestri posits an either /or tes t,” Erie Ins. Exch., 659 F. Supp. 2d at 707, indicating two distinct means of justifying severe sanctions, this Court has not terminated a case
where a spo liator a cted in bad f aith, ab sent a showing of substantial prejudice. 36 Elsewhere,
dispositive or potentially dispositive sanctions are impermissible without bad faith, even if there
is considerable prejudice. See Rimkus, 688 F. Supp. 2d at 614 (In the Seventh, Eighth, Tenth,
Eleventh, and D.C. Circuits, “the severe sa nctions of granting defa ult judgm ent, striking
pleadings, or giving adverse inference instructions may not be im posed unless there is evidence
of ‘bad faith.’”); see also the Appendix to this Mem orandum, Order and Recommendation
36 VSI cites various c ases in which the Fourth Ci rcuit has affir med default or dism issal as a sanction for spoliation, but in m any cases the court found irrepa rable prejudice. See Pl.’s Mot. 53 (c iting King v. Am. Power Conversion Corp., 181 Fed. App’x 373, 374 (4th Cir. 2006) (affirming dism issal as sanction when plainti ff’s neglig ence caused irrep arable prejud ice); Silvestri, 271 F.3d 583 (sam e); PVD Plast. Mould Indus., Ltd. v. Polymer Grp., 31 Fed. App’x 210, 211 (4th Cir. 2002) (same)). In other cases, the issue concerned a party’s failure to produce discovery (not its failure to preserve ESI) and, in any event, there was substantial prejudice. See Pl.’s Mot. 53 (citing Anderson v. Found. for Advancement, Educ. & Emp’t of Am. Indians, 155 F.3d 500, 504-05 (4th Cir. 1998) (affi rming default judgm ent “as a last-resort sanction” where defendant in bad faith “stonewalled on discovery from the inception of the lawsuit, ” failing to comply with court orders to produce docum ents, and the delayed produc tion caused prejudice because plaintiff’s “claim beca me junior to th at of another claim ant suing the Foundation”); Zornes v. Specialty Indus., Inc., No. 97-2337, 1998 WL 886997 (4th Cir. Dec. 21, 1998) (affirming dismissal where pla intiffs in bad f aith failed to com ply with court orde rs to answer interrogatories, and the delayed production caused “substantial prejudice”). In Zaczek v. Fauquier County, 764 F. Supp. 1071 (E.D. Va. 1991), aff’d, 16 F.3d 414 (4th Cir. 1993), the district court dismissed a prisoner’s case for failure to comply with rules of procedure. In its own research, which has been considerable, the C ourt has identified only one case—in a different circuit—that was terminated based solely on a party’s bad faith spoliation of evidence. In Miller v. Time-Warner Communications, Inc., No. 97 Civ. 7286, 1999 WL 739528, at *2 (S.D.N.Y. Sept. 22, 1999), the plaintiff tried unsuccessfully to erase handwritten notes on documents produced and then lied about it. Reasoni ng that the plaintiff’s spoliation of evidence was willful and in bad faith and, significantly, she committed “repeated instances of perjury,” the court concluded that although th ere was no prejudice whatsoever, “the only appropriate sanction [was] to dism iss the complaint.” Id. It noted that, had the plaintiff not comm itted perjury, the “lesser sanction of requiring plaintiff to pay all the defendant' s attorneys fees incurred as a result of the spoliation might [have] be[en] appropriate.” Id. Accordingly, lofty discussions about the truth-seeking purpose of a lawsuit and the need to deter conduct that interferes with it aside, it does not appear that courts have imposed ulti mate case-ending sanctions in m any cases where there has not also been a showing of extreme prejudice.
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(identifying requirements by jurisdiction). And, in the Fifth Circuit, “[a] severe sanction such as a default judgm ent or an adverse in ference instruction requires bad faith and prejudice.” Id. at
642 (em phasis added). The sheer variety of form ulae used by various courts to determ ine whether case-dispositive sanctions are appropriate also contributes to the difficulty that lawyers and clients experience in attempting to evaluate the risks and consequences of failing to preserve evidence.
2. Adverse Inference and Other Adverse Jury Instructions
In its discretion, the court may order an adverse infere nce instruction, which inform s a jury that it m ay “draw adverse inferences from . . . the loss of evidence , or the destruction of evidence,” by assum ing that failure to preserv e was because the spo liator was a ware that th e evidence w ould have b een detrim ental. Vodusek, 71 F.3d at 156. Because such a definitive inference is not always warranted, courts have cr afted various levels of adverse inference jury instructions: The court may instruct the jury that “certain facts are deemed admitted and must be accepted as true”; im pose a m andatory, yet rebu ttable, presu mption; or “perm it[] (but . . . not require) a jury to presum e that the lost evidence is both releva nt and favorable to the innocent party.” Pension Comm., 685 F. Supp. 2d at 470-71; see examples cited in the Appendix to this
Memorandum, Order and Recomm endation. In th is Circuit, to impose an adverse jury instruction, the court “must only find that the s poliator acted willfully in the destruction of evidence.” Goodman, 632 F. Supp. 2d at 519 (citing Vodusek, 71 F.3d 148, and noting at footnote 15 that “in the Fourth Circuit, the Vodusek standard detailing the requirements for an adverse jury instruction remains applicable,” rather than the oft-cited Zubulake IV standard from the Southern District of New York, b ecause although it “rem ains insightful,” the Zubulake IV standard “could be read to lim it the availability of sanctions” in this Circuit); see Sampson, 251
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F.R.D. at 181. But see Pension Comm., 685 F. Supp. 2d at 478-79 (stati ng that an adverse jury
instruction was warranted for the grossl y negligent, but uni ntentional, conduct). 37 W hile negligence or even gross ne gligence is not sufficient in this Ci rcuit, the conduct need not rise to the level of bad faith. Goodman, 632 F. Supp. 2d at 519. But see Rimkus, 688 F. Supp. 2d at 617
(stating that “the severe sancti ons of . . . giving adverse infe rence instructions m ay not be imposed unless there is evidence of ‘bad faith.’”); see also Faas v. Sears, Roebuck & Co., 532
F.3d 633, 644 (7th Cir. 2008) (sam e); Johnson v. Avco Corp., 702 F. Supp. 2d 1093, 1110 (E.D.
Mo. 2010) (same); Stevenson v. Union Pac. R.R., 354 F.3d 739, 745, 747 (8th Cir. 2004) (stating that if spoliation occurs before litigation commences, there must be evidence of bad faith for the court to im pose an adverse inferen ce instruction, but if spoliation occurs during litig ation, the court may impose an a dverse inference instruction “even absent an explicit bad faith finding”).
The court must also con sider relevance and prejudice. Pension Comm., 685 F. Supp. 2d at 467; see Vodusek, 71 F.3d at 156 (“To draw an adverse inference from the absence, loss or destruction of evidence, it would have to app ear that the evidence would have been relevant to an issue at trial and otherwise would naturally have been introduced into evidence .”). Once again, the approaches taken by courts vary widely, making predictability difficult for parties who are trying to determine what they must preserve, and what can happen if they do not.
37 Again, the significance of this departure comes to light when it is viewed in the context of the chain reaction spurred by considering certain conduct gross negligence per se. If, for example, a court adopts the position of Pension Committee, 685 F. Supp. 2d at 471, that a failure to institute a written litiga tion hold is gross negligen ce per se, and therefore presum es relevance and prejudice, it is inexorably poised to give an a dverse jury instruction w ithout further analysis. This approach is not consistent with Fourth Circuit precedent. 78
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3. Attorney’s Fees, Costs, and Fines
Less severe sanction s include costs, at torney’s fees, and fines, which not only compensate the prejudiced party but also “punish the offending party for its actions” and “deter the litigant’s conduct, s ending the m essage that egregious conduct will not be to lerated.” See
Pension Comm., 685 F. Supp. 2d at 467, 471; Goodman, 632 F. Supp. 2d at 506. (citations and quotation marks om itted). The court’s “inquiry focuses more on the co nduct of the spoliating party than on whether docum ents were lost, and, if so, whether those docum ents were relevant and resulted in pre judice to th e innocent party.” Pension Comm., 685 F. Supp. 2d at 467. This
Court will a ward costs or f ees in c onjunction w ith a spoliation m otion as an alte rnative to a harsher sanction; if further discove ry is necessary due to the spoliation; or in addition to another sanction, in which case the award m ay be for “reasonable expenses incurred in m aking the motion, including attorney’s fees,” or also for the cost of inves tigating the spolia tor’s conduct.
Goodman, 632 F. Supp. 2d at 524. Additionally , a few courts have ordered the spoliating p arty to pay a fine to the clerk of court or a bar association for prolonging lit igation and wasting the court’s time and resources. E.g., Pinstripe, Inc. v. Manpower, Inc., No. 07-CV-620-GKF-PJC,
2009 WL 2252131, at *4 (N.D. Okla. July 29, 2009); Claredi v. Seebeyond Tech. Corp., No.
4:04CV1304 RWS, 2007 W L 735018, at *4 (E.D. Mo. Mar. 8, 2007); Wachtel v. Health Net,
Inc., 239 F.R.D. 81, 111 (D.N.J. 2006); Turnage, 115 F.R.D. at 559. However, as stated supra at page 59, it is unclear w hether these unappealed trial court holdings woul d withstand appellate review, because in similar cases the Fourth and Tenth Circuits ha ve vacated discovery sanctions ordering the payment of money to the Clerk of the Court, deeming them to be criminal contempt sanctions, which are unavailable without the enhanced due process procedure requirem ents criminal contempt proceedings require. Bradley v. Am. Household, Inc., 378 F.3d 373, 377-79
79
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(4th Cir. 2004); Buffington v. Baltimore Cnty., Md., 913 F.2d 113, 133 (4th Cir. 1990); Law v.
Nat’l Collegiate Athletic Ass’n, 134 F.3d 1438, 1442-44 (10th Cir. 1998).
4. Contempt of Court
Fed. R. Civ. P. 37(b)(2)(A)(vii ) provides that the court m ay “treat[] as contempt of court
the failure to obey” a court orde r to provide or perm it discovery of ESI evidence. Sim ilarly,
pursuant to its inherent authorit y, the court m ay impose fines or prison sentences f or contempt
and enforce “the observance of order.” United States v. Hudson, 11 U.S. (7 Cranch) 32, 34
(1812). Contempt sanctions may be civil or criminal. Buffington, 913 F.2d at 133-34.
When the nature of the relief and th e purpose for which the contem pt sanction is imposed is rem edial and intended to coer ce the contem nor into com pliance with court orders or to com pensate the complainant for losses sustained, the contempt is civil; if, on the other hand, the relief seeks to vindicate the authority of the court by punishing the contem nor and deterri ng future litigants' m isconduct, the contempt is criminal. . . . If the relief provided is a senten ce of i mprisonment, it is rem edial if “the d efendant s tands comm itted unless and until he pe rforms the affirmative act required by the co urt's order,” and is punitive if “the sentence is lim ited to im prisonment for a definite period.” If the relief provided is a fine, it is remedial when it is p aid to th e complainant, and punitive when it is paid to the court, though a fine that would be paya ble to th e court is also remedial when the defendant can avoid paying the fine sim ply by perform ing the affirmative act required by the court's order. Id. (quoting Hicks v. Feiock, 485 U.S. 624, 631-32 (1988 ) (citations om itted)); see also Int’l
Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 828, (1994) (“The paradigm atic
coercive, civil contem pt sanction . . . involve s confining a contem nor indefinitely until he complies with an affirm ative comm and such as an order ‘to pay alimony, or to surrender property ordered to be turned over to a receiver, or to make a conveyance.’” (quoting Gompers v.
Bucks Cnty. Stove & Range Co., 221 U.S. 418 (1911)); Bradley, 378 F.3d at 378 (discussing the
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“basic difference between civil and crim inal contempt sanctions” and quoting Buffington, 913
F.2d at 133).
“Criminal contempt is a cr ime in the ordin ary sense,” Bloom v. Illinois, 391 U.S. 194,
201 (1968), requiring the procedural prot ections of notice and a hearing. Bradley, 378 F.3d at
379. Therefore, to treat a party’s failure to comply with a court order as criminal contempt, the court m ust refer the matter to the United States Attorney for prosecution. Fed. R. Cri m. P.
42(a)(2). If that office declines to accept the case (a highly probable outcome in most instances),
then the court must appoint a private prosecutor to bring the criminal contempt case. Fed. R.
Crim. P. 42(a)(2); Young v. United States ex rel. Vuitton et Fils S.A., 481 U.S. 787, 793 (1987)
(concluding that federal courts po ssess inherent authority to initiate “co ntempt proceedings for
disobedience of their orders, authority which n ecessarily encompasses the ability to appoint a
private atto rney to prosecute the contem pt”); Buffington, 913 F.2d at 132 (vacating order
imposing crim inal contem pt sanctions without required procedural pr otections; noting that
district court, “following the procedure outlined in Young [481 U.S. at 801] initially referred th e
matter to the United States Atto rney” and “[ a]fter the U.S. Attorney de clined to pr osecute, the
court, citing Young, appointed a private prosec utor,” but u ltimately im properly im posed f ines payable to the clerk of the court as civil contempt sanc tions). If brought, th e burden of proof i s
beyond a reasonable doubt. Gompers, 221 U.S. at 444; Bradley, 378 F.3d at 379. Addition ally,
the defendant is entitled to a jury trial if the sent ence will be longer than six m onths. Fed. R.
Crim. P. 42(a)(3); Cheff v. Schnackenberg, 384 U.S. 373, 380 (1966) (“[S]entences exceeding six
months for criminal contempt may not be imposed by federal courts absent a jury trial or waiver
thereof.”). Recently, another cou rt in the Fou rth Circu it referred a case to the U nited States
Attorney for criminal contempt proceedings against a party for spoliation of ESI in a civil case.
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See SonoMedica, Inc. v. Mohler, No. 1:08-cv-230 (GBL), 2009 WL 2371507, at *1 (E.D. Va .
July 28, 2009).
To hold a party in civil contem pt, the cour t must find that four elem ents have been established by clear and convincing evidence:
“(1) the existence of a v alid decree of which the alleged contem nor had actual or constructive knowledge; (2) that the decree wa s in the m ovant's ‘favor’; (3) that the alleged contem nor by its conduct viol ated the term s of the decree, and had knowledge (at least constructive knowledge) of such violation; and (4) that [the] movant suffered harm as a result.” Id. at *3 (quoting Ashcraft v. Conoco, Inc., 218 F.3d 288, 301 (4th Cir. 2000)).
5. Appropriate Sanctions for Defendants
a. Default judgment as to liability on copyright claim only
Plaintiff argues that “only th e severest form s of sanctions ” would be “e ffective” against
Defendants. Pl.’s Mot. 90-91. As Plaintiff sees it, “[i]f this Court finds that Defendants’ misconduct was egregious enough to have justified a forfeiture of their defenses, then it need not also determine whether Defendants’ m isconduct denied VSI the ability to prove all its claim s.”
Pl.’s Reply 5-6. See Erie Ins. Exch., 659 F. Supp. 2d at 707. Defendants contend that here, unlike in the cases in which courts have sa nctioned the spoliating pa rty through a default judgment or dismissal, “the lost evidence is not the sole evidence at issue on liability,” such that a default judgment on the copyright claim, the unfair competition claim, the alleged Lanham Act violations, and the alleged patent violation, i.e., all rem aining counts, is not appropriate. Defs.’
Opp’n 45. Moreover, as Defenda nts see it, a court m ay impose a def ault judgm ent “on only those claims that m ake a cause of action and not on those to which the defendant possessed a viable legal defense.” Defs.’ Surreply 3.
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As noted, Defendants admit spoliation, relevance, and prejudice, and consent to a default
judgment on liability for Count I, the copyright claim. Further, the facts amply demonstrate the
intentional, bad faith permanent destruction of a significant quantit y of relevant evidence, to the
Plaintiff’s detriment. Thus, it is clearly appropriate that the spoliation consequences include a judgment finding CPI and Pappas liable on Count I.38
It is far less certain, however, wheth er Plaintiff has demonstrated that a default judgm ent as to all the rem aining counts alleged against Defendants is required, or that a default judgm ent as to dam ages for all counts, including Count I, is warranted. The copyright claim always has been Plaintiff’s prim ary claim , and it is ea sy to see how the evid ence th at was destroyed prejudiced Plaintiff’s efforts to prove it. The same cannot be said about the remaining counts for unfair com petition (Cou nt II), Lanh am Act viol ations, na mely false advertising and reverse palming off (Count VII), and patent violations (Count VIII)—for both liab ility and damages; at least not at this tim e and on this re cord. W hile it may be correct that evidence that would b e
relevant to prove the copyright cl aim might also be relevant to proving the others , Plaintiff has
not yet m ade the necessary showing of irrepa rable or substantial pr ejudice. Therefore,
38 Defendants indulge in a little verbal legerdemain in characte rizing their po sition regarding Count I. They acquiesce to the entry of a “consen t” judgment, rather than the entry by the Court of a default judgm ent. While th e end result is the sam e under e ither characterization, the latter makes it unam biguous t hat the outcom e is as a severe sanction for egregious m isconduct; the former im plies a form of agreem ent without th e pejorative classification, sim ilar to settling a claim without admitting liability. It would be in appropriate for the Court to indulg e Defendants in this face-saving effort. Defendants cannot ha ve their cake and eat it too. They cannot adm it to breach of the duty to preserve and acknowledge (or, more accurately, capitulate) on the issues of prejudice and relevance, but attempt to sanitize th e result by labeling it something other than what it is—a sanction. Accordingly, the appropri ate sanction is the entry of a de fault judgment as to liability for Count I, copyright infringem ent, pursuant to Fed. R. Civ. P. 37(b)(2)(A)(vi). Because this is a d ispositive outcome, I am recommending that Judge Garbis impose it, rather than doing so myself, although there can be no doubt that this result is warranted on this record. 83
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dispositive sanctions are inappropriat e with regard to those counts. See Silvestri, 271 F.3d at
593; Goodman, 632 F. Supp. 2d at 519; Sampson, 251 F.R.D. at 180.
Similarly, with the exc eption of the rem edy of the entry of a permanent injunction as to
the copyright claim, which Defendants do not o ppose, Defs.’ Opp’n 29 & Ex. 11, it is not clear
that Plaintiff has de monstrated an inability to prove m onetary dam ages for any of the counts alleged. The debate all these years has focu sed on liability, not dam ages. While Plaintiff ultimately may be able to m ake this showing, it has not do ne so yet. Accordingly , entry of a
default judgment as to monetary dam ages is denied, without prejudice. Ra ther, it is appropriate
for the court to schedule a trial on the issues of liability for Counts II ( unfair competition), VII
(Lanham Act violation s), and VIII (Paten t Act vi olations), and m oney damages for all counts .
Counsel have inform ed the Court th at they do not seek a jury tr ial on these issues. (June 25,
2010 Hr’g Tr. 5:19 – 6:11.) Accord ingly, these issued will be trie d to the Court. I recomm end
that Plaintiff be permitted to proceed, but that if in the future of this litigation Plaintiff is able to
demonstrate with greater particularity than it has to date that it cannot meet its burden of proof as
to liability for Counts II (unfair competition), VI I (Lanham Act violations), and VIII (Patent Act
violations), or money damages as to all counts, because of Defendants’ spoliation, then the Court
should revisit at that time whether additional sanctions, such as the entry of an order pursuant to
Fed. R. Civ. P. 37(b)(2)(A)(ii) prohibiting Defenda nts from supporting their defenses to liability
on Counts II, VII, and VIII, or m oney damages; or prohibiting them from opposing Plaintiff’s
proof of money damages; or finding Defendants liable for the counts other than copyright.
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b. Permanent injunction on the copyright claim
As for the perm anent injunction on the c opyright count, which Plaintiff requests and
Defendants do not oppose, Defs.’ Opp’n 29 & E x. 11, I am recommending that Judge Garbis
grant this as a sanction.
c. Attorney’s fees, costs, and civil, but not criminal, contempt
As the prevailing party, Plaintiff is entitled to reasonable attorney’s fees and costs. See
Fed. R. Civ. P. 37(b)(2)(C) (For failure to comp ly with a court order to provide or perm it discovery, “the court must order the disobedient party, the attorney advising that party, or both to
pay the reasonable expenses, including attorney’s fees, caused by the failure, unless the failure
was substantially justified or other circumstances make an award of expenses unjust.”). Here, the
failure was not substantially ju stified, and there ar e no circum stances m aking such an award unjust. Indeed, Defendants conceded that a fee award would be appr opriate when Defense counsel stated that “the Court . . . would determ ine what would be the appropriate attorneys’ fees.” (June 25, 2010 Hr’g Tr. 3:16-22.) Thus, spoliation sanctions shall include costs and legal fees allocable to spoliation. Specifically, as Plai ntiff requested, the Court shall award attorney’s fees and costs, including cost s related to uncovering Defendan ts’ discovery abuses; preparing,
filing, and arguing all of Plaintiff’s ESI m otions; and retaining Guidance Software and Andreas
Spruill. To that end, Plaintiff shall subm it a bill of co sts within thirty (30) d ays of this
Memorandum, Order an d Recommendation, with Defe ndants’ response, if any, to b e submitted
within thirty (30) days thereafter.
Plaintiff als o has ask ed the Court to refer this case to the United Sta tes Attorney to
evaluate whether perjury or other crim inal charges should be brought against Pappas. Pl.’s Mot.
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98. Such action is unusual and extrem e for spoliation cases, but not unheard of . See, e.g.,
SonoMedica Inc., 2009 WL 2371507. I have given serious thought to doing this, because I have concluded that Pappas, and through him, CPI, engaged in multip le willful acts of destruction of evidence and lied under oath in affidavits, depo sition testimony, and before the Court during th e hearings it held. Knowing, however, the existi ng dem ands on the U.S. Attorney’s office to prosecute very serious crimes, as well as their av ailable resources, I do not think it probable that they would agree to initia te a criminal case arising ou t of a f actually-complicated civil cas e involving an inordinately volum inous record, and concerning highly technical issues that will necessitate expert testimony.
It is true th at, if the U.S. Attorney dec lined to initiate a c riminal pros ecution ag ainst
Pappas for contempt of court, th is court could appoint a private prosecutor to do so, pursuant to
Fed. R. Crim. P. 42(a)(2). See Young, 481 U.S. at 793 (describing process for appointing a private attorney for contem pt proceedings). However, co mmencement of a new proceed ing would require proof beyond a reasona ble doubt, and Pappas would be entitled to a jury trial, involving considerable expenses and tim e. I seri ously question whether this would be the best manner of dealing with Pappas’s m isconduct. Th is dispute has been pending for far too long, been far too expensive, and, quite frankly, consum ed far too m uch of this Court’s resources to warrant initiating a crim inal proceeding th at unavoidably will go over the sam e ground, and likely involve yet another judge.
This is not to say, however, that referral for criminal contempt proceedings is the extent of what this Court can do to address Pappa s’s egregious behavior. After all, Rule
37(b)(2)(A)(vii) permits the Court to treat “as c ontempt of court the failure to obey any order except an order to subm it to a physical or m ental examination.” This sanction has the obvious
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benefit of being warranted on the existing recor d, without need for initiating new proceedings.
As noted, there m ust exist “‘valid decrees of which the alleged contem nor [i.e., Pappas] had
actual or constructive knowledge’”; those decrees must have been in Plaintiff’s favor; Pappas, by
his conduct, m ust have “‘violated the term s of the decree, and had knowledge (at least
constructive knowledge) of such violation’”; and VSI m ust have suffered harm as a result of
Pappas’s conduct. See SonoMedica, Inc., 2009 WL 2371507, at *3 (quoting Ashcraft, 218 F.3d
at 301). As detailed above at Sections I.2-9, I have found that Pappas violated both preservation
orders and production orders that this Court issued in Plaintiff’s favor, a nd the above discussion
manifestly establishes the factual record to show that he knew of the orders and acted willfully to
thwart those orders, thereby causing harm to Plaintiff. 39 Therefore, Papp as’s civil contem pt is
established by clear and convincing evidence.
For such clearly contem ptuous behavior , a very serious sanction is required.
Accordingly, I order that Pappas’s acts of spoliation be treated as contempt of this court, and that
as a sanction, he be imprisoned for a period no t to exceed two years, unless and until he pays to
39 To summarize briefly, on Dece mber 22, 2006, I stat ed: “[B]oth parties are rem inded of their substantive duty to preserve evidence, including electronic evidence, that is relevant to the case.” ECF No. 41. On February 1, 2007, I issued a wr itten Preservation Order that stated that the parties had been adm onished at the February 1, 2007 hearing of thei r “substantive duty to preserve evidence potentially relevant to the case, and . . . ordered to do so by the Court.” (Feb. 1, 2007 Order 2, ECF No. 56.) The language of th e Court’s preservation orders was crystal clear. Pappas testif ied that he understood both orders. (Oct. 29, 2009 Hr’g Tr. 117:18 – 118:2, 139:10 – 140:19.) Even if the language of the firs t order and the Court’s oral order on February 1, 2007 left anything to doubt, the clarity of the February 1, 2007 order is undeniable. Indeed, in Pappas’s own words, the Court’s February 1, 2007 preservation order “w as very clear.” ( Id. 139:10 – 140:19.) Pappas deleted thousands of file s following these orders. Separate and apart from these preservation orders, civil contempt sanctions are warranted for Defendants’ violations of the Court’s August 1 and 30, Septem ber 21, and October 3, 2007 production orders, which stated clearly that Defendants were to “produce all relevant, non-privilege d ESI” to Plaintiff’s counsel. (ECF Nos. 131, 145, 149, and 164.) Pappas stated in a sworn affidavit that he produced all such ESI, demonstrating that he had knowle dge of the orders, yet his ESI production was not complete. 87
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Plaintiff the attorn ey’s f ees and costs tha t w ill be awarde d af ter Plaintif f has subm itted an
itemized accounting of the atto rney’s fees and cost s associated not only with filing this m otion,
but also with respect to all efforts expended th roughout this case to dem onstrate the nature and
effect of Pappas’s spoliation. These costs and fees likely will amount to a significant figure, and
that will p roperly v indicate this Court’s a bility to e nforce its discovery o rders. Th e
commencement of Pappas’s confinement will be determined at the conclusion of the proceedings
to quantify the amount of attorney’s fees and costs.
Despite the fact that, if Pappas refuses to pay the attorney’s fees and costs ordered by the
Court, he will be im prisoned for two years, it is quite clear that this is a civil—not a crim inal— contempt sanction, because the relief is compensatory and the sanction will be imposed to coerce
Pappas’s compliance with this Court’s order to pay attorney’s fees and costs to Plain tiff; Pappas can avoid imprisonment by promptly paying the fees and costs. See Hicks v. Feiock, 485 U.S. at
631-32; Int’l Union, United Mine Workers of Am., 512 U.S. at 828; Bradley, 378 F.3d at 378 (4th
Cir. 2004); Buffington, 913 F.2d at 133-34. This result is absolutely essential as a civil contempt sanction because, without it, I am convinced that Pappas will do all that he can to avoid paying any money judgment or award of at torney’s fees th at is in the for m of a civil judgm ent alone.
Without the threat of jail tim e, Pappas’s futu re conduct would be pred icted by his past, and
Plaintiff will receive a p aper judgment that does not enable it to recover its consid erable out-of- pocket losses caused by Pappas’s spolia tion. To avoid jail tim e, all that is required of Pappas is to pay Plaintiff the atto rney’s fees and costs that will be aw arded to Plaintiff for prevailing on this m otion. Because this sanction is not case-di spositive, I have th e authority to order it directly, pursuant to Rule 37(b)(2 )(A)(vii). Should Judge Garbis di sagree, I request that he treat this as a recommendation, pursuant to 28 U.S.C. § 636(b)(1).
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A separate Order follows.
Dated: September 9, 2010 ______/S/______Paul W. Grimm Chief United States Magistrate Judge lmy
89
Case 8:06-cv-02662-MJG Document 377-1 Filed 09/09/10 Page 1 of 12 Spoliation Sanctions by Circuit
Can conduct be Culpability and prejudice requirements Culpability and culpable per se Scope of Duty What constitutes corresponding without for adverse for a rebuttable to Preserve For sanctions for dispositive prejudice jury consideration of inference presumption of in general sanctions instructions reasonableness? Circuit law Case instruction relevance
It is a duty to This specific issue “The measure “severe prejudice “does not require Whether relevance When spoliation Intentional preserve has not been of the or egregious bad faith or can be presumed has substantially denies spoliation; potentially addressed. appropriate conduct” comparable bad not been addressed. a party the ability to permissive relevant sanctions will Driggin v. Am. Sec. motive” support or defend adverse evidence a party depend on the Alarm Co., 141 F. Trull v. the claim inference if the owns or severity of the Supp. 2d 113, 123 Volkswagon of Velez v. Marriott PR jury finds that controls and prejudice (D. Me. 2000). Am., Inc., 187 F.3d Mgmt., Inc., 590 F. the spoliator also a duty to suffered.” Velez 88, 95 (1st Cir. Supp. 2d 235, 259 knew of the notify the v. Marriott PR 1999); Oxley v. (D.P.R. 2008). lawsuit and the opposing party Mgmt., Inc., Penobscot County, documents’ of evidence in 590 F. Supp. 2d No. CV-09-21- relevance when the hands of 235, 259 JAW, 2010 WL it destroyed third parties. (D.P.R. 2008). 3154975 (D. Me. them Velez v. 2010). Testa v. Wal- Marriott PR “[C]arelessness Mart Stores, Mgmt., Inc., is enough for a Inc., 144 F.3d 590 F. Supp. 2d district court to 173, 178 (1st 235, 258 consider Cir. 1998). (D.P.R. 2008). imposing sanctions.” Driggin v. Am. Sec. Alarm Co., 141 F. Supp. 2d 113, 123 (D. First Me. 2000). Case 8:06-cv-02662-MJG Document 377-1 Filed 09/09/10 Page 2 of 12 Documents that Yes; specific “[D]iscovery “‘willfulness, bad Gross negligence Bad faith or gross When spoliation Grossly are potentially actions, such as the sanctions . . . faith, or fault on Pension Comm. of negligence substantially denies negligent relevant to failure “to issue a may be imposed the part of the the Univ. of Pension Comm. of a party the ability to conduct; likely litigation written litigation upon a party sanctioned party’” Montreal Pension the Univ. of Montreal support or defend permissible “are considered hold,” constitute that has Dahoda v. John Plan v. Banc of Pension Plan v. Banc the claim inference of to be under a gross negligence breached a Deere Co., 216 Am. Sec., 685 F. of Am. Sec., 685 F. Pension Comm. of “the relevance party’s control,” per se. discovery Fed. App’x 124, Supp. 2d 456, 478- Supp. 2d 456, 467 the Univ. of of the missing such that the Pension Comm. of obligation not 125, 2007 WL 79 (S.D.N.Y. (S.D.N.Y. 2010). Montreal Pension documents and party has a duty the Univ. of only through 491846, at *1 (2d 2010). Plan v. Banc of Am. resulting to preserve Montreal Pension bad faith or Cir. 2007) (quoting Sec., 685 F. Supp. prejudice to the them, “when Plan v. Banc of gross West v. Goodyear Negligence 2d 456, 479 . . . Defendants, that party has Am. Sec., 685 F. negligence, but Tire & Rubber Co., Residential (S.D.N.Y. 2010). subject to the the right, Supp. 2d 456, 471 also through 167 F.3d 776, 779 Funding Corp. v. plaintiffs’ authority, or (S.D.N.Y. 2010). ordinary (2d Cir. 1999)). DeGeorge Fin. ability to rebut practical ability negligence.” Corp., 306 F.3d 99, the presumption to obtain the Residential 108 (2d Cir. 2002). to the documents from Funding Corp. satisfaction of a non-party to v. DeGeorge Intentional conduct the trier of the action.” Fin. Corp., 306 In re Terrorist fact.” Pension In re NTL, Inc. F.3d 99, 113 Bombings of U.S. Comm. of the Sec. Litig., 244 (2d Cir. 2002). Embassies in East Univ. of F.R.D. 179, 195 Africa, 552 F.3d Montreal (S.D.N.Y. 93, 148 (2d Cir. Pension Plan v. 2007). 2008). Banc of Am. Sec., 685 F. The duty Supp. 2d 456, extends to key 478 (S.D.N.Y. players. 2010). Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 217 (S.D.N.Y. Second 2003).
2
Case 8:06-cv-02662-MJG Document 377-1 Filed 09/09/10 Page 3 of 12 Potentially No; conduct is Bad faith The degree of fault Negligence Whether relevance Spoliation of Intentional relevant culpable if “party Bensel v. Allied is considered, and Canton v. Kmart can be presumed has evidence that would spoliation; evidence; “‘it is [with] notice that Pilots Ass'n, dispositive Corp., No. 1:05- not been addressed. have helped a permissible essential that evidence is 263 F.R.D. 150, sanctions “should CV-143, 2009 WL party’s case inference the evidence in relevant to an 152 (D.N.J. only be imposed in 2058908, at *2-3 In re Hechinger Inv. Mosaid Techs., question be action . . . either 2009). the most (D.V.I. July 13, Co. of Del., Inc., Inc. v. Samsung within the proceeds to destroy extraordinary of 2009). 489 F.3d 568, 579 Elecs. Co., 348 party's that evidence or circumstances,” see (3d Cir. 2007). F. Supp. 2d control.’” allows it to be Mosaid Techs., Inc. Intentional conduct 332, 334 Canton v. destroyed by v. Samsung Elecs. Brewer v. Quaker (D.N.J. 2004). Kmart Corp., failing to take Co., 348 F. Supp. State Oil Refining No. 1:05-CV- reasonable 2d 332, 335 (D.N.J. Corp., 72 F.3d 326, 143, 2009 WL precautions” 2004), but a 334 (3d Cir. 1995). 2058908, at *2 Canton v. Kmart minimum degree of (D.V.I. July 13, Corp., No. 1:05- culpability has not 2009) (quoting CV-143, 2009 WL been identified. Brewer v. 2058908, at *3 Quaker State (D.V.I. July 13, Oil Refining 2009) (quoting Corp., 72 F.3d Mosaid Techs., Inc. 326, 334 (3d v. Samsung Elecs. Cir. 1995)) Co., 348 F. Supp. 2d 332, 338 (D.N.J. 2004)) (emphasis Third added).
3
Case 8:06-cv-02662-MJG Document 377-1 Filed 09/09/10 Page 4 of 12 Documents that The U.S. District “only a The court must “be The court “must Willful behavior When spoliation Willful are potentially Court for the showing of able to conclude only find that Sampson v. City of substantially denies spoliation; relevant to District of fault, with the either (1) that the spoliator acted Cambridge, 251 a party the ability to adverse jury likely litigation Maryland has degree of fault spoliator’s conduct willfully in the F.R.D. 172, 179 (D. support or defend instruction, but “are considered quoted Zubulake impacting the was so egregious as destruction of Md. 2008). the claim not the “series to be under a IV, 220 F.R.D. at severity of to amount to a evidence.” Goodman v. Praxair of fact-specific party’s control,” 220 (“Once the sanctions” forfeiture of his Goodman v. Servs., Inc., 632 F. adverse jury such that the duty to preserve Sampson v. City claim, or (2) that Praxair Servs., Supp. 2d 494, 519 instructions” party has a duty attaches, any of Cambridge, the effect of the Inc., 632 F. Supp. (D. Md. 2009); that the plaintiff to preserve destruction of 251 F.R.D. 172, spoliator's conduct 2d 494, 519 (D. Sampson v. City of requested them, “when documents is, at a 179 (D. Md. was so prejudicial Md. 2009). Cambridge, 251 Goodman v. that party has minimum, 2008) (using that it substantially F.R.D. 172, 180 (D. Praxair Servs., ‘the right, negligent.”). See “fault” to denied the Md. 2008). Inc., 632 F. authority, or Sampson v. City of describe defendant the Supp. 2d 494, practical ability Cambridge, No. conduct ranging ability to defend 523 (D. Md. to obtain the WDQ-06-1819, from bad faith the claim.” 2009). documents from 2008 WL 7514364, destruction to Silvestri v. Gen. a non-party to at *8 (D. Md. May ordinary Motors Corp., 271 the action.’” 1, 2008) (finding negligence). F.3d 583, 593 (4th Goodman v. defendant’s Cir. 2001). Praxair Servs., conduct negligent); Inc., 632 F. Pandora Jewelry, Supp. 2d 494, LLC v. Chamilia, 515 (D. Md. LLC, No. CCB-06- 2009) (citation 3041, 2008 WL omitted). 4533902, at *9 (D. Md. Sept. 30, It is also a duty 2008) (finding to notify the defendant’s opposing party conduct grossly of evidence in negligent); cf. the hands of Goodman, 632 F. third parties. Supp. 2d at 522 Silvestri v. Gen. (stating that Motors Corp., defendant, “much 271 F.3d 583, like the defendants 590 (4th Cir. in Sampson and 2001). Pandora, was clearly negligent” Duty extends to because it failed to key players. implement a Goodman, 632 litigation hold, but F. Supp. 2d at also explaining 512 why such action Fourth Fourth was negligent).
4
Case 8:06-cv-02662-MJG Document 377-1 Filed 09/09/10 Page 5 of 12 Party with No: “Whether “some degree of Bad faith (and Bad faith “The Fifth Circuit has When spoliation Willful control over preservation or culpability” prejudice) Rimkus Consulting not explicitly substantially denies spoliation; jury potentially discovery conduct Rimkus Rimkus Consulting Group, Inc. v. addressed whether a party the ability to instruction relevant is acceptable in a Consulting Group, Inc. v. Cammarata, 688 F. even bad-faith support or defend would “ask the evidence has a case depends on Group, Inc. v. Cammarata, 688 F. Supp. 2d 598, 617 destruction of the claim jury to decide duty to preserve what is reasonable, Cammarata, Supp. 2d 598, 614 (S.D. Tex. 2010). evidence allows a Rimkus Consulting whether the it; scope and that in turn 688 F. Supp. 2d (S.D. Tex. 2010). court to presume that Group, Inc. v. defendants includes depends on 598, 613 (S.D. the destroyed Cammarata, 688 F. intentionally evidence in whether what was Tex. 2010). evidence was Supp. 2d 598, 613 deleted emails possession of done-or not done- relevant or its loss (S.D. Tex. 2010). and attachments “employees was proportional to prejudicial.” to prevent their likely to have that case and Rimkus Consulting use in relevant consistent with Group, Inc. v. litigation.” information, clearly established Cammarata, 688 F. Rimkus i.e., ‘the key applicable Supp. 2d 598, 617-18 Consulting players’” standards.” Rimkus (S.D. Tex. 2010). Group, Inc. v. Tango Transp., Consulting Group, Cammarata, LLC v. Transp. Inc. v. Cammarata, 688 F. Supp. 2d Int’l Pool, Inc., 688 F. Supp. 2d 598, 620, 646 No. 5:08-CV- 598, 613 (S.D. Tex. (S.D. Tex. 0559, 2009 WL 2010). 2010). 3254882, at *3 (W.D. La. Oct. Fifth Fifth 8, 2009).
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Case 8:06-cv-02662-MJG Document 377-1 Filed 09/09/10 Page 6 of 12 It is a duty to This specific issue Bad faith willfulness, bad Bad faith “The spoliating party When spoliation Unintentional preserve has not been (intentional) faith, or fault In re Global bears the burden of substantially denies conduct; potentially addressed. In destruction, In re Global Technovations, establishing lack of a party the ability to permissible relevant BancorpSouth gross Technovations, Inc., 431 B.R. 739, prejudice to the support or defend inference evidence that a Bank v. Herter, 643 negligence, or Inc., 431 B.R. 739, 782 (Bankr. E.D. opposing party, a the claim Jain v. party owns or F. Supp. 2d 1041, ordinary 779 (Bankr. E.D. Mich. 2010). burden the Sixth Jain v. Memphis Memphis controls and to 1061 (W.D. Tenn. negligence Mich. 2010) (using Circuit has described Shelby Airport Shelby Airport notify the 2009), the court In re Global “fault” to describe Bad faith not as ‘an uphill battle.’” Auth., No. 08-2119- Auth., No. 08- opposing party quoted Zubulake Technovations, conduct ranging required Jain v. Memphis STA-dkv, 2010 WL 2119-STA-dkv, of evidence in IV, 220 F.R.D. at Inc., 431 B.R. from intentional Miller v. Home Shelby Airport Auth., 711328, at *4 (W.D. 2010 WL the hands of 220 (“Once the 739, 780 conduct to ordinary Depot USA, Inc., No. 08-2119-STA- Tenn. Feb. 25, 711328, at *4-5 third parties. duty to preserve (Bankr. E.D. negligence). No. 3-08-0281, dkv, 2010 WL 2010). (W.D. Tenn. Jain v. attaches, any Mich. 2010) 2010 WL 373860, 711328, at *2 (W.D. Feb. 25, 2010). Memphis destruction of (equating Other cases in at *1 (M.D. Tenn. Tenn. Feb. 25, 2010). Shelby Airport documents is, at a intentional and circuit define Jan. 28, 2010). Auth., No. 08- minimum, bad faith “fault” as 2119-STA-dkv, negligent.”), but it conduct). “objectively Ordinary 2010 WL also analyzed the unreasonable negligence 711328, at *2 defendant’s behavior.” E.g., Jain v. Memphis (W.D. Tenn. conduct to make BancorpSouth Shelby Airport Feb. 25, 2010). the finding that it Bank v. Herter, 643 Auth., No. 08- was “more than F. Supp. 2d 1041, 2119-STA-dkv, Duty extends to negligent.” 1060 (W.D. Tenn. 2010 WL 711328, key players 2009); Jain v. at *3 (W.D. Tenn. In re Nat’l Memphis Shelby Feb. 25, 2010); Century Fin. Airport Auth., No. Forest Labs., Inc. Enters., Inc. 08-2119-STA-dkv, v. Caraco Pharm. Fin. Inv. Litig., 2010 WL 711328, Labs., Ltd., No. 06- No. 2:03-md- at *3 (W.D. Tenn. CV-13143, 2009 1565, 2009 WL Feb. 25, 2010). WL 998402, at *5- 2169174, at *11 6 (E.D. Mich. Apr. (S.D. Ohio July 14, 2009). Sixth Sixth 16, 2009).
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Case 8:06-cv-02662-MJG Document 377-1 Filed 09/09/10 Page 7 of 12 Duty to No: Breach is Willfulness, bad Willfulness, bad Bad faith Unintentional When spoliation Grossly preserve failure to act faith, or fault faith, or fault Faas v. Sears, conduct is substantially denies negligent potentially reasonably under Jones v. In re Kmart Corp., Roebuck & Co., insufficient for a party the ability to conduct; jury relevant the circumstances Bremen High 371 B.R. 823, 840 532 F.3d 633, 644 presumption of support or defend instruction to evidence party Jones v. Bremen Sch. Dist. 228, (Bankr. N.D. Ill. (7th Cir. 2008). relevance the claim inform the jury has control over High Sch. Dist. No. 08-C-3548, 2007) (noting that In re Kmart Corp., Krumwiede v. of the Jones v. 228, No. 08-C- 2010 WL fault, while based 371 B.R. 823, 853-54 Brighton Assocs., defendant’s Bremen High 3548, 2010 WL 2106640, at *5 on reasonableness, (Bankr. N.D. Ill. L.L.C., No. 05-C- duty and breach Sch. Dist. 228, 2106640, at *6-7 (N.D. Ill. May is more than a 2007). 3003, 2006 WL thereof No. 08-C-3548, (N.D. Ill. May 25, 25, 2010) “‘slight error in 1308629, at *10 Jones v. 2010 WL 2010). (stating that judgment’”) (N.D. Ill. May 8, Bremen High 2106640, at *5 fault is based on (citation omitted) 2006). Sch. Dist. 228, (N.D. Ill. May “The failure to the No. 08-C-3548, 25, 2010). institute a reasonableness When spoliation 2010 WL document retention of the party’s substantially denies 2106640, at *10 policy, in the form conduct). a party the ability to (N.D. Ill. May of a litigation hold, support or defend 25, 2010). is relevant to the Bad faith the claim court's BP Amoco OR delays consideration, but Chemical Co. v. production of it is not per se Flint Hills evidence evidence of Resources, Jones v. Bremen sanctionable LLC, No. 05 C High Sch. Dist. 228, conduct.” 5, 2010 WL No. 08-C-3548, Haynes v. Dart, 1131660, at *24 2010 WL 2106640, No. 08 C 4834, (N.D. Ill. Mar. at *8-9 (N.D. Ill. 2010 WL 140387, 25, 2010). May 25, 2010). at *4 (N.D. Ill. Jan. Seventh 11, 2010).
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Case 8:06-cv-02662-MJG Document 377-1 Filed 09/09/10 Page 8 of 12 Duty to Courts in the Bad faith Bad faith Bad faith This issue has not Destruction of “destruction preserve Eighth Circuit have Wright v. City Johnson v. Avco Greyhound Lines, been addressed, but it evidence that “may was not potentially not found conduct of Salisbury, Corp., No. 4:07CV Inc. v. Wade, 485 has been stated that have [been] helpful” ‘willful’ or relevant culpable without No. 1695 CDP, 2010 F.3d 1032, 1035 there is no Dillon v. Nissan malicious,’” but documents in analyzing the facts, 2:07CV0056 WL 1329361, at (8th Cir. 2007); presumption of Motor Co., 986 F.2d plaintiffs’ party’s although AGF, 2010 WL *13 (E.D. Mo. Menz v. New irrelevance of 263, 268 (8th Cir. counsel should possession reasonableness is 126011, at *2 2010); Menz v. Holland N. Am., intentionally 1993). have known to Dillon v. Nissan not discussed. (E.D. Mo. Apr. New Holland N. Inc., 440 F.3d destroyed documents. preserve the Motor Co., 986 6, 2010). Am., Inc., 440 F.3d 1002, 1006 (8th Alexander v. Nat’l “irreparable injury evidence; jury F.2d 263, 267 1002, 1006 (8th Cir. 2006); Farmers Org., 687 to plaintiffs’ claims” was instructed (8th Cir. 1993). Cir. 2006). Stevenson v. Union F.2d 1173, 1205 (8th Monsanto Co. v. that “an adverse Pac. RR, 354 F.3d Cir. 1982). Woods, 250 F.R.D. inference may 739, 747 (8th Cir. 411, 414 (E.D. Mo. be drawn from 2004) (bad faith 2008). plaintiffs’ required if failure to spoliation happens preserve the pre-litigation) vehicle” Bass v. Gen. Motors Bad faith is not Corp., 929 F. required to Supp. 1287, sanction for “the 1290 (W.D. ongoing Mo. 1996), destruction of aff’d on this records during ground, 150 litigation and F.3d 842, 851 discovery.” (8th Cir. 1998). Stevenson, 354 F.3d at 750; MeccaTech, Inc. v. Kiser, 2008 WL 6010937, at *8 (D. Neb. 2008) (same), adopted in part, No. 8:05CV570, 2009 WL 1152267 (D. Neb. Apr. 23, Eighth 2009).
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Case 8:06-cv-02662-MJG Document 377-1 Filed 09/09/10 Page 9 of 12 Duty to In Hous. Rights Bad faith not Willfulness, bad Bad faith or gross This issue has not When spoliation The Court’s preserve Ctr. v. Sterling, required faith, or fault negligence been addressed. substantially denies research has not potentially 2005 WL 3320739, Dae Kon Kwon Dae Kon Kwon v. Karnazes v. County a party the ability to located case in relevant at *3 (C.D. Cal. v. Costco Costco Wholesale of San Mateo, No. support or defend which the court evidence in Mar. 2, 2005), the Wholesale Corp., No. CIV. 09-0767 MMC the claim granted an party’s court quoted Corp., No. CIV. 08-360 JMSBMK, (MEJ), 2010 WL Henry v. Gill Indus., adverse possession Zubulake IV, 220 08-360 2010 WL 571941, 2672003, at *2 983 F.2d 943, 948 inference Leon v. IDX F.R.D. at 220 JMSBMK, at *2 (D. Hawai‘i (N.D. Cal. July 2, (9th Cir. 1993). instruction and Systems Corp., (“Once the duty to 2010 WL 2010) (requiring 2010). stated what the 2004 WL preserve attaches, 571941, at *2 that party “engaged instruction 5571412, at *3 any destruction of (D. Hawai‘i deliberately in Bad faith not would be. (W.D. Wash. documents is, at a 2010); Carl deceptive required 2004), aff’d, minimum, Zeiss Vision practices”) Otsuka v. Polo 464 F.3d 951 negligent.”), and Intern. GmbH v. Ralph Lauren (9th Cir. 2006). found that Signet “‘[D]isobedient Corp., No. C 07- defendants’ Armorlite, Inc., conduct not shown 02780 SI, 2010 Duty extends to “[d]estruction of No. 07CV0894 to be outside the WL 366653, at *3 key players. documents during DMS(POR), control of the (N.D. Cal. Jan. 25, Hous. Rights ongoing litigation 2010 WL litigant’ is all that 2010). Ctr. v. Sterling, was, at a minimum, 743792, at *15 is required to 2005 WL negligent.” (S.D. Cal. Mar. demonstrate 3320739, at *3 1, 2010), willfulness, bad (C.D. Cal. Mar. amended on faith, or fault.” 2, 2005). other grounds, Henry v. Gill 2010 WL Indus., 983 F.2d 1626071 (S.D. 943, 948 (9th Cir. Cal. Apr 21, 1993). Ninth Ninth 2010).
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Case 8:06-cv-02662-MJG Document 377-1 Filed 09/09/10 Page 10 of 12 Duty extends to No. Bad faith not “willfulness, bad Bad faith Although this Spoliation that Bad faith; key players Procter & Gamble required faith, or [some] Turner v. Pub. specific issue has not impairs a party’s adverse Pinstripe, Inc. Co. v. Haugen, 427 Hatfield v. Wal- fault” Serv. Co. of Colo., been addressed, the ability to support a inference v. Manpower, F.3d 727, 739 n.8 Mart Stores, Procter & Gamble 563 F.3d 1136, court declined to claim or defense. instruction Inc., No. 07- (10th Cir. 2005) Inc., 335 Fed. Co. v. Haugen, 427 1149 (10th Cir. “create a presumption Pinstripe, Inc. v. Smith v. Slifer CV-620-GKF- (stating that district App’x 796, 804 F.3d 727, 738 (10th 2009). in favor of spoliation Manpower, Inc., No. Smith & PJC, 2009 WL court must consider (10th Cir. Cir. 2005) (using whenever a moving 07-CV-620-GKF- Frampton/Vail 2252131, at *1 Rule 2009). language originally Neither bad faith party can prove that PJC, 2009 WL Assocs. Real (N.D. Okla. 26(b)(2)[(C)](iii), in Societe nor intentionality records that might 2252131, at *2 Estate, LLC, July 29, 2009). which requires the Negligence Internationale v. required have contained (N.D. Okla. July 29, No. CIVA court to limit Pipes v. UPS, Rogers, 357 U.S. Hatfield v. Wal- relevant evidence 2009). 06CV02206- A party with discovery if “the Inc., No. 197, 212 (1958), Mart Stores, Inc., have been destroyed” JLK, 2009 WL possession of burden or expense CIV.A.07-1762, which 335 Fed. App’x in Crandall v. City & 482603, at *13 potentially of the proposed 2009 WL distinguished 796, 804 (10th Cir. County of Denver, (D. Colo. Feb. relevant discovery 2214990, at *1 “fault” from a 2009); Colo., No. 05-CV- 25, 2009). evidence has a outweighs its likely (W.D. La. July party’s inability to Schrieber v. Fed. 00242-MSK-MEH, duty to preserve benefit”). 22, 2009). act otherwise). Ex. Corp., No. 09- 2006 WL 2683754, at it; even if the CV-128-JHP-PJC, *2 (D. Colo. Sept. 19, party 2010 WL 1078463 2006). relinquishes (N.D. Okla. March ownership or 18, 2010). custody, it must contact the new custodian to preserve the evidence. Jordan F. Miller Corp. v. Mid-Continent Aircraft Serv., 139 F.3d 912, 1998 WL 68879, at *5-6 (10th Cir. Tenth 1998).
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Case 8:06-cv-02662-MJG Document 377-1 Filed 09/09/10 Page 11 of 12 Duty to Courts in the Bad faith Bad faith Bad faith This issue has not Spoliation of Negligence; preserve Eleventh Circuit Managed Care Managed Care Penalty Kick been addressed. evidence that was jury to be potentially have not found Solutions, Inc. Solutions, Inc. v. Mgmt. Ltd. v. Coca not just relevant but instructed that relevant conduct culpable v. Essent Essent Healthcare, Cola Co., 318 F.3d “crucial” to a claim the destruction evidence that without analyzing Healthcare, Inc., No. 09-60351- 1284, 1294 (11th or defense raises a party has the facts, although Inc., No. 09- CIV, 2010 WL Cir. 2003); Managed Care rebuttable “access to and reasonableness is 60351-CIV, 3368654, at *12 Managed Care Solutions, Inc. v. inference that control over” not discussed. 2010 WL (S.D. Fla. Aug. 23, Solutions, Inc. v. Essent Healthcare, the evidence Nat’l Grange 3368654, at *4 2010). Essent Healthcare, Inc., No. 09-60351- supported Mut. Ins. Co. v. (S.D. Fla. Aug. Inc., No. 09-60351- CIV, 2010 WL plaintiff’s claim Hearth & 23, 2010). CIV, 2010 WL 3368654, at *8 (S.D. Brown v. Home, Inc., No. 3368654, at *13 Fla. Aug. 23, 2010). Chertoff, 563 F. CIV.A. Degree of (S.D. Fla. Aug. 23, Supp. 2d 1372, 2:06CV54WCO culpability is 2010). 1381 (S.D. Ga. , 2006 WL weighed against 2008) (but other 5157694 at * 5 prejudice courts in (N.D. Ga. Dec. caused by Eleventh 19, 2006). spoliation Circuit will not Flury v. order any Daimler sanctions Chrysler Corp., without bad 427 F.3d 939, faith) 945 (11th Cir. 2005); Brown v. Chertoff, 563 F. Supp. 2d 1372, 1381 (S.D. Ga. Eleventh 2008).
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Case 8:06-cv-02662-MJG Document 377-1 Filed 09/09/10 Page 12 of 12 Duty to Courts in the D.C. Case law Bad faith Negligent or This issue has not Case law states that “[A]ny adverse preserve Circuit have not addresses Shepherd v. Am. deliberate been addressed. the spoliated inference potentially found conduct specific Broad Cos., 62 Mazloum v. D.C. evidence must have instruction relevant culpable without sanctions, rather F.3d 1469, 1477 Metro. Police been relevant, i.e., grounded in evidence analyzing the facts, than sanctions (D.C. Cir. 1995); Dep’t, 530 F. Supp. information that negligence “within the although generally. D’Onofrio v. SFX 2d 282, 292 would have would be ability of the reasonableness is Sports Group, Inc., (D.D.C. 2008); supported a claim or considerably defendant to not discussed. No. 06-687 More v. Snow, 480 defense, but it does weaker in both produce it” (JDB/JMF), 2010 F. Supp. 2d 257, not address language and Friends for All WL 3324964, at *5 274-75 (D.D.C. prejudice. probative force Children v. (D.D.C. Aug. 24, 2007); D’Onofrio than an Lockheed 2010). v. SFX Sports instruction Aircraft Corp., Group, Inc., No. regarding 587 F. Supp. 06-687 (JDB/JMF), deliberate 180, 189 2010 WL 3324964, destruction.” (D.D.C.), at *10 (D.D.C. Mazloum v. modified, 593 F. Aug. 24, 2010) (not D.C. Metro. Supp. 388 for mere Police Dep’t, (D.D.C.), aff’d, negligence unless 530 F. Supp. 2d 746 F.2d 816 “the interests in 282, 293 (D.C. Cir. righting the (D.D.C. 2008). 1984). evidentiary balance and in the deterring of others trumps the lacuna that a logician would detect in the logic of giving such an D.C. D.C. instruction”).
“In reviewing sanction orders, [the Federal Circuit] applies the law of the regional circuit from which the case arose.” Monsanto Co. v. Ralph, 382 F.3d 1374, 1380 (Fed. Cir. 2004). In Consolidated Edison Co. of N.Y., Inc. v. United States, 90 Fed. Cl. 228, 255 n.20 (Fed. Cl. 2009), the United States Court of Federal Claims observed that “the United States Court of Appeals for the Federal Circuit, has not definitively addressed whether a finding of bad faith is required before a court can find spoliation or impose an adverse inference or other sanction. Because many of the spoliation cases decided to date by the Federal Circuit have been patent cases in which the Federal Circuit applies the law of the relevant regional circuit, the Federal Circuit has not had the opportunity to announce a position binding on this court as to a possible ‘bad faith’ or other standard to trigger a spoliation of evidence sanction. Consequently, judges of the United States Court of Federal Claims have taken differing positions on the “bad faith” requirement. Compare [United Med. Supply Co. v. United States, 77 Fed. Cl. 257, 268 (2007)] (‘[A]n injured party need not demonstrate bad faith in order for the court to impose, under its inherent authority, spoliation sanctions.’), with Columbia First Bank, FSB v. United States, 54 Fed. Cl. 693, 703 (2002) (noting findings of bad faith are required before the court can determine that there was spoliation).” (Citation omitted.) Federal Federal
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Case 8:10-ml-02151-JVS -FMO Document 249 Filed 07/20/10 Page 1 of 22 Page ID #:5924
1 STEVE W. BERMAN CARI K. DAWSON (GA SBN 213490) (WA SBN 12536) Email: [email protected] 2 Email: [email protected] ALSTON + BIRD LLP HAGENS BERMAN SOBOL 1201 West Peachtree Street 3 SHAPIRO LLP Atlanta, GA 30309 1918 Eighth Avenue, Suite 3300 Telephone: (404) 881-7766 4 Seattle, WA 98101 Facsimile: (404) 253-8567 Telephone: (206) 268-9320 5 Facsimile: (206) 623-0594 LISA GILFORD (CA SBN 171641) Email: [email protected] 6 MARC M. SELTZER ALSTON + BIRD LLP (CA SBN 054534) 333 South Hope Street, 16th Floor 7 Email: [email protected] Los Angeles, CA 90071 SUSMAN GODFREY L.L.P. Telephone: (213) 576-1000 8 1901 Avenue of the Stars, Suite 950 Facsimile: (213) 576-1100 Los Angeles, CA 90067 9 Telephone: (310) 789-3100 Lead Defense Counsel for Economic Loss Facsimile: (310) 789-3150 Cases 10 FRANK M. PITRE (CA SBN 100077) VINCENT GALVIN, JR. 11 Email: [email protected] (CA SBN 104448) COTCHETT, PITRE Email: 12 & MCCARTHY [email protected] 840 Malcolm Road, Suite 200 BOWMAN AND BROOKE 13 Burlingame, CA 94010 1741 Technology Drive, Suite 200 Telephone: (650) 697-6000 San Jose, CA 95110 14 Facsimile: (650) 697-0577 Telephone: (408) 279-5393 Facsimile: (408) 279-5845 15 Co-Lead Plaintiffs’ Counsel for Economic Loss Cases JOEL SMITH (SC SBN 5266) 16 Email: [email protected] ELIZABETH J. CABRASER BOWMAN AND BROOKE 17 (CA SBN 083151) 1441 Main Street, Suite 1000 Email: [email protected] Columbia, SC 29201 18 LIEFF CABRASER HEIMANN Telephone: (803) 726-0020 & BERNSTEIN, LLP Facsimile: (803) 726-0021 19 275 Battery Street, Suite 3000 San Francisco, CA 94111 Lead Defense Counsel for Personal 20 Telephone: (415) 956-1000 Injury/Wrongful Death Cases Facsimile: (415) 956-1008 21 MARK P. ROBINSON, JR. 22 (CA SBN 54426) Email: [email protected] 23 ROBINSON, CALCAGNIE & ROBINSON INC. 24 620 Newport Center Drive, 7th Floor Newport Beach, CA 92660 25 Telephone: (949) 720-1288 Facsimile: (949) 720-1292 26 Co-Lead Plaintiffs’ Counsel for 27 Personal Injury/Wrongful Death Cases 28
1 LEGAL02/32003939v6 Case 8:10-ml-02151-JVS -FMO Document 249 Filed 07/20/10 Page 2 of 22 Page ID #:5925
1 UNITED STATES DISTRICT COURT 2 CENTRAL DISTRICT OF CALIFORIA 3 SOUTHERN DIVISION 4
5 IN RE: TOYOTA MOTOR CORP. Case No.: 8:10ML2151 JVS (FMOx) UNINTENDED ACCELERATION 6 MARKETING, SALES PRACTICES, AND Order No. 5: Phase I Discovery Plan PRODUCTS LIABILITY LITIGATION 7 This document relates to: 8 ALL CASES 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
2 LEGAL02/32003939v6 Case 8:10-ml-02151-JVS -FMO Document 249 Filed 07/20/10 Page 3 of 22 Page ID #:5926
1 2 I. OVERVIEW OF PHASE I DISCOVERY...... 5
3 A. Purpose...... 5 4 B. General Description Of Discovery To Be Conducted During Phase 5 I...... 5
6 C. Time Period For Phase I Discovery ...... 6 7 D. State/MDL Coordination...... 6 8 E. Proposal For Phase II Discovery...... 7 9 F. Modification Of Di scovery Plan And Lim itations On Pha se I 10 Discovery ...... 7 11 II. PHASE I DISCOVERY PROVIDED BY THE TOYOTA 12 DEFENDANTS...... 7 13 A. 30(b)(6) Depositions On Foundational Issues ...... 7 14 1. Scope of Depositions ...... 7 15 2. Production of Documents at Depositions ...... 10 16 17 3. Noticing Depositions ...... 10 18 4. Application of Rule 30...... 11
19 5. Additional Principl es Gove rning Phase I 30(b)(6) 20 Depositions ...... 11 21 B. Documents Toyota Will Produce In Phase I...... 11
22 III. DISCOVERY TO BE PROVIDED BY PLAINTIFFS AND THIRD 23 PARTIES IN PHASE I...... 13 24 A. Fact Sheets...... 13
25 1. Timing and Form of Fact Sheets ...... 13 26 a. Personal Injury/Wrongful Death Cases...... 13 27 (1) Form of Fact Sheets...... 13 28 (2) Timing of Fact Sheet Responses ...... 13 3 LEGAL02/32003939v6 Case 8:10-ml-02151-JVS -FMO Document 249 Filed 07/20/10 Page 4 of 22 Page ID #:5927
b. Consolidated Class Action Complaint...... 14 1 2 2. Responses to Fact Sheets ...... 14 3 3. Document Production Pursuant to Fact Sheets...... 15
4 4. Dispute Resolution Concerning Fact Sheets ...... 15 5 5. Supplementation ...... 16 6 B. Vehicle Inspections ...... 16 7 C. Third-Party Subpoenas...... 16 8 9 D. Depositions Generally Not Permitted ...... 17
10 IV. PHASE I DEPOSITION PROCEDURES ...... 17
11 A. Attendance...... 17 12 1. Access to Confidential Information and Documents...... 17 13 2. Unnecessary Attendance...... 17 14 15 B. Conduct Of Depositions...... 17 16 C. Duration Of Examinations ...... 18
17 D. Deposition Disputes ...... 18 18 E. Additional Order ...... 19 19
20 21 22 23 24 25 26 27 28
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1 I. OVERVIEW OF PHASE I DISCOVERY 2 A. Purpose 3 The Phase I Discovery Plan i s intended solely t o educate the parties about 4 foundational issues involved in this litigation, including the identification of the 5 proper parties to this litigation, the identity of relevant third-pa rties, organizational 6 structure, the identify of relevant witne sses, and identity, natu re, and location of 7 relevant documents. It is al so intended to allow the partie s to obtain certain threshold 8 information and documents in order to ev aluate their claims and defenses on the 9 pleadings, inspect the subject vehicles, and obtain information, especially in 10 connection with vehicle accidents, at the earliest possible time after such accident has 11 occurred. Phase I discovery should be conducted in such a way as to ensure that 12 Plaintiffs and the Toyota defendants (“T oyota Defendants”) are both afforded the 13 opportunity to obtain information on foun dational, threshold issues, and such 14 discovery should proceed concu rrently and in a manner that is fair and equitabl e to 15 both parties. 16 It is expected that di scovery on foundati onal issues during Phase I will enable 17 the parties to develop a m ore narrowly t ailored discovery pla n for subsequent phases 18 of this l itigation and to be m ore focused, econom ical an d efficient in subse quent 19 phases of discovery. In additi on to the f oundational inform ation to be provi ded to 20 Plaintiffs by Toyota , Phase I will also provide Toyota the opportunity to obtain 21 foundational, threshold info rmation from Plaintiffs, th e class representatives, and 22 relevant third-parties. 23 B. General Description Of Discovery To Be Conducted During Phase I 24 During Phase I, the Toyota Defendants w ill produce witnesses pursuant to Rule 25 30(b)(6) to testify concerning the twenty-o ne issues out lined below (the “li mited 26 30(b)(6) depositions” or “pre liminary 30(b)(6) depositions” ). In keeping with the 27 purpose of Phase I, these depositions ar e prim arily educational and foundational as 28 defined above. In addition, the Toyota Defendants will commence production of
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1 relevant ETCS documents produced in cert ain state court actions and will supplement 2 its governmental production as specifically set forth below i n Section II.B. Toyota 3 has also agreed that it will provide plaintiffs with exem plar documents in connection 4 with depositions, where appropriate, and in those cases where documents will assist in 5 educating counsel on the subject m atter of the depositi on. Because the limited 6 30(b)(6) depositions and these initial docume nt productions are designed to assist 7 plaintiffs in crafting more tar geted discove ry requests in subse quent phases of this 8 litigation, no written discover y requests (whether in the form of interroga tories, 9 requests for production, reque sts for admissions, or other deposition notices) shall b e 10 propounded on Toyota Defendants during Phase I. 11 During Phase I, Plaintiffs shall provide co mpleted Plaintif f Fact Sheets and 12 Class Representative Fact Sheets, incl uding t he production of any documents 13 responsive to the fact sheets. Additionall y, Toyota Defendants sh all be permitted to 14 conduct inspections of the subject vehicles. 15 Both parties shall be perm itted to subpoena materials from third parties in the 16 individual and class cases as appropri ate (including, but not lim ited to, m edical 17 records, insurance records, acci dent reports and reports of responding personnel and 18 vehicle history and service records). 19 C. Time Period For Phase I Discovery 20 Phase I Discovery, as outlined below, sh all commence upon the entry of this 21 Order and shall extend for one-hundred (100) days thereafter. The parties shall use 22 good faith reasonable efforts t o com plete th e discovery outl ined in this Phase I 23 discovery plan; however, either side m ay move the Court for an extension of Phase I 24 discovery. 25 D. State/MDL Coordination 26 The parties agree the Phase I discovery plan needs to be coordi nated to the 27 extent feasible with UA ca ses pending in state courts. The scheduling of lim ited 28 30(b)(6) depositions during Phase I shall be coordinated with the state cou rt actions to
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1 the extent possible. The parties are curren tly working to develop a more detailed plan 2 concerning the protocol for state court coordination and will subm it a supplemental 3 order addressing coordination. 4 E. Proposal For Phase II Discovery 5 Twenty (20) days prior to the completion of Phase I Discovery, the parties shall 6 submit to the Court a Joint Proposed Or der Governing Phase II Discovery. The 7 proposed order shall reflect alternative provisions where there is dispute. The Liaison 8 and Lead Counsel Comm ittees m ay each supplement the proposed order with one 9 brief of no m ore than ten (10) pages. The Toyota Defendants may supplem ent the 10 proposed order with one brief of no more than fifteen (15) pages. 11 F. Modification Of Discovery Plan And Limitations On Phase I 12 Discovery 13 Modification of thi s Discovery Plan may be necessary ba sed on experience 14 operating under it and the partie s and claim s ultimately included in the consolida ted 15 complaint. Any party is therefore free to seek modification of this Phase I Discovery 16 Plan for good cause shown. 17 No party to this litigation shall engage in discovery that is not explicitly set 18 forth in this Phase I Discovery Plan without leave of the Court or Special Masters. 19 II. PHASE I DISCOVERY PROVIDED BY THE TOYOTA DEFENDANTS 20 A. 30(b)(6) Depositions On Foundational Issues 21 1. Scope of Depositions 22 The parti es have conducted m eet an d confer sessions and have reach ed 23 agreement concerning topics to be covered in the limited 30(b)(6) depositions. During 24 Phase I of discovery, the Toyota Defendants shall produce a witness (or witnesses) for 25 deposition pursuant to Fed. R. Civ. P. 30 (b)(6) to address the following threshold 26 topics: 27 1. The Toyota Defendants’ organization structure. 28
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1 2. The roles and responsibilities of each of the various Toyota co mpanies 2 with respect to the design, manufacture and sale of Toyota vehicles. 3 3. The relationships am ong the various Toyota entities, between Toyota 4 entities and Toyota and Lexus dealer s, and between Toyota entities and 5 their suppliers. 6 4. The identity, nature, location and rete ntion of documents related to th e 7 design, evaluation, and testing of the ETCS system and any modifications 8 or adaptations of the ETCS system for Toyota vehicles. 9 5. The identity, nature, location and rete ntion of documents related to th e 10 manufacture of the ETCS system and components, including specifically 11 drawings, specifications, testing standards, test reports, FMEA (including 12 FTA and DRBFM) and quality control documents. 13 6. The identity of the persons and de partments involved in the design, 14 evaluation, testing and manufacture of the ETCS and its components. 15 7. The identity, nature, location and re tention of documents related to 16 information Toyotas has received a bout speed control, surge, and SUA 17 events in Toyota and Lexus vehicl es, including specifically warranty 18 records, customer complaints, clai ms and lawsuits (“Field Perform ance 19 Documents”). 20 8. The identities of the persons and depart ments involved in the intake and 21 evaluation of Field Performance Departments. 22 9. The identity, nature, location and re tention of documents related to 23 electronic data recorders, elect ronic data read ers, and stored electronic 24 data (collectively, “EDRS”, includi ng but not li mited to, documents 25 containing any EDRS data regarding any SUA events). 26 10. The identity of the persons and departm ents knowledgeable about EDRs 27 [sic] and stored data in Toyota and Lexus vehicles. 28
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1 11. The general process for the concepti on, creation, production and use of 2 advertising relating to Toyota, Lexus and Scion vehicles. 3 12. A general description of the testing done to confirm the perform ance of 4 the ETC system, including the evolution of ETCS design, developm ent, 5 and testing. 6 13. The location and retention of exem plars of any and all sales brochures, 7 user manuals, instructions of any ki nd and any other documentation that 8 may have accompanied Toyota vehicles. 9 14. The procedures employed for investigating and responding to complaints 10 of uni ntended acceleration by owne rs or operations of any Toyota 11 vehicles. 12 15. The identity, nature, location and rete ntion of any and all reports or 13 studies regarding SUA events in an y Toyota vehi cles, including but not 14 limited to summaries describing which Toyota vehicles, models and years 15 have been the subject of any reported SUA events and any and all studies 16 or analyses relating to any suspected causes of SUA events in any Toyota 17 vehicles. 18 16. A general description of the inte rnal decision-making process by the 19 Toyota Defendants about what and wh en to inform Toyota customers, 20 governmental agencies and the pub lic about SUA events and t he 21 identities of the persons and depart ments involved in that decision- 22 making process and the identit y of the persons and departm ents involved 23 in that process. 24 17. The identity, nature, location and reten tion of any a nd all documents that 25 refer or re late to any vehicle warra nty materials and a dvertising of the 26 Toyota Defendants regardi ng the quality, reliability or safety of any 27 Toyota vehicles manufactured and sold from 1998 to the present. 28
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1 18. The identity, nature, location and rete ntion of any documents concerning 2 any agreements or co mmunications between any of the Toyota 3 Defendants and any outside public relations firm s or marketing 4 consultants that refer or relate to claims of SUA in any Toyota vehicles. 5 19. The identity, nature, location and retention of any documents prepared by 6 or on be half of a ny of the Toyot a Defendants or pub lished in any 7 newspaper, journal, magazine, bl og, webpage or newsletter wherein 8 Toyota publically responded t o UA comp laints (for exam ple, the Gilbert 9 Press Briefing). 10 20. The identity, nature, location and retention of any documents reflecting or 11 relating to communications with Toyota dealers regarding SUA events in 12 any Toyota vehicles. 13 21. The identity, nature, location and rete ntion of any documents regarding 14 the design, development and testing of the ETCS systems installed in any 15 Toyotas vehicles during the period from 2002 to 2008. 16 2. Production of Documents at Depositions 17 Deponents shall not be requi red to produce docum ents or other t angible 18 evidence in connection with the prelim inary 30(b)(6) depositi ons. However, Toyota 19 will provide exem plar documents in c onnection with the preliminary 30(b)(6) 20 depositions in those instances where Toyota believes such materials will aid counsel 21 in understanding the subject matter of the deposition. 22 3. Noticing Depositions 23 Because the parties have reached agreement concerning the scope of the limited 24 30(b)(6) deposition(s), Plainti ffs shall not be required to serve formal notice of 25 depositions. However, given the number of witnesses, the tight tim ing, and the fact 26 that many witnesses will be traveling from Japan, scheduling of particular depositions 27 shall be agreed upon in advance. 28
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1 Although no notice shall be required, the limited 30(b)(6) deposition(s) shall be 2 strictly limited to the twenty-one topics set forth above. 3 The need for cross-notices for related st ate court actions will be addressed in a 4 supplemental order that the parties will submit to the Court. 5 4. Application of Rule 30 6 These limited 30(b)(6) depositions are being taken pursuant FRCP 30 and may 7 be used for all purposes permitted under the Federal Rules. Pursuant to Rule 32(d)(3), 8 all objections are preserved ex cept as to fo rm of the question a nd responsiveness of 9 the answer. 10 5. Additional Principles Governing Phase I 30(b)(6) Depositions 11 As discussed in Section II.B., infra, Toyota will produce certain documents on a 12 rolling basis during Phase I. The parties ag ree, however, that the preliminary 30(b)(6) 13 depositions are independent of these document productions and no 30(b)(6) deposition 14 shall be continued or postponed based on these Phase I document productions. 15 Additionally, during this lit igation t he parties shall endeavor to avoid 16 duplicative depositions or repetitive questions and to avoid deposing any witness more 17 than once on the same subject matter. To the extent that substantive questioning 18 concerning the merits of Plaintiffs’ clai ms is pursued duri ng the li mited 30(b)(6) 19 deposition(s), it is T oyota’s position that no Toyota witn ess deposed during Phase I 20 shall be deposed again in subsequent phases of this litigation on the sam e subject 21 matter, except by agreement of the parties. Plaintiffs do not agree with Toyota’s 22 position. 23 B. Documents Toyota Will Produce In Phase I 24 The parties have agreed that lim ited docum ent production may occur during 25 Phase I, but only as specified herein. 26 During Phase I, the Toyota defendants will commence a rolling production of 27 relevant ETCS documents produced in Alberto, et al. v. Toyota North America, Inc., 28 et al., Genessee County, Michi gan, Case No. 09-91973NP, and Ezal, et al. v. Martin
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1 Resorts, Inc., et al., San Luis Obispo Count y Superior Court, California, Case No. 2 CV090425. 3 Additionally, the Toyota Defendants w ill produce on a rolling basis relevant, 4 non-privileged documents that Toyota ha s produc ed to NHTSA, the United States 5 Congress, and State Attorneys General si nce the Court entered Order No. 3 (the 6 “Supplemental Government Pro duction”). Within thi rty (30) days of producing 7 documents to NHTSA, the United States C ongress, or State Attorneys General, 8 Toyota will produce a Supplemental Governmental Production to Plaintiffs, subject to 9 withholding or redaction for privilege, re levance, and/or confidentiality. Toyota 10 reserves the right to seek leave to ex tend the tim e permitted to m ake Supplemental 11 Governmental Productions. The parties ag ree that the Supplemental Governmen t 12 Production will be lim ited to Phase I and th at any additional docum ents produced to 13 governmental agencies after Phase I will be addressed in su bsequent phases of 14 discovery. In addition, Plainti ffs have agreed that neither they, nor anyone acting on 15 their behalf, will se ek to circum vent th e prohibition on docume nt requests during 16 Phase I by directly or indi rectly requesting legislators or other governmental officials 17 or em ployees to request documents from Toyot a. Lead Counsel for Plaintiffs will 18 communicate to other plaintiffs’ counsel in the MDL and plaintiffs’ counsel in rel ated 19 state court cases that they should not thwart the purpose and agreement reached in this 20 Phase I discovery plan. 21 The parties agree that lim ited Phase I 30(b)(6) depositions are indepen dent of 22 any documents produced by Toyota during Phase I and t hat the Phase I depositi ons 23 will not be continued or postponed on the basis of documents produced during Phase I 24 or the schedule of production of documents during Phase I. 25 26 27 28
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1 III. DISCOVERY TO BE PROVIDED BY PLAINTIFFS AND THIRD 2 PARTIES IN PHASE I 3 A. Fact Sheets 4 1. Timing and Form of Fact Sheets 5 a. Personal Injury/Wrongful Death Cases 6 (1) Form of Fact Sheets 7 The form of the fact sheet shall be th e subject of meet an d confer between 8 counsel. There shall be sepa rate Plaintiff/Class Representative Fact Sheets for (1) 9 individual personal i njury/wrongful death cas es and (2) economi c loss class actio ns. 10 While the inform ation and form of Fact Sheets between thes e two categories are 11 expected to be similar, the Facts Sheets will be tailored to the case type (i.e., personal 12 injury or class economic loss, consumer or non-consumer, etc.). Class Representative 13 Fact Sheets are discussed below in Section III.A.1.b. 14 No later than August 30, 2010, the Partie s shall submit a proposed form for the 15 Personal Injury/Wrongful Death Plainti ff Fact Sheets for approval by the Court or 16 Special Masters. 17 (2) Timing of Fact Sheet Responses 18 For all pe rsonal injury/wrongful death cas es currently in the MDL, Plaintiffs’ 19 case-specific fact sheet responses shall be due thirty (30) days from the approval of 20 the Fact Sheet by the Court or the Special Masters. 21 For future personal injury/wrongful d eath cases transferred to the M DL, 22 Plaintiffs’ case-specific fact sheet responses shall be due thirt y (30) days from when 23 the Conditional Transfer Order is filed w ith the M DL Court or from when Toyot a is 24 served with the summons and complaint, whichever is later. 25 Should any future UA personal injury/wrongf ul death cases be filed directly in 26 the Central District of California, Plaintiffs’ case-specific fact sheet responses shall be 27 due thirty (30) days from when Toyota is served with the summ ons and com plaint, 28 regardless of the status or form of Toyota’s response or answer to the complaint.
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1 b. Consolidated Class Action Complaint 2 It is expected that Class Representatives will subm it fact sheets sim ilar to the 3 fact sheets to be subm itted in the persona l injury/wrongful death cases. While there 4 may be some differences in the content and timing of the Class Fact Sheets as 5 compared to the Individual Pl aintiff Fact Sheets , it is expected that the general 6 procedures set forth above concerning the fact sheets shall also be applied in the class 7 actions. However, because the number of class representatives and the types of claims 8 that are ultimately included in the consolidated co mplaint(s) will impact the time 9 needed to co mplete Class Re presentative Fact Sheets and the information that that 10 should be encompassed by Class Representative Fact Sheets, specific timing deadlines 11 and the content of Class Representative Fact Sheets shall be the subject of meet and 12 confers between the parties. Specifically , within twenty (20) days after the filing of 13 the consolidated complaint(s), the parties are directed to meet and confer regarding the 14 timing an d content of Class Represent ative Fact Sheets. The parties shall subm it a 15 joint proposal to the Court or the Special M asters concerning Class Representati ve 16 Fact Sheets, including a stipulated form Fact Sheets, no later than thirty (30) days after 17 the filing of the consolidated co mplaint(s). The p roposal shall include alternative 18 provisions where there is dispute. 19 2. Responses to Fact Sheets 20 Fact Sheet Responses to information re quests shall be deemed interrogatory 21 responses pursuant to FRCP 33 and may be treated as such at time of trial. Responses 22 shall set forth all inform ation known or reas onably ascertainable to the party and/ or 23 their counsel. The parties are obligated to m ake a reasonable search and diligent 24 inquiry for information or documents responsive to the request. 25 Fact Sheet Responses to document reque sts and the product ion of doc uments 26 are deemed responses and production under FRCP 34. If no documents are being 27 produced in response to the particular questi on, the party must affirm that it has made 28 a reasonable search and dil igent inquiry and has been unable t o locate the documents
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1 because they never existed, were destroyed, have been lost, misplaced, or stolen, or 2 have never been, or are no longer, in the po ssession, custody, or control of the party. 3 The statement shall set forth the name a nd address of any pers on or organization 4 known or believed by the party to have possession, custody, or control of that item or 5 category of item. 6 All Fact Sheets Responses may be s ubject to m otions to com pel under 7 FRCP 37. 8 3. Document Production Pursuant to Fact Sheets 9 Documents produced in response to fact sheets shall comport with the following 10 requirements: 11 (1) In personal injury cases, case-sp ecific materi als shall be produced to 12 local counsel on the particular case, copying without enclosures Lead/Liaison 13 Counsel. For the consolidat ed class action, documents shall be produced to l ead 14 counsel. 15 (2) Document production sha ll be due thi rty (30) days after service of fact 16 sheet responses. 17 (3) The production shall identify the request(s) the production is in response 18 to by labeling or an index. 19 (4) Plaintiffs’ production shall include signed record release authorizations 20 as negotiated by the parties through a meet and confer process. 21 (5) The documents shall be produced in electronic format or as agreed to by 22 the parties through a meet and confer process. 23 (6) Bates labeling: The producing pa rty shall give each page of any 24 document it produc es a unique num ber, usi ng a consistent num bering system that 25 identifies the producing party (using a letter or series of letters as a prefix). 26 4. Dispute Resolution Concerning Fact Sheets 27 Defendants have the right to com pel fu rther responses t o the Plaintiff Fact 28 Sheets in appropri ate situations, such as where they deem th e responses t o be
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1 incomplete, inadequate, or evasive. Prior to filing any m otion to com pel, the parties 2 agree to engage in a m eet and confer, eith er telephonically or in writing, and to make 3 best efforts to resolve the dispute without intervention by the Special Masters or the 4 Court. 5 Pursuant to the Court’s Order Regarding Appointment of Special Masters [Dkt. 6 No. 238], the parties shall subm it a proposed or der addressing the process to be used 7 to present discovery disputes to the Special Masters for resolution. 8 5. Supplementation 9 Plaintiffs shall supplem ent prior Fact Sh eet Responses consi stent with Fed. R. 10 Civ. P. 26(e). 11 B. Vehicle Inspections 12 Plaintiffs and class representatives sha ll identify, in each case, whether th e 13 subject vehicle exists, and if so, its curr ent location, general condition, and vehicle 14 identification number, if known. 15 The parties agree th at vehicle inspections will be perm itted co mmencing in 16 Phase I. The protocol for vehicle inspec tions will be determ ined on a case-by-case 17 basis and agreed upon by the parties. If th ere is no agreement, the issue will be 18 resolved with the help of the Special Master(s). 19 C. Third-Party Subpoenas 20 Document subpoenas for case- specific documents may be issued as of the date 21 this Order is entered by the Court. Du ring Phase I, any part y may subpoena third 22 party records i n t he indi vidual and class cases as appropriate, including, but not 23 limited to , medical records, insurance reco rds, accident reports and reports of 24 responding personnel and vehicle history and service records. 25 The parties must notify each other of any subpoenas issued and the parties may 26 join in each other’s subpoenas. 27 In the event that doc uments produced by persons or entities who are not parties 28 to this action are not, when produced, id entified by a unique num bering system, the
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1 party at whose request produc tion was made shall be responsible for num bering each 2 page with a unique num ber, using a consis tent numbering system that identifies the 3 producing party (using a letter or series of letters as a prefix). 4 D. Depositions Generally Not Permitted 5 At Plainti ffs’ request, the Toyota Defe ndants ha ve agreed to forego taking 6 depositions of plaintiffs, class representatives, and other fact witnesses during Phase I. 7 Defendants, however, reserve the right to seek leave of the Court or Special Masters to 8 depose persons or parties where such depositions are necessary for (1) the 9 preservation of testi mony for trial or (2) to determine jurisdiction or present specific 10 defenses in connection with foreign plaintiffs. 11 IV. PHASE I DEPOSITION PROCEDURES 12 A. Attendance 13 1. Access to Confidential Information and Documents 14 If a deponent is bei ng exam ined about any document desi gnated confidential 15 pursuant to a confidentiality agreement or order or the confidential inform ation 16 contained therein, persons to whom disclosure is not authori zed under the 17 confidentiality order shall be excluded while such examination occurs. 18 2. Unnecessary Attendance 19 Unnecessary attendance by counsel is discouraged, and the Court may not 20 compensate such attendance in any fee application to the Court. 21 B. Conduct Of Depositions 22 Reasonably in advance of the date sc heduled for a deposition, any attorne y 23 designated as a questioner for t hat deposition shall coordinate w ith the other counsel 24 whose interests they represent regardi ng the areas of ex amination and specific 25 questions to be asked. The purpose of this coordination is to ensure that a thorough 26 deposition is conducted. Counsel who w ill not be serving as questioners are 27 encouraged to subm it proposed questions or l ines of questioni ng t o the attorne y 28 designated to conduct the deposition on their behalf. Attorneys will be responsible for
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1 tracking the dates of depositions and suggesting their proposed lines of questioning on 2 a timely basis. New or supplemental de positions of witnesses will not be sched uled 3 without prior leave of the Special Masters or the Court. 4 C. Duration Of Examinations 5 Consistent with Fed. R. Civ. Pro. 30(d)(1), the deposition of each native 6 English-speaking deponent sha ll be lim ited to seven (7) total hours, excluding t ime 7 taken for breaks, meals, a nd other reasons, not extend beyond one (1) day except by 8 agreement of the Parties or with leave of the Special Masters or the Court. 9 The deposition of each non-native English speaking deponent shall be limited to 10 ten (10) t otal hours, excluding tim e taken for breaks, meals, and other reasons, not 11 extend beyond one (1) day except by agreement of the Parties or with leave of the 12 Special Masters or the Court. 13 The Parties recognize the need for flex ibility in determ ining the duration of 14 examinations and shall meet and confer in good faith to attem pt to resolve any 15 disputes over appropriate exceptions to t his durational limitation. Should the Parties 16 be unable to reach agreement, deviation from these time li mitations will be permit ted 17 only with leave of the Special Masters or the Court. Any request to extend the time 18 limit on a depositi on must be accompanied by a cer tification that co mpelling reasons 19 preclude com pletion of the de position during the allotted time period and t hat the 20 particular information being sought cannot be elicited from a witness that is (or could 21 be) scheduled to appear at another time. 22 D. Deposition Disputes 23 During depositi ons, disputes that arise that cannot be resolved by agreement 24 and that, if not immediately resolved, will significantly disrupt the discovery schedule 25 or require a resch eduling of the deposition, may be presented to the Special Masters 26 by telephone. The presentation of the issu e and the Special Master’s ruling will be 27 recorded as part of the deposition. 28
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1 E. Additional Order 2 The Parties shall meet and confer to develop a protocol concerning attendance 3 of depositions in the MDL by counsel in th e state court actions. This protocol will 4 also address the numb er of at torneys permitted to question each w itness, the met hod 5 for selecting questi oners, and any other i ssues related to the conduct of Phase I 6 depositions that the parties jointly wish to address. The p arties shall subm it this 7 supplemental proposed order concerning the conduct of depositions and coordination 8 with state court cas es to the Court or Sp ecial Master(s) for approval. No Phase I 9 limited 30(b)(6) depositions sh all be conducted until this pr oposal has been approved 10 by the Court. 11 Dated: July 20, 2010 12 13 JAMES V. SELNA 14 UNITED STATES DISTRICT JUDGE 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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1 2 Dated: July 16, 2010 Respectfully submitted,
3
4 By: /s/ Steve W. Berman
5 STEVE W. BERMAN (WA SBN 12536) HAGENS BERMAN SOBOL SHAPIRO LLP 6 1918 Eighth Avenue, Suite 3300 Seattle, WA 98101 7 Telephone: (206) 268-9320 Facsimile: (206) 623-0594 8 Email: [email protected]
9 By: /s/ Marc M. Seltzer 10 MARC M. SELTZER (CA SBN 054534) 11 SUSMAN GODFREY L.L.P. 1901 Avenue of the Stars, Suite 950 12 Los Angeles, CA 90067 Telephone: (310) 789-3100 13 Facsimile: (310) 789-3150 Email: [email protected] 14
15 By: /s/ Frank M. Pitre
16 FRANK M. PITRE (CA SBN 100077) COTCHETT, PITRE & MCCARTHY 17 840 Malcolm Road, Suite 200 Burlingame, CA 94010 18 Telephone: (650) 697-6000 Facsimile: (650) 697-0577 19 Email: [email protected]
20 Co-Lead Plaintiffs’ Counsel for Economic Loss Cases 21
22 23 24 25 26 27 28
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1 By: /s/ Elizabeth J. Cabraser 2 ELIZABETH J. CABRASER (CA SBN 083151) 3 LIEFF CABRASER HEIMANN & BERNSTEIN, LLP 4 275 Battery Street, Suite 3000 San Francisco, CA 94111 5 Telephone: (415) 956-1000 Facsimile: (415) 956-1008 6 Email: [email protected]
7 By: /s/ Mark P. Robison 8 MARK P. ROBINSON, JR. (CA SBN 54426) 9 ROBINSON, CALCAGNIE & ROBINSON INC. 620 Newport Center Drive, 7th Floor 10 Newport Beach, CA 92660 Telephone: (949) 720-1288 11 Facsimile: (949) 720-1292 Email: [email protected] 12 Co-Lead Plaintiffs’ Counsel for Personal 13 Injury/Wrongful Death Cases
14
15 By: /s/ Cari K. Dawson
16 CARI K. DAWSON (GA SBN 213490) ALSTON + BIRD LLP 17 1201 West Peachtree Street Atlanta, GA 30309 18 Telephone: (404) 881-7766 Facsimile: (404) 253-8567 19 Email: [email protected]
20 By: /s/ Lisa Gilford 21 LISA GILFORD (CA SBN 171641) 22 ALSTON + BIRD LLP 333 South Hope Street, 16th Floor 23 Los Angeles, CA 90071 Telephone: (213) 576-1000 24 Facsimile: (213) 576-1100 Email: [email protected] 25 Lead Defense Counsel for Economic Loss Cases 26 27 28
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1 By: /s/ Vincent Galvin, Jr. 2 VINCENT GALVIN, JR. (CA SBN 104448) 3 BOWMAN AND BROOKE 1741 Technology Drive, Suite 200 4 San Jose, CA 95110 E-mail: [email protected] 5
6 By: /s/ Joel Smith
7 JOEL SMITH (SC SBN 5266) BOWMAN AND BROOKE 8 1441 Main Street, Suite 1000 Columbia, SC 29201 9 E-mail: [email protected]
10 Lead Defense Counsel for Personal Injury/Wrongful Death Cases 11 12
13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
22 LEGAL02/32003939v6 Case 1:05-cv-00064-TS -DN Document 1416 Filed 07/21/10 Page 1 of 6
IN THE UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, NORTHERN DIVISION
PHILLIP M. ADAMS & ASSOCIATES, MEMORANDUM DECISION AND L.L.C., a Utah Limited Liability Company, ORDER DENYING ADAMS’S MOTION FOR TERMINATING SANCTIONS Plaintiff, AGAINST ASUS BASED UPON ASUS’ SPOLIATION OF EVIDENCE OF ITS vs. PIRACY
WINBOND ELECTRONICS CORP., Civil No. 1:05-CV-64 TS ASUSTEK COMPUTER, INC., ASUS COMPUTER INTERNATIONAL, MICRO- The Honorable Ted Stewart STAR INTERNATIONAL CORPORATION, Magistrate Judge David Nuffer LTD., MSI COMPUTER CORPORATION, ITE TECH. INC., INTEGRATED TECHNOLOGY EXPRESS, INC.,
Defendants.
And Related Third-Party Claims
On April 17, 2008, Phillip M. Adams & Associates L.L.C. (Adams) filed a motion1 for sanctions against ASUSTEK Computer, Inc. and ASUS Computer International (collectively
ASUS) for spoliation of evidence. Adams claimed that ―ASUS has destroyed the source code and documents relating to [ASUS’s] test programs, as well as other documents that would have conclusively demonstrated ASUS’ piracy.‖2 On March 30, 2009, the magistrate judge issued a
1 Adams’ Motion for Terminating Sanctions Against ASUS Based upon ASUS’ Spoliation of Evidence of Its Piracy, docket no. 492, filed April 17, 2008. 2 Id. at 1. 1
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decision granting in part Adams’s motion.3 The magistrate judge found that ―[t]he universe of materials we are missing is very large,‖ and that ―we have very little evidence compared to what would be expected.‖4 The magistrate judge also found that ―[i]n the 1999-2000 environment,
ASUS should have been preserving evidence related to floppy disk controller errors.5 The magistrate judge further found that ―ASUS’ practices invite the abuse of [the] rights of others, because the practices tend toward loss of data.‖6
In order to determine what prejudice Adams faced and what, if any, sanctions were appropriate, the magistrate judge ordered ASUS to provide the court with a summary listing and copy of all evidence ASUS has produced to Adams of:
1. the ASUS test programs’ source code;
2. ASUS FDC error test program development;
3. ASUS’s FDC and motherboard testing activities in the 2000-2001 time period;
4. ASUS’s communications with suppliers regarding testing of the FDC problems;
5. ASUS’s communications with design experts relating to Adams’s technology;
6. Discussions occurring internally within ASUS regarding whether to license Adams’s technology;
7. ASUS’s communications with its customers about the FDC issue;
8. ASUS’s efforts to resolve the FDC issue; and
9. ASUS’s patent application process for its detector technology.7
3 Memorandum Decision and Order: Granting in Part [492] Motion for Terminating Sanctions Against ASUS Based Upon ASUS’ Spoliation of Evidence of Its Piracy; Granting in Part [559] Motion to Strike; and Denying [604] Motion to Strike, docket no. 731, filed March 30, 2009. 4 Id. at 24. 5 Id. at 26. 6 Id. at 31. 7 Id. at 33-34. 2
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The magistrate judge then ordered Adams to file a response to identify evidence Adams has received from sources other than ASUS which would be of value in Adams’s spoliation claim against ASUS.8 Comparison of this evidence would enable the magistrate judge to determine the degree of prejudice to Adams from ASUS’s inadequate document retention.
After March 30, 2009, ASUS produced approximately 350,000 pages of documents.9
Adams asserts that while ―ASUS was able to produce documents from the relevant time period
. . . none of those documents involves critical evidence such as the source code, testing, etc.‖10
Adams filed its response on September 22, 2009, listing evidence that Adams believed to be of evidentiary value from sources other than ASUS. Adams relies on four emails which ASUS either sent or received11 and the cover page of a fax received by Sony which was possibly sent by
ASUS.12
Adams claims it has shown that ―ASUS has destroyed, lost or withheld documents[,] . . . has completely thwarted Adams from obtaining any evidence . . . [and] has greatly interfered with the judicial process and has caused great harm.‖13 The evidence that Adams lists from other parties does not show that ASUS has willfully spoliated its evidence—very little was produced by other parties. In fact, the evidence that Adams obtained from other parties shows just the opposite—other parties also have very little documentary evidence involving ASUS. The fact
8 Id. at 34. 9 Adams’ Response to ASUS’ Summary Listing of Evidence at 1, docket no. 987, filed under seal, September 22, 2009. 10 Id. at 2. 11 Id. at 3-4. 12 Id. at 12-13. 13 Adams’ Memorandum in Support of Its Motion for Terminating Sanctions Against ASUS Based upon ASUS’ Spoliation of Evidence of Its Piracy at 5, docket no. 493, filed April 17, 2008. 3
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that evidence is not present does not mean it was spoliated. The documents produced by other parties do not show that ASUS destroyed documents.
However, ASUS has failed to produce its original source code. ASUS, in an attempt to remedy this problem, retained an independent consultant to disassemble the executable files and reassemble the source code.14 ASUS again reveals its lack of an information retention policy.
Engineers would maintain data on their own, and had no specific requirements on data retention.15 Another ASUS witness testified that ―when an individual left the company, the hard drive should be left with the company. But there was no SOP or standard SOP.‖16
Adams believes the original source code would be the ―smoking gun‖ that would show
ASUS’s piracy.17 Adams asserts that ASUS destroyed the source code because ―the developer
Sam Yang included various comments in the source code evidencing that he was pirating the technology from Adams’ patents and trade secrets.‖18 Adams is correct that the recompiled source code will not have any comments that were made by the developer, but whether the comments may have shown ASUS’s piracy is speculation.
ASUS asserts that Adams has previously claimed to be able to prove its case without source code, and therefore, a reassembled version of the source code eliminates any prejudice to
Adams.19 ASUS’s argument ignores the value of the missing comments and ASUS’s admission that it made ―minor modifications [to the reassembled code] in order to . . . produce an
14 ASUSTeK’s and ACI’s Summary Listing and Copy of Evidence Produced to Adams at 4, docket no. 955, filed under seal, September 8, 2009. 15 Id. at 6-7. 16 Id. at 7. 17 Adams’ Response to ASUSTeK’s Supplementation to Its Summary Listing of Evidence [Dkt. No. 1358] at 2, docket no. 1369, filed July 6, 2010. 18 Id. at 4. 19 ASUSTeK’s Reply to Adams’ Response to Summary Listing of Evidence at xvi – xvii, docket no. 1034, filed under seal, September 30, 2009. 4
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executable file.‖20 ASUS should have the original source code. In 2000, ASUS filed patent applications in Taiwan and China.21 Both patent applications were granted.22 In 2001, ASUS filed patent applications in Japan and the United States.23 These patent applications were initially rejected and eventually abandoned by ASUS.24 Adams points out that the final patent application was abandoned in 2005.25 For roughly five years ASUS attempted to obtain a patent of its source code.
The fact that ASUS no longer has the original source code and the reasons it would be expected to have it will be in evidence. Adams can argue to the jury that ASUS should have the original source code to a program that it both patented and attempted to patent for many years.
The jury will consider these facts and draw their inferences.
Adams argues that this court should ―enter judgment against ASUS for patent infringement . . . and schedule a trial for damages.‖26 But entry of judgment is a severe and extreme remedy to be used only when there is clear proof that evidence central to the case has been spoliated. ASUS’s data retention policies, as stated many times, were clearly inadequate.
However, under the backdrop of the minimal evidence Adams has obtained from other parties, it is not clear that ASUS spoliated evidence.
20 ASUSTeK’s and ACI’s Summary Listing and Copy of Evidence Produced to Adams at 4, docket no. 955, filed under seal, September 8, 2009. 21 ASUSTeK’s Reply to Adams’ Response to Summary Listing of Evidence at viii, docket no. 1034. 22 Id. 23 Id. 24 Id. at ix. 25 Adams’ Response to ASUSTeK’s Supplementation to Its Summary Listing of Evidence [Dkt. No. 1358] at 3, docket no. 1369, filed July 6, 2010. 26 Adams’ Memorandum in Support of Its Motion for Terminating Sanctions Against ASUS Based upon ASUS’ Spoliation of Evidence of Its Piracy at 9, docket no. 493, filed April 17, 2008. 5
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ASUS has presented multiple defenses it anticipates using at trial.27 Some of these defenses may have merit, and ASUS should be allowed to put on its case.
Further, ASUS believes the recent deposition of Thi La, a former HP employee, strongly supports ASUS’s arguments. ASUS claims that it did not receive a pirated copy of Adams’s programs from HP. Thi La testified in her deposition that she had never sent a program given to her by Dr. Adams to anyone outside of HP; she never told anyone at HP to send Dr. Adams’s program to anyone outside of HP; and that to her knowledge, she is unaware of anyone at HP ever sending any of Adams’s programs to anyone outside of HP.28
The jury will consider these facts and draw their inferences.
ORDER
IT IS HEREBY ORDERED that Adams’s motion29 for terminating sanctions against
ASUS is DENIED.
Dated July 21, 2010. BY THE COURT:
______David Nuffer U.S. Magistrate Judge
27 ASUSTeK’s Reply to Adams’ Response to Summary Listing of Evidence at xiv – xxv, docket no. 1034, filed under seal, September 30, 2009. 28 Deposition of Thi La at 33:3-19, attached As Exhibit A to ASUSTeK’s Supplementation to Its Summary Listing of Evidence,docket no. 1358, filed under seal, June 24, 2010. 29 Adams’ Motion for Terminating Sanctions Against ASUS Based upon ASUS’ Spoliation of Evidence of Its Piracy, docket no. 492, filed April 17, 2008. 6
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IN THE UNITED STATES COURT FOR THE DISTRICT OF UTAH NORTHERN DIVISION
PHILLIP M. ADAMS & ASSOCIATES, LLC, a Utah Limited Liability Company, Plaintiff, MEMORANDUM DECISION AND ORDER GRANTING IN PART ADAMS’ OBJECTION TO MAGISTRATE JUDGE NUFFER’S MEMORANDUM DECISION AND ORDER GRANTING ADAMS’ MOTION FOR SANCTIONS AGAINST MSI & ORDER DENYING MSI’S OBJECTIONS TO PLAINTIFF’S DESIGNATION OF TESTIMONY OF LEE AND HUANG
vs.
WINBOND ELECTRONICS Case No. 1:05-CV-674 TS CORPORATION, ASUS COMPUTER INTERNATIONAL, MICRO-STAR INTERNATIONAL CORP., LTD, AND MSI COMPUTER CORP., et al., Defendants.
I. INTRODUCTION
On May 26, 2010, the Magistrate Judge entered an Order (1) denying Plaintiff’s
Motion to Amend Complaint to add a misappropriation of trade secret claim against MSI
1 Case 1:05-cv-00064-TS -DN Document 1723 Filed 09/16/10 Page 2 of 13
and (2) Denying Plaintiff’s Motion for Terminating Sanctions Against MSI on the ground it was moot as related to the trade secret claim.
Plaintiff objected to that Order and argued that both motions be granted.1 On
August 30, 2010, this Court overruled Plaintiff’s objection to the Order for the Motion to
Amend, but the Court sustained Plaintiff’s Objection regarding sanctions motion because it found that the issue of sanctions was not moot.2 The Court stated that it would “enter a separate order on the Motion for Sanctions against MSI,” and does so in this Order.
On September 9, 2010, the Court denied in part MSI’s motion in Limine No. 13.3
In that Order the Court stated that Plaintiff was not to put on any evidence regarding MSI’s duty to preserve evidence or a sanction, or use the words spoliated and spoilation in connection with MSI “until it is determined that MSI had a duty to preserve the evidence.”4
The Court will now make the determination on the duty to preserve
Finally, MSI has recently filed Objections to Plaintiff’s Designation of Testimony of
Nora Lee and Jeans Huang;5 on the ground that it violated the Order on Motion in Limine
No. 13. That objection is also addressed in this Order.
In the present Motion for Sanctions, Plaintiff argues that some form of sanctions is appropriate because Defendant MSI had a duty to preserve evidence and violated that
1Docket No. 1338.
2Docket No. 1609.
3Docket No. 1677.
4Id. at 2.
5Docket No. 1712.
2 Case 1:05-cv-00064-TS -DN Document 1723 Filed 09/16/10 Page 3 of 13
duty. The Court finds that there is sufficient evidence of a duty and spoliation to allow
Plaintiff to present evidence on these matters. The jury will be instructed that MSI failed to preserve the evidence and that the jury may draw inferences from MSI’s failure to preserve and produce evidence.
II. BACKGROUND
In late 1999 the entire computer and component manufacturers industry was put on notice of a potential for litigation regarding defective floppy disc components (“FDCs”) by the well publicized settlement in a large class action lawsuit against Toshiba.6 While MSI argues it was “not in the FDC business” at the time,7 it was testing FDCs in the period and was further put on notice by a letter from Gateway dated July 26, 2000, ensuring MSI was aware of the FDC liability issue.8 The letter stated in part:
The recent settlement by Toshiba of a lawsuit relating to the defect has raised concerns with respect to all FDC products. Moreover, we have been told that former IBM engineer Phillip Adams has developed and patented techniques for detecting and fixing underrun errors. The Adams patents (Nos 5,379,414 and 5,983,202) may be of assistance to you in describing and analyzing this issue. For your convenience, we have enclosed copies of his patents. Gateway is committed to providing products that meet the highest levels of quality and need you to verify that the FDC components provided by you to Gateway operate according to specifications.9
6Docket No. 731 at 28 (Memorandum Decision and Order).
7Docket No. 860, MSI’s Opposition to Adams’ Motion for Terminating Sanctions Against MSI, Motion to Amend Complaint and Other Relief, at 7.
8Docket No. 837, Plaintiff’s Memorandum in Support of its Motion for (1) Leave to Amend, and (2) Terminating Sanctions Against MSI and Other Relief, at ix.
9Id. at Exhibit A.
3 Case 1:05-cv-00064-TS -DN Document 1723 Filed 09/16/10 Page 4 of 13
It is unclear if other documents provided additional notice because of MSI’s
questionable document archiving practice at the time. For example, when MSI switched
its email server in 2003, it states it simply deleted the emails stored on the previous
server.10 Despite representing that it deleted the emails as a result of the server switch,
MSI has produced some emails from before the switch over.11 Plaintiff has not been
satisfied by such partial production and argues that any incriminating emails not already
in Plaintiff’s possession were deleted. The fact that some emails were preserved and
others were not calls into question why only a portion of emails were deleted at the switch
over. This also refutes MSI’s claim that it “has always had a reasonable document
retention system.”12
Furthermore, MSI has been unable to produce a utility used allegedly at least once to test for FDC problems. Plaintiff alleges the utility was patented by Mr. Adams.
MSI has also been unable to produce the test results from the tests it ran on the utility. MSI disputes this fact, stating “MSI has produced test results from the testing that is at the heart of plaintiff’s allegation here.”13
To support this argument in its Memorandum in Opposition, MSI cites to its attached
Exhibit 4, Brookings Rework Test Procedural, and Exhibit B, Declaration of Alou Chuang
10Id. at Exhibit B, Deposition of Alou Chuang, at 13.
11Docket No. 860, Defendant MSI’s Memorandum In Opposition To Adams’ Motion For Terminating Sanctions Against MSI, Motion to Amend Complaint and Other Relief, at xviii.
12Id. at xiii.
13Id. at 6
4 Case 1:05-cv-00064-TS -DN Document 1723 Filed 09/16/10 Page 5 of 13
which states: “I found and produced numerous test reports and other technical documents from the 1999-2001 timeframe. I also found and produced test reports related to the testing mentioned in Exhibit C.”14 However, key material such as the test utility is missing.
Consequently it is not possible to verify that the test results are as represented. Further, the deposition testimony of Ms. Chuang supports Plaintiff’s position.15
The Court finds that the Chuang Declaration lacks veracity because of the untruthful statement in the Declaration, discussed further below, regarding this being the sole lawsuit
MSI has been a party to in the United States.
MSI argues that Plaintiff currently has in its possession any documents that may incriminate MSI, and that none others exist. It further argues that at the time in question it “had an efficient and effective document retention system,” and that “no MSI employee was ever asked or authorized to destroy any document in anticipation of a future litigation.”16 MSI also points out that during the course of this action it has produced
“thousands of pages of documents . . . including product schematics, data sheets and software.”17
14¶ 11.
15Chuang Dep. at 32-33; 37-38.
16Chuang Decl. a ¶ 11.
17Id. at xv.
5 Case 1:05-cv-00064-TS -DN Document 1723 Filed 09/16/10 Page 6 of 13
III. DISCUSSION
A. LEGAL STANDARD WHEN IMPOSING SANCTIONS FOR SPOLIATION
There are two threshold issues in determining whether sanctions are appropriate when a claim of spoliation is raised: whether “evidence has been lost, destroyed, or made unavailable” and whether there was a “duty to preserve the evidence.”18 If the moving party can show that the threshold standards are met, the Court applies a five factor test in determining which form of sanctions should be imposed:
(1) the degree of actual prejudice to the [plaintiff]; (2) the amount of interference with the judicial process; (3) the culpability of the litigant; (4) whether the court warned the party in advance that [entry of judgment against it] would be a likely sanction for noncompliance; and (5) the efficacy of lesser sanctions.19
B. THRESHOLD ISSUES
It is clear that evidence has been “lost, destroyed, or made unavailable.” MSI has been unable to produce the utility in question. Consequently it is unclear whether it has produced the results of the testing it performed using that utility. It is also unclear whether additional evidence has been lost, destroyed, or made unavailable. At the time MSI only retained documents and computer files for a year, and it did not retain documents in
18Docket No. 731, Memorandum Decision and Order by Magistrate Judge Nuffer.
19Ehrenhaus v. Reynolds, 965 F.2d 916, 921 (10th Cir. 1992). Ehrenhaus applied this five factor test to determining whether terminable sanctions such a entering a judgment or dismissal are appropriate. Id. at 920-21. However, the factors are easily applicable in the determination of which type of sanctions are appropriate, ranging from a mere jury instruction to entering a judgement.
6 Case 1:05-cv-00064-TS -DN Document 1723 Filed 09/16/10 Page 7 of 13
anticipation of any FDC litigation.20 Further, as noted above, only some evidence from the
1999-2000 time frame was retained.
While a closer question, the evidence shows that MSI also had a duty to preserve evidence. To the extent that MSI was not put on notice of potential litigation regarding
FDCs by the news of the October 1999 settlement in the Toshiba case, MSI was put on notice by communications from its customer Gateway. These communications included the Gateway letter and the Gateway email, which included an attachment received by MSI labeling the August 1, 2000 MSI/Gateway communications on Gateway’s FDC and defective chip issues as “information protected under Attorney/Client privilege.”
As early as April 4, 2000—well before the July 26, 2000, Gateway letter—another
MSI customer, Sony, was sued over the FDC issue. The class action suit against Sony alleged defective computers based on the FDCs, not patent infringement. There was also various other FDC related litigation following Toshiba.
Additionally, the Gateway case was filed in early February 2002. Gateway was a client of MSI. This was the first patent infringement case by Dr. Adams for the FDC related patents.
20Docket No. 1712, MSI’s Objections to Plaintiff’s Designation of Testimony of Nora Lee and Jeans Huang.
7 Case 1:05-cv-00064-TS -DN Document 1723 Filed 09/16/10 Page 8 of 13
In conclusion, shortly after the Toshiba settlement MSI knew or should have known that litigation was imminent and therefore had a duty to preserve evidence.21 This was especially true by 2003 when it deleted its old email server.
MSI raises two arguments to refute its duty to preserve evidence: first, it was not in the FDC business22 and second, it lacked experience with patent litigation.23 MSI’s claim that it was not in the FDC business, and thus would not be put on notice by a lawsuit regarding FDCs, lacks merit because, as noted above, it was testing FDCs in the period.
MSI’s second argument of lacking experience is also unconvincing. In the Chuang
Declaration MSI states that this is its first experience involving litigation of a U.S. patent.24
21Docket No. 731 Memorandum Decision and Order regarding Plaintiff’s sanctions motion against ASUS, at 25-27 (summarizing law on duty to preserve evidence when “a litigant knows or should know [it] is relevant to imminent or ongoing litigation”) (quoting Jordan F. Miller Corp. v. Mid-Continent Aircraft Service, Inc., 1998 WL 68879, at *5 (10th Cir. Feb. 20, 1998)). The Court adopts and incorporates that Order’s statement of the law herein.
22Docket No. 860, MSI’s Opposition to Adams’ Motion for Terminating Sanctions Against MSI, Motion to Amend Complaint and Other Relief, at 7 (“MSI was not concerned in the least with the Toshiba settlement because MSI is not in the FDC business.”).
23Id. at xiii.
24Id. at 6. See also id. at Exhibit B, Declaration of Alou Chuang at 3 (“In the 1999- 2001 timeframe, MSI had no experience with patent litigation in the United States of America. The first and only time MSI has been involved in a patent infringement lawsuit in the U.S. is the present litigation, which started in 2005. Therefore, in the 1999-2001 timeframe, MSI’s document retention policy was not explicitly guided by rules related to U.S. patent litigation.”).
8 Case 1:05-cv-00064-TS -DN Document 1723 Filed 09/16/10 Page 9 of 13
Jeans Huang stated in his deposition that at the time period in question MSI “didn’t have
enough legal knowledge” to know that it needed to preserve evidence.25
To begin with, if the Court accepted MSI’s argument, then new businesses would
be immune to any legal consequences of their actions in failing to preserve evidence as
long as they remained ignorant of the law.
Furthermore, it has recently come to the Court’s attention that MSI has been a party
to litigation prior to this action. Its statement regarding this being the first time it has been
a party to litigation in the United States is untrue. MSI became a party to this action in
2007. From 1999 to 2007 it was a party in eleven lawsuits in the United States. Of
particular note, MSI was a defendant in a patent matter filed in October of 2001—at least
fourteen months prior to its deleting the emails on its old server. In 2003 MSI was served
a subpoena for document production in Adams v. Gateway which dealt with the same testing and much of the same evidence as the matter currently before the Court.
The Court finds that MSI should have preserved evidence pertinent to future FDC litigation. From 1999-2000 the industry as a whole was aware of potential litigation. Also,
MSI’s understanding that FDC litigation was imminent should have been reinforced by its experience in litigation and the cases filed against its own customers.
Plaintiff has shown that evidence has been destroyed and there was a duty to preserve the evidence. Even if MSI has turned over some emails and reports of key importance, it has not turned over the utility. Furthermore, the fact that MSI deleted and/or
25Deposition of Jeans Huang, at 25, located at Docket No. 1338, Adams’ Objection to Magistrate Judge’s May 26, 2010 Order at Ex. I (under seal).
9 Case 1:05-cv-00064-TS -DN Document 1723 Filed 09/16/10 Page 10 of 13
destroyed a significant and unknown portion of its documents from the time in question, without any regard as to what may be later necessary for FDC litigation, satisfies the first threshold question. Thus, some form of sanctions are appropriate.
C. WHAT FORM THE SANCTIONS SHOULD TAKE
As noted above, the Court considers five factors in determining sanctions: “the degree of actual prejudice to the [plaintiff]; . . . the amount of interference with the judicial process; . . . the culpability of the litigant; . . . whether the court warned the party in advance that [entry of judgment was possible]; . . . and the efficacy of lesser sanctions.”26
The first factor, prejudice toward Plaintiff, is not easily weighed without making factual determinations as to the likelihood that additional evidence not in Plaintiff’s possession would have been produced had MSI not destroyed its records.
What has been described by MSI in its memoranda as key evidence Plaintiff will use against MSI, namely what has been referred to as “the Gateway email” was produced by
Gateway. Thus, there is no way to know if other relevant evidence would have been produced had MSI preserved all of their documents regarding potential FDC litigation. On the other hand, MSI points out that Plaintiff has the key evidence and is not prejudiced because no other incriminating evidence has ever existed. However, MSI recently obtained an order in limine27 largely excluding the Gateway email—which it referred to as notes prepared by Chris Wetzel—and which included notes of a conference call with MSI
26Ehrenhaus v. Reynolds, 965 F.2d 916, 921 (10th Cir. 1992).
27Order Granting in Part MSI’s Motion in Limine No. 21 to Exclude Brookings notes and Wetzel emails prepared by Gateway’s Chris Wetzel. Docket No.
10 Case 1:05-cv-00064-TS -DN Document 1723 Filed 09/16/10 Page 11 of 13
employees. That evidence is excluded except as necessary for the jury to understand the deposition testimony of three individuals—one MSI employee and two Gateway employees. As the record now stands it may not be received as substantive evidence, but some use for impeachment or the like has not been addressed. Thus, there is prejudice to Plaintiff because what little evidence remains from MSI is not all admissible at trial.
The second factor, interference with the judicial process, points towards imposing sanctions. MSI destroyed its documents several years before Plaintiff filed this action.
Furthermore, as set forth in a prior Order,28 MSI has not always fully cooperated in discovery matters.
The third factor, culpability of MSI, points towards sanctions but not extreme sanctions such as entry of judgment. MSI’s culpability regarding sanctions is that it failed to retain documents. This is mitigated by the fact that MSI did not produce FDCs but simply incorporated them into its product.
Regarding the final two factors, the Court has not warned MSI that severe sanctions such as a judgment may be entered against it. The lesser sanction of a jury instruction seems sufficient.
The Court finds that the appropriate sanction is a jury instruction stating that the jury may, but is not required to, draw assumptions from the fact that MSI did not preserve and has not produced evidence. However, it will still be up to the jury to determine whether MSI infringed on Plaintiff’s patent and if the patent is enforceable. The exact form of the jury
28Docket No. 1573, Memorandum Decision and Order on Plaintiff’s Motion in Limine to Exclude Witness Huang, August 16, 2010.
11 Case 1:05-cv-00064-TS -DN Document 1723 Filed 09/16/10 Page 12 of 13
instruction will be determined as the trial draws to an end and all evidence on this issue and other issues has been received.
Furthermore, the Court finds that Plaintiff shall not mention this sanction to the jury due to the danger of prejudicing the jury. Plaintiff is free to put on evidence of MSI’s failure to preserve evidence (spoliation) and, the Court having determined that MSI had a duty to preserve evidence, of its actions regarding the preservation of evidence, if any, including any document retention policy issues. Plaintiff may argue in closing argument that MSI should have preserved evidence and refer to the fact that the jury will be instructed that
MSI should have preserved the evidence. However, Plaintiff may not directly or impliedly state that the Court has made a finding of wrongdoing on MSI’s part; in other words,
Plaintiff may not state or imply that the Court has sanctioned MSI. Further, the Court will not instruct the jury at this time on the duty to preserve. Plaintiff has already presented some evidence on this topic, but should follow this Order from this point forward.
Thus, the Court is modifying its prior Order Denying in Part MSI’s Motion in Limine
No. 13. This modification renders moot MSI’s Objections to Plaintiff’s Designation of
Testimony of Nora Lee and Jeans Huang.
IV. CONCLUSION
The Court finds, as stated above, that MSI violated its duty to preserve evidence and that Plaintiff was prejudiced due to MSI’s destruction of documents. It is therefore
ORDERED that Plaintiff’s Motion for Sanctions and other relief against MSI (Docket
No. 836) is GRANTED in part and sanctions are imposed on MSI in the form of a jury instruction as outlined above. It is further
12 Case 1:05-cv-00064-TS -DN Document 1723 Filed 09/16/10 Page 13 of 13
ORDERED that Plaintiff may put on evidence of MSI’s spoliation of evidence, but
Plaintiff may not refer the to Court’s action in issuing this sanction. It is further
ORDERED that MSI’s Objections to Plaintiff’s Designation of Testimony of Nora Lee and Jeans Huang, (Docket No. 1712), is DENIED as MOOT.
DATED September 16, 2010.
BY THE COURT:
______TED STEWART United States District Judge
13 Case: 1:08-cv-03548 Document #: 71 Filed: 05/25/10 Page 1 of 21 PageID #:562
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION
VICTORIA JONES, ) . ) Plaintiff, ) Case No. 08 C 3548 ) vs. ) Magistrate Judge Susan E. Cox ) BREMEN HIGH SCHOOL DISTRICT 228, ) ) Defendant. )
Memorandum Opinion and Order
Plaintiff Victoria Jones (“pl aintiff”) s ued de fendant Br emen High School District 228
(“defendant”) for em ployment discrim ination ba sed on race. Plaintiff has filed a m otion for sanctions due to spoliation of evide nce, alleging that defendant has failed to ensure that relevant documents were preserved during litigation and that this f ailure has severely prejudiced plaintiff’s case. Plaintiff asks for an adverse inference instruction to the jury t hat the destroyed documents would have supported her claim s by c ontaining discriminatory statements. She also asks for this Court to preclude defendant fr om arguing that the absence of discrim inatory comments in extant docum ents shows that no disc riminatory comments were m ade and/or that plaintiff was not subject to disc rimination or a hostile work envir onment. This Court grants this motion in part and denies it in part [dkt 51].
I. Factual Background
A. Plaintiff’s Allegations and Employment History
Unless otherwise stated, the following fact s are from plaintiff’s Second Am ended
Complaint [dkt 58]. Plaintiff is a black wo man who worked for defendant from 1984 until 2009.
She alleges that from April 2006 onwards she and other black secretaries were given m ore
1 Case: 1:08-cv-03548 Document #: 71 Filed: 05/25/10 Page 2 of 21 PageID #:563
responsibilities than si milarly situated white secretaries, that she was subject to insults and
criticisms not given to sim ilarly situated white s ecretaries, and that def endant was aware of this discriminatory behavior. She further alleges that defendant’s discharge of her was a retaliation against plaintiff’s charges of discrimination.
Plaintiff claim s that she received positive ev aluations and few com plaints pri or t o t he
2005-2006 school year.1 This began to change in early 2006, when Michelle Jurgens ("Jurgens"),
a Dean, began com plaining to PPS Director Phyllis Kim mel ("Kim mel") about plai ntiff's
conduct at work. 2 Plaintiff on her part com plained to Principal Marcia Mendenhall
("Mendenhall") about Jurgens' s conduct. 3 During the spring of 2006 plaintiff told Mendenhall
she had been assigned more work than she could reasonably complete in the time given. Plaintiff
was called into m eetings regarding her conduct and c omplaints on March 29, 2006 and
December 4, 2006.
Jurgens’s complaints continued into 2007. On March 21 Jurgens called plaintiff into a
meeting to discuss an incident i n which Jurgen s claimed plaintiff raised her voice to a student. 4
Defendant claim s plaintiff told Jurgens that she was not able to tell her what to do. 5 Jurgens arranged a m eeting between her, plaintiff, Me ndenhall, and plaintiff' s union repres entative for
March 28. 6 On March 23 defendant claim s that plain tiff refused to follow Jurgens' s request to
write a pass for a student and failed to acknowledge Jurgens as she was speaking.7 The March 28
meeting happened as planned but did not r esolve the conflict between Jurgens and plaintiff;
1Exhibit 12, Plaintiff’s Reply Brief In Support of Her Motion for Sanctions [dkt 61-1]. 2Exhibit B, Defendant’s Response In Opposition to Plaintiff’s Motion for Sanctions [dkt 59-2]. 3Dkt 61-1. 4Dkt 59-2. 5Id. 6Id. 7Id.
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Kimmel has testified that during the last two to three months of the school year Jurgens would complain to her about plaintiff at least once a we ek.8 Ki mmel also witnessed Jurgens slam a
handful of pa pers on plaintiff' s desk. Kim mel told Mendenhall about this incident but to her
knowledge Mendenhall did not respond. 9 Kim mel also witnessed Associate Principal Paul
Rybarczyk ("Rybarczyk") acting rudely towards plaintiff and a fellow s ecretary, Karen Edwards
("Edwards") on May 16, 2007. 10 Ms. Kimmel left her job later that month, but her email folders
were compl etely em pty (with the exception of her resignation) according to the district’s
technological director.11
At the beginning of the 2007-2008 school ye ar def endant hired Edwin Lipowski
("Lipowski") as Kim mel's replacem ent for PPS director .12 Ar ound this tim e plaintiff began
seeing a physician for stress-related m edical problem s.13 The change in leader ship di d not improve the relationship between plaintiff and Jurgens. Jurgens began to com pile a list of plaintiff's actions, which she considered insubordinate, such as not acknowledging her when talking, not i nforming her of student visits, and not acknowledging receiving her em ails.14 On
September 21 defendant alleged that plaintiff ignored Jurgens's request to find a suspension form
and instead talked with a co-worker; that day plaintiff was called into another m eeting.15 On
September 27 plaintiff asked Principal Dave Kibelkis via em ail to m ediate be tween her and
Jurgens.16
8Dkt 59-2; Dkt 51-1. 9Plaintiff’s Initial Complaint, Dkt 1. 10Id. 11Deposition of Curtiss Strieltelmeier, October 27, 2009, Dkt 51-4, p. 9. 12Dkt 59-2. 13Dkt 1. 14Dkt 59-2. 15Dkt 59-2; Dkt 51. 16Dkt 59-2.
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Lipowski's rela tionship with plaintiff also deteriorated. For exam ple, on October 1
Lipowski emailed plaintiff asking her to c omplete a list of students on probation and told her he
needed it done im mediately; s he inform ed him she would have it done by the next day
(Lipowski’s language indicates that he was im patient for the list). 17 Plaintiff and Lipows ki also
had a disagreem ent regarding a rewrite of a list of bus stops, and on October 12 Edwards
witnessed Lipowski becom e confrontational with plaintiff when asking her for the bus report. 18
That day plaintiff and Lipowski had another meeting to try to resolve their problems.19
Complaining of stress, plaintiff took a leav e of a bsence from work starting on October
15, 2007 whi ch lasted about seven m onths. Plaintiff filed a com plaint with the EEOC alleging
racial and disability discrim ination on October 5, 2007 and a com plaint alleging discrimination
based on race and disability with the IDHR on November 29, 2007. Defendant filed its response
to plaintiff's EEOC cha rges on December 19, 2007 a nd its response to plaintiff' s IDHR charges
sometime before March 2008. 20 Plaintiff received a Final Agency Decision from the EEOC on
April 10 and a R ight to S ue letter on A pril 13. P laintiff filed her original com plaint with this
Court on June 20, 2008. Upon retaining counsel, plaintiff f iled her am ended com plaint on
October 16, 2008; this com plaint added a 42 U.S.C. § 1983 c laim a lleging that this
discrimination followed defendant’s custom or policy and added an age discrim ination claim based on 29 U.S.C. § 621 et seq [dkt 11]. The district court has since dismissed Plaintiff's age, sex, and national origin claim s, but has allowed her racial discrimination claims to proceed [dkt
25].
17Dkt 59-2. 18Dkt 59-2; Dkt 1. 19Dkt 59-2. 20Dkt 59-2.
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Defendant and plaintiff's relationship did not significantly improve after plaintiff returned to work in the spring of 2008; indeed, it worsen ed during the f all of 2008. Plaintif f was called into further meetings regarding her behavior on September 5, September 16, and Septem ber 18, as well as t wo me etings on Septem ber 12. 21 During the rest of the school year, plaintiff was called into m eetings about he r perform ance on a nearly m onthly basis (Novem ber 12, 2008,
December 1, 2008, January 29, 2009, February 26, 2009, March 5, 2009, April 3, 2009, and
April 28, 2009.)22
Defendant fired plaintiff on Novem ber 17, 2009, allegedly for turni ng over confidential student records to her attorneys , the subject of a m otion for a protective order before this Court.
Plaintiff next filed a retaliation claim against defendant with the EEOC on Novem ber 30, 2009.
She filed her Second Am ended Com plaint on January 5, 2010, adding a claim of retaliatory discharge to her racial discrimination claims in violation of Title VII.23
B. Defendant’s Preservation of Documents Relevant to Plaintiff’s Claims
It is undisputed here that def endant did not place a litigation hol d on electronically created documents in this case when it first l earned in October 2007 that plaintiff had filed an
EEOC charge agai nst it alleging race and disab ility. Instead, only Principal Kibelkis, Dean
Jurgens and PPS Director Lipowski, the individuals most involved in the allege d discriminatory actions, were tasked by the district to search through their own electronic m ail (and no one else’s) and cull out relevant docum ents.24 T here is no evidence that suggests that their assessment of what was relevant and what was not was guided by outside counsel. These three
21Dkt 51. 22Id. 2342 U.S.C. § 2000e et seq. 24Dkt 51.
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employees ( and only these three) were asked to preserve whatever em ail and docum ents they
believed were relevant to the case. In addition, if any em ployee in the distri ct wanted to
permanently delete an em ail, he or she could do so by “double-deleting” that em ail from his or
her computer. Aft er t hirty days, that em ail would automatically be erased from the back-up
system.
After plaintiff filed her Complaint in June 2008 in federal court , defendant requested that
additional e mployees search for relevant electronic and other docum ents, including Principal
Mendenhall and Associate Principal Rybarczyk. As with Lipowski, Jurgens, and Kibelkis, the
employees were free to m ake their own de termination as to which docum ents were relevant. 25
It was not until the spring of 2009 that defendant inst ructed all of its em ployees to preserve emails which might be relevant to the litigation. 26 However, i n October 2008, defendant began
automatically saving all em ails fr om the district’s users in a searchable archive. 27 (As noted
above, befor e this change was m ade, defendant' s backup tapes were rewritten every thirty
days.28) Accordingly, although there was no litigation hold in place for all em ployees until
spring of 2009, all potentially relevant documents created after October 2008 were automatically
preserved in a backup archive.
In summary, prior to June 2008, only three em ployees were asked to search and preserve
electronic mail and they did so without any supervisi on by counsel. Three additional em ployees
were added to this list in June 2008, after the Complaint was filed. Any email that existed prior
to October 2008, which these em ployees did not preserve because they did not deem it relevant,
25Dkt 51. 26Dkt 51-4, p. 5. 27Dkt 51-5. 28Id.
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cannot be recovered now. Other em ail, which was deleted in the norm al course of business by
other em ployees who were not asked to preserve em ail before Oc tober 2008, cannot be
recovered now. By contrast, all email created after October 2008 has been backed up and can be
searched for relevant materials.
C. Defendant’s Belated Production of Documents to Plaintiff
Plaintiff filed her First Set of Requests for Production of Documents and Things on May
13, 2009. 29 Som etime between May 13, 2009 and Septem ber 4, 2009, defendant partially
answered these requests. 30 Plaintiff claim ed that there were obvious deficiencies in the production of docum ents to her, partic ularly the dearth of em ails from 2006 and 2007. On
October 20, 2009, this Court ordered defendant to produce its docum ent retention poli cy.31
Defendant responded by requesting its technological director. Mr. Strietelmeier, to put in writing
the district’s email retention policy ("ERP"). 32 In his deposition a bout the E RP on O ctober 27,
2009, Strietelmeier testified tha t he changed the archiving system in October 2008 to allow for
the autom atic backup of em ail "not necessarily because of any particular case.” 33 He also testified that he s earched the current inboxes of Mendenhall, Jurgens, Rybarczyk, Kibelkis,
Kimmel, and several other supervisory em ployees, plus the em ail boxes of the other secre taries to com ply with the production r equests.34 He described his search protocol as searching for
various forms of plaintiff's name within the email boxes, and he made his own determinations as
29Dkt 44-2. 30Dkt 44-3. 31Dkt 36. 32Dkt 44-7 p. 4. 33Id. at p. 5 34Dkt 51-4 p. 6.
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to what material was relevant.35 Strietelmeier was not sure if he looked on the archive server for
emails from the supervisors, and he was not sure of all of the people whose ema il boxes he
searched.36
However, during the briefing on defendant’s m otion to bar the use of confidentia l
records, which plaintiff allegedly had m isappropriated, plaintiff produced an alternative
document retention policy which she had discovered on defendant’s website called "Access to
District's Public Records" policy ("DRP"). The DRP states that it is def endant's policy to
maintain and preserve all evidence of defendant's "organization, function, policies, procedures,
or activities.”37 The DRP was adopted in 2003 and was last amended in 2006.38
On December 7, 2009, plaintiff filed the Motion for Sanctions at issue.39 As of December
6, 2009, defendant had not pr ovided plaintiff with any em ails regarding meetings on March 29,
2006, December 4, 2006, May 21, 2008, Septem ber 12, 2008, Septem ber 16, 2008, Novem ber
12, 2008, or Apr il 3, 2009. 40 Defendant also had not supplied any docum ents from October
through December 2006, Fe bruary 2007, April 2007 (despite Kim mel's testimony that Jurgens
had regularl y s ent he r com plaints about pl aintiff during this tim e), July 2007, August 2007,
February 2008, March 2008, April 2008, and June 2008. 41 The only docum ents from January
2007 that defendant had produc ed by Decem ber 6, 2009 were those included in defendant' s
response to plaintif f's initial EEO C charges. 42 Even though m any of those docum ents were
35Id. at p. 7. 36Id. at p. 8. 37Dkt 44-9. 38Id. 39Dkt 51. 40Id. at 11. 41Id. at 7. 42Plaintiff claimed that Defendant had supplied no documents from January 2007, but Defendant’s EEOC defenses show emails from January 2007.
8 Case: 1:08-cv-03548 Document #: 71 Filed: 05/25/10 Page 9 of 21 PageID #:570
relevant to various non-EEOC interrogatories, defe ndant's answer did not cross-reference these
documents when answering the other interrogatories. The sam e day, defendant se nt plaintiff
2,354 additional pages of em ails.43 Defendant filed i ts response to the m otion for sanctions on
January 13, 2010, and plaintiff fi led her reply to the response on January 27, 2010. Defendant’s
response included affidavits from Kibelkis and Li powski stating that archives of their em ail for
the 2007-2008 and 2008-2009 school years had been re-created and they did not perma nently
delete any emails regarding plaintiff during eit her of these periods. Jurgens filed an affidavit in
which she stated that she saved all em ails between herself and Kimme l which were on her
computer in Novem ber 2007. She also stated that she printed out all em ails in her possession
regarding plaintiff during the 2007-2008 school year.44
On May 4, 2010, after briefing on the m otions for sanctions was com pleted, we asked
plaintiff for mor e i nformation concerning the late production of approxim ately 2300 em ails.
Specifically, we asked plaintiff whether the new production filled in any of the missing gaps she
had identified in her motion for sanctions from the 2007-2008 production. In response, plaintiff
told us that defendant produced another 3600 em ails on the sam e day as our order. 45 According to plaintiff, most of this latest production is email created before October 2008, the tim e period during which em ail would not have been autom atically saved if deleted by recipient/sender.
Although many of these emails are irrelevant, plaintiff has identified at least 110 em ails that are directly relevant to plaintiff’s allegations and, therefore, should have been produced long ago.
43Dkt 59-9. 44Dkt 59-4, Dkt 59-5, Dkt 59-6. 45Dkt. 68.
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In sum , a lthough all em ails responsive to plaintiff’s discovery requests were produced
only after her m otion for sanctions was filed, it app ears now that m ost (if not all) of the gaps in
defendant’s production have been filled. That being said, because there was no hold put in place
on electronic documents and because em ails could be m anually and perm anently deleted if an
employee chose to do this, we cannot determ ine with certainty that all em ail relevant to
plaintiff’s claims were preserved.
II. Legal Standards
Both the Court’s i nherent powers as well as the Federal Rules of Civil Procedure give
the Court the author ity to sanction a party for failure to preserve docum ents.46 A m otion for
discovery sanctions can be m ade when a party either de stroys or fails to preserve evidence
which it controls and which it could reasonably foresee to be ma terial to a potential lawsuit. 47
The purpose of sanctions is to prevent abuses of the judicial system and to promote the efficient
administration of justice. 48 The Cour t’s power to sanction includes sanctioning parties that fail
to preserve potential evidence that would ha ve been discoverable. 49 Sanctions “m ust be
proportionate to the circumstances surrounding the failure to comply with discovery.”50
To find that sanctions for spoliation ar e appropriate, the Court m ust find the following:
1) that there was a duty to preserve the specific documents and/or evidence, 2) that the duty was
breached, 3) that the other party was harm ed by the breach, and 4) t hat the breach was caused
46Chambers v. NASCO, Inc., 501 U.S. 32, 50-51 (1991); Barnhill v. United States, 11 F.3d 1360, 1368 (7th Cir. 1993). 47Porche v. Oden, No. 02 C 7707, 2009 WL 500622, at *3 (N.D.Ill. Feb. 27, 2009) , citing Fed. R. Civ. P. 37(c)(1). 4811 F.3d at 1367. 49Wigninton v. Ellis, No. 02 C 6832, 2003 WL 22439865, at *3 n. 5 (N.D. Ill. Oct. 27, 2003). 50Langley v. Union Electric Co., 107 F.3d 510, 515 (7th Cir. 1997) (internal citations omitted).
10 Case: 1:08-cv-03548 Document #: 71 Filed: 05/25/10 Page 11 of 21 PageID #:572
by the breaching party’s wilful ness, bad fai th, or fault.51 If the Court finds that sanctions are
appropriate, it must determine whether the proposed sanction can am eliorate the prejudice that
arose from the breach; if a lesse r sanction can accomplish the same goal, the Court must award
the lesser sanction.52
First, a party has a duty to preserve evidence that i t ha s control over and which it
reasonably knows or c an foresee would be m aterial (and thus relevant) to a potential legal
action.53 A document is potentially relevant, a nd thus must be preserved for discovery, if there
is a possibility that the inf ormation therein is relevant to any of the claims.54 The existence of a
duty to preserve evidence does not depend on a court order. 55 Instead, it arises when a
reasonable party would anticipate litigation.56
Second, the duty to preserve evidence m ust have been breached. 57 In the Northern
District of Illinois, a party’s failure to issue a litigation hold is not per se evidence that the party
breached its duty to preserve evidence. 58 Instead, reasonableness is the key to dete rmining
whether or not a party breached its duty to preserve evidence. 59 It may be reasonable for a party
to not stop or alter autom atic electronic document management routines when the party is first
51Porche, 2009 WL 500622 at *5. 52Larson v. Bank One Corp., No. 00 C 2100, 2005 WL 4652509, at *9 (N.D. Ill. Aug. 18, 2005). 53Bryant v. Gardner, 07 C 5909, 587 F. Supp. 2d 951, 967-68 (N.D. Ill. Nov. 21, 2008). 54Ares-Serano, Inc. v. Organon Int’l B.V., 151 F.R.D. 215, 219 (D. Mass 1993). 55Trask-Morton v. Motel 6 Operating L.P., 534 F.3d 672, 681 (7th Cir. 2008). 56Id. 57Porche, 2009 WL 500622 at * 58Haynes v. Dart, 08 C 4834, 2010 WL 140387 at *4 (N.D. Ill. Jan 11, 2010). 59Haynes v. Dart, 08 C 4834, 2010 WL 140387, at *4 (N.D. Ill. 2010), citing Marrocco v. Gen. Motors Corp., 966 F.2d 220, 224 (7th Cir. 1992).
11 Case: 1:08-cv-03548 Document #: 71 Filed: 05/25/10 Page 12 of 21 PageID #:573
notified of the possibility of a suit. 60 However, parties m ust take positive action to preserve
material evidence.61
Third, the breach m ust have ha rmed t he ot her party and, fourth, there m ust be a
sufficient level of fault to warrant sanctions.62 Findings of wilfulness, bad faith, and fault are all
sufficient grounds for sanctions. 63 However, a court m ay only grant an adverse inference
sanction upon a showing of bad faith. 64 Bad faith requires the intent t o hide unfavorable
information.65 This intent may be inferred if a document’s destruction violates regulations (with
the exception of EEOC record regulations). 66 Fault is defined not by the party’s intent, but by
the reasonableness of the party’s conduct. 67 It m ay include gros s negligence of the duty to
preserve material evidence.68 Mere negligence is not enough for a factfinder to draw a negative
inference based on document destruction.69
III. Analysis
A. Duty to Preserve
The fi rst i ssue we m ust resolve is when defendant’s duty to preserve evidence is
triggered. A defendant has a duty to preserve evidence that it has control over and whi ch it
60Cache La Poudre, Inc. v. Land O’Lakes, Inc., 244 F.R.D. 614, 624 (D. Colo. 2008). 61Danis v. USN Communications, Inc., 2000 WL 1694325, at *36, *38 (N.D. Ill. 2000). 62Porche, 2009 WL 500622 at *5. 63Porche v. Oden, No. 02 C 7707, 2009 WL 500622, at *5. But see Trask-Morton v. Motel 6 Operating L.P., 534 F.3d 672, 681 (7th Cir. 2008) (“a showing [of bad faith] is a prerequisite to imposing sanctions for the destruction of evidence,” thereby refusing to issue sanctions because the level of fault had not risen to the level of bad faith. 64Fass v. Sears, Roebuck & Co. , 532 F.3d 633, 644 (7th Cir. 2008). But see OCE North America, Inc. v. Brazeau, 09 C 2381, 2010 U.S. Dist. LEXIS 25523, at *17 (N.D. Ill. March 18, 2010) (“[a]n adverse inference may be appropriate if . . . the breach involved willfulness, bad faith or fault[.]”) 65Mathis v. John Morden Buick, Inc., 136 F.3d 1153, 1155 (7th Cir. 1998). 66Park v. City of Chicago, 297 F.3d 606, 615 (7th Cir. 2002). 67Id. 68Marrocco v. Gen. Motors, 966 F.2d 220, 224 (7th Cir. 1992). 69Rodgers v. Lowe’s Home Ctrs, Inc., 05 C 0502, 2007 WL 257714 at *5 (N.D. Ill. Jan. 30, 2007).
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reasonably knows or can foresee would be m aterial (and t hus r elevant) to a potential legal
action.70 Documents are potentially relevant if there exists a possibility th at the information in
the docum ents would be relevant to any of the claim s.71 This duty arises when a reason able
party would anticipate litigation and does not depend on a court order. 72 Defendant clearly had
a duty to preserve documents relevant to plaintiff’s claims when it received notice of plaintiff’s
EEOC charges on or before November 30, 2007; accordingly, defendant had a duty to preserve
documents relevant to plaintiff’s discrimination claims at least by this date.
B. Breach of Duty to Preserve
The second question we mus t a nswer is wh ether defendant has breached its duty to
preserve evidence. A party f ulfills its duty to preserve evidence if it acts reasonably. 73 “More
than good intentions [are] required; those intentions [mus t] be followed up with concrete
actions reasonably calculated to ensure that re levant m aterials will be preserved,” such as
giving out specific criteria on what should or should not be saved for litigation.74
Plaintiff contends that defendant failed to preserve docum ents which were m aterially
relevant to this case. She points to the f act that while a f ormer employee of defendant, Phyllis
Kimmel (“Kimmel”), has stated that she received weekly em ails from Jurgens about plaint iff’s
work for two to thr ee months, as of D ecember 6, 2009 defendant only produced six em ails
fitting that description. 75 She also points to the fact that while defendant cal led plaintiff into at
70Bryant v. Gardner, 07 C 5909, 587 F. Supp. 2d 951, 967-68 (N.D. Ill. 2008). 71Ares-Serano, 151 F.R.D. at 219. 72Trask-Morton v. Motel 6 Operating L.P., 534 F.3d 672, 681 (7th Cir. 2008). 73Haynes v. Dart, 08 C 4834, 2010 WL 140387, at *4 (N.D. Ill. 2010), citing Marrocco v. Gen. Motors Corp., 966 F.2d 220, 224 (7th Cir. 1992). 74Danis v. USN Communications, Inc., 2000 WL 1694325, at *36, *38 (N.D. Ill. 2000). 75Dkt 51-1.
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least 18 m eetings between March 2006 through April 2009, there were (as of Decem ber 6,
2009) no emails relating to eight of the meetings. The Court believes, based on plaintiff’s latest filing, that most of these gaps in plaintiff’s production have been eliminated. Defendant argues that its document preservation procedures were entirely appropriate.
The Court finds that defendant clearly breached its duty to preserve relevant docum ents in this litigation. Defendant was aware at least by November 2007 that plaintiff was challenging its treatment of her on the basis of her race a nd alleged disability. Defendant also was aware that its em ployees were able to delete perm anently em ails. Despite these indisputable facts, defendant inexplicably did not request all em ployees who had dealings with plai ntiff t o preserve emails so that they could be searched further for possible relevance to plaintiff’s case by counsel. Instead, defendant directed just three employees (one of whom was at the center of plaintiff’s complaints) to search their own email without help from counsel and to cull from that email what would be relevant documents. It is unreasonable to allow a party’s interested employees to make the decision about the relevance of such docum ents, especially when thos e same em ployees have the ability to perm anently delete unf avorable em ail from a party’s system. As one court has noted, “simply accept[ing] whatever documents or information might be produced by [its] em ployees,” without prev enting defendants from clearing the hard dr ives of form er em ployees, was im proper.76 M ost non-lawyer em ployees, whether m arketing consultants or high school deans, do not have enough knowledge of the applicable law to
76Cache La Poudre Feeds, L.L.C. v. Lan O’Lakes, Inc., 244 F.R.D. 614, 630 (D. Colo. 2007)
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correctly recognize which documents are relevant to a lawsuit and which are not. Furtherm ore, employees are often reluctant to reveal their mistakes or misdeeds.
Defendant arrgues that m erely failing to place a litigation hol d on i ts employees’ email is excusable, citing Haynes v. Dart.77 The c ourt’s decision in Haynes, however, centered on defendant’s f ailure to preserve a sheriff’s de puty’s handwritten notes taken during m eetings.
We acknowledge that the Haynes court found that, i n c ertain cases, a defendant’s failure to issue a litigation hold at the star t of a case would not, standing alone, be a breach of the duty to preserve docum ents.78 However, the c ourt in Haynes em phasized that defendant, the Cook
County Sheriff’s Office, was a party in approxi mately 800 pending lawsuits. Im posing a broad litigation hold in each case could cause an undue burden to the Sheriff’s office. 79 The Court also emphasized that there was no evidence that th e official secretarial notes for those meet ings were even m issing.80 To the contrary, in this case ther e is no evidence that a sim ple litigation hold to preserve existing electronic m ail w ould have placed any burden on defendant. In addition, the Court is troubled that the policy followed in this case is not the sam e document retention policy that defendant publically espouses on its web site and which was discovered by plaintiff in this law suit.
Further, although defendant m ay not have had a duty before the l awsuit was filed to cease the overwrit ing of the backup tapes, it certa inly had a duty to preserve extant em ail folders when it was fir st not ified of the EEO C filing. Such preservation efforts would have
772010 WL 140387 at *4. 78Id. 79Id. 80Id.
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required very little effort; defendant’s technology department could have easily halted the auto- deletion process and a sked all employees who supe rvised plaintiff (not just Kibelkis, Jurgens, and Lipowski) to preserve information. In fact, defendant did just that with apparently minimal effort beginning in October 2008.
C. Harm to Plaintiff
The third factor to determine whether sanctions are appropriate for spoliation is whether or not the plaintif f has been harmed by the de fendant’s breach. Jurgens has adm itted that she deleted emails after December 2008 and, because some of those emails were created before the new ar chival system was put in place, those em ails are now lost. 81 She testif ied that these emails did not seem pertinent to the lawsuit in her view. As a non-lawyer and as an interested party, Jurgens is not qualified to judge whether documents are relevant to the suit. Furthermore, neither Mendenhall nor Rybarczyk, nor any other em ployee besides Jurgens, Lipowski, and
Kibelis, was informed of the need to preserve emails before November 2008. Even if this Court assumes no bad faith on the part of defendant or defendant employees, there remains the distinct possibility that em ails relevant to plaintif f’s case were destroyed by its em ployees. Further, although m any m ore em ails from the 2007-2008 s chool year have been produced since the instant motion was filed, the tardiness of that production ( which was not until May 14, 2010), also has harmed plaintiff.
81Dkt. 44-6 and 44-10, p.4.
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D. Level of Fault
The final factor to determ ine the appropria teness of sanctions and the appropriate level of sanctions is whether the defendant acted wilfully, acted in bad faith, or is m erely at fault. To find bad faith, a court m ust determ ine that the party intended to withhold unfavorable information.82 Bad faith may be inferred when a party disposes of docum ents in violation of its own policies.83 Gross negl igence of the duty to preserve m aterial evidence is generally held to be fault.84
Plaintiff charges that defendant disposed of documents in violation of its own policies and thus dem onstrated bad faith. In response to th is charge, defendant cl aims that emails that contained individual com plaints about plain tiff do not evince defendant’s “organization, function, policies, procedures, and activities.”
There is no evidence that de fendant wilfully chose its doc ument retention system as a way t o mi nimize exposure of potentially relevant docum ents for future lawsuits; indeed, defendant began to preserve m ore data, not less, during these proceedings. However, defendant was grossly negligent in its attem pts to secure relevant docum ents. Defendant reli ed upon its employees–the sam e em ployees whose conduct was at question in the lawsuit–to sel ect t he documents they felt were relevant. These em ployees had no legal training. Furtherm ore, if the employees had racially harassed plaintiff, they would have had both pr ofessional and personal motives for concealing evidence of that harassm ent. I t i s i nconceivable that defendant was
82Mathis, 136 F.3d at 1155. 83Park, 297 F.3d at 615. 84Marrocco v. Gen. Motors, 966 F.2d 220, 224 (7th Cir. 1992).
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unaware of these motives; the fact that defendant still allowed the employees to make their own determinations on relevancy is proof of defendant’s recklessness.
Furthermore, defendant’s failure to obtain docum ents from more than three em ployees at the f irst sign of litigation constitutes gross negligence. Plaintiff’s EEOC com plaint did not name s pecific persons; indeed, defendant adm its in its Position Statem ent to the EEOC that
“absent from this complaint is the identity of the person or persons who have harassed Jones.” 85
However, upon receiving the com plaint in Novem ber 2007, defendant asked only Kibelkis,
Jurgens, and Lipowski to save relevant records. Mendenhall was not asked to preserve re cords until November 2008, eve n though a) Mendenhall was present at a m eeting between plaintiff and Jurgens before Septem ber 27, 2007, 86 b) plaintiff sent Mendenhall a com plaint about
Jurgens in 2006, 87 and c) defendant m entioned Mendenha ll in its Position Statem ent to the
EEOC.88 Because defendant was cl early aware that Mendenhall was one of plaintiff’s supervisors and had received plaintiff’s com plaints, defendant’s year-long failure t o a sk
Mendenhall to preserve relevant docum ents goes beyond ordi nary mi stake into gross negligence. Thus, it is appropriate to find defendant at fault.
Plaintiff also contends, however, that this Court should sanction defendant for spoilation of evidence because it concealed its docum ent retention policy from plaintiff during discovery.
Defendant produced a docume nt (the EDP) a bout its em ail retention procedures, which indicates that staff were free to perm anently de lete emails until October 2008. 89 In response,
85Dkt 59-2. 86Plaintiff’s Original Complaint, dkt 1. 87Id. 88Dkt 59-2. 89Dkt 44-6.
18 Case: 1:08-cv-03548 Document #: 71 Filed: 05/25/10 Page 19 of 21 PageID #:580
plaintiff produced what she contends is defenda nt’s true docum ent retention policy (the DRP) from defendant’ s we bsite, which requires that docum ents, including em ails, which are
“evidence of the District’s organi zation, function, policies, procedures, or activities” be cataloged and saved. 90 She asserts that defendant sought to purposefully hide the DRP because defendant’s actions in deleting em ails about pl aintiff’s work perform ance violated the DRP.
The Court is unconvinced by this argum ent. An individual em ployee’s dissatisf action w ith a coworker does not constitute evidence of def endant’s procedures or activities. However, this
Court does not understand why defendant did not produc e t his broader docum ent retention policy when the Court ordered it to reveal its record retention policies. Because the DRP i s available on defendant’s website, it would be r eadily accessible to adm inistrators and staff.
Because the DRP deals with Freedom of Information Act and other public records requests, it is the sort of docum ent that defendant should ha ve readily on hand. It i s inexplicable that defendant c ould not produce the DRP. This failure is another exam ple of the defendant’s negligence in handling preservation and production of electronic documents in this litigation.
V. Appropriate Sanction
Plaintiff has demonstrated that defendant’s attem pts to preserve evidence were r eckless and grossly negligent. She has dem onstrated that defendant did not reasonably pr event employees from destroying documents concerning this case. She has established that defendant failed to adequately supervise those em ployees who we re asked to preserve docum ents. She also has dem onstrated that s ome relevant em ails were probably lost due to this negligence.
90Dkt 44-9.
19 Case: 1:08-cv-03548 Document #: 71 Filed: 05/25/10 Page 20 of 21 PageID #:581
Finally, she has shown t hat the tardy production of m any more emails after depositions have been taken has caused her prejudice. Plaintiff has not, however, dem onstrated that defe ndant purposefully tried to destroy evidence m aterial to her racial discrimination claim. This is not a case where, for exam ple, there were del iberate attem pts to “wipe” hard drives or to destroy relevant evidence by other technological or m anual me ans.91 Indeed, by October 2008, document preservation efforts were put in place to ensure that all email would be backed up.
The Court has broad discretion to fashion an appropriate sanction to rem edy plaintiff’s prejudice. That sanction should be appropriate to the harm that has been done to plaintiff. 92
Because the Court does not f ind that there w as a deliberate effort to conceal harmful evidence, the Court will not find (as plaintiff urges) that an adverse inference be drawn against defendant
(that email it did not pr eserve contained discriminatory statements). Such an inference, under these facts, would be contrary to established precedent and unfair to defendant.93
However, the Court will grant plaintif f the f ollowing sanctions: 1) the jury in this case should be t old that the defendant had a duty to preserve all em ail concerning plaintiffs’ allegations beginning in November 2007, but di d not do so until October 2008. Acc ordingly, defendant will be precluded f rom arguing that the absence of discriminatory statements from this period (November 2007 until October 2008) is evidence that no such statem ents were made; 2) def endant will be assessed the costs a nd fees of plaintiff’s preparation of the m otion for sanctions; and 3) plaintiff will be permitted to depose witnesses concerning emails produced on May 14, 2010 if it so chooses. De fendant will pay for the cost of the court reporter for those
91See, e.g., Plunk v. Village of Elwood, Ill., No. 07-88, 2009 WL 1444436 (N.D. Ill. May 20, 2009). 92See discussion, supra, pp. 10-11. 93Fass, 532 F.3d at 644.
20 Case: 1:08-cv-03548 Document #: 71 Filed: 05/25/10 Page 21 of 21 PageID #:582
depositions. Plaintif f to subm it a f inal f ee petition af ter these depositions are com pleted.
IT IS SO ORDERED.
ENTERED: May 25, 2010 ______UNITED STATES MAGISTRATE JUDGE Susan E. Cox
21 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 1 of 105
UNITED STATES DISTRICT COURT USDCSDNY SOUTHERN DISTRICT OF NEW YORK DOCUMENT ElECTRONICALLY FILED PASSLOGIX, INC., DOC #: -- I DATE FH.J~!.~: ,-+ I':f'll,c Plaintiff,
- against
2FA_TECHNOLOGY, LLC, 2FA, INC., OPINION AND ORDER GREGORY SALYARDS, and SHAUN CUTTILL, 08 Civ. 10986 (PKL) Defendants.
APPEARANCES
PROSKAUER ROSE LLP Steven M. Kayman, Esq. Dan Goldberger, Esq. 1585 Broadway New York, N.Y. 10036-8299
CADWALADER, WICKERSHAM & TAFT LLP Hal S. Shaftel, Esq. One World Financial Center New York, N.Y. 10281
Attorneys for Plaintiff
LAURENCE SINGER, ATTORNEY-AT-LAW Laurence Singer, Esq. 1629 K Street NW, Suite 300 Washington, D.C. 20006
Attorney for Defendants Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 2 of 105
Table of Contents
BACKGROUND I. Anonymous E-mails II. Investigation Into Authorship of Anonymous E-mails III. Salyards' Defense and "IP Spoofing" Theory IV. Chris Collier's Confession to Sending April 13 E-mail and "Spoofing" Salyards' IP Address V. Expert Testimony Regarding IP Spoofing VI. Evidentiary Hearing in January 2010
DISCUSSION I. Fraud on the Court A. Legal Standard B. Application 1. 2FA Misstates the Fraud on the Court Standard 2. Passlogix has Failed to Establish that Salyards Committed a Fraud on the Court a. Expert Testimony by Obuchowski b. April 13 E-mail i. Evidence Presented by Passlogix ii. Evidence Rebutted by 2FA iii. Passlogix Fails to Present Clear and Convincing Evidence that Salyards Authored the April 13 E-mail c. September 3 E-mail i. Evidence Presented by Passlogix
ll. Evidence Rebutted by 2FA
lll. Passlogix Fails to Present Clear and Convincing Evidence that Salyards authored the September 3 E mail 3. 2FA has Failed to Establish that Passlogix Committed a Fraud on the Court 4. 2FA's Request to Amend Its Complaint to Assert a Claim for Malicious Institution of Civil Proceedings is Denied II. Spoliation of Evidence A. Legal Standard
2 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 3 of 105
1. Duty to Preserve 2. Culpable State of Mind 3. Relevance B. Application 1. June/July Anonymous E-mail a. Duty b. Culpable State of Mind c. Relevance 2. Written Communications between Collier and Salyards a. Duty b. Culpable State of Mind c. Relevance 3. 2FA's Computer and Network Logs from Cuttill's Investigation a. Duty b. Culpable State of Mind c. Relevance C. Remedy for 2FA's Spoliation of Evidence l. Adverse Inference 2 . Evidence Preclusion 3. Costs 4. Monetary Fine CONCLUSION
LEISURE, District Judge:
Plaintiff, Passlogix, Inc. ("Passlogix"l, brings this fraud on the court allegation against defendants Gregory Salyards, 2FA
Technology, LLC, and 2FA, Inc. for creating and sending an anonymous e-mail in an effort to expand discovery, cause
Passlogix competitive harm, and garner a favorable settlement.
3 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 4 of 105
As a remedial measure, Passlogix asks the Court to dismiss 2FA's pleadings and award Passlogix costs and attorneys' fee.
Passlogix also alleges that 2FA engaged in spoliation of evidence and asks for an adverse inference, preclusion, and costs. 2FA counter-alleges that Passlogix committed its own
fraud on the court by bringing its erroneous fraud on the court allegation to delay adjudication on the merits.
The Court held a five-day evidentiary hearing on the issues of fraud on the court and spoliation of evidence and asked the parties to submit post-hearing memoranda. For the reasons set
forth below, the Court holds that neither Passlogix nor 2FA has established by clear and convincing evidence that a fraud on the court was committed. The Court also holds that 2FA's failure to preserve certain documents led to the destruction of evidence in
this case, requiring imposition of a $10,000 monetary fine.
BACKGROUND
Both Passlogix and 2FA Technology, LLC and 2FA, Inc.
(collectively, "2FA") are in the business of developing and
selling security-related software for managing access to
restricted computerized systems. (Pl. Passlogix's Post-Hearing
Mem. ("Mem. rr ) 1.) The instant dispute arises out of Passlogix's
lawsuit against 2FA, and 2FA's principals, Gregory Salyards
("Salyards") and Shaun Cuttill ("Cuttill"), for breach of a
4 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 5 of 105
licensing agreement in which 2FA purportedly agreed to develop identity-authentication software for Passlogix. Passlogix seeks
(1) money damages against 2FA for breach of contract and tortious interference with business relations, and (2) a declaration that (a) it did not breach the licensing agreement or any other duties owed to 2FA or its employees, including
Salyards and Cuttill, (b) 2FA has no valid grounds to terminate the licensing agreement and is obligated to continue abiding by
the agreement, (c) Passlogix has not impermissibly used any
confidential information or intellectual property of 2FA, and
(d) Passlogix does not owe 2FA any money. (Am. Compl. ~~ 20
32.) In its Answer, 2FA asserts counterclaims against Passlogix
for breach of contract, breach of the covenant of good faith and
fair dealing, unfair competition, misappropriation of 2FA's
intellectual property, and tortious interference with business
relations. (Answer & Countercl. ~~ 32-46.)
In addition to the fraud on the court and spoliation
allegations addressed in this decision, also pending before the
Court is 2FA's motion to reverse Magistrate Judge Dolinger's denial of its motion to compel discovery and 2FA's motion for a preliminary injunction against Passlogix. These motions will be
addressed in subsequent decisions.
I. Anonymous E-mails
5 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 6 of 105
The instant dispute was triggered by an anonymous e-mail sent on September 3, 2009, 4:00 p.m. Central Daylight Time
("CDT") from "[email protected]" (the "September 3 e-mail"). The September 3 e-mail was sent to Passlogix's
President and CEO, Marc Boroditsky, Passlogix's Chief Technology
Officer, Marc Manza, two executives at a non-party business
entity, Imprivata, Inc. ("Imprivata"), and Salyards and Cu t t i Ll v '
(Passlogix Exhibit ("PX") 1.) The anonymous author, who purports to have "more than 15 years of development experience" and to have transitioned to Passlogix "earlier this year," asserts that Passlogix issued a "recent mandate to utilise
Imprivat[a] and 2FA information that clearly oversteps. contractual and ethical obligations." (Id. ) The anonymous author claims to be "appalled by the unprofessionalism and unethical behavior undertaken by the Passlogix engineering management organisation" and to "have been treated like a second-class citizen." (Id. ) The September 3 e-mail also includes two attachments that contain specifications to
Passlogix software under development. (See id.; (Evidentiary
Hr'g Tr. ("Tr.") 44:23-45:5.) One attachment is titled "Master
Func Spec v-GO SAW vl.5" and the other is titled "SAW Func Spec
Iteration 2 vl.5." (PX 1; Tr. 45:3-5.)
1 Cuttill never actually received the September 3 e-mail because his e-mail address was misspelled. (Evidentiary Hr'g Tr. ("Tr.") 532:3-11.)
6 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 7 of 105
Passlogix claims that the September 3 e-mail was not the first time that it received an anonymous e-mail from a hushmail.com e-mail address, and that on April 13, 2009, 3:59 p.m. COT, Boroditsky and Mark Gillespie, a Passlogix employee,
received an e-mail from "[email protected]" (the
"April 13 e-mail") . (PX 2.) The April 13 e-mail expresses concern about Passlogix losing "the Wal-Mart deal" and discloses
Salyards' close relationship with "Adnan," a principal
consultant at Deloitte & Touche who was brokering a deal with
Wal-Mart for 2FA. (PX 2; Tr. 417:12-419:6, 542:15-20.) Cuttill
testified that this e-mail was "detrimental to 2FA" because it
"expose[d] a key relationship that [2FA] [was] pursuing to win
the Wal-Mart deal," which "was the only way" for a small company
like 2FA to get "in front of Wal-Mart," and "exposing that
[relationship], in essence, killed [2FA's] opportunity at Wal-
Mart." (Tr. 542:3-14.) In fact, Cuttill testified that after
April 13, Adnan would not return Cuttill's e-mails. (Tr.
542:15-20.)
By letter dated September 14, 2009, counsel to 2FA wrote to
Magistrate Judge Dolinger about the anonymous September 3 e-mail
"because of the seriousness of the allegations set forth in the
email, especially in light of 2FA's present Motion for
Preliminary Injunction, filed on the basis of Passlogix's misappropriation of 2FA's intellectual property." (PX 30 at 2.)
7 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 8 of 105
In a separate letter dated October 27, 2009, Passlogix alleged that Salyards committed a fraud on the Court by authoring and transmitting the September 3 and April 13 e-mails. (PX 33.)
Passlogix alleges that Salyards created and sent these e-mails to expand discovery, cause Passlogix competitive harm, and garner a favorable settlement-all of which constitute a fraud on this Court. (Mem. 6.)
II. Investigation Into Authorship of Anonymous E-mails
Within days of receiving the September 3 e-mail, Passlogix
retained outside counsel to conduct an internal investigation
into the sender of that e-mail and any evidence supporting the
allegations set forth in that e-mail. (Tr. 24:25-25:12, 35:10
36: 3; PX 34.) A report following the internal investigation
concluded that the claims in the September 3 e-mail were false
and that no individual at Passlogix identified any inappropriate
request to utilize intellectual property from third parties.
(PX 34 & 35; Tr. 36:17-22.)
In addition to its internal inquiry, Passlogix subpoenaed
Hushmail.com ("Hush"), the Canadian e-mail service provider
through which the September 3 and April 13 e-mails were sent.
(Tr. 38:5-21.) Hush provided Passlogix with the Internet
Protocol ("IP") address logs for the Hush accounts from which
the anonymous e-mails were sent ("Hush logs"). (PX 48 & 49.)
8 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 9 of 105
"An IP address is a set of numbers . . assigned to a computer in order for it to communicate on a network, which also includes communicating to the outside world; internet, web pages, e-mail as an example." (Tr. 146:20-23.) "An IP log is a log that many companies use to capture the source IP address of the network or computer that's connecting to the service. " (Tr. 154:3
5.) The Hush logs reveal that both the September 3 and April 13 e-mails were sent from the IP address 70.114.246.62. (PX 48 &
49. ) After the April 13 e-mail was sent, Hush captured additional log-ins from the IP addresses 70.114.246.202 and
64.186.161.2. (PX 49.) According to records that Passlogix obtained from Time Warner, the IP address 70.114.246.62 is
registered to Salyards at 2FA's office location while the IP
address 70.114.204.202 is registered to Salyards' wife, at their home address. (PX 40; Tr. 41:1-23, 156:9-20.) The final IP address-64.186.161.2-appears related to the Mark Hopkins Hotel
in San Francisco, where Salyards and Cuttill were staying for a work conference from April 19 - April 24, 2009. (PX 37, 38, 49;
Tr. 42:14-43:21.)
In addition to the Hush logs, Passlogix points to
circumstantial evidence that Salyards authored both anonymous e- mails. Passlogix contends that the timing of each of the
anonymous e-mails is suspect because the April 13 e-mail was
sent during the course of a dispute regarding third party
9 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 10 of 105
discovery subpoenas and the September 3 e-mail was sent one day after Passlogix filed its brief in opposition to 2FA's motion for a preliminary injunction. (De£. , s Ex. ("OX") 1 (Passlogix
Ltr. 11/6/09 at 1-2).) Additionally, Passlogix contends that because the September 3 e-mail was sent less than two weeks prior to the parties' settlement conference before Judge
Dolinger, Salyards sent the e-mail to procure a more favorable settlement from Passlogix. (Mem. 6.) Salyards admits that he referenced the September 3 e-mail in settlement conversations with Boroditsky in the days following the September 3 e-mail.
(See PX 29 ("We have a proposal for you that we feel best serves all concerned" (September 5, 2009); "Our attorney plans on raising the [September 3 e-mail] with the court this week,
I'm in NYC this weekend and would be willing to meet in the event you have a change of heart concerning our recent proposal"
(September 12, 2009)); Tr. 338:20-339:13.) Passlogix further asserts that Salyards has admitted to receiving the confidential information attached to the September 3 e-mail from another anonymous e-mail purportedly sent to him from a Hush e-mail address in late June or early July 2009. (PX 33 at 4 n.1.)
Also, Passlogix claims that Salyards may have received the attachments to the September 3 e-mail from a source within
Passlogix. (OX 1 (Passlogix Ltr. 11/6/09 at 3).)
10 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 11 of 105
Cuttill testified about his own investigation into the
origin of the anonymous e-mails. During the second or third week of September 2009, Cuttill and Salyards visited Hush "to
find out what Hushmail was all about." (Tr. 576:22-577:16.) In
late October or early November 2009-after Passlogix wrote this
Court alleging that Salyards was the author of both anonymous e mails-Cuttill interviewed 2FA employees that he thought would
have had access to 2FA's computer network in April and September
and checked all of 2FA's computers for evidence of the
attachments to the September 3 e-mail, but found no evidence
that anyone at 2FA sent the e-mails. (Tr. 572:16-575:5.)
Cuttill did not take notes during his investigation, nor did he
memorialize his findings in writing. (Tr. 573:15-16.)
III. Salyards' Defense and "IP Spoofing" Theory
Salyards testified under oath at his October 23, 2009
deposition and during the evidentiary hearing in January 2010
that he was not involved in the transmission of either e-mail.
(Tr. 384:25-385:4.) He refutes Passlogix's claim that the
confidential attachments to the September 3 e-mail were
available to him or to 2FA. (DX 1 (2FA Ltr. 10/29/09 at 3-4 &
2FA Ltr. 11/9/09 at 3).) He also maintains that the mere
content of the April 13 e-mail, which discloses a business
opportunity with Wal-Mart that 2FA was pursuing as a competitor
11 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 12 of 105
to Passlogix, eliminates any motive that Salyards would have in sending that e-mail. (DX 1 (2FA Ltr. 10/29/09 at 2-3) .) In arguing that no one at 2FA sent the September 3 e-mail, Salyards points to the use of the letter "s" in the spelling of words such as "organisation" and "utilise" in the e-mail, indicating
British or Canadian authorship. (DX 1 (2FA Ltr. 11/9/09) at 3.)
Salyards notes that the IP address linked to the September
3 e-mail is not assigned to him specifically, but rather to
2FA's office location and is used by every computer sending e- mails from that location. (DX 1 (2FA Ltr. 10/29/09 at 2) .)
Moreover, Salyards contends that he was out with his family and friends at the time the September 3 e-mail was sent at 4:00 p.m.
CDT,2 and submitted affidavits from three individuals, two of whom specifically state that Salyards was with them from approximately 3:15 p.m. until 4:30 or 4:45 p.m. on September 3.
(Id. at 4 & Ex. 2.) 2FA also notes that the anonymous e-mails are not evidence and, notwithstanding the fact that 2FA could have used the allegations in the September 3 e-mail in its reply brief in support of its motion for a preliminary injunction, it did not do so. (DX 1 (2FA Ltr. 11/9/09 at 2) .)
Salyards proffers the affirmative defense of IP spoofing, stating that a Passlogix employee may have "spoofed" his IP
2 There is no dispute that Cuttill was vacationing in Mexico when the September 3 e-mail was sent. (OX 1 (2FA Ltr. 10/29/09 at 4).)
12 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 13 of 105
address in an effort to impersonate him on the internet. (OX 1
(2FA Ltr. 10/29/09 at 1-2).) IP address spoofing is a practice whereby a person can make his true IP address appear to be any address he chooses. (Id. at 1.) 2FA asserts that IP spoofing can be accomplished from anywhere, as long as the impersonator knows a user's IP address. (Id. at 1; see also Tr. 391:22-25
(Salyards defining IP spoofing as "concealing your . IP address . . and perpetrating to be something else when you're
U out on the Internet ) . ) Salyards claims that, based on a decade of specialized training in computer security, including hacking and spoofing IP addresses to conduct "penetration testing" of security solutions, he knows how to conceal his IP address and that had he endeavored to create a fictitious e-mail, he would have ensured that it could not be traced back to him personally or to 2FA. (Tr. 389:3-11, 390:13-393:21; DX 1 (2FA Ltr.
10/29/09 at 2) .)
IV. Chris Collier's Confession to Sending the April 13 E-mail and "Spoofing" Salyards' IP Address
Chris Collier, a former Passlogix employee who has over ten years of experience in the computer security industry, confessed under oath during a December 2, 2009 deposition that he wrote and sent the April 13 e-mail. (Collier Dep. 5:18-6:23, 8:11-14,
61:3-62:5.) Collier testified that he sent the April 13 e-mail
13 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 14 of 105
from his personal laptop computer while he was at 2FA's office without the knowledge of 2FA. (Collier Dep. 60:11-62:11, 76:15
19, 83:11-14.) Because he sent the April 13 e-mail from a wireless access point in 2FA's conference room, Collier did not need to spoof 2FA's IP address to make it appear that the e-mail was sent from 2FA. (Id. 62:4-8, 84:6-8.) After the initial e- mail was sent from 2FA's office, Collier said that he spoofed
2FA's IP address "[s]ix, maybe seven times" to check whether he received any responses to the April 13 e-mail from the e-mail recipients-Boroditsky or Gillespie. (Id. 86:2-4.) During his
subsequent log-ins to Hush, Collier said that he concealed his
IP address by substituting his IP address with "an IP address
from the e-mail headers from Greg [Salyards] ," by using software downloaded from the internet. (Id. 64:22-25, 70:12-21, 86:11
25.) When asked what program he used to spoof Salyards' IP address, Collier responded, "I can't be sure. Probably Mac IP
Change, which is one that I've used many times before. That's the one I used." (Id. 86:23-25.) Collier also testified that
the source of the content of the April 13 e-mail came from
Cuttill, who disclosed to Collier 2FA's efforts to land the Wal
Mart deal during Collier's April 13 visit to 2FA's office. (Id.
108:15-110:15.) Collier no longer has the laptop that he used
to send the April 13 e-mail because he "decommissioned" it and
14 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 15 of 105
gave it to a friend In need. (Id. 108:11-14; PX 45 at CC-OOOA ~
1.)
Cuttill corroborates Collier's account of visiting 2FA's office on April 13. Cuttill recalls being in the office on
April 13 because he was preparing for a work conference ("RSA conference") in California the following week. (Tr. 532:14
533:8.) Cuttill states that Salyards was not in the office because he was watching his children that week since his wife was going to watch them the following week while Salyards was at the RSA conference. (Tr. 533:9-19.) Cuttill states that
Collier arrived at 2FA's offices on April 13 "somewhere around
3:00, give or take maybe 15 minutes" to do work on "Oberthur cards." (Tr. 594:9-595:1; 585:13-19.) After Collier arrived, he and Cuttill "chatted for a little bit," "definitely less than ten minutes, probably less than five minutes," about the Wal
Mart deal. (Tr. 585:20-586:1. 594:12-25.) Then Cuttill set up
Collier with internet in a conference room while Cuttill went to prepare for a 4 p.m. call. (Tr. 585:14-19; 595:1-11.) After
Cuttill's 4 p.m. call was over, he and Collier worked on the
Oberthur cards until 6 or 6:30 p.m. (Tr. 595:9-23.)
Collier testified that he did not send the September 3 e- mail. (Collier Dep. 65:8-17.) He did state, however, that in
June 2009, he had a conversation with another Passlogix employee, Joseph Robinson, who expressed concerns similar to
15 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 16 of 105
those stated in the September 3 e-mail. (Id. 65:18-67:4, 77:17
78:24, 79:7-18.) Collier states that he suggested to Robinson to raise the issue with Boroditsky or, alternatively, send an e- mail through Hush since "[t]hey won't know who you are." (Id.
68:7-16, 98:19-99:21.) Collier says that he told Robinson that he used Salyards' IP address when he sent his own anonymous e mail, though he did not tell Robinson what that IP address was.
(Id. 98:14-18.) Salyards asserts that Robinson fits the profile
of the author of the September 3 e-mail because Robinson lives
in Canada, transitioned to Passlogix in April 2009 from a firm bought by Imprivata, the company mentioned in and copied on the
September 3 e-mail, had fifteen years of technology experience,
and was terminated by Passlogix in October 2009 for unexcused
absences. (DX 19; Tr. 80:7-81:5; PX 53 at 2.)
Passlogix states that Collier's confession to sending the
April 13 e-mail is unreliable since Collier admitted to lying
about his role in the creation of the e-mail when Passlogix
interviewed him as part of its internal investigation. (DX 4 at
2.) Passlogix underscores the secretive business ties Collier
had with Salyards and Cuttill, evidenced by the fact that
Collier testified that Cuttill provided him with the information
used to write the April 13 e-mail. (Id.; Collier Dep. 53:21
54:2, 114:13-115:8, 118:13-19.) Passlogix also points to
inaccuracies in Collier's testimony regarding when and where he
16 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 17 of 105
created the April 13 e-mail account, his Hush account password, and the extent of his communications with Salyards. (DX 4 at
2.) Collier testified that he set up the Hush account "a few days before the e-mail was sent." (Collier Dep. 84:10-12;
85:20-86:1.) However, the Hush logs indicate that the account was set up on April 13, 2009-the same day the e-mail was sent,
just twenty-seven minutes before it was transmitted. (PX 49; PX
44 ~ 6.) Collier also provided a password that he used for the
Hush account, which Hush confirmed was inaccurate. (Collier
Dep. 84: 1 7 - 85 : 19; PX 41 & 4 4 ~ 5.) Collier, however, noted that he could not "remember if that's exactly the password [he] used, because [he had not] been [on the website] for months now."
(Collier Dep. 85:18-19.) Additionally, Collier testified that between April 13 and December 2, 2009, he spoke to Salyards
"[p]robably 15 to 20 times," while phone records from October
2009 alone show that they spoke over thirty times. (Id. 118:13
15; PX 45.) With respect to the September 3 e-mail, Passlogix states that Collier's "suspicions" that Robinson sent that e- mail are inadmissible and unreliable. (Mem. 11.)
v. Expert Testimony Regarding IP Spoofing
The Court qualified Passlogix's expert in computer
forensics and computer crime investigations, Andrew Obuchowski,
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Jr., during a preliminary hearing on November 9, 2009,3 based on
Obuchowski's twelve years of law enforcement experience in computer crime forensics and three years of experience in private computer forensics, including "tracing of e-mails" and
"analysis of how a computer was used . . during the commission of an incident or crime." (Prelim. Hr'g Tr. 33:6-34:20, 36:11
37: 7 . ) Obuchowski has taught computer crime investigations to law enforcement officers and is an adjunct professor at a criminal justice college in Massachusetts. (Id. 33:23-34:5.)
Obuchowski has testified in several court proceedings "regarding computer crime and computer forensics," including IP spoofing.
(Id. 34:6-35:10.)
Obuchowski concludes that spoofing a public IP address assigned by an Internet Service Provider,4 such as Time Warner,
"is not possible to the extent of being undetected" because
"[t]he email message headers would show inconsistencies.
[that] were not present in the email headers" from the April 13 and September 3 e-mails. (PX 36 ~ 15i see also Tr. 153:9-13,
170:15-18.) Obuchowski also concludes that the MAC IP Change program that Collier claimed he used to spoof Salyards' IP
3 At the end of the preliminary hearing, the Court permitted the parties to conduct additional discovery and reconvene for a more fulsome hearing where all relevant witnesses, particularly Salyards, could be present. (Prelim. Hr'g Tr. 61:22-67:9.) , A private IP address is assigned to a user locally. When a user connects to the internet, the internet service provider (ISP)-Time Warner, in this case assigns a public IP address. (Tr. 180:24-181:14.)
18 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 19 of 105
address "does not have the technical capability of changing an
IP address that's assigned by Time Warner to make it appear that you are coming from 2FA's network unless you were actually on
2FA's network." (Tr. 164:6-19.) Obuchowski explains that the
MAC IP Change Program only "changes [the] IP address of the computer that you install the software program on," and is not capable of "spoofing an Internet service provider." (Tr.
242:5-11.) Additionally, Obuchowski concludes that he is not
"aware of" any "software on the market that can be used to spoof an Internet service provider" and that "any software program install[ed] on a local laptop computer . would not change the IP address assigned by an Internet service provider, in the example of Time Warner, that would reflect any change in the
Hushmail logs." (Tr. 242:12-16, 623:17-624:2.) Obuchowski explains that, to access a website on the internet, two computers or networks must be able to communicate with each other. (Tr. 146:20-23.) They do so by sending information back and forth to each other's IP address (the same way a telephone number corresponds to a telephone, an IP address corresponds to a computer and/or network) . (Tr. 146:20-147:3.) Thus, if someone tried to access Hush and conceal his own IP address by spoofing another IP address, Hush would respond by sending information to the computer/network associated with the
"spoofed" IP address, not to the concealed IP address. (Mem.
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10.) As a result, the spoofer would never be able to complete the process of logging into the Hush website or complete any other activity on the Hush website because he would not receive communication back from Hush, as it would instead be directed to the spoofed IP address. (Id.; see also Tr. 615:8-16.)
Obuchowski acknowledges that if Collier sent the April 13 e-mail from 2FA's network, as Collier claims, "then 2FA's IP address would appear in the logs." (Tr. 231:22-25.) However,
Obuchowski states that Collier did not send the April 13 e-mail because Collier was incorrect about when the April 13 Hush account was created and about the password he used to create it.
(Tr. 165:4-166:25, 168:14-20; PX 41.)
Obuchowski created his own Hushmail test account during the course of his investigation, even though he did not mention the test account in either one of his declarations. (Tr. 234:10-24;
PX 36 & 40.) Obuchowski "walk[ed] through the same steps in creating an e-mail account as Mr. Collier claimed that he did" and sent a test e-mail to his work e-mail address. (Tr. 235:1
6.) Obuchowski only used the test account once to see what services Hush offers and what the e-mail headers look like when a Hush e-mail is received. (Tr. 235:12-19.) Obuchowski stated that the test e-mail he sent appeared just like the other e mails sent from the April 13 and September 3 e-mail addresses,
although he did not have a copy of, or a log from, the test e
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mail. (Tr. 235:5-23.) When asked for his password to the Hush account at the evidentiary hearing on January 14, 2010,
Obuchowski could not recall; nor could he recall the date that he created the account, but noted that it would have been before his first declaration, which was dated November 6, 2009. (Tr.
235:24-236:5.)
2FA does not proffer a computer forensics expert in rebuttal; instead, it relies on Salyards' and Cuttill's personal experiences to challenge Obuchowski's conclusion about the unfeasibility of IP spoofing. Salyards testified that he has twelve years of experience in computer forensics and computer security, including hacking and spoofing, and has spoofed IP addresses to conduct "penetration testing" of security solutions as part of his work and that he knows how to conceal his IP address. (Tr. 388:19-389:11, 390:13-392:18.) Cuttill, 2FA's
Chief Technology Officer, has fourteen years of experience in strong authentication computer software. (Tr. 519:19-521:9.)
Cuttill testified that he has spoofed IP addresses by concealing his own IP address and selecting an IP address that belonged to a company's internal network. (Tr.565:9-567:17.) Cuttill also said that, contrary to Obuchowski's conclusions, he has spoofed a public IP address that has been assigned by an Internet
Service Provider, such as Time Warner, as part of security analysis projects. (Tr. 589:25-591:20.) He said he typically
21 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 22 of 105
spoofs "by hand" but has used software that helps with encryption matters. (Tr. 591:5-9.) Although he has never used the MAC IP Change program to spoof an IP address, Cuttill noted that there are "a number of programs that are called very similar to that." (Tr. 591:21-592:11.)
Cuttill and Salyards also contend that the Hush logs exonerate Salyards because the Mark Hopkins Hotel, where they stayed from April 19 to April 24, 2009, never assigned Salyards an IP address ending in ".2"-the IP address that the Hush logs captured. (Def.'s Opp'n to Pl. Passlogix's Post-Hearing Mem.
("Opp' n Mem.") 18.) The Hush logs captured two log-ins to Hush from the IP address 64.186.161.2-the first on April 20 at 10:30 a.m. Pacific Daylight Time ("PDT") and the second on April 23 at
10:15 p.m. PDT. (PX 49 (emphasis added).) The Mark Hopkins
Hotel records indicate that Salyards purchased a higher level of service ($15.95) at the time of the first log in. (PX 49 at IHG
3.) This higher level of service, which was purchased from
Salyards' computer (MAC Address 00:21:70:A9:54:51),5 assigned
Salyards' computer an IP address of 64.186.161.12. (PX 38 at
IHG 3 (emphasis added).) Also during the time of the first log in, another room at the Mark Hopkins Hotel-which Salyards paid for-used a computer with a different MAC Address
S A MAC address is a physical address associated with a computer's unique network adaptor. (Tr. 193:9-10.)
22 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 23 of 105
(00:21:9B:E1:BD:5F) to purchase a lower level of internet service ($12.95) that did not assign a specific IP address. (PX
38 at IHG 7.) The second log-in on April 23, 2009, 10:15 p.m.
PDT, occurred when a lower level of service ($12.95) was purchased through Salyards' computer (MAC Address
00:21:70:A9:54:51) . (See PX 38 at IHG 4.)
Obuchowksi acknowledges that the IP address 64.186.161.12, which was assigned to Salyards when he purchased a higher level of internet service at the Mark Hopkins Hotel, is not reflected in the Hush logs. (Tr. 191:1-15.) He reconciles this discrepancy by explaining that, when a lower level of service is purchased, the Mark Hopkins Hotel assigns its own IP address through a public IP service; therefore, the .2 IP address reflected in the Hush logs must have been the public IP address that the Hotel assigned when the lower level of service was purchased by the non-Salyards MAC address on April 20 and by the
Salyards MAC address on April 23. (Tr. 191:9-22, 240:17
241:16.)
VI. Evidentiary Hearing in January 2010
The Court held an evidentiary hearing on January 13, 2010, intended to last no more than a day and a half, but which went on for five days. At the hearing, Passlogix proffered two arguments: (1) the Hush logs, Mark Hopkins Hotel records, and
23 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 24 of 105
other circumstantial evidence establish that Salyards committed a fraud on the court by (a) transmitting the September 3 e-mail to procure a better settlement from Passlogix and cause
Passlogix commercial harm, (b) transmitting the April 13 e-mail as pretext to obtain third party discovery, and (c) orchestrating Collier's confession to writing the April 13 e mail; and (2) 2FA engaged in spoliation of evidence by failing to implement a litigation hold policy at the onset of this litigation, leading to the destruction of relevant documents.
(Tr. 8:4-12:1.) In support of its position, Passlogix presented live testimony from Boroditsky, Manza, Scott Bonnell, and
Salyards. It also presented live expert testimony from
Obuchowski and Doug Brush, who the Court qualified on a limited basis as an expert in computer forensics. (Tr. 481:8-482:1.)
As a remedy for Salyards' alleged fraud on the court, Passlogix asks the Court to dismiss 2FA's pleadings and award Pass10gix costs for its investigation into the authorship of the e-mails.
(Mem. 35.) Passlogix also requests an adverse inference, preclusion, and costs for 2FA's alleged spoliation of evidence.
(Id. 33-34.)
2FA asserts the following claims and affirmative defenses:
(1) Collier's admission to writing the April 13 e-mail and spoofing Salyards' IP address subsequent to sending that e-mail vindicates Salyards; (2) there is circumstantial evidence
24 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 25 of 105
pointing to Robinson as the author of the September 3 e-mail;
(3) Passlogix, not 2FA, committed a fraud on the court by submitting both anonymous e-mails to the Court with a bad faith intent to delay adjudication on the merits; and (4) no spoliation of evidence occurred because the documents that
Salyards did not preserve were not evidence when they were deleted and, even if they were evidence, they would have been helpful to 2FA, not Passlogix. (Opp' n Mem. 1, 5, 8, 29.) 2FA presented live testimony from Cuttill and Boroditsky, in addition to Dr. Alan Perlman, from whom the Court heard testimony but declined to qualify as an expert in linguistics.
(Tr. 259:14-260:5, 261:1-8.) 2FA asks the Court to dismiss
Passlogix's claims with prejudice and award 2FA relief, including but not limited to reimbursement for the costs incurred to defend itself and Salyards, which, as of January 21,
2010, totaled approximately $200,000. (Opp'n Mem. 35; Tr.
569:10-18.)
DISCUSSION
The Court first addresses whether either party has established that its adversary committed a fraud on the court.
Then the Court turns to Passlogix's allegation that 2FA engaged in the spoliation of evidence.
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I. Fraud on the Court
Passlogix fails to establish that Salyards committed a fraud on the court. Likewise, 2FA fails to establish that
Passlogix committed a fraud on the court and, therefore, is not entitled to amend its counterclaims to assert a malicious prosecution claim against Passlogix. In reaching these conclusions, the Court first addresses the legal standard for fraud on the court. Then the Court explains why each party has failed to demonstrate that its adversary committed a fraud on the Court.
A. Legal Standard
A fraud on the court occurs where it is established by clear and convincing evidence "that a party has sentiently set in motion some unconscionable scheme calculated to interfere with the judicial system's ability impartially to adjudicate a matter by . . unfairly hampering the presentation of the opposing party's claim or defense." McMunn v. Mem'l Sloan
Kettering Cancer Ctr., 191 F. Supp. 2d 440, 445 (S.D.N.Y. 2002)
(quoting Aoude v. Mobil Oil Corp., 892 F.2d 1115, 1118 (1st Cir.
1989)); see also Hargrove v. Riley, No. 04 Civ. 4587, 2007 U.S.
Dist. LEXIS 6899, at *36 (E.D.N.Y. Jan. 31, 2007); Shangold v.
Walt Disney Co., No. 03 Civ. 9522, 2006 WL 71672, at *4
(S.D.N.Y. Jan. 12, 2006); Intelli-Check, Inc. v. Tricorn Card
26 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 27 of 105
Techs., Inc., No. 03 Civ. 3706, 2005 WL 3533153, at *11
(E.D.N.Y. Dec. 22, 2005); Scholastic, Inc. v. Stouffer, 221 F.
Supp. 2d 425,439 (S.D.N.Y. 2002). The essence of fraud on the court is "when a party lies to the court and his adversary intentionally, repeatedly, and about issues that are central to the truth-finding process." McMunn, 191 F. Supp. 2d at 445.
Fraud on the court, therefore, does not merely "embrace any conduct of an adverse party of which the court disapproves;" rather, it "embrace[s] only that species of fraud which does or attempts to, defile the court itself." Kupferman v. Consolo
Research & Mfg. Corp., 459 F.2d 1072, 1078 (2d Cir. 1972)
(Friendly, C.J.) (citation and internal quotation marks omitted)
(discussing fraud on the court in the context of a Rule 60(b) motion). Consequently, "an isolated instance of perjury, standing along, will not constitute a fraud upon the court."
McMunn, 191 F. Supp. 2d at 445; see also Jung v. Neschis, No. 01
Civ. 6993, 2009 WL 762835, at *21 (S.D.N.Y. Mar. 23, 2009);
Skywark v. Isaacson, No. 96 Civ. 2815, 1999 WL 1489038, at *14
(S.D.N.Y. Oct. 14, 1999). "Rather, fraud upon the court 'occurs where a party has acted knowingly in an attempt to hinder the fact finder's fair adjudication of the case and his adversary's defense of the action.'" McMunn, 191 F. Supp. 2d at 445
(quoting Skywark, 1999 WL 1489038, at *14).
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The Court has inherent authority "to conduct an independent investigation in order to determine whether it has been the victim of fraud." Chambers v. NASCa, Inc., 501 U.S. 32, 44, 111
S. Ct. 2123, 115 L. Ed. 2d 27 (1991); see also Universal Oil
Prods. Co. v. Root Ref. Co., 328 U.S. 575, 580, 66 S. Ct. 1176,
90 L. Ed. 1447 (1946). "Because of their very potency, inherent powers must be exercised with restraint and discretion."
Chambers, 501 U.S. at 44. The Court's inherent powers serve "to do whatever is reasonably necessary to deter abuse of the judicial process and assure a level playing field for all litigants." Shangold, 2006 WL 71672, at *4.
If it is shown by clear and convincing evidence that a party perpetrated a fraud on the Court, the Court may consider the following five factors in determining an appropriate sanction: (i) whether the misconduct was the product of intentional bad faith; (ii) whether and to what extent the misconduct prejudiced the injured party; (iii) whether there is a pattern of misbehavior rather than an isolated instance; (iv) whether and when the misconduct was corrected; and (v) whether further misconduct is likely to occur in the future. See
Shangold, 2006 WL 71672, at *4; Intelli-Check, 2005 WL 3533153, at *11; Scholastic, 221 F. Supp. 2d at 444; McMunn, 191 F. Supp.
2d at 461. When faced with a fraud on the court, "[t]he available sanctions at a court's disposal. . range from the
28 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 29 of 105
B. Application
First, the Court explains the showing required to establish a fraud on the court claim. Next, the Court applies the fraud on the court standard in holding that neither Passlogix nor 2FA has demonstrated that its adversary committed a fraud on the court by its conduct in this litigation.
1. 2FA Misstates the Fraud on the Court Standard
2FA insists that "[i]t is essential - it is the foundation of fraud on the court - that the party accused first submits evidence, evidence that eventually is found to be fraudulent or fabricated. Otherwise there cannot possibly be fraud on the
Court." (Opp' n Mem. 4.) 2FA argues that although it wrote a letter to Magistrate Judge Dolinger dated September 14, 2009, bringing the anonymous misappropriation claims in the September
3 e-mail to Judge Dolinger's attention, it never attached the
September 3 e-mail and, thus, did not "submit" evidence. (Id. )
Instead, 2FA states that it was Passlogix that "submitted" both
29 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 30 of 105
anonymous e-mails by attaching them as exhibits to Passlogix's
October 27, 2009 letter to this Court. (Id. 1.) Moreover, 2FA asserts that neither anonymous e-mail constitutes "evidence" under the Federal Rules of Evidence. (Id. 4.) Since Passlogix cannot make this threshold showing, 2FA insists that Passlogix's
fraud on the court allegation fails as a matter of law. (Id. )
2FA misinterprets the requirements necessary to establish a
fraud on the court. 2FA provides the holdings of five fraud on
the court cases, which, as 2FA states correctly, sanctioned parties for "submitting" actual "evidence" to the court. See
Hargrove, 2007 U.S. Dist. LEXIS 6899, at *11, *38 (dismissing plaintiff's claims with prejudice where plaintiff provided
fraudulent documents to defendants during discovery and attached
said documents as exhibits to his complaint and his affidavit in
opposition to defendant's motion for summary judgment);
Shangold, 2006 WL 71672, at *5 (dismissing plaintiff's misappropriation case with prejudice and awarding costs and
attorneys' fees to defendants where plaintiffs "fabricated
evidence and manipulated the judicial process"); Scholastic, 221
F. Supp. 2d at 444 (granting plaintiff's motion for sanctions
where defendant "perpetuated a fraud on the Court through her
submission of fraudulent documents [as exhibits to her
counterclaims] as well as her untruthful testimony"); McMunn,
191 F. Supp. 2d at 452, 454, 462 (dismissing plaintiff's action
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with prejudice and awarding monetary sanctions where plaintiff perpetuated a fraud on the court by tampering with evidence and repeatedly providing false testimony); Cerruti 1881 S.A. v.
Cerruti, Inc., 169 F.R.D. 573, 574 (S.D.N.Y. 1996) (granting plaintiffs' motion to strike defendants' answer and all but one
counterclaim and awarding plaintiffs costs and attorneys' fees where defendants, through their principal, fabricated evidence and offered false testimony). As these cases demonstrate,
submitting false evidence to a court may rise to the level of a
fraud on the court; however, it is not the only way to commit a
fraud on the court. A fraud on the court occurs where a party:
(1) "improperly influence[es] the trier," McMunn, 191 F. Supp.
2d at 445 (citation and internal quotation marks omitted); (2)
"unfairly hamper[s] the presentation of the opposing party's
claim or defense," Id. (citation and internal quotation marks
omitted); (3) "lies to the court and his adversary
intentionally, repeatedly, and about issues that are central to
the truth-finding process," Id.; or (4) "knowingly submit[s]
fraudulent documents to the Court," Scholastic, 221 F. Supp. 2d
at 443.
Given this clarification, the Court holds that even if the
anonymous e-mails are not "evidence" under the Federal Rules of
Evidence and 2FA did not "submit" the e-mails to the Court,
these two facts do not obviate the need for the Court to
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determine whether 2FA engaged in an "unconscionable scheme" to interfere with the adjudication of this case by unfairly hampering Passlogix's claims or defenses or by lying to the court and Passlogix about issues central to the case. See
Hargrove, 2007 u.S. Dist. LEXIS 6899, at *36; Scholastic, 221 F.
Supp. 2d at 439; McMunn, 191 F. Supp. 2d at 445; Skywark, 1999
WL 1489038, at *14. Below, the Court analyzes whether a fraud on the court has been established.
2. Passlogix has Failed to Establish that Salyards Committed a Fraud on the Court
Passlogix has failed to present clear and convincing evidence that Salyards authored the April 13 and September 3 e- mails and used them to commit a fraud on the Court. Below, the
Court first addresses the testimony offered by Passlogix's expert, Obuchowski, and determines to what extent to credit his conclusions. Then, the Court analyzes the evidence that
Passlogix submits in support of its claim, and explains why, in totality, the evidence does not meet Passlogix's burden of proof.
a. Expert Testimony by Obuchowksi
"[A]n expert testifying on the basis of experience may form his conclusions by applying his extensive experience to the
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facts of the case." In re Methyl Tertiary Butyl Ether Prods.
Liab. Litig., No. M21-88, 2008 WL 1971538, at *10 (S.D.N.Y. May
7, 2008); see also Kumho Tire Co., Ltd. v. Carmichael, 526 u.s.
137, 152, 119 S. Ct. 1167, 143 L. Ed. 2d 238 (1999). Where, as here, an expert's "qualifications and testimony rest on his
. experience and not on scientific, mathematical or social science studies or calculations, [the expert] must . apply his experience to the facts using the same intellectual rigor a professional [in his field] would use in practice." In re Methyl, 2008 WL 1971538, at *10; see also Kumho, 526 u.s. at
152 ("[A]n expert, whether basing testimony upon professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field."). Contentions that the expert's "'assumptions are unfounded go to the weight, not the admissibility, of the testimony.'" In re Methyl, 2008 WL
1971538, at *12 (quoting Boucher v. u.s. Suzuki Motor Corp., 73
F.3d 18, 21 (2d Cir. 1996)); see also McCullock v. H.B. Fuller
Co., 61 F.3d 1038, 1044 (2d Cir. 1995) (McLaughlin, J.)
(stating, with respect to a scientific expert, that "[d]isputes as to the strength of [the expert's] credentials, faults in his use of . [a particular] methodology, or lack of textual authority for his opinion, go to the weight, not the admissibility, of his testimony").
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Where, as here, the Court acts as the trier of fact, it uses "the discretion given to it . [to] parse and evaluate the evidence for its weight and worth." United States v.
Alcan Aluminum Corp., No. 03 Civ. 0765, 2006 U.S. Dist. LEXIS
39042, at *4 (N.D.N.Y. June 9, 2006); see also New York v.
Solvent Chem. Co., Inc., No. 83 Civ. 1401C, 2006 U.S. Dist.
LEXIS 65595, at *4 (W.O.N.Y. Sept. 14, 2006) ("[T]he concerns expressed in Daubert and Kumho Tire about the need for the trial court to guard against the admission of unreliable scientific or technical evidence are not implicated in a non-jury trial.")
Pursuant to its role as factfinder, the Court may credit an expert's testimony in whole or in part, regardless of whether another expert is called in rebuttal. See Giles v. Rhodes, 171
F. Supp. 2d 220, 226, 230 (S.D.N.Y. 2001) (denying plaintiff's motion for a new trial where jury had the power to refuse to credit plaintiff's expert's opinion, even though another expert was not called to rebut it); accord Leonard B. Sand, et al., 4
Modern Federal Jury Instructions-Civil ~ 76-9 cmt. ("[E]xpert testimony is designed to assist the jury to reach an independent decision on the facts, and . is not a substitute for the jury's common sense evaluation of the evidence." (emphasis in original) ) .
While the Court credits much of Obuchowski's expert
testimony, it declines to credit some of his ultimate
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conclusions. The Court credits Obuchowksi's conclusions that, in his experience, (1) he has not come across software capable of doing the kind of IP spoofing that is alleged here, and (2) the MAC IP Change Program is incapable of doing the kind of IP spoofing that is alleged here. However, the Court declines to credit Obuchowski's broader conclusion that spoofing an IP address assigned by an internet service provider ("ISP")-the type of spoofing that is alleged to have been done here-is technologically impossible. (See Passlogix's Post-Hearing Reply
Mem. ("Reply Mem.") 4 ("Obuchowski's conclusions are unrebutted that IP address spoofing is not technologically feasible here rr (emphasis in original)).) This conclusion is contradicted by Obuchowski's initial declaration, which states that "spoof[ing] the IP address in order for it to appear as
70.114.246.62 is extremely difficult and highly improbable," rather than impossible. (PX 36 en 14.) Similarly, at the preliminary hearing, Obuchowski equivocated about whether it is possible to spoof an IP address assigned by an ISP. (See
Prelim. Hr'g Tr. 39:13-17 ("[B]ecause an IP address is already assigned by an Internet service provider to a company or to an individual, . it's very difficult, if at all, to spoof that because that IP address is assigned." (emphasis added)).)
Obuchowski's more nuanced conclusion that "IP spoofing of an
[ISP] IP address is not possible to the extent of being
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undetected" also is problematic because Obuchowski does not explain what kind of "inconsistencies" would appear in the
"email message headers." (PX 36 ~ 15 (emphasis added).)
Obuchowski states that "jumps" in the e-mail headers are "one attribute" that "would lead [one] to believe that . potential IP spoofing existed"; however, he does not explain what a "jump" might look like in the e-mail headers here or whether there are other indicia of spoofing that he considered and concluded did not exist in the e-mail headers. (Prelim.
Hr'g Tr. 40:12-14.) Also, there is personal experience testimony contradicting Obuchowski's conclusion that spoofing an
IP address assigned by an ISP is technologically impossible, albeit by interested lay parties. Both Salyards and Cuttill testified to having spoofed IP addresses in their personal experience and Cuttill specifically testified to spoofing a public IP address assigned by an ISP. (Tr. 389:3-11, 390:13
392:3, 565:9-567:17, 589:25-591:25.)
The Court also finds Obuchowski's conclusions regarding how the Mark Hopkins Hotel assigns and routes IP addresses inconclusive at best, as Obuchowski admits that his conclusions are not based on personal knowledge about the Hotel's IP address routing practices. (See Tr. 213:20-21 ("How the hotel is assigning [its] IP addresses and their uses that they use them for, I do not know."), 618:5-11 (stating that "Mark Hopkins did
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not supply information in the records" regarding its IP address routing practices and that he is "not sure exactly how Mark
Hopkins is routing traffic").)
While the Court does not form its own judgment regarding whether spoofing an IP address assigned by an ISP is technologically feasible, it holds that Obuchowki's equivocating statements and inconsistencies noted elsewhere in this decision lead the Court to decline to credit his conclusion that such spoofing is impossible.
b. April 13 E-mail
The substance of the April 13 e-mail primarily relates to
Wal-Mart, a Passlogix customer with whom Passlogix was finalizing an agreement. (PX 2; Mem. 16.) The e-mail also references Oracle, as well as an executive, Adnan, from Deloitte
& Touche-all companies that 2FA was seeking to subpoena in connection with the underlying litigation. (PX 2; Mem. 16.)
The anonymous author of the April 13 e-mail claims that
Passlogix is in jeopardy of losing the Wal-Mart account because a certain Passlogix executive was leaking Passlogix's information. (PX 2.) The e-mail also references 2FA and claims that Adnan "has a lot of respect for [SalyardsJ" and states that
"[h]opefully Passlogix's legal issues will not spillover to
[the Wal-MartJ account." (Id. ) Passlogix considered the April
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13 e-mail when investigating the September 3 e-mail because the
April 13 e-mail is "the only other anonymous, Hush email that
Passlogix management has ever received." (Mem. 3.) Passlogix's stated purpose in introducing the April 13 e-mail "is to reveal a pattern of misconduct, and thereby corroborate Salyards' culpability for the critical September 3 Email." (Id. 15.)
i. Evidence Presented by Passlogix
Passlogix's strongest evidence that Salyards authored the
April 13 e-mail are the logs that Passlogix subpoenaed from
Hush, which indicate that the April 13 e-mail was sent from
2FA's office IP address. (See PX 49.) Passlogix contends that
"the April 13 Hush Log reflects IP addresses that notably shift
from Salyards' office to his home in Austin; from Austin to a
specific San Francisco hotel, where he stayed while attending a
conference; and then back to Austin." (Mem. 17.) Passlogix
notes that each log-in to Hush syncs "precisely to Salyards' moving whereabouts": from work (April 13, 6:15 p.m. COT), to home (April 13, 10:38 p.m. COT), to work (April 14, 3:19 p.m.
COT), to work again (April 15, 8:58 p.m. COT), to work again
(April 16, 10:29 a.m. COT), to work again (April 17, 10:31 a.m.
COT), to San Francisco (April 20, 10:30 a.m. PDT), to San
Francisco again (April 23, 10:15 p.m. PDT), and back to work
(April 27, 1:26 p.m. COT). (Mem. 17-18; PX 49.) Passlogix
38 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 39 of 105
insists that "the likelihood that a spoofer would be able to
accurately capture the[se] different IP addresses . is not
credible." (Mem. 18.)
Passlogix points to timing and motive for corroboration,
stating that Salyards sent the April 13 e-mail to Boroditsky and
Gillespie to gain leverage in a discovery dispute in which 2FA
sought to serve third-party subpoenas on business entities with
whom Passlogix has commercial relationships. (See Mem. 15-16.)
Passlogix contends that the un rebutted testimony of its expert,
Obuchowski, confirms that the Hush logs and the records from the
Mark Hopkins Hotel provide dispositive evidence that Salyards
authored the April 13 e-mail. (See Mem. 2-3; PX 36,38, & 44;
Tr. 153:9-13.)
Passlogix also presents evidence contradicting Collier's
confession to sending the April 13 e-mail. Obuchowski states
that Collier did not send the April 13 e-mail because Collier
was incorrect about when the April 13 Hush account was created
and about the password he used to create it. (Tr. 165:4-166:25,
168:14-20; PX 41.) Obuchowski also states that the MAC IP
Change program that Collier recalled using to conceal his IP
address "does not have that capability." (Tr. 164:7-11.)
Moreover, Obuchowski concludes "that there is no evidence of IP
spoofing as being claimed" because the spoofing that 2FA alleges
39 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 40 of 105
would have left evidence in the header of the April 13 e-mail, which is not present. (Tr. 153:9-13, 170:15-18; PX 36 To further discredit Collier's admission, Passlogix points to Collier's activities during the time period when the April 13 e-mail was sent. First, Doug Brush, who the Court qualified on a limited basis as an expert in computer forensics (Tr. 481:8 482-1), testified that on April 13, 2009, between 3:25 p.m. and 4:55 p.m. COT, when Collier claims to have been at 2FA's office, there is evidence of computer user activity on Collier's work laptop under his username, including a printer installation. (Tr . 482: 1 7- 21; PX 55.) Brush also found evidence of web browsing on Collier's work laptop during this time period. (Tr. 483:19-484:4.) Second, Passlogix contends that Collier was e- mailing a Passlogix employee, Jennifer Kilmer, through his Passlogix e-mail account during the time that he claims to have been at 2FA's office. (Tr. 49:16-51:11; PX 56.) Third, Passlogix argues that Collier's phone records indicate that Collier was on a thirteen-minute phone call with Salyards on April 13 between 3:02 and 3:15 p.m. COT, which contradicts Cuttill's testimony that Collier arrived at 2FA's office around 3:00 p.m. and that the two spoke for "about ten minutes or less." (Tr. 594:9-25; PX 45 at CC10, Item 212.) Fourth, Passlogix argues that Collier would not have had enough time to set up the Hush account and send the e-mail because Collier was 40 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 41 of 105 on a sixteen-minute phone call with a Passlogix employee, Stephan Wardell, during the time frame that the Hush account was being set up. (Tr. 167:1-168:13; PX 45 at CC10, Item 213.) ii. Evidence Rebutted by 2FA 2FA rebuts Passlogix's evidence that Salyards authored the April 13 e-mail. First, 2FA maintains that the mere content of the April 13 e-mail, which discloses a business opportunity with Wal-Mart that 2FA was pursuing as a competitor to Passlogix, eliminates the possibility that Salyards-the President, CEO, and co-founder of 2FA-would have sent it to Passlogix. (Opp'n Mem. 9; Tr. 385:22-25.) Second, 2FA contends that Collier's sworn confession to writing the April 13 e-mail discredits any suggestion that Salyards authored it. (Opp'n Mem. 9.) Collier's motive for sending the April 13 e-mail supports this conclusion. Collier testified-and Cuttill confirmed-that he learned about 2FA competing for the Wal-Mart opportunity from Cuttill during a visit to 2FA's office. (Collier Dep. 108:15-110:15; Tr. 536:22 537:16.) Collier explained that, prior to his employment at Pass10gix, he "spent and invested a lot of time and energy into the Wal-Mart account" and felt that the "deal was extremely important to the success of Passlogix," especially after just transitioning from a company that went out of business, so he 41 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 42 of 105 sent the e-mail to "warn[] Passlogix about threats at Wal-Mart." (Collier Dep. 61:15-16, 76:20-77:13). Third, 2FA refutes Obuchowski's conclusions regarding the implausibility of IP spoofing. Collier testified that he is familiar with Hush and IP spoofing. (See Collier Dep. 107:8-14 (stating that although he had "not used Hush in years" prior to sending the April 13 e-mail, he has used Hush "three or four times before . . to send secure e-mail.").) Collier explained that he was aware that Hush tracks the IP addresses that interact with it [b] ecause it's kind of the second half of the equation. [A]nyone in the security industry I hope would know that . an anonymous e-mail service with the big disclaimer that says it at the bottom of their home page before you log on, you have to know that you're not truly anonymous unless you change that [IP] address. (Id. 107:22-108:10.) Collier testified that he did not spoof 2FA's IP address when he sent the April 13 e-mail since he sent the e-mail from 2FA's office network. (Collier Dep. 62:4-11, 76:15-19, 83:11-14, 84:6-8.) Obuchowski acknowledges that if Collier sent the April 13 e-mail from 2FA's network, "then 2FA's IP address would appear in the logs." (Tr. 231: 22-25.) To explain why the Hush logs appear to track Salyards' movement from work, to home, to the Mark Hopkins Hotel, 2FA points to Collier's testimony, which explains that in signing on to Hush 42 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 43 of 105 following the April 13 e-mail, Collier used an IP address "from the e-mail header properties of an e-mail that [he] had from 2FA." (Collier Dep. 87:16-18, 70:12-21.) When asked whether he used the same IP address every time he logged on to Hush, Collier responded that he "was less interested in the exact numbers than . . that it came from the same source, which would have been, unfortunately, Greg Salyards[] at the time." (Id. 87:21-88:1.) Collier then reiterated that he used "the same IP address or range of IP addresses based upon a 2FA e- mail." (Id. 88:18-89:1.) Collier's only stated reason for using Salyards' IP address was that he sent the April 13 e-mail from 2FA's "IP address the first time and just to maintain. the same thing. It wasn't relevant. It didn't seem relevant." (Id. 88:2-12.) Cuttill also suggests that Collier may have had a typo when spoofing Salyards' Mark Hopkins Hotel IP address ending in .12, resulting in the .2 IP address logged by Hush. (Tr. 602:16-603:2.) Moreover, Salyards challenges Passlogix's assertion that the Hush logs track his "exact geographical location," (Mem. 18), since Passlogix has not introduced evidence that Salyards actually was at home or at his office during the times captured by Hush. For instance, the Hush log from April 15, 8:58 p.m. CDT indicates that the account was accessed from Salyards' work IP address at a time when, if 43 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 44 of 105 compared to the other work entries captured by Hush, Salyards would have been at home. (PX 49.) With respect to the gaps in Collier's testimony, 2FA contends that Collier said that he did not remember if the Hush password he provided Passlogix was "exactly the password [he] used, because [he had not] been there for months now." (Collier Dep. 85:18-19.) Collier also said that he "can't be sure" that the MAC IP Change program was indeed the program he used to spoof Salyards' IP address to log on to Hush after April 13. (Id. 86:23-25.) Collier does not have the laptop that he used to send the April 13 e-mail to corroborate his sending of the e mail because he "decommissioned" it and gave it "to a friend in need." (PX 45 at CC-OOOA; see also Collier Dep. 108:11-14.) Fourth, 2FA insists that the Mark Hopkins Hotel records exonerate Salyards since they show a different IP address than the one indicated on the Hush logs. (Opp'n Mem. 18.) Specifically, the Mark Hopkins Hotel records indicate that, over the course of Salyards' five-night stay, two levels of internet services were purchased for the rooms Salyards paid for: a higher level, which assigned the guest a specific IP address, and a lower level, which did not assign a specific IP address. (PX 38.) When the higher level of service was purchased from April 20 - April 23, 2009, the rooms that Salyards paid for were assigned two IP addresses: 64.186.161.12 and 64.186.161.57. 44 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 45 of 105 (Id.) The Hush logs, however, document two log-ins to Hush from a slightly different IP address-64.186.161.2-on (1) April 20, 10:30 a.m. PDT, and (2) April 23, 10:15 p.m. PDT. (PX 49.) 2FA claims that the Hush logs exonerate Salyards because the Mark Hopkins Hotel never assigned Salyards an IP address ending in ".2"-the IP address the Hush logs captured. (Opp'n Mem. 18.) Obuchowski attempts to reconcile this inconsistency by insisting that "[t]he IP address of .2 and .12 both resolve back to the Mark Hopkins Hotel." (Tr. 213:9-10.) Obuchowski states that it is common for hotels to have multiple IP addresses "facing the Internet," such that when a guest purchases a lower level of internet service that does not assign a particular IP address, the guest is routed to one of the hotel's available IP addresses-in this case, the .2 IP address that Hush captured. (Tr. 191:9-22, 240:17-241:16, 614:3-15.) Obuchowski admits, however, that his explanation is no more than a guess that is not grounded in the facts or evidence presented in this case. (See Tr. 213:20-21 ("How the hotel is assigning [its] IP addresses and their uses that they use them for, I do not know.").) When asked whether there was "any evidence from Mark Hopkins that indicates that traffic in this particular situation was routed outward using a different IP address than .2, or .12," Obuchowski acknowledged that "Mark Hopkins did not supply [this] information in the records" and that he is "not sure 45 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 46 of 105 exactly how Mark Hopkins is routing traffic other than that they are using the .12 for web-based traffic." (Tr. 618:1-11.) While Obuchowski's theory is grounded in his "experience in conducting hundreds of investigations, including several hotels," none of those hotels includes the Mark Hopkins. (Tr. 618:6-7.) 2FA also challenges Obuchowski's "re-routing" theory by pointing to several e-mails from Salyards to Cuttill between April 20 and April 22, 2009, all originating from Salyards' Mark Hopkins Hotel IP address ending in .12, not .2. (OX 7 at 11015 20; Tr. 598:21-600:17.) Fifth, 2FA refutes Passlogix's contention that Collier was engaged in activities that would have prevented him from sending the April 13 e-mail. With respect to evidence of Collier installing a printer on his Passlogix laptop while he claims to have been at 2FA, Collier made clear that he sent the April 13 e-mail from his personal, not Passlogix, laptop. (Collier Oep. 62:6-8; Opp'n Mem 21.) The fact that a printer was being installed and websites were visited on Collier's work computer at the time Collier claims to have been at 2FA does not mean that Collier could not have sent the April 13 e-mail from 2FA's office using his personal computer. While Passlogix contends that Collier was e-mailing Jennifer Kilmer from Collier's Passlogix e-mail account at the time he claims to have been at 2FA's office writing and transmitting the April 13 e-mail, 46 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 47 of 105 Cuttill clarified-and the Court agrees-that Collier's e-mail correspondence with Kilmer occurred between 1:23 p.m. COT and 2:27 COT, which was before Collier's stated arrival at 2FA's offices around 3 p.m. (Tr. 49:16-51:11, 529:23-531:11; PX 56.) With respect to Collier's thirteen-minute phone call with Salyards from 3:02 to 3:15 p.m. COT, Cutti11's testimony that Collier arrived at 2FA's office around 3:00 p.m. COT, "give or take maybe 15 minutes," leaves open the possibility that Collier arrived around 2:45 p.m. and finished his ten-minute (or so) conversation with Cuttill before beginning the call with Salyards. (Tr. 594:10-25; PX 45 at CC10, Item 212.) With respect to evidence that Collier was on the phone with Wardell during the time he claims to have been at 2FA, besides the prospect of multi-tasking, there is a seven-minute gap between when the Hush account was set up at 3:32 p.m. COT and the start of Collier's call with Wardell at 3:39 p.m. COT, leaving sufficient time to draft a two-paragraph e-mail. (PX 45 at CC10, Item 213; Tr. 221:11-24.) Moreover, the call ended at 3:55 p.m. COT, leaving four more minutes before the e-mail was transmitted. (PX 45 at CC10, Item 213; Tr. 222:6-12.) lll. Passlogix Fails to Present Clear and Convincing Evidence that Salyards Authored the April 13 E-mail After reviewing all of the evidence in this case, including Collier's three-hour videotaped deposition, the Court holds that 47 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 48 of 105 Passlogix has not presented clear and convincing evidence that Salyards authored the April 13 e-mail. Virtually every piece of evidence Passlogix presents is rebutted by 2FA. Importantly, the Court finds Collier's admission to authoring the April 13 e- mail credible. 6 Collier's motive for sending the April 13 e-mail is logical, he matches the profile of the author,7 and his testimony regarding his subsequent log-ins is corroborated by the Hush logs.8 Although some inconsistencies remain with respect to Collier's confession, they do not amount to clear and convincing evidence that Salyards authored the e-mail. For instance, Collier stated that he set up the Hush account "a few days before the [April 13J e-mail was sent," yet the Hush logs indicate that the account was set up just twenty-seven minutes before the e-mail was sent. (Collier Dep. 84:10-12, 85:20-86:1; 6 Passlogix claims that Collier's confession is not credible because Collier previously "disavow[ed] any knowledge of the emails to Passlogix and its lawyers." (Mem. 20.) However, prior to his December 2, 2009 deposition, Passlogix never asked Collier directly whether he sent the April 13 e-mail. (Collier Dep. 80:8-82:5.) 7 The April 13 e-mail, which was sent on a Monday, refers to the author being on a "call this morning." (PX 2.) Boroditsky testified that Passlogix has a weekly sales calIon Mondays. (Tr. 72:13.) While Boroditsky did not know whether Collier was on the call that Monday, April 13, he acknowledged that Collier "has been on those calls." (Tr. 72:17-22.) Salyards, on the other hand, was not supposed to be on those calls. (Tr. 72:15-16.) Boroditsky also stated that the topic of Oracle being brought into the Wal-Mart account "could have been raised" during those Monday sales calls, further linking Collier to the April 13 e-mail. (Tr. 72:23-25.) 8 Collier testified that after sending the April 13 e-mail, he logged into Hush "[s]ix, maybe seven times" and that the last time he accessed the Hush account "may have been two weeks after [the April 13 e-mail] was sent." (Collier Dep. 86:2-4, 89:2-6.) This testimony largely is consistent with the Hush logs, which indicate nine log-ins to Hush after the April 13 e-mail was sent and show a final log-in on April 27, 2009, fourteen days after the April 13 e-mail was sent. (PX 49.) 48 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 49 of 105 see also PX 44 ~ 6; PX 49.) Also, the password that Collier provided did not match the password used to access Hush. (See Collier Dep. 84:17-85:19; PX 41 & 44 ~ 5.) However, Collier admitted that he was not sure whether the password he provided was correct and, because there are no records from Hush indicating what the actual password was, the Court does not know whether the password Collier offered was close to the actual password used. (Collier Dep. 85:17-19; PX 41.) In any event, Collier's inaccuracies about the date the Hush account was created and the password he used to create the account do not convince the Court that Collier is lying. For example, Passlogix's own expert admitted that he too could not recall when he set up his more recent Hush test account and what password he assigned to it. (Tr. 235:24-236:5.) As discussed earlier, the Court does not credit Obuchowski's conclusion that the kind of IP spoofing at issue here is technologically impossible. See supra. Therefore, given Collier's equivocation about the program that he used to spoof Salyards' IP address, Obuchowski's testimony regarding the MAC IP Change program's inability to spoof IP addresses to the degree done here-which the Court credits-is not dispositive of the fact that IP spoofing could not, and did not, happen. (Collier Dep. 86:23-25; Tr. 242:5-11; PX 44 ~~ 3-4.) 49 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 50 of 105 With respect to how Collier spoofed an IP address similar to the one that the Mark Hopkins Hotel assigned to Salyards, Collier states that the only way he could have used an IP address similar to that of the Mark Hopkins Hotel is if he copied it from an e-mail header that Salyards sent to Collier from the Hotel. (Collier Dep. 93:24-94:1.) In an affidavit submitted to the Court, Salyards states that on April 19, 2009, he sent an e-mail to Collier "from the Mark Hopkins hotel upon [his] arrival in San Francisco via Outlook. u (PX 43 'Jl 5 (e) . ) If true, Salyards would have sent this e-mail using a lower level of internet service, which is the only type of internet service purchased by Salyards on April 19. (PX 38 at IHG7-8.) However, this level of internet service was linked to a computer with a MAC address different than Salyards' computer. (Id. ) Thus, there is a gap in the record concerning how Collier was able to spoof Salyards' IP address from the Mark Hopkins Hotel using the April 19 e-mail that Salyards allegedly sent. The record also is bare with respect to whether Salyards and Collier may have communicated through remote means, such as a blackberry device, and, if so, what IP address would appear in the e-mail headers of those e-mails. These remaining questions, however, do not amount to the clear and convincing evidence that Passlogix needs to present to prove that Salyards wrote the 50 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 51 of 105 April 13 e-mail and used it in an attempt to commit a fraud on the Court. c. September 3 E-mail The September 3 e-mail, which was sent the day after Passlogix submitted its opposition to 2FA's motion for a preliminary injunction, accuses Passlogix of using 2FA's and Imprivata's intellectual property in violation of "contractual and ethical obligations." (PX 1.) The anonymous author claims to have transitioned to Passlogix "earlier this year" and to have over fifteen years of development experience. (Id. ) The e-mail contains two attachments consisting of Passlogix's confidential technical specifications for a project under development-the dissemination of which "created a serious risk of competitive harm and lost investment for Passlogix." (Mem. 6.) Passlogix seeks sanctions for 2FA's affirmative use of the September 3 e-mail "as negotiating leverage before the settlement conferences on September 16 and October 1, 2009" and for 2FA's "interject[ing] the email into the case as pretext for demanding broad document and deposition discovery into Passlogix's operations." (Id. ) l. Evidence Presented by Passlogix 51 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 52 of 105 Like the April 13 e-mail, Passlogix's strongest evidence that Salyards authored the September 3 e-mail are the Hush logs, which indicate that the September 3 e-mail was sent from 2FA's office IP address (70.114.246.62). (See PX 48.) Passlogix also points to Obuchowski's conclusion that there is no software on the market that can be used to spoof a public IP address, including 2FA's office IP address, and that the e-mail headers from the September 3 e-mail show no indicia of spoofing. (Mem. 10; Reply 4-5; Tr. 164:6-19, 168:21-169:16, 242:12-16, 616:20 617:4, 623:17-624:2; PX 36 given the timing and subject matter of the September 3 e-mail, as well as the Hush logs, it is clear that Salyards sent the e mail to garner a favorable settlement and to expand discovery. (Mem. 6.) Moreover, because the September 3 e-mail alleges that Passlogix misappropriates the intellectual property of third parties, attaches two proprietary Passlogix documents, and was sent to a third-party business entity that Passlogix has a commercial relationship with, Salyards clearly sought to harm Passlogix's business relations in sending the e-mail. Passlogix asserts that Salyards obtained the proprietary attachments either from an anonymous e-mail that Salyards claims to have received in June or July 2009, which purportedly contained one of the attachments, or through his secretive 52 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 53 of 105 relationship with Collier. (Tr. 137:17-22, 139:15-21, 436:14 437:2.) Pass10gix insists that 2FA's suggestion that a former Passlogix employee, Joseph Robinson, authored the September 3 e mail is speculative and inadmissible and that the factual contentions in the September 3 e-mail belie any suggestion that Robinson was the author. (Mem. 11.) First, Passlogix states that its internal investigation concluded that that the claims in the September 3 e-mail were false and that no individual at Passlogix, including Robinson, identified any inappropriate request to utilize intellectual property from third parties. (Tr. 35:10-21, 36:17-22; PX 34 & 35.) Second, the author of the September 3 e-mail refers to receiving a "monthly paycheck" from Passlogix, but Robinson was paid semi-weekly. (Tr. 47:24-48:6, 140:12-13; PX 1.) Third, the September 3 e-mail's author refers to having fifteen years of development experience, but Boroditsky maintains that Robinson had ten years of development experience because Robinson's first five years in the computer technology field consisted of "lesser roles that would not be claimed as software developer roles." (Tr. 48:7-11, 93:10-94:5, 101:16-102:12; PX 1.) Fourth, while the author states that he intends to stop assisting on the SAW project, Robinson continued to work on this project diligently and never raised an issue about the misuse of intellectual property. (Tr. 48:12-15, 53 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 54 of 105 139:5-8.) Finally, Robinson and Salyards had no communication with one another, including via e-mail, such that Robinson would have known Salyards' IP address. (Tr. 449:10-18 (Salyards testifying that he never communicated with Robinson in any way) . ) Passlogix also contends that Salyards' September 3 alibi does not hold up to scrutiny. Salyards testified that he was at a restaurant with his family and friends when the September 3 e mail was sent, thereby refuting any claim that he authored the e-mail. (Tr. 433:8-435:19.) Three of Salyards' restaurant companions, as well as Salyards' wife, submitted affidavits and sat for depositions to confirm Salyards' whereabouts on the afternoon of September 3. (OX 1 (2FA Ltr. 10/29/09 at 4 & Ex. 2).) Passlogix, however, contends that the "recollections from these friendly witnesses . . each of whom arrived and left at different times . . are inconsistent and contradictory." (Mem. 13.) While Salyards claims that he left his office for the restaurant "at like 3:30 or so" (Tr. 434:2-9), one friend recalled Salyards arriving at "approximately 3:15" (Posey Dep. 16:15-17), another friend recalled Salyards arriving at "3:15, 3:30ish" (Dunson Dep. 14:10-12), the third friend did not "remember what time [Salyards] and his family got there" (Dismore Dep. 9:7-8), and all Salyards' wife could recall was 54 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 55 of 105 that she arrived sometime that afternoon and believes Salyards was there already (A. Salyards Oep. 6:9-21). ii. Evidence Rebutted by 2FA 2FA insists that Salyards could not have sent the September 3 e-mail because he did not have access to the proprietary Passlogix documents that were attached to it. (Opp'n Mem. 5-7.) 2FA also contends that the content of the e-mail and other corroborating evidence point to Robinson as the author. First, 2FA refers to Collier's testimony that, in June 2009, Robinson expressed concerns to him that reflect the concerns in the September 3 e-mail. (Collier Oep. 66:3-67:4, 77:17-78:24.) Specifically, Collier e-mailed Robinson on June 17, 2009, asking him to "take a quick look at the code samples that [Robinson] worked on late last year" at IdentiPHI. (OX 16 at PL96158; see also Collier Oep. 98:21-22.) Robinson was concerned about working on code that he did not write while at Passlogix, and raised the issue with his boss, Cory Womacks, who also hesitated about working on the code. (OX 16 at PL96148 & PL96157-58.) Collier spoke with Robinson over the phone to explain that he was asking for "development assistance for a customer that we were attempting to transition . legally and ethically, from IndentiPHI to Pass1ogix, and [he] needed support that only the developer [Robinson] could provide." (Collier Oep. 77:21 55 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 56 of 105 25.) Collier says that he told Robinson to take up his issues with Boroditsky and, otherwise, abandoned his request and "never spoke to [Robinson] again." (Id. 98:19-99:21.) Contrary to Passlogix's assertion that 2FA relies only on Collier's speculation about Robinson being the author of the September 3 e-mail, 2FA points to an e-mail chain between Collier, Robinson, and Womacks, to corroborate Collier's version of events. (See OX 16 at PL96148-49 & PL96157-58.) Also, Passlogix's notes from its internal investigation indicate that both Robinson and Womacks recalled Collier requesting Robinson's help with the aforementioned code, further corroborating Collier's deposition testimony. (PX 35 at PL95991.) Collier also testified to speaking with Robinson about Hush and about spoofing Salyards' IP address. Collier states that when Robinson expressed concern about working on certain code, Collier suggested that Robinson raise the issue with Boroditsky or, alternatively, send an e-mail through Hush since "[t]hey won't know who you are." (Collier Oep. 68:7-16.) Importantly, Collier revealed to Robinson that he used Salyards' IP address when he sent his own anonymous e-mail, though he did not tell Robinson what that IP address was. (Id. 98:14-18.) Second, 2FA states that Salyards was not in 2FA's office when the September 3 e-mail was sent and several witnesses have corroborated that he was with them at a restaurant. (Tr. 433:8 56 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 57 of 105 435:19; Opp'n Mem. 12.) The fact that the witnesses' testimony regarding the timeline was not identical only indicates "that nothing was rehearsed, and three of the witnesses placed Mr. Salyards at the restaurant at the crucial time, recalling what time he arrived and where they sat." (Opp' n Mem. 12.) Third, 2FA contends that the spelling of certain words in the September 3 e-mail indicates that the author may have had a British or Canadian background, as Robinson does. 9 (Opp'n Mem. 15. ) However, 2FA submitted dozens of Robinson's work e-mails, none of which uses the "s" spelling. (Compare PX 1 (anonymous author spelling "organisation" and "utilise" with an "s"), with ox 16 at PL96120 (Robinson spelling "organization" and "serialization" with a "z") .) In any event, spelling is not dispositive of identity in this case, since one can impersonate British or Canadian spelling easily by substituting an "s" for a "z" in many common words. Fourth, 2FA maintains that additional details in the September 3 e-mail refute any claim that Salyards was the author. The author of the September 3 e-mail misspells the e- mail address of Shaun Cuttill-Salyards' long-time business 9 At the evidentiary hearing, 2FA called Dr. Alan Perlman, a purported expert in linguistics, to testify that Salyards did not author the September 3 e mail because the language used in the e-mail is inconsistent with his writings. Pursuant to its gatekeeping function under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S. Ct. 2786, 125 L. Ed. 2d 469 (1993), the Court declined to qualify Dr. Perlman as an expert and, therefore, gives no weight to his testimony in this decision. (See Tr. 259:14-260:5, 261:1-4.) 57 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 58 of 105 partner-by using only one "t N instead of two. (Opp' n Mem. 12; Tr. 436:2-10; PX 1.) Additionally, 2FA insists that if Robinson's early technical experience is counted, he has exactly fifteen years of development experience, as stated in the September 3 e-mail. (Opp'n Mem. 13; PX 1 & 21 at PL96028-30; Tr. 80:7-81:5.) Also, as the author of the September 3 e-mail represents, Robinson transitioned to Passlogix earlier in 2009 from another company. (Opp'n Mem. 13; PX 1.) There is no dispute that Robinson had access to the attachments to the September 3 e-mail, since Boroditsky confirmed that Robinson was one of four Canadian developers that Passlogix hired from IndentiPHI to work on the v-GO SAW program. (Tr. 79:1-5, 510:23-511:1; Opp'n Mem. 13; PX 1.) 2FA also contends that the anonymous author's forward-looking statement expressing an intention to leave Passlogix after securing alternative employment is consistent with Robinson's intentions. (Opp'n Mem. 14; PX 1.) 2FA states that Robinson intended to stay at Passlogix until October 1, 2009, so that he could receive his $10,000 retention bonus. (PX 21 at PL96025; Tr. 511:8-512:6; Opp' n Mem. 14.) The retention bonus benchmark and forward- looking statement also correspond with Robinson's subsequent termination on October 15, 2009, for abandoning his position due to unexcused absences. (DX 25; Tr. 515:25-516:2.) Passlogix counters that Robinson continued to assist on the SAW project 58 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 59 of 105 until his unexcused absences in late September and that, as far as anyone knows, Robinson has not secured alternative employment. (Tr. 48:12-15.) lll. Passlogix Fails to Present Clear and Convincing Evidence that Salyards Authored the September 3 E mail After reviewing all of the evidence related to the September 3 e-mail, the Court holds that Passlogix has not presented clear and convincing evidence that Salyards authored the September 3 e-mail. 2FA rebuts nearly all of Passlogix's evidence and presents a colorable counter-narrative that Robinson may have authored the September 3 e-mail. This counter-narrative is not limited to Collier's speculation, as Passlogix suggests, but rather is corroborated in part bye-mail correspondence and Passlogix's internal investigation. (See DX 16 at PL96148-49 & PL96157-58; PX 35 at PL95991.) While gaps undoubtedly remain regarding the identity of the author of the September 3 e-mail, 2FA does not bear the burden to prove that someone other that Salyards authored the September 3 e-mail; rather, Passlogix bears the burden to prove that Salyards was the author. Because Passlogix fails to present clear and convincing evidence that Salyards authored the September 3 e- mail, the Court holds that Salyards did not commit a fraud on the Court. 59 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 60 of 105 3. 2FA Has Failed to Establish that Passlogix Committed a Fraud on the Court 2FA asserts that by alleging that Salyards committed a fraud on the court when faced with evidence to the contrary, Passlogix "fabricated accusations to interfere with the Court's ability impartially to adjudicate 2FA's counterclaims and it[s] claim of misappropriation," thereby engaging in its own fraud on the court. (Opp' n Mem. 33.) To establish its fraud on the court claim, 2FA must present clear and convincing evidence that Passlogix brought its allegation against Salyards in bad faith- that is, knowing that it was false. See McMunn, 191 F. Supp. 2d at 445 (stating that a fraud on the court "occurs where a party has acted knowingly in an attempt to hinder . his adversary's defense of the action") (citation and internal quotation marks omitted); Skywark, 1999 WL 1489038, at *14 (same); see also Schlaifer Nance & Co., Inc. v. Estate of Warhol, 194 F.3d 323, 338 (2d Cir. 1999) ("Bad faith can be inferred when the actions taken are so completely without merit as to require the conclusion that they must have been undertaken for some improper purpose.") (citation and internal quotation marks omitted). Fraud on the court will not lie where the alleged misconduct merely consists of "an advocate's view of the evidence, drawing all inferences favorable to the [client] and 60 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 61 of 105 against the [adversary] " Intelli-Check, 2005 WL 3533153, at *12. 2FA has not shown that Passlogix's allegation of fraud on the Court was brought for an improper purpose. Contrary to 2FA's allegations, there is no clear and convincing evidence of an "unconscionable scheme" by Passlogix to delay the litigation; rather, Passlogix's allegations were based upon "an advocate's view of the evidence, drawing all inferences favorable to the [Passlogix] and against [Salyards]." Id.; see also TVT Records v. Island Def Jam Music Group, 447 F. Supp. 2d 311, 315 (S.D.N. Y. 2006) (holding that "even if [plaintiff] pressed this motion [for sanctions] with utmost zeal and certain aspects of it rest on grounds that are somewhat tenuous, the Court is not persuaded that [plaintiff's] application was frivolous, objectively unreasonable or pursued in bad faith") . Passlogix brought its fraud on the court allegation only after conducting an internal investigation and obtaining subpoenaed records from Hush, which appeared to provide objective evidence linking Salyards to both anonymous e-mails. It was not until after the Court granted the parties further discovery at the November 9 preliminary hearing that additional evidence arose challenging the conclusions drawn from the Hush logs and supporting 2FA's defense of IP spoofing. Nonetheless, even in the face of this subsequent discovery, Passlogix's continued presentation of its 61 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 62 of 105 claim against Salyards was not "frivolous, objectively unreasonable or pursued in bad faith" because, as already discussed, the competing evidence does not conclusively support that Salyards was not the author of the e-mails;rather.it hinders Passlogix's ability to show, by clear and convincing evidence, that Salyards was the author. TVT Records, 447 F. Supp. 2d at 314, 315 (holding that "the record lacks clear and convincing evidence to support a finding that [defendant] acted in actual bad faith at the time his . . submission was made") The Court holds, therefore, that 2FA has failed to establish that Passlogix committed a fraud on the Court by pursuing its claims against Salyards. 4. 2FA's Request to Amend Its Complaint to Assert a Claim for Malicious Institution of Civil Proceedings is Denied 2FA requests leave to amend its counterclaims to include a claim against Passlogix for malicious institution of civil proceedings. (Opp'n Mem. 35.) 2FA states that, prior to bringing its fraud on the court allegation against Salyards, Passlogix possessed evidence indicating that Salyards did not send either anonymous e-mail but, nonetheless, continued to pursue its claim even after obtaining further evidence during discovery that Salyards was innocent. (Id. 34.) 62 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 63 of 105 Courts are instructed to "freely give leave [to amend] when justice so requires." Fed. R. Civ. P. 15 (a) (2); see also Holmes v. Grubman, 568 F.3d 329, 334 (2d Cir. 2009). Leave to amend need not be granted, however, where the proposed amendment would be futile. See Advanced Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11, 18 (2d Cir. 1997) (Kearse, J.). In addition to futility, "'[aJ district court has discretion to deny leave for . . bad faith, undue delay, or undue prejudice to the opposing party.'" Holmes, 568 F.3d at 334 (quoting McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007)). To recover on a claim of malicious prosecution under New York law, Salyards must establish that: (1) Passlogix either commenced or continued a criminal or civil proceeding against him; (2) the proceeding terminated in his favor; (3) there was no probable cause for the criminal or civil proceeding; and (4) the criminal or civil proceeding was instituted with actual malice. See von Bulow v. von Bulow, 657 F. Supp. 1134, 1140 (S.D.N.Y. 1987); Rosemont Enters., Inc. v. Random House, Inc., 261 F. Supp. 691, 695 n.11 (S.D.N.Y. 1966); see also Russo v. New York, 672 F.2d 1014, 1018 (2d Cir. 1982), on reh'g, 721 F.2d 410 (2d Cir. 1983); Brady v. Penn Cent. Transp. Co., 406 F. Supp. 1239, 1242 (S.D.N.Y. 1975). A favorable conclusion does not necessarily mean that there was no probable cause for the institution of a claim. See Brady, 406 F. Supp. at 1242 63 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 64 of 105 (holding that "[t]he fact that the indictment was discontinued against the plaintiffs does not, in and of itself, constitute a lack of probable cause for the initial arrests"). The New York Court of Appeals has stated clearly that a litigant "may act on evidence which would seem reasonably to justify making a charge, and the prosecution will not be malicious if he was mistaken about the true meaning of the evidence." Munoz v. City of N.Y., 18 N.Y.2d 6, 9, 218 N.E.2d 527 (1966). 2FA's request to amend its complaint to add a malicious prosecution charge is denied as futile. While Salyards can establish the first two elements of a malicious prosecution claim, he cannot establish the latter two elements of lack of probable cause and malice. As already discussed, in bringing the instant allegations, Passlogix reasonably relied on the Hush logs, which showed objective evidence that Salyards was involved in transmitting both the April 13 and September 3 e-mails. While Passlogix pressed forward notwithstanding evidence uncovered in future discovery, it did so in good faith based upon "an advocate's view of the evidence." Intelli-Check, 2005 WL 3533153, at *12; see also Sauer v. Xerox Corp., 5 Fed. Appx. 52, 57 (2d Cir. 2001) (affirming district court's denial of attorneys' fees where, "although ultimately adjudged to be without merit, [plaintiff's] suit cannot be fairly characterized as 'entirely without color and [undertaken] for reasons of 64 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 65 of 105 harassment or delay or for other improper purposes'" (citation omitted)); Menashe v. V Secret Catalogue, Inc., 409 F. Supp. 2d 412, 427 (S.D.N.Y. 2006) (rejecting claim for attorneys' fees where there was "nothing in [the] record to suggest that" the unsuccessful claim was brought "in bad faith, vexatiously, wantonly, or for oppressive reasons" (internal quotation marks omitted) ) Passlogix, therefore, had probable cause to commence and continue its fraud on the court allegation against Salyards because of the Hush logs, its expert's testimony concluding that no IP spoofing occurred, and remaining gaps concerning the identity of the author(s) of the anonymous e-mails. Passlogix lacked malice in commencing and continuing its claim because it acted on evidence that "seem[ed] reasonably to justify making a charge," even if Passlogix ultimately "was mistaken about the true meaning of the evidence." Munoz, 18 N.Y.2d at 9. For the foregoing reasons, 2FA's request to amend its counterclaims to assert a cause of action for malicious prosecution against Passlogix is denied on grounds of futility. II. Spoliation of Evidence Passlogix alleges that because Salyards and Cuttill admit to failing to implement a litigation hold notice and to deleting certain documents during the pendency of this litigation, they should be sanctioned for spoliation of evidence. (Mem. 31.) 6S Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 66 of 105 The destroyed documents include: (1) an anonymous e-mail received by Salyards in June or July 2009 containing an attachment of Passlogix functional specifications; (2) at least 143 written communications between Salyards and Collier; and (3) 2FA network and computer logs from Cuttill's inspection of 2FA's computers and computer network. (Id. 31-32.) As a result of 2FA's purported spoliation of evidence, Passlogix asks for three forms of relief. First, Passlogix requests that an adverse inference be drawn that the deleted documents would have been harmful to 2FA and beneficial to Passlogix. (Id. 33.) Second, Passlogix requests that 2FA be precluded from making arguments implicating the discarded documents. Third, Passlogix asks that Salyards be responsible for the cost of Passlogix's investigation, which was more costly and protracted as a result of Salyards' destruction of documents. (Id. 34.) A. Legal Standard "Spoliation refers to the destruction or material alteration of evidence or to the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation." Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, -- F. Supp. 2d --, 2010 WL 184312, at *4 (S.D.N.Y. Jan. 15, 2010); see also West v. Goodyear Tire & Rubber Co., Inc., 167 F.3d 776, 779 (2d Cir. 66 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 67 of 105 1999); Scalera v. Electrograph Sys., 262 F.R.D. 162, 170 (E.D.N.Y. 2009); Zubulake v. UBS Warburg LLC, 229 F.R.D. 422, 430 (S.D.N.Y. 2004) ("Zubulake V"). "The right to impose sanctions for spoliation arises from a court's inherent power to control the judicial process and litigation, but the power is limited to that necessary to redress conduct 'which abuses the judicial process.'" Pension, 2010 WL 184312, at *4 (quoting Chambers, 501 U.S. at 45). A party seeking sanctions for spoliation of evidence must establish: (1) that the party having control over the evidence had an obligation 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 party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense. Zubulake V, 229 F.R.D. at 430; see also Byrnie v. Town of Cromwell, Bd. of Educ., 243 F.3d 93, 107-11 (2d Cir. 2001); Scalera, 262 F.R.D. at 170-71. The Court analyzes each of these three elements below. 1. Duty to Preserve A litigant has the "duty to preserve what it knows, or reasonably should know, is relevant in the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the 67 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 68 of 105 subject of a pending discovery request." Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68, 72 (S.D.N.Y. 1991) (citation omitted); see also Kronisch v. United States, 150 F.3d 112, 126 (2d Cir. 1998); In re NTL, Inc. Sec. Litig., 244 F.R.D. 179, 193 (S.D.N.Y.2007). "[N]o duty to preserve arises unless the party possessing the evidence has notice of its relevance." Turner, 142 F.R.D. at 72-73. A party is on notice to preserve relevant documents "when litigation is reasonably anticipated," Pension, 2010 WL 184312, at *1, and "at least by the time the complaint [is] served," Turner, 142 F.R.D. at 73. "This obligation to preserve relevant evidence exists whether or not the evidence has been specifically requested in a demand for discovery." Scalera, 262 F.R.D. at 171; see also Barsoum v. N.Y.C. Hous. Auth., 202 F.R.D. 396,400 (S.D.N.Y. 2001). After obtaining notice of the litigation, a party "'must suspend its routine document retention/destruction policy and put in place a 'litigation hold' to ensure the preservation of relevant documents.'" Pension, 2010 WL 184312, at *4 (quoting Treppel v. Biovail Corp., 249 F.R.D. 111, 118 (S.D.N.Y. 2008)); see also Toussie v. County of Suffolk, No. 01 Civ. 6716, 2007 WL 4565160, at *7 (E.D.N.Y. Dec. 21, 2007) ("[O]nce the duty to preserve attaches, at a minimum, a litigant is expected to 'suspend its routine document and retention/destruction policy and to put in place a litigation hold.'") (quoting Zubulake v. 68 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 69 of 105 UBS Warburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y. 2003) ("Zubulake IV") ) . The requirement to issue a written litigation hold notice has been in place in this District since the Zubulake V decision in July 2004. See Pension, 2010 WL 184312, at *10 (stating that plaintiffs' failure to institute a litigation hold notice by 2005 when the action was transferred to the Southern District of New York was grossly negligent in light of the requirement that "was clearly established in this District by mid [- ] 2004") . "The preservation obligation runs first to counsel, who has 'a duty to advise his client of the type of information potentially relevant to the lawsuit and of the necessity of preventing its destruction.'" Chan v. Triple 8 Palace, Inc., No. 03 Civ. 6048, 2005 WL 1925579, at *6 (S.D.N.Y. Aug. 11, 2005) (quoting Turner, 142 F.R.D. at 73); see also Zubulake V, 229 F.R.D. at 439 ("[C]ounsel has a duty to effectively communicate to her client its discovery obligations so that all relevant information is discovered, retained, and produced. In addition, when the duty to preserve attaches, counsel must put in place a litigation hold and make that known to all relevant employees by communicating with them directly. The litigation hold instructions must be reiterated regularly and compliance must be monitored."). Once on notice of litigation, "the failure to issue a written litigation hold constitutes gross negligence because 69 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 70 of 105 that failure is likely to result in the destruction of relevant information." Pension, 2010 WL 184312, at *3 (emphasis in original); see also Crown Castle USA Inc. v. Fred A. Nudd Corp., No. 05 Civ. 6163T, 2010 WL 1286366, at *13 (W.D.N.Y. Mar. 31, 2010) (holding plaintiff grossly negligent for failing to implement a litigation hold, which led to the destruction of documents); Richard Green (Fine Paintings) v. McClendon, 262 F.R.D. 284, 290 (S.D.N.Y. 2009) ("[T]he failure to implement a litigation hold is, by itself, considered grossly negligent behavior."); Toussie, 2007 WL 4565160, at *8; Chan, 2005 WL 1925579, at *7 ("[T]he utter failure to establish any form of litigation hold at the outset of litigation is grossly negligent."). In one case, however, this District has found negligence, rather than gross negligence, when a party failed to institute a litigation hold but then corrected its failure. See Pension, 2010 WL 184312, at *18 n.179 (holding seven plaintiffs negligent, rather than grossly negligent, for failing to issue a litigation hold by 2005 where all plaintiffs issued such a notice by 2007 and where instituting the litigation hold in 2005 may not have made any difference because the electronic records that existed in 2003 very likely would have been lost or destroyed by 2005) . 2. Culpable State of Mind 70 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 71 of 105 In the spoliation context, a culpable state of mind includes ordinary negligence. See Zubulake V, 229 F.R.D. at 431; see also Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 108 (2d Cir. 2002). "When evidence is destroyed in bad faith (i.e., intentionally or willfully), that fact alone is sufficient to demonstrate relevance." Zubulake V, 229 F.R.D. at 431; see also Residential Funding, 306 F.3d at 108-09. By contrast, when the destruction is negligent, grossly negligent, or reckless, relevance must be proven by the party seeking sanctions. See Zubulake IV, 220 F.R.D. at 221 ("[B]ecause UBS's spoliation was negligent and possibly reckless, but not willful, [plaintiff] must demonstrate that a reasonable trier of fact could find that the missing e-mails would support her claims."); see also Richard Greene, 262 F.R.D. at 291. "No matter what level of culpability is found, . the spoliating party should have the opportunity to demonstrate that the innocent party has not been prejudiced by the absence of the missing information." Pension, 2010 WL 184312, at *5. To show prejudice, "[t]he moving party usually sets forth some type of extrinsic evidence as to the content of missing materials which demonstrates the extent to which such materials would have been harmful to the spoliator." Skeete v. McKinsey & Co., Inc., No. 91 C.i v. 80 93 , 1 993 WL 25 665 9 , at * 7 (S . D. N. Y. J u 1 Y 7, 1 9 93 ) (Leisure, J.). "If the spoliating party offers proof that there 71 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 72 of 105 has been no prejudice, the innocent party, of course, may offer evidence to counter that proof." Pension, 2010 WL 184312, at *5. 3. Relevance In the spoliation context, relevance "means something more than sufficiently probative to satisfy Rule 401 of the Federal Rules of Evidence." Chan, 2005 WL 1925579, at *7; see also Residential Funding, 306 F.3d at 108-09. A discarded document is relevant where a reasonable trier of fact could find that the document either would harm the spoliator's case or support the innocent party's case. See Port Auth. Police Asian Jade Soc'y of N.Y. & N.J. Inc. v. Port Auth. of N.Y. & N.J., 601 F. SUpp. 2d 566, 570 (S.D.N.Y. 2009) ("'[R]elevant' means that the evidence must be of the sort that a reasonable jury could find harmful to the spoliator's case."); Zubulake V, 229 F.R.D. at 430 (stating that a discarded document is "relevant" to the victimized party's "claim or defense" where "a reasonable trier of fact could find that [the missing document] would support that claim or defense") . "[R]elevance 'may be inferred if the spoliator is shown to have a sufficiently culpable state of mind.'" Scalera, 262 F.R.D. at 178 (quoting Chan, 2005 WL 1925579, at *8). To have a sufficiently culpable state of mind warranting a relevance inference, the spoliator must have acted 72 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 73 of 105 in bad faith-that is, intentionally or willfully. See In re Methyl Tertiary Butyl Ether Prods. Liab. Litig., 643 F. Supp. 2d 482, 496 (S.D.N.Y. 2009); Zubulake V, 229 F.R.D. at 431; Zubulake IV, 220 F.R.D. at 221; Turner, 142 F.R.D. at 77. "Although many courts in this district presume relevance where there is a finding of gross negligence, application of the presumption is not required. ff Pension, 2010 WL 184312, at *5; see also Residential Funding, 306 F.3d at 109 ("[A] showing of gross negligence in the destruction or untimely production of evidence will in some circumstances suffice, standing alone, to support a finding that the evidence was unfavorable to the grossly negligent party.ff); Treppel, 249 F.R.D. at 121-22 ("While it is true that under certain circumstances 'a showing of gross negligence in the destruction or untimely production of evidence' will support [a relevance] inference, the circumstances here do not warrant such a finding, as the defendants' conduct 'does not rise to the egregious level seen in cases where relevance is determined as a matter of law.'ff (quoting Residential Funding, 306 F.3d at 109 and Toussie, 2007 WL 4565160 , at * 8) ) . In the absence of bad faith destruction of evidence, "the moving party may submit extrinsic evidence tending to demonstrate that the missing evidence would have been favorable to .i t v " Chan, 2005 WL 1925579, at *8. Moreover, "when the 73 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 74 of 105 spoliating party [is] merely negligent, the innocent party must prove both relevance and prejudice in order to justify the imposition of a severe sanction." Pension, 2010 WL 184312, at *5; see also Byrnie, 243 F.3d at 108 ("[T]he burden falls on the 'prejudiced party' to produce 'some evidence suggesting that a document or documents relevant to substantiating [its] claim would have been included among the destroyed files.'" (quoting Kronisch, 150 F.3d at 128)). The innocent party may do so by presenting "'extrinsic evidence tending to show that the destroyed e-mails would have been favorable to [its] case.'" Pension, 2010 WL 184312, at *5 (quoting Toussie, 2007 WL 4565160, at *8). B . Application To establish that Salyards engaged in spoliation of evidence by deleting the documents at issue, Passlogix must show by a preponderance of the evidence that, for each category of documents: (a) Salyards had a duty to preserve the documents at the time they were destroyed; (b) Salyards destroyed the documents with a culpable state of mind; and (c) the destroyed documents were relevant to Passlogix's claim or defense. See Pension, 2010 WL 184312, at *5; Zubulake V, 229 F.R.D. at 430; Scalera, 262 F.R.D. at 170-71. For the reasons set forth below, the Court holds that although Passlogix has satisfied the first 74 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 75 of 105 two elements-duty and culpable state of mind-with respect to all three categories of deleted documents, it has satisfied the final relevance prong only with respect to the latter two: (2) written communications between Salyards and Collier, and (3) logs from Cuttill's investigation of 2FA's computers and computer network. As a sanction for 2FA's spoliation of documents, the Court orders 2FA to pay a fine of $10,000. 1. June/July Anonymous E-mail Salyards testified at his deposition and at the evidentiary hearing that he received an anonymous e-mail around late June or early July 2009 that included an attachment containing Passlogix functional specifications (the "June/July e-mail") . (Tr.356:7 22, 357:11-17.) Salyards could not recall the e-mail address from which the June/July e-mail was sent, except that he believed it came from a "hushmail.com" domain name. (Tr.357:2 10.) After receiving the June/July e-mail, which was sent only to him, Salyards testified that he spent about forty-five minutes to an hour reading the attachment, then showed it to Cuttill. (Tr. 356:10-11, 358:13-19.) After reading and discussing the document, both Salyards and Cuttill decided it was improper for them to have it, so Salyards deleted it without disclosing it to his attorney or Passlogix. (Tr. 358:18-359:2.) 75 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 76 of 105 Salyards notes that this attachment was similar to one of the attachments to the September 3 e-mail. (Tr. 436:14-437:2.) Passlogix first contends that Salyards is lying about the existence of the June/July e-mail "to cover up his role in the other two emails." (PX 33 at 4 n.1.) Passlogix asserts that Salyards' claim that he deleted the attachment to the June/July e-mail is not credible when juxtaposed with Salyards' push "for expansive discovery based on his review of the computer specifications attached to the September 3 E-mail," which, according to Salyards, contained similar content. (Reply Mem. 13.) The Court, however, finds Salyards' testimony about the existence of the June/July e-mail credible because he first testified about the e-mail at a deposition that took place before Passlogix brought its fraud on the court claim, thereby refuting Passlogix's argument that Salyards had a motive to lie about the June/July e-mail to cover-up his role in the other two e-mails. (PX 33 at 4 n.1.) Alternatively, Passlogix argues that, assuming that the June/July e-mail existed, Salyards engaged in spoliation of evidence by deleting it. Salyards concedes that he deleted the June/July e-mail. (Tr. 357:18-358:5.) 2FA contends that Salyards' deletion of the June/July e-mail is not spoliation because the e-mail "was not evidence when Mr. Salyards deleted it" and "[t]he attachment was a Passlogix document, which is 76 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 77 of 105 still in its possession." (Opp' n Mem. 29.) Moreover, 2FA asserts that even if the June/July e-mail "wereevidence.it would only help show the misappropriation of intellectual property and is favorable to 2FA." (Id. ) 2FA also contends that Salyards' deletion of the June/July e-mail was no different from Boroditsky's, Passlogix's CEO's, request that the recipients of the September 3 e-mail delete that e-mail and its attachments. (Id. 29-30; Tr. 89:15-21.) a. Duty The Court holds that 2FA had a duty to preserve the June/July e-mail at the time that Salyards deleted it. According to Salyards, the June/July e-mail contained Passlogix technical specifications that he and Cuttill recognized they should not possess. (Tr. 358:13-359:2.) 2FA states that Salyards' deletion of the June/July e-mail was not spoliation because "[t]he attachment was a Passlogix document, which is still in [Passlogix's] possession." (Opp' n Mem. 29). The significance of the June/July e-mail, however, is not that Passlogix may have a copy of the proprietary attachment, but that the attachment was sent to Salyards. (Tr. 356: 10-11.) "While a litigant is under no duty to keep or retain every document in its possession once a complaint is filed," the June/July e-mail is particularly germane to the underlying 77 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 78 of 105 litigation which involves a claim by 2FA that Passlogix misappropriated its intellectual property. Turner, 142 F.R.D. at 72. Although 2FA argues that the June/July e-mail was not evidence when Salyards deleted it, 2FA's duty to preserve extends not only to evidence, but to what "is reasonably calculated to lead to the discovery of admissible evidence" or is "reasonably likely to be requested during discovery." Id. (citation and internal quotation marks omitted); see also Arista Records LLC v. Usenet.com, Inc., 608 F. Supp. 2d 409, 433 (S.D.N.Y. 2009). An e-mail transmitting Passlogix's own propriety information, even if not evidence itself, may lead to the discovery of admissible evidence regarding Passlogix's intellectual property safeguarding practices. See Arista, 608 F. Supp. 2d at 433; Turner, 142 F.R.D. at 72. Because 2FA's duty to preserve documents related to Passlogix's underlying lawsuit attached, at minimum, on December 18, 2008, when Passlogix filed its original complaint, Salyards was on notice of the June/July e-mail's relevance when he deleted it shortly after receiving it in June or July 2009. See Turner, 142 F.R.D. at 73. For the foregoing reasons, the Court holds that Salyards violated his duty to preserve documents when he deleted the June/July e-mail. 78 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 79 of 105 b. Culpable State of Mind The Court holds that Salyards was grossly negligent in deleting the June/July e-mail. Notwithstanding his obligation to preserve documents, Salyards testified that 2FA never implemented a litigation hold and continues to delete e-mails routinely. (Tr. 353:9-14, 449:23-450:7, 451:11-14; PX 43 ~ 2.) Passlogix contends that 2FA's failure to implement a litigation hold/document retention notice, standing alone, warrants sanctions. (Mem. 31; Reply Mem. 12.) As detailed above, "the failure to implement a litigation hold is, by itself, considered grossly negligent behavior." Richard Greene, 262 F.R.D. at 290. Because Salyards admits that 2FA did not, and does not, have a litigation hold/document preservation policy, Passlogix "has clearly satisfied its burden with respect to the second prong of the spoliation test." rd. at 291. Thus, the Court holds that 2FA acted with gross negligence by deleting the June/July e-mail in the absence of a litigation hold during the pendency of this litigation. c. Relevance Because there is insufficient evidence indicating that Salyards deleted the June/July e-mail in bad faith, the Court does not infer relevance. Likewise, the Court declines to infer relevance based on 2FA's grossly negligent failure to institute 79 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 80 of 105 a litigation hold because 2FA's conduct, in the context of its overall document production in this case, "does not rise to [an] egregious level." Toussie, 2007 WL 4565160, at *8. Therefore, to satisfy the relevance requirement, Passlogix must submit extrinsic evidence tending to demonstrate that the missing evidence would have been favorable to it. See Chan, 2005 WL 1925579, at *8. Although "the burden placed on the moving party to show that the lost evidence would have been favorable to it ought not be too onerous," id. at *7, Passlogix submits no extrinsic evidence tending to show that the June/July e-mail would have been favorable to it. Passlogix states that had the June/July e-mail been preserved, the parties may have been able to track down the IP address and other information identifying the sender and, thereby, test the bonafides of Salyards' IP address spoofing defense. (Mem. 34.) However, the only way the June/July e-mail could be relevant to Passlogix, i.e., support its theory that Salyards is the author of the anonymous Hush e mails, is if-implausibly-Salyards sent the June/July e-mail to himself. If, on the other hand, the June/July e-mail indicated that someone other than Salyards was the author, then the e-mail would harm, rather than support, Passlogix's theory that Salyards is the author of these anonymous Hush e-mails. Since Passlogix cannot point to extrinsic evidence tending to show 80 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 81 of 105 that Salyards authored the June/July e-mail, the Court is "not persuaded on this record that a reasonable [trier of fact] could find that the [June/July e-mail] was harmful" to 2FA or helpful to Passlogix. Adorno v. Port Auth. of N.Y. & N.J., 258 F.R.D. 217, 229 (S.D.N.Y. 2009) (Chin, J.); see also Port Auth. Police Asian Jade Soc'y, 601 F. Supp. 2d at 570 (denying motion for sanctions for spoliation where moving party could not demonstrate that evidence would have been unfavorable to the spoliator); Hamre v. Mizra, No. 02 Civ. 9088, 2005 WL 1083978, at *3 (S.D.N.Y. May 9, 2005) (Leisure, J.) (denying plaintiffs' request for adverse inference where they "did not put forth any evidence" indicating that destroyed documents would corroborate their theory of the case (emphasis in original)). To the extent that Passlogix's investigation into Hush-related e-mail activity was more burdensome and expensive as a result of Salyards' deletion of the June/July e-mail, (Mem. 34), the court discerns no prejudice to Passlogix going to the merits of the case, and Passlogix points to none. See Pension, 2010 WL 184312, at *5. For the foregoing reasons, the Court holds that although 2FA had a duty to preserve the June/July e-mail and was grossly negligent in deleting it, it did not engage in spoliation of evidence because Passlogix has failed to establish that the e mail would have been helpful to its claims or defenses or harmful to 2FA's claims or defenses. 81 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 82 of 105 2. Written Communications between Collier and Salyards Passlogix contends that Salyards engaged in the spoliation of evidence by deleting at least 143 written communications with Collier during the pendency of this litigation. (Mem. 31-32.) These destroyed documents consist of at least twelve e-mails, ninety-one text messages, and forty Skype messages. 1 0 (Id. 31.) Passlogix states that because Collier used his personal, rather than his work, computer to engage in most of these communications, there was no way for Passlogix to obtain a copy of most of these records. (Reply Mem. 13 n .13.) 2FA acknowledges that it did not preserve these written communications, but states that Collier's involvement in this litigation "was only known to 2FA in late November 2009 N and that "neither Mr. Salyards nor 2FA had any knowledge, or reason to know, that any documents related to Chris Collier might be relevant in this case, which anyway they are not. N (Opp'n Mem. 30. ) 2FA also points out that Passlogix has obtained some of the e-mails, phone records, and Skype messages, resulting in no prejudice to Passlogix. (Id. ) To address the discarded the written communications between himself and Collier during the pendency of this litigation, ]Q Skype is an internet software application that, among other features, allows users to engage in instant messaging. 82 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 83 of 105 Salyards submits an affidavit outlining their correspondence based on a review of his phone records, travel calendar, and discussions with Cuttill. (PX 43 q[ 5.) Salyards recalls corresponding with Collier via e-mail "approximately 12 times in 2009" and that "eight of the exchanges were during [Collier's] tenure at Passlogix," which was from April 1, 2009 to November 16, 2009. Salyards states that these e-mails generally concern possible business opportunities and consist of statements such as, "let's talk about something. Phone call, let's talk about a lot." (Id. 'll 3; see also Tr. 440:10-13.) With respect to the content of the unsaved text messages, Salyards states that "they were routinely confirming the ability or inability to answer a call, the arrival at a restaurant at a specific time or our respective locations on the lake," and consisted of phrases such as "I'm leaving, lunch, I'm here, be five minutes." (PX 43 'll 13; see also Tr. 440:4-9.) The Skype records that Passlogix obtained from Collier's work computer indicate that the Skype messages between Salyards and Collier mainly concern lunch plans or social activities. (See PX 50; Tr. 46:1-7, 124:20-127:5.) These Skype records corroborate Salyards' description of the typical Skype exchanges between him and Collier. (See Tr. 442:25-443:10 (Salyards testifying that the typical Skype messages between him and Collier consisted of statements like "you busy," "on the phone," 83 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 84 of 105 "cool," and "where").) Passlogix, however, claims that some of the Skype communications concern topics at issue in the underlying litigation and, therefore, should have been preserved. (Reply Mem. 13.) Passlogix also points to Collier's secret visits with Salyards at 2FA's office as circumstantial proof that their interactions related to the underlying litigation. Salyards acknowledges that from April 2009 through November 16, 2009, Collier came to 2FA's office at least seven times, but that Salyards "was always under the impression that [Collier] had full endorsement from Passlogix and was acting as a go between" for Passlogix's interest in a software product that 2FA had licensed to HID Global, 2FA's largest customer who also maintains a business relationship with Passlogix. (PX 43 5(f)(a).) a. Duty Salyards admits that he did not preserve the 143 written communications he had with Collier. (Tr. 354:21-355:25.) Salyards testified that 2FA does not have a document retention policy, that he routinely deletes e-mails and text messages, and that his Skype logs are retained for about two weeks and then are purged automatically. (Tr. 449:23-451:4; PX 43 84 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 85 of 105 As already discussed, by December 18, 2008, Salyards had a duty to preserve documents related to the underlying litigation. That duty extends to documents concerning, but not limited to, the misappropriation of intellectual property and the parties' obligations and performance under their licensing agreement. (See generally Compl.i Am. Compl.i Answer & Countercl.) The issue is whether Salyards was on notice that some of his written communications with Collier were probative of the underlying litigation when the communications were deleted. The Court holds that he was. Salyards' affidavit accounts for at least one e-mail from mid-August 2009, in which Collier asks for Salyards' "help coordinating the development effort with HID" to "get naviGO into [Passlogix's] authenticator program." (PX 43 'J1 5 (g) . ) NaviGo is a 2FA software product that 2FA licensed to HID Global, 2FA's largest customer, who also maintains a business relationship with Passlogix. (Id. 'J1 5(f) (a).) Salyards states that he referred Collier to two other 2FA employees for assistance, and that he and Collier "had several follow-up conversations on this topic." (Id. 'J1 5(g).) Such an e-mail, which discusses a potential business opportunity between Passlogix and 2FA, is probative of the parties' underlying dispute, which arises from Passlogix's prior licensing of 2FA's software. Passlogix also contends that a Skype message from 85 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 86 of 105 April 30, 2009, in which Salyards asks Collier, "do you have access to PLX Adminitrack?" (PX 50 at PL961801), implicates "the very subject of discovery disputes before the Magistrate Judge" and constitutes communication "about product bugs and maintenance matters at issue in the case." (Reply Mem. 13.) Salyards acknowledges that he "talk[ed] to [Collier] about PLX AdminiTrack," which is a "detrack or bug defect tracking system," around the same timeframe that 2FA sent Passlogix a discovery request for "all historical and present AdminiTrack items ever entered." (Tr. 460:17-462:17; PX 63 'Jl 27.) This Skype message relates to a discovery request regarding software maintenance matters at issue in the underlying litigation and, therefore, should have been preserved. For the reasons above, Salyards had a duty to preserve written communications with Collier pertaining to, at a minimum, 2FA's software and business opportunities with Passlogix as well as maintenance matters related to software at issue in the parties' underlying lawsuit. By failing to preserve such documents, including the aforementioned e-mail and Skype message, Salyards breached his duty to preserve documents. b. Culpable State of Mind 2FA argues that neither Salyards nor 2FA acted willfully or negligently in deleting the communications with Collier, who was 86 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 87 of 105 not involved in this case until late November 2009. (Opp'n Mem. 32.) As already discussed, even if Collier was not involved actively in the instant fraud on the court dispute until late November 2009, at least two of Salyards' written communications with Collier relate to issues involved in the underlying litigation. Salyards' failure to preserve these written communications, in addition to 2FA's overall failure to issue a litigation hold notice, constitutes gross negligence. c. Relevance Passlogix provides extrinsic evidence that the written communications that Salyards discarded would support Passlogix's position in the underlying litigation. The April 30, 2009 Skype message, in which Salyards suggests that Collier report a software problem on Passlogix's AdminiTrack system, directly relates to a discovery request in the underlying litigation. However, because Passlogix obtained a copy of these Skype communications from Collier's work computer, it is not prejudiced by their deletion. See Pension, 2010 WL 184312, at *5 ("[T]he spoliating party should have the opportunity to demonstrate that the innocent party has not been prejudiced by the absence of the missing information."); Ispat Inland, Inc. v. Kemper Envtl., Ltd., No. 05 Civ. 5401, 2006 WL 3478339, at *3 (S.D.N.Y. Nov. 30, 2006) (denying defendant's motion for 87 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 88 of 105 sanctions for alleged perjury and spoliation of evidence where, although deponent, in-house counsel at plaintiff corporation, admitted to discarding documents used to refresh his recollection prior to his deposition, defendant's counsel had duplicates in his actual possession at the deposition) . The record provides additional extrinsic evidence that the deleted communications between Salyards and Collier were relevant. The e-mail that Salyards deleted in mid-August 2009, in which Salyards sought to help Collier "get naviGO into [Passlogix's] authenticator program," (PX 43 ~ 5(g)), provides extrinsic proof that this communication, if preserved, could support Passlogix's defense to 2FA's misappropriation of intellectual property claim. This communication could lead a reasonable factfinder to cast doubt on 2FA's misappropriation claim where 2FA, a purported victim of Passlogix's misappropriation of its intellectual property, pursues a business opportunity with Passlogix involving 2FA's intellectual property in the midst of a lawsuit relating to the fall-out of a prior such relationship. Because Passlogix does not have a copy of this e-mail and because Salyards' description of the e-mail in his affidavit does not supplant the missing document, Passlogix is prejudiced by its deletion. For the reasons stated above, the Court holds that, in failing to preserve written communications between Salyards and 88 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 89 of 105 Collier concerning software maintenance matters and potential business opportunities between 2FA and Passlogix, 2FA engaged in the spoliation of evidence. 3. 2FA's Computer and Network Logs from Cuttill's Investigation Passlogix alleges that 2FA failed to preserve evidence from Cuttill's personal inspection of 2FA's computers and computer network. (Mem. 32.) 2FA responds that Passlogix was aware of Cuttill's inspection since December 1, 2009, when Cuttill testified about it during his deposition, "but never requested anything from 2FA in this regard, and never made any requests in the several appearances before Judge Dolinger." (Opp'n 32.) Passlogix responds that, during Cuttill's deposition, 2FA's counsel blocked questioning pertaining to Cuttill's investigation, citing attorney client and work product privileges, yet later admitted that counsel was not involved in the investigation. (Mem. 32; Tr. 571:11-20; 12/22/09 J. Dolinger Hr'g Tr. 24:24-28:4.) At the evidentiary hearing, Cuttill testified that in late October or early November 2009, he interviewed people who had access to 2FA's network on September 3 and checked all of 2FA's computers for evidence of the attachments to the September 3 e- mail and found no evidence that anyone at 2FA sent that e-mail. 89 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 90 of 105 (Tr. 572:25-575:5.) He also testified that he interviewed people that he thought had access to 2FA's network in April but did not interview Collier since the interviews were conducted before Collier's confession. (Tr. 573:6-14.) Cuttill did not take notes during his interviews and investigation. (Tr. 573:15-16.) Cuttill also said that he reviewed 2FA's computer logs but did not produce those logs because they were "indiscernible" and "inconclusive." (Tr. 575:6-578:21.) Cuttill explains that the September logs "were tainted" because, by the time he conducted his investigation, "the most recent cookies were all from . the second or third week of r d September" and "[t]here was nothing from September 3 . " (Tr. 577:1-7.) Cuttill testified that during the second or third week of September, he and Salyards had visited Hush "to find out what Hushmail was all about." (Tr. 577:3-16.) Therefore, had these logs been produced, Passlogix "would have come back and said, 'But if he accessed it [in mid-September], what if he accessed it before?' And that wouldn't have been proof of anything." (Tr. 577: 11-16.) Then Cuttill said that "[t]here were some security logs that show that Greg Salyards' computer was locked" on September 3, but 2FA did not produce those logs either-even though they appear helpful to 2FA's position-because "[t]hey weren't asked for, and to be honest, we were moving so quickly in this that I - I don't know." (Tr. 578:10-18.) 90 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 91 of 105 Cuttill offered to produce these logs with 2FA's post-hearing brief, though the Court has no record of any logs from Cuttill's investigation ever being produced. (Tr. 578:15-19.) a. Duty Cuttill admits that his investigation took place after Passlogix sent its letter to the Court accusing Salyards of authoring the anonymous e-mails and, therefore, after 2FA's duty to preserve documents related to the authorship of the April 13 and September 3 e-mails attached. (Tr. 573:10-13.) Even if Passlogix had not requested the logs, as 2FA contends, the duty to preserve documents is not limited solely to documents that U are "the subject of a pending discovery request ; rather, the duty extends to documents "reasonably likely to be requested during discovery.u Turner, 142 F.R.D. at 72. Since Cuttill affirmatively undertook his investigation, he had a duty to preserve the fruits of that investigation, whether ripe or rotten. Because 2FA requested information from Passlogix's internal investigation, it was reasonable for 2FA to expect that Passlogix, likewise, would request documents related to any investigation 2FA conducted. Even if 2FA no longer had its April 2009 and September 3 computer logs by the time Cuttill conducted his investigation, Cuttill had a duty to preserve the logs that were available-that is, the mid-September logs, which 91 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 92 of 105 Cuttill admits were accessible. See Treppel, 249 F.R.D. at 119 ("[I]t is. . clear that [defendant] should have retained the monthly backup tapes of the relevant servers from the previous year, since these were quite likely to contain files that were later deleted"); Zubulake IV, 220 F.R.D. at 218 ("If a company can identify where particular employee documents are stored on backup tapes, then the tapes . . should be preserved if the information contained on those tapes is not otherwise available.") . 2FA, therefore, breached its duty to preserve documents when it did not retain the computer logs that Cuttill reviewed. b. Culpable State of Mind As already discussed, 2FA never implemented a litigation hold notice at any point in this litigation. At minimum, therefore, Cuttill acted with gross negligence by failing to preserve the computer logs from his late October/early November 2009 investigation. Moreover, Cuttill admitted that he intentionally withheld the logs because of his subjective belief that the logs would have appeared to point falsely to Salyards as the author of the September 3 e-mail. The duty to preserve documents is meant to prevent these sorts of "judgment calls" by litigants and, instead, requires parties to preserve all documents that may reasonably lead to the discovery of relevant 92 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 93 of 105 evidence, regardless of whether those documents appear to create false positives or false negatives. See Pension, 2010 WL 184312, at *8 (disparaging document preservation policy that "place[d] total reliance on the employee to search and select what that employee believed to be responsive records"). Thus, 2FA acted in bad faith by failing to preserve records that it thought falsely pointed to Salyards as the author of the September 3 e-mail. The Court holds, therefore, that 2FA's failure to preserve the computer logs from Cuttill's investigation amounts to intentional bad faith spoliation of evidence. c. Relevance Because the Court finds that Cuttill intentionally and in bad faith failed to preserve 2FA's computer logs from his investigation, the Court presumes the relevance of these documents, obviating Passlogix's burden to show through extrinsic evidence that these documents would have been favorable to its position. See Pension, 2010 WL 184312, at *5. The burden now shifts to 2FA to demonstrate that Passlogix was not "prejudiced by the absence of the missing information." rd. 2FA states that Passlogix knew about Cuttill's investigation "on December 1 s t but never requested anything from 2FA . and never made any requests in the several appearances before Judge 93 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 94 of 105 Dolinger." (Opp'n Mem. 32-33.) This representation clearly misrepresents the record. During a December 22 hearing before Judge Dolinger, which occurred after Cuttill's deposition, Passlogix explicitly requested, and Judge Dolinger ordered 2FA to produce, information from Cuttill's investigation. (See 12/22/09 J. Dolinger Hr'g Tr. 24:24-28:4 (Passlogix's counsel requesting "any notes, findings, documentation surrounding the 2FA internal investigation within the 2FA company concerning the anonymous e-mails" and Judge Dolinger ordering 2FA's counsel to "inquire of [his] client and advise counsel for Passlogix within three days" about 2FA's internal investigation).). There is no dispute that the records that 2FA provided to Passlogix did not include the electronic records from Cuttill's investigation. In defense of its actions, 2FA contends that it agreed to allow Passlogix to conduct forensic examinations on all of 2FA's computers, but Passlogix never did so. (Opp'n Mem. 32-33.) 2FA's argument misses the point. Making its computers available to Passlogix for inspection does not absolve 2FA of its affirmative duty to preserve electronic records that it examined but admittedly failed to preserve. Because 2FA failed to preserve the electronic records, making its computers available for inspection likely would have been a meaningless gesture. 94 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 95 of 105 Moreover, 2FA's position that Passlogix never asked for the computer logs-even if true-is disingenuous in light of 2FA preventing Passlogix, on seemingly erroneous privilege grounds, from asking Cuttill during his deposition about the scope of his investigation. (Mem. 4; Tr. 596:22-598:20; 12/22/09 J. Dolinger Hr'g Tr. 24:24-28:4.) 2FA's counsel and Cuttill later admitted that counsel was not involved in Cuttill's investigation. (See Tr. 596:22-597:25; 12/22/09 J. Dolinger Hr'g Tr. 25:10-26:17.) Though considered, the Court declines to issue a separate sanction for 2FA's possibly erroneous assertion of privilege, as the Court deems 2FA's sanction for spoliation of evidence sufficient to prevent future litigation misconduct. Because Passlogix does not have a copy of 2FA's computer logs and because the logs likely are no longer available as a result of 2FA's continued deletion of records, the Court holds that Passlogix is prejudiced by 2FA's spoliation of these electronic records. B. Remedy for 2FA's Spoliation of Evidence "The court has the inherent power to impose sanctions for the spoliation of evidence, even where there has been no explicit order requiring the production of the missing evidence." Scalera, 262 F.R.D. at 171; see also Residential Funding, 306 F.3d at 106-07. "The determination of an 95 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 96 of 105 appropriate sanction for spoliation, if any, is confined to the sound discretion of the trial judge and is assessed on a case by-case basis." Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423, 436 (2d Cir. 2001); see also Reilly v. Natwest Mkts. Group Inc., 181 F.3d 253, 267 (2d Cir. 1999) ("Trial judges should have the leeway to tailor sanctions to insure that spoliators do not benefit from their wrongdoing-a remedial purpose that is best adjusted according to the facts and evidentiary posture of each case.") Sanctions for the spoliation of evidence are meant to (1) deter parties from destroying evidence; (2) place the risk of an erroneous evaluation of the content of the destroyed evidence on the party responsible for its destruction; and (3) restore the party harmed by the loss of evidence helpful to its case to where the party would have been in the absence of spoliation. See Potenza v. Gonzales, Nos. 5:07-CV-225, 5:07-CV 226, 2010 WL 890959, at *3 (N.D.N.Y. Mar. 8, 2010); Byrnie, 243 F.3d at 107; Port Auth. Police Asian Jade Soc'y, 601 F. Supp. 2d at 570. "[AJ court should always impose the least harsh sanction that can provide an adequate remedy." Pension, 2010 WL 184312, at *6. "The choices include-from least harsh to most harsh-further discovery, cost-shifting, fines, special jury instructions, preclusion, and the entry of default judgment or dismissal (terminating sanctions)." Id. 96 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 97 of 105 Passlogix asks for three forms of relief for 2FA's spoliation of evidence-an adverse inference, preclusion, and costs. (Mem. 33-34.) The Court declines to impose any of these sanctions, concluding that the most appropriate sanction for 2FA's spoliation of evidence is a monetary fine. 1. Adverse Inference An adverse inference is warranted where a party intentionally destroys documents that it is obligated to preserve and that are relevant to its adversary's case. See Byrnie, 243 F.3d at 107-08; Kronisch, 150 F.3d at 126. Passlogix asks the Court to infer from the deleted communications between Salyards and Collier that Salyards and Collier conspired to send the anonymous e-mails and to have Collier falsely testify to authoring the April 13 e-mail. In support of its adverse inference request, Passlogix points to phone records and Skype logs indicating that Collier and Salyards communicated during critical points in the litigation: (1) April 13 when the first anonymous e-mail was sent; (2) September 4, 2009, the day after the next anonymous e-mail was sent; and (3) between October 26-28, when Salyards learned that Passlogix was going to, and then did, inform that Court that Salyards authored the anonymous e-mails. (PX 43 Ex. A; PX 45 at CC10 line 212, CC100 line 68, CC124 lines 365-66, 370-71, 383, 97 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 98 of 105 CC128 line 191, CC136 line 2; PX 47 at 11690, 11796, 11800, 11857, 11862; PX 50 at PL9618016.) Upon a review of the entire record of communications between Salyards and Collier-including their cell phone records from April through November 2009 and Skype logs from April through October 2009 that Passlogix retrieved from Collier's work computer-Salyards' and Collier's level of communication during critical points in the litigation is consistent with their level of contact throughout the course of the year. Therefore, this extrinsic evidence is inconclusive at best and does not warrant an adverse inference that the two were conspiring to commit a fraud on the court. See Skeete, 1993 WL 256659, at *7 (denying defendant's request for adverse inference "where defendants have not demonstrated a nexus between the content of the materials and the inference the defendants wish to have drawn") . The Court also declines to infer that the 2FA computer network logs that Cuttill failed to preserve would have shown that Salyards authored the September 3 e-mail. Through his testimony at the evidentiary hearing, Cuttill admitted that the 2FA network logs, if preserved, would have indicated that Salyards visited Hush in mid-September. The Court credits this testimony and finds that a further adverse inference is not warranted. See Wechsler v. Hunt Health Sys., Ltd., 381 F. Supp. 2d 135, 148-49 (S.D.N.Y. 2003) (Leisure, J.) (denying request 98 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 99 of 105 for a negative inference where, among other things, the absent documents did not have a profound effect on defendant's case). 2. Evidence Preclusion "Preclusion is a harsh sanction preserved for exceptional cases where a . party's failure to provide the requested discovery results in prejudice to the requesting party." Tracey ex reI. v. NVR, Inc., No. 04 Civ. 6541L, 2009 WL 3153150, at *8 n.15 (W.D.N.Y. Sept. 30, 2009) (citation and internal quotation marks omitted); see also Update Art, Inc. v. Modiin Publ'g, Ltd., 843 F.2d 67, 71 (2d Cir. 1988) Passlogix asks that 2FA be precluded from arguing that Collier somehow traced Salyards' whereabouts through Salyards' e-mail headers and somehow spoofed Salyards' IP address as it changed from office, to home, to the Mark Hopkins Hotel. (Mem. 33.) The Court declines Passlogix's preclusion request as too harsh and unwarranted by the evidence in the record, as it would prohibit 2FA from asserting its IP spoofing defense. See Pesce v. Gen. Motors Corp., 939 F. Supp. 160, 165 (N.D.N.Y. 1996) (declining "the drastic sanction of preclusion" where "an order precluding any testimony or evidence of the [product] being defective would necessarily preclude plaintiff from being able to present a prima facie case," "which would be tantamount to dismissal of the action"); see also In re WRT Energy Sec. Litig., 246 F.R.D. 185, 200 (S.D.N.Y. 2007) 99 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 100 of 105 (crafting a more narrow remedy where defendants' proposed sanction of precluding plaintiffs from relying on the destroyed documents "in any respect" would "sweep too broadly") . 3. Costs Passlogix requests that 2FA pay for its investigation, which was more costly and protracted as a result of 2FA's spoliation of evidence. (Mem. 34.) "[C]ompensable costs may arise either from the discovery necessary to identify alternative sources of information, or from the investigation and litigation of the document destruction itself." Turner, 142 F.R.D. at 78 (holding that "an award of costs, including attorneys' fees, is entirely warranted" where defendant "unjustifiably destroyed documents after litigation had been commenced, causing the plaintiff to expend time and effort in attempting to track down the relevant information"); see also Pension, 2010 WL 184312, at *24 (sanctioning plaintiffs who were negligent in providing discovery by issuing a monetary sanction of reasonable costs, including attorneys' fees, associated with reviewing declarations submitted, deposing these declarants, and bringing this motion for sanctions). After careful consideration, the Court holds that costs are not appropriate here where the extra expense incurred by Passlogix-that is related solely to the deletion of electronic 100 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 101 of 105 data from Cuttill's investigation and certain communications between Salyards and Collier-cannot be carved out easily from Passlogix's overall costs in litigating the instant dispute. Therefore, a more narrowly tailored sanction that serves to punish 2FA for its grossly negligent failure to institute a litigation hold, intentional failure to preserve electronic records from its investigation, and possibly erroneous assertion of privilege, is more appropriate here. 4. Monetary Fine The applicable sanction for spoliation of evidence "should be molded to serve the prophylactic, punitive, and remedial rationales underlying the spoliation doctrine." West, 167 F.3d at 779; see also In re Terrorist Bombings of U.S. Embassies in E. Africa, 552 F.3d 93, 148-49 (2d Cir. 2008). Imposing a fine is consistent with the Court's inherent power to sanction parties for the spoliation of evidence. See Pension, 2010 WL 184312, at *6 (considering a fine one of the less harsh remedies a Court may choose from to sanction a party for spoliation of evidence); accord Travelers Property Cas. Of Am. ex reI. Goldman v. Pavillion Dry Cleaners, No. Civ. A. 04-1446, 2005 WL 1366530, at *4 (D.N.J. June 7, 2005) (stating that a monetary fine may be appropriate to punish an offending party for spoliation of evidence) . 101 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 102 of 105 The Court holds that a monetary fine of $10,000 against 2FA best suits "the facts and evidentiary posture of [this] case." Reilly, 181 F.3d at 267. 2FA is a small company founded only in 2006, and Salyards and Cuttill-who the Court both finds responsible for the spoliation of evidence in this case-are 2FA's sole principals and co-founders. Here, a fine against 2FA serves the dual purposes of deterrence and punishment. See Green, 262 F.R.D. at 292. Because Salyards and Cuttill are the sole principals of 2FA, a fine directed at 2FA will affect them directly. In concluding that a fine of $10,000 is the most appropriate sanction, the Court balances 2FA's litigation conduct with its status as a small corporation. See Shangold v. Walt Disney Co., 275 Fed. Appx. 72, 74 (2d Cir. 2008) (stating that district courts "should not hesitate to take the relative wealth of the parties into account" when setting monetary sanctions, and affirming district court's $10,000 fee award) (citation and internal quotation marks omitted); McMunn, 191 F. Supp. 2d. at 448, 462 (considering defendant's ability to collect from plaintiff in issuing order requiring plaintiff to pay defendant $20,000 with interest for, among other misconduct, "spoil[ing] highly relevant evidence by, intentionally and in bad faith, concealing the existence of [her] Visa Card, [which] . was highly prejudicial to [defendant], and . never corrected by [plaintiff]"); accord United States v. Philip 102 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 103 of 105 Morris USA Inc., 327 F. Supp. 2d 21, 26 (D.D.C. 2004) (holding that a fine of $2,995,000 payable to the Court Registry "is particularly appropriate here because [the Court hasJ no way of knowing what, if any, value [theJ destroyed emails had to Plaintiff's case; [therefore J . it [isJ impossible to fashion a proportional evidentiary sanction that would accurately target the discovery violation. [Ye t ] , it is essential that such conduct be deterred . and that the amount of the monetary sanction fully reflect the reckless disregard and gross indifference displayed by [defendantsJ toward their discovery and document preservation obligations"); In re Prudential Ins. Co. of Am. Sales Practices Litig., 169 F.R.D. 598, 617 (D.N.J. 1997) (imposing $1 million fine, payable to the Clerk of the U.S. District Court for the District of New Jersey, for Prudential's consistent pattern of document destruction, where Prudential violated a court order "on at least four occasions," "ha[dJ no comprehensive document retention policy," and "impede[dJ the litigation process"; reasoning that the fine "informs Prudential and the public of the gravity of repeated incidents of document destruction and the need of the Court to preserve and protect its jurisdiction and the integrity of the proceedings before it"). 103 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 104 of 105 CONCLUSION For the foregoing reasons, the Court holds that neither Passlogix nor 2FA has established by clear and convincing evidence that its adversary committed a fraud on the Court. 2FA's request to amend its counterclaims to assert a cause of action for malicious prosecution against Passlogix is denied on grounds of futility. The Court also holds that 2FA's failure to preserve relevant documents led to the spoliation of evidence in this case. Therefore, the Court hereby orders 2FA to pay a fine in the amount of ten thousand dollars ($10,000.00), via check made payable to "Clerk, U.S. District Court" within thirty (30) days from the date of this Opinion and Order. SO ORDERED. New York, New York April 2.7, 2010 Copies of this Opinion and Order have been e-mailed to: Steven M. Kayman, Esq. Dan Goldberger, Esq. Proskauer Rose LLP 1585 Broadway New York, New York 10036-8299 Hal S. Shaftel, Esq. Cadwalader, Wickersham & Taft LLP One World Financial Center 104 Case 1:08-cv-10986-BSJ -MHD Document 68 Filed 04/27/10 Page 105 of 105 New York, N.Y. 10281 Laurence Singer, Esq. Laurence Singer, Attorney-At-Law 1629 K Street NW, Suite 300 Washington, D.C. 20006 105 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 1 of 40 UNITED STATES DISTRICT COURT (ECF) SOUTHERN DISTRICT OF NEW YORK ------: ORBIT ONE COMMUNICATIONS, INC., : and DAVID RONSEN, : 08 Civ. 0905 (LAK) (JCF) : Plaintiffs/Counterclaim : Defendants, : : MEMORANDUM - against - : AND ORDER : NUMEREX CORP., : : Defendant/Counterclaim : Plaintiff. : ------: NUMEREX CORP., : 08 Civ. 6233 (LAK) (JCF) : Plaintiff/Counterclaim : Defendant, : : - against - : : SCOTT ROSENZWEIG, GARY NADEN, and : LAVA LAKE TECHNOLOGIES, LLC, : : Defendants/Counterclaim : Plaintiffs. : ------: GARY NADEN, DAVID RONSEN, SCOTT : 08 Civ. 11195 (LAK) (JCF) ROSENZWEIG, ORBIT ONE : COMMUNICATIONS, INC. and LAVA LAKE : TECHNOLOGIES, LLC, : : Plaintiffs/Counterclaim : Defendants : : - against - : : NUMEREX CORP., : : Defendant/Counterclaim : Plaintiff. : ------: JAMES C. FRANCIS IV UNITED STATES MAGISTRATE JUDGE 1 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 2 of 40 There is a pervasive risk that electronic information will be lost during the course of litigation, whether through inadvertence, intentional spoliation, or failure to institute and properly implement a litigation hold. Consequently, the law provides a range of sanctions and remedies that may be imposed when the destruction of evidence occurs. No matter how inadequate a party’s efforts at preservation may be, however, sanctions are not warranted unless there is proof that some information of significance has actually been lost. In these related cases, Numerex Corporation (“Numerex”) contends that the jury should be instructed that it may draw an adverse inference against Orbit One Communications, Inc. (“Orbit One”) and David Ronsen on the ground that these parties are responsible for the spoliation of electronically stored information. Numerex further seeks an award of attorneys’ fees and costs incurred in connection with this motion. Because Numerex has been unable to demonstrate that relevant information has in fact been destroyed, its motion is denied. 2 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 3 of 40 Background1 A. Origins of the Litigation In 2000, David Ronsen established Orbit One, a corporation dedicated to selling satellite communications services and manufacturing tracking devices that rely on satellite technology. Orbit One III, 692 F. Supp. 2d at 375-76. The business operated out of a facility in Bozeman, Montana. Id. at 375. Although Mr. Ronsen was initially the sole shareholder, two other company executives, Scott Rosenzweig and Gary Naden, later became equity owners, though Mr. Ronsen retained eighty-four percent of the stock. Id. at 376. Prior to joining Orbit One, Mr. Naden had been an engineer at Axonn, the communications company that supplied Orbit One’s satellite transmitters. Id. Beginning in 2006, Numerex, a satellite communications company, began negotiations to acquire Orbit One. Id. These discussions culminated with the execution of an asset purchase agreement on July 31, 2007. (Asset Purchase Agreement dated July 31, 2007 (the “APA”), attached as Exh. 1 to Declaration of Dorothy N. Giobbe dated April 17, 2009). Pursuant to the APA, Numerex, 1 The factual background is set forth in detail in three prior opinions: Orbit One Communications, Inc. v. Numerex Corp., No. 08 Civ. 905, 2008 WL 3361376 (S.D.N.Y. Aug. 12, 2008) (“Orbit One I”); Orbit One Communications, Inc. v. Numerex Corp., 255 F.R.D. 98 (S.D.N.Y. 2008) (“Orbit One II”); and Orbit One Communications, Inc. v. Numerex Corp., 692 F. Supp. 2d 373 (S.D.N.Y. 2010) (“Orbit One III”). 3 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 4 of 40 through a specially created subsidiary, acquired substantially all of Orbit One’s assets in return for approximately 5.5 million dollars. Orbit One II, 255 F.R.D. at 101. In addition, Numerex agreed to provide Orbit One with “earn out” payments if the new division of Numerex that had been Orbit One met a series of revenue and earnings targets for 2007 through 2009. Id. at 101-02. Based on the success of the new division, these payments could amount to up to 4.5 million dollars in cash and 2.5 million shares of Numerex stock. Id. at 102. At the same time that the parties executed the APA, Numerex and the principals of Orbit One entered into employment agreements pursuant to which Mr. Ronsen would continue as President of the new division, with Mr. Rosenzweig as Vice President of Business Development and Mr. Naden as Chief Technology Officer. Orbit One III, 692 F. Supp. 2d at 376. The agreements contained non- competition covenants that varied in duration depending upon whether the executives departed from their employment for “good reason” or “other than good reason.” Id. at 376-77. In addition, Mr. Ronsen’s employment agreement provided that he could be terminated for cause, which included failure to meet the performance targets set forth in the APA. Orbit One II, 255 F.R.D. at 102. On the other hand, if he were terminated without cause or if he resigned “for good reason,” he would be entitled to the full 4 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 5 of 40 earn out. Id. During the fall of 2007, Orbit One’s sales were poor, and its revenues were not meeting projections. Id. On January 7, 2008, Orbit One and Mr. Ronsen filed an action in New York State Supreme Court, New York County, alleging that Numerex had interfered with Mr. Ronsen’s ability to receive compensation from the earn out by impeding his management of Orbit One. Numerex removed the case to this Court and asserted counterclaims.2 In April 2008, Mr. Ronsen resigned from Numerex, and Mr. Naden and Mr. Rosenzweig departed in June 2008. Numerex then sued Mr. Naden and Mr. Rosenzweig in this Court, asserting, among other things, that they had stolen proprietary information from Numerex upon their resignation.3 The defendants filed counterclaims, alleging that Numerex had violated the APA as well as their employment agreements. Finally, in July 2008, Mr. Ronsen, Mr. Naden, and Mr. Rosenzweig filed an action in the United States District Court for the District of Montana contending that their covenants not to compete were overbroad and therefore unenforceable. That action was transferred to this Court on Numerex’s motion, and Numerex filed counterclaims.4 2 This is the case designated 08 Civ. 905 (LAK) (JCF). 3 This case was filed as 08 Civ. 6233 (LAK) (JCF). 4 Following transfer, this case was designated 08 Civ. 11195 (LAK) (JCF). 5 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 6 of 40 B. Information Management Prior to the sale of Orbit One’s assets to Numerex, Mr. Ronsen utilized a laptop computer and a desktop computer in his office at Orbit One’s facility in Bozeman. (Tr. at 3-4, 104).5 The desktop was initially purchased on behalf of another of Mr. Ronsen’s companies, Bridger Fire, Inc. (Tr. at 9; Deposition of David Ronsen (“Ronsen Dep.”), attached as Exh. A to Declaration of Emily A. Kim dated March 8, 2010 (“Kim Decl.”) at 413, 426).6 Both the Orbit One laptop (when it was in the office) and the desktop were linked to Orbit One’s network of servers. (Tr. at 4, 104). This network included an exchange server for e-mail, a shared server where electronic documents resided (the “U-drive”), and a portion of a server that could be accessed by anyone at the facility (the “O-drive”). (Tr. at 4-5, 104-05; Declaration of David A. Ronsen dated Oct. 3, 2008 (“Ronsen Decl.”), attached as Exh. D to Kim Decl., ¶¶ 8-9). Mr. Ronsen’s laptop and desktop were both synchronized with the shared drive on the server. (Tr. at 105). Consequently, whenever he logged on or off, anything he had saved to a folder on the shared drive (including his “My Docs” folder) would 5 “Tr.” refers to the transcript of an evidentiary hearing held in connection with the instant motion on July 28, 2010. 6 He also possessed a laptop that had been issued to him by the Federal Emergency Management Agency, which he used in connection with Orbit One business as well. (Tr. at 5). 6 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 7 of 40 automatically be saved on the server as well.7 (Tr. at 105). There was no backup for local hard drives. (Tr. at 106). The servers were backed up to disks on a daily basis, and the disks were preserved for a two-week period before being rotated and written over. (Tr. at 106). In addition, two additional disks were used for monthly and yearly backups. (Tr. at 106). In August 2007, shortly after its acquisition by Numerex but before Numerex physically took over the Bozeman facility, Orbit One received a communication from Axonn, Mr. Naden’s former employer, threatening litigation, apparently because Axonn believed that Orbit One had misappropriated certain intellectual property. (Tr. at 13-14). Axonn’s letter demanded that Orbit One preserve all documents, including electronic information, relevant to the issues that Axonn had raised. (Tr. at 14). Mr. Ronsen consulted with an attorney, Antoinette M. Tease, regarding Axonn’s letter. (Tr. at 14). Ms. Tease, in turn, orally advised Mr. Ronsen on August 27 to retain relevant information, and she subsequently issued a litigation hold in the form of an e-mail addressed to Mr. Ronsen and copied to Mr. Naden and Mr. Rosenzweig. (Tr. at 14-15; Exh. U- 7).8 The e-mail, dated September 17, 2007, directed Orbit One to 7 Documents saved only to a local folder, on the C-drive of his laptop, for example, would not be synchronized with the server. (Tr. at 106). 8 This document was introduced at the evidentiary hearing on July 28, 2010, and referred to by its exhibit number in the 7 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 8 of 40 “take all steps necessary to preserve all hard copy and electronic files, including, but not limited to, emails” relating to Axonn’s concerns. (Exh. U-7). It further stated: If possible, it would be advisable to back up all electronic files (including emails) using an external hard drive or some other method so that those files are preserved in the event of litigation. Please forward this email to anyone else in your company who may be in possession of relevant files, and please let me know if you have any questions. (Exh. U-7). Beginning in August 2007, Christopher Dingman, Orbit One’s information technology administrator, began requesting Orbit One executives, and particularly Mr. Ronsen, to remove data from the servers. (Tr. at 18-22, 101, 112-13; Ronsen Decl., ¶ 18). The purpose of this initiative was to increase available storage space and improve computer performance. (Tr. at 18, 20, 113; Ronsen Decl., ¶ 18). According to Mr. Ronsen, Mr. Dingman asked for the removal of “personal information or older information that wasn’t needed on a day-to-day basis.” (Tr. at 18). Mr. Dingman did not specifically direct the deletion of business-related information. (Tr. at 22, 113). He did, however, ask Mr. Ronsen to remove and archive e-mail dated prior to 2007. (E-mail from Chris Dingman to David Ronsen dated Oct. 17, 2007, attached as Exh. 1 to Ronsen Decl.). At the time Mr. Dingman requested that data be removed pretrial order. It bears bates number ORBIT00022830. 8 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 9 of 40 from the servers, Mr. Ronsen did not advise him of the litigation hold that Ms. Tease had imposed. (Tr. at 22, 113-14). During the first week of December 2007, Mr. Ronsen, with Mr. Dingman’s assistance, archived over six gigabytes of data. (Tr. at 22-23, 27, 33, 75, 114; Ronsen Decl., ¶¶ 22, 27, 29). According to Mr. Ronsen, “over eighty percent (80%) of that information was very old, personal, and not related in any way to Numerex, the APA, or Orbit’s business or operations.” (Ronsen Decl., ¶ 29). Furthermore, “[o]f the remaining files, the vast majority were files created before August 1, 2007 (i.e., prior to the closing of the APA), and some of the files were pre-acquisition, confidential, and privileged communications between Orbit and its counsel relating to the drafting and negotiation of the APA.” (Ronsen Decl., ¶ 30). Mr. Ronsen stored the archived files on an external hard drive that he had obtained for that purpose. (Tr. at 23; Ronsen Decl., ¶ 21). He then deleted from the server personal items, such as music files. (Tr. at 22-24). He also deleted at least some of the business e-mails that predated the acquisition by Numerex; however, he insists that he simply copied many of these e- mails, such that they remained on the server. (Tr. at 23-27). In response to a request by Numerex’s counsel for the archived documents, Mr. Ronsen eventually gave the external hard drive to his attorneys. (Tr. at 71; Ronsen Decl., ¶ 32). 9 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 10 of 40 Meanwhile, Mr. Dingman had also requested that Mr. Ronsen remove his personal desktop computer from the network and use only the laptop. (Tr. at 108). This change was intended to bring the company into compliance with a computer security protocol known as ISO 27001 and also to improve performance. (Tr. at 108). In October 2007, Mr. Dingman assisted Mr. Ronsen with the transition by instructing him how to save any files that he wanted to retain. (Tr. at 108-10). Mr. Ronsen did not inform him of the Axonn litigation hold. (Tr. at 109). Nevertheless, because the desktop and the laptop were synchronized with each other through the network, the folders that resided on the desktop remained on the laptop and the server when the desktop was removed. (Tr. at 68- 70). According to Mr. Dingman, the desktop computer was then moved to a storage area next to his work space. (Tr. at 110). Mr. Ronsen, however, states that he removed the computer directly from his office to the garage at his home. (Tr. at 29-30). Later, sometime after he left Numerex, Mr. Ronsen gave that computer along with two others he owned to a technician to cannibalize the best components and build one computer. (Tr. at 60-61). The reconstituted computer did not contain the hard drive from the desktop. (Tr. at 61). However, when the preservation of information became an issue in this case, Mr. Ronsen contacted his technician, recovered the hard drive, and turned it over to his 10 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 11 of 40 counsel. (Tr. at 61-62). On November 28, 2007, Mr. Ronsen had set up a meeting with attorneys at Lowenstein Sandler PC to discuss his legal options in light of his view that Numerex was violating the APA by impeding his ability to do his job. (Email from David Ronsen to Anthony O. Pergola dated Nov. 28, 2007, attached as Exh. B to Kim Decl.). That meeting took place on December 6, 2010; at that time, Mr. Ronsen did not tell his counsel about the steps he had taken a few days before to remove data from Orbit One’s servers. (Tr. at 27). On December 19, 2007, Mr. Ronsen’s attorneys sent a letter to Stratton Nicolaides, the Chief Executive Officer of Numerex, threatening litigation in the event that Numerex did not resolve the issues raised by Mr. Ronsen (Tr. at 35; Letter of John McFerrin Clancy dated Dec. 19, 2007, attached as Exh. H to Kim Decl.), and on January 7, 2008, the plaintiffs made good on this threat and filed the first of the related actions. On January 28, 2008, counsel for Numerex sent plaintiffs’ counsel a comprehensive preservation letter, demanding that the plaintiffs implement a litigation hold. (Letter of Kent A. Yalowitz dated Jan. 25, 2007,9 attached as Exh. I to Kim Decl.). In response, Mr. Dingman took several then-current backup disks out of rotation and stored them 9 This date is obviously a typographical error, as is confirmed by the fact that the header of the second page of the letter contains the correct date, January 25, 2008. 11 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 12 of 40 in what he considered the safest location in the Bozeman facitlity: the safe in Mr Ronsen’s office. (Tr. at 1006-08, 115). Mr. Ronsen subsequently took the disks home. (Tr. at 115). Mr. Ronsen remained employed by Numerex even after he filed suit. However, by late March or early April of 2008, he was contemplating resigning. (Tr. at 45-46; Ronsen Dep. at 417). At about the same time, he reported to Mr. Dingman that he was experiencing difficulties with his laptop computer. (Tr. at 44-45, 116; Ronsen Dep. at 416). When Mr. Dingman conducted an analysis and discovered “bad sector” errors, Mr. Ronsen asked him to replace the hard drive, and Mr. Dingman complied. (Tr. at 49, 116; Ronsen Dep. at 417). According to Mr. Dingman, he loaded operating system programs onto the new hard drive and synched the laptop to the shared drive so that the laptop acquired Mr. Ronsen’s files. (Tr. at 117). At that time, Mr. Ronsen did not tell Mr. Dingman that he was on the verge of leaving Numerex. (Tr. at 117; Ronsen Dep. at 417). As part of this litigation, a forensic expert, Robert Bolstad of Daylight Forensic and Advisory, LLC, conducted an analysis of information obtained from Orbit One, and specifically of the laptop and its new hard drive. (Tr. at 83, 87). The data was collected in September 2008 and analyzed in November 2008. (Tr. at 93). Mr. Bolstad first observed that although the laptop contained Mr. 12 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 13 of 40 Ronsen’s e-mail file, there were few if any user-created word processing documents. (Tr. at 87-88). Second, Mr. Bolstad compared the backup disk for January 3, 2008 with e-mail contained on the laptop, on the shared drive, and on the exchange server. (Tr. at 90). He determined that there were some 2,089 unique items on the backup disk that did not exist on any of the active files. (Tr. at 91, 93). Following his resignation in April 2008, Mr. Ronsen asked Mr. Dingman to fix a forwarding protocol that Mr. Ronsen had previously established that forwarded e-mail that he received at Numerex to his personal Yahoo account. (Tr. at 64-65, 118). Mr. Ronsen told Mr. Dingman that he wanted to stay current with events at Numerex because he had only resigned to prove a point and expected to return. (Tr. at 119). Approximately 200 e-mails were forwarded to the Yahoo account, which Mr. Ronsen deleted because they were “useless” to him. (Tr. at 64-65; Ronsen Dep. at 429-34). Sometime shortly thereafter, Mr. Dingman deleted the forwarding rule. (Tr. at 125). A few days after his resignation from Numerex, Mr. Ronsen also returned the backup disks that Mr. Dingman had taken out of rotation in January 2008. (Declaration of Stephen Black dated Oct. 10, 2008, attached as Exh. C to Kim Decl., ¶ 4). 13 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 14 of 40 Discussion A. The Law of Sanctions Spoliation is “‘the destruction or significant alteration of evidence, or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.’” Byrnie v. Town of Cromwell, Board of Education, 243 F.3d 93, 107 (2d Cir. 2001) (quoting West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999)); accord Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC, 685 F. Supp. 2d 456, 465 (S.D.N.Y. 2010); Richard Green (Fine Paintings) v. McClendon, 262 F.R.D. 284, 288 (S.D.N.Y. 2009). Where a party’s spoliation violates a court order, Rule 37(b) of the Federal Rules of Civil Procedure empowers the court to impose various sanctions, including dismissing the complaint or entering judgment by default, precluding the introduction of certain evidence, imposing an adverse inference, or assessing attorneys’ fees and costs. Fed. R. Civ. P. 37(b); see Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99, 106-07 (2d Cir. 2002); Richard Green (Fine Paintings), 262 F.R.D. at 288; Metropolitan Opera Association, Inc. v. Local 100, Hotel Employees and Restaurant Employees International Union, 212 F.R.D. 178, 219 (S.D.N.Y. 2003). “‘The determination of an appropriate sanction for spoliation, if any, is confined to the sound discretion of the trial judge, and is 14 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 15 of 40 assessed on a case-by-case basis.’” Zubulake v. UBS Warburg LLC, 229 F.R.D. 422, 430 (S.D.N.Y. 2004) (“Zubulake V”) (quoting Fujitsu Ltd. v. Federal Express Corp., 247 F.3d 423, 436 (2d Cir. 2001)); see Harkabi v. SanDisk Corp., No. 08 Civ. 8203, 2010 WL 3377338, at *8 (S.D.N.Y. Aug. 23, 2010). A party may be sanctioned for violating a preservation order directly; but it may also be liable for sanctions under Rule 37(b) if it fails to produce information when ordered to do so because it has destroyed the evidence. See Residential Funding, 306 F.3d at 106-07; Richard Green (Fine Paintings), 262 F.R.D. at 288. Sanctions are appropriate even where a party’s spoliation occurred before the issuance of the discovery order -- thus rendering compliance impossible -- because the inability to comply with the order was “self-inflicted.” Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68, 72 (S.D.N.Y. 1991); accord Pipes v. United Parcel Service, Inc., Civ. A. No. 07-1762, 2009 WL 2214990, at *1 n.3 (W.D. La. July 22, 2009); In re NTL Securities Litigation, 244 F.R.D. 179, 192 (S.D.N.Y. 2007), aff’d, Gordon Partners v. Blumenthal, No. 02 Civ. 7377, 2007 WL 1518632 (S.D.N.Y. May 17, 2007). Furthermore, a court may impose discovery sanctions even absent an order pursuant to “its inherent power to manage its own affairs.” Residential Funding, 306 F.3d at 106-07; accord Richard Green (Fine Paintings), 262 F.R.D. at 288; NTL, 244 F.R.D. at 191; 15 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 16 of 40 Metropolitan Opera, 212 F.R.D. at 220. Where, as here, a party seeks an adverse inference instruction based on the spoliation of evidence, it must establish: (1) that the party having control over the evidence had an obligation 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 party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense. Residential Funding, 306 F.3d at 107; accord ACORN (New York Association of Community Organizations for Reform Now) v. County of Nassau, No. 05 CV 2301, 2009 WL 605859, at *2 (E.D.N.Y. March 9, 2009); Richard Green (Fine Paintings), 262 F.R.D. at 289; Treppel v. Biovail Corp., 249 F.R.D. 111, 120 (S.D.N.Y. 2008); Zubulake V, 229 F.R.D. at 430. I will address each of these factors in turn. 1. The Preservation Obligation One court has observed that “[i]dentifying the boundaries of the duty to preserve involves two related inquiries: when does the duty to preserve attach, and what evidence must be preserved?” Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 216 (S.D.N.Y. 2003) (“Zubulake IV”). There are also two additional questions pertinent to satisfying preservation requirements: how must a party go about fulfilling its ultimate obligation, and who is responsible for seeing that it is fulfilled? 16 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 17 of 40 a. When With respect to the first inquiry, the obligation to preserve evidence arises when the party has notice that the evidence is relevant to litigation -- most commonly when suit has already been filed, providing the party responsible for the destruction with express notice, but also on occasion in other circumstances, as for example when a party should have known that the evidence may be relevant to future litigation. Kronisch v. United States, 150 F.3d 112, 126 (2d Cir. 1998), overruled on other grounds, Rotella v. Wood, 528 U.S. 549 (2000); see Fujitsu Ltd. v. Federal Express Corp., 247 F.3d 423, 436 (2d Cir. 2001). Thus, the preservation requirement arises when a party “reasonably anticipates litigation.” Pension Committee, 685 F. Supp. 2d at 466; Treppel, 249 F.R.D. at 118; Zubulake IV, 220 F.R.D. at 218. b. What Although some cases have suggested that the definition of what must be preserved should be guided by principles of “reasonableness and proportionality,” Victor Stanley, Inc. v. Creative Pipe, Inc., No. 06-2662, 2010 WL 3703696, at *24 (D. Md. Sept. 9, 2010); see Rimkus Consulting Group, Inc. v. Cammarata, 688 F. Supp. 2d 598, 613 (S.D. Tex. 2010), this standard may prove too amorphous to provide much comfort to a party deciding what files it may delete 17 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 18 of 40 or backup tapes it may recycle.10 Until a more precise definition is created by rule, a party is well-advised to “retain all relevant documents (but not multiple identical copies) in existence at the time the duty to preserve attaches.”11 Zubulake IV, 220 F.R.D. at 218. In this respect, “relevance” means relevance for purposes of discovery, which is “an extremely broad concept.” Condit v. Dunne, 225 F.R.D. 100, 105 (S.D.N.Y. 2004); see Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978); Convolve, Inc. v. Compaq Computer Corp., 223 F.R.D. 162, 167 (S.D.N.Y. 2004); Melendez v. Greiner, No. 01 Civ. 7888, 2003 WL 22434101, at *1 (S.D.N.Y. Oct. 23, 2003). “Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” Fed. R. Civ. P. 26(b)(1). 10 Reasonableness and proportionality are surely good guiding principles for a court that is considering imposing a preservation order or evaluating the sufficiency of a party’s efforts at preservation after the fact. Because these concepts are highly elastic, however, they cannot be assumed to create a safe harbor for a party that is obligated to preserve evidence but is not operating under a court-imposed preservation order. Proportionality is particularly tricky in the context of preservation. It seems unlikely, for example, that a court would excuse the destruction of evidence merely because the monetary value of anticipated litigation was low. 11 It may not always be obvious, however, what constitutes an “identical” copy. For example, there may be multiple copies of an e-mail, all containing the same text. However, it may be important in the litigation to identify who actually received the communication. Therefore, it would be necessary to preserve, if not all copies of the document, at least the data (or, more precisely, the metadata) identifying the recipients. 18 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 19 of 40 c. How To meet its obligations, the litigant “must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents.” Zubulake V, 229 F.R.D. at 431; accord NTL, 244 F.R.D. at 194. This step, however, is only the beginning of a party’s discovery obligations. Zubulake V, 229 F.R.D. at 432. “Once a ‘litigation hold’ is in place, a party and [its] counsel must make certain that all sources of potentially relevant information are identified and placed ‘on hold’ . . . .” Id. Then, “[c]ounsel must take affirmative steps to monitor compliance so that all sources of discoverable information are identified and searched.” Id. Thereafter, the duty to preserve discoverable information persists throughout the discovery process; a litigant must ensure that all potentially relevant evidence is retained. Id. at 432-33; see also Fed. R. Civ. P. 26(e); R.F.M.A.S., Inc. v. So, No. 06 Civ. 13114, 2010 WL 3322639, at *6 (S.D.N.Y. Aug. 11, 2010); Richard Green (Fine Paintings), 262 F.R.D. at 289. There is something of a split of authority with respect to whether permitting the downgrading of data -- for example, deleting information from active files but preserving backup media containing the same data -- constitutes spoliation. In Treppel v. Biovail Corp., 233 F.R.D. 363, 372 n.4 (S.D.N.Y. 2006), I found 19 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 20 of 40 that “permitting the downgrading of data to a less accessible form -- which systematically hinders future discovery by making the recovery of the information more costly and burdensome -- is a violation of the preservation obligation.” Accord Scalera v. Electrograph Systems, Inc., 262 F.R.D. 162, 175 (E.D.N.Y. 2009). By contrast, in Quinby v. WestLB AG, No. 04 Civ. 7406, 2005 WL 3453908, at *8 n.10 (S.D.N.Y. Dec. 15, 2005), the court “decline[d] to sanction defendant for converting data from an accessible to inaccessible format, even if they should have anticipated litigation.” This disagreement, however, seems to be more semantic than real. Even those courts that do not denominate downgrading as a violation of the preservation obligation appear prepared to remedy any prejudice that it causes. Indeed, in a subsequent decision in Quinby, the court refused to shift discovery costs in favor of the party that had allowed the downgrading, reasoning that: if a party creates its own burden or expense by converting into an inaccessible format data that it should have reasonably foreseen would be discoverable material at a time when it should have anticipated litigation, then it should not be entitled to shift the costs of restoring and searching the data. 245 F.R.D. 94, 104 (S.D.N.Y. 2006). d. Who “‘The preservation obligation runs first to counsel, who has a duty to advise his client of the type of information potentially 20 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 21 of 40 relevant to the lawsuit and of the necessity of preventing its destruction.’” NTL, 244 F.R.D. at 197-98 (quoting Heng Chan v. Triple 8 Palace, Inc., No. 03 Civ. 6048, 2005 WL 1925579, at *6 (S.D.N.Y. Aug. 11, 2005) (internal quotation mark omitted)); see also Zubulake V, 229 F.R.D. at 433 n.80; Fayemi v. Hambrecht and Quist, Inc., 174 F.R.D. 319, 326 (S.D.N.Y. 1997). Moreover, this responsibility is “heightened in this age of electronic discovery.” Qualcomm Inc. v. Broadcom Corp., No. 05 Civ. 1958-B, 2008 WL 66932, at *9 (S.D. Cal. Jan. 7, 2008), vacated in part on other grounds, 2008 WL 638108 (S.D. Cal. March 5, 2008). Indeed, for the current “good faith” discovery system to function in the electronic age, attorneys and clients must work together to ensure that both understand how and where electronic documents, records and emails are maintained and to determine how best to locate, review, and produce responsive documents. Attorneys must take responsibility for ensuring that their clients conduct a comprehensive and appropriate document search. Id.; see also Phoenix Four, Inc. v. Strategic Resources Corp., No. 05 Civ. 4837, 2006 WL 1409413, at *5-6 (S.D.N.Y. May 23, 2006) (emphasizing counsels’ affirmative duty to search for sources of electronic information); Zubulake V, 229 F.R.D. at 433 (noting that “active supervision of counsel” is of particular importance when electronically-stored information is involved). Where the client is a business, its managers, in turn, are responsible for conveying to their employees the requirements for preserving evidence. See id. at 433 & n.80; Turner, 142 F.R.D. at 73. 21 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 22 of 40 2. Culpability In this circuit, a “culpable state of mind” for purposes of a spoliation inference includes ordinary negligence. Residential Funding, 306 F.3d at 108. This standard protects the innocent litigant from the destruction of evidence by a spoliator who would otherwise assert an “empty head, pure heart” defense: “[The] sanction [of an adverse inference] should be available even for the negligent destruction of documents if that is necessary to further the remedial purpose of the inference. It makes little difference to the party victimized by the destruction of evidence whether that act was done willfully or negligently. The adverse inference provides the necessary mechanism for restoring the evidentiary balance. The inference is adverse to the destroyer not because of any finding of moral culpability, but because the risk that the evidence would have been detrimental rather than favorable should fall on the party responsible for its loss.” Id. (quoting Turner, 142 F.R.D. at 75); accord Harkabi, 2010 WL 3377338, at *4; Pension Committee, 685 F. Supp. 2d at 464. It is cold comfort to a party whose potentially critical evidence has just been destroyed to be told that the spoliator did not act in bad faith.12 12 The rationale of the adverse inference in this context is sometimes misconstrued. For example, in Victor Stanley, 2010 WL 3703696, at *27, the court stated that: an adverse inference instruction makes little logical sense if given as a sanction for negligent breach of the duty to preserve, because the inference that a party failed to preserve evidence because it believed that the evidence was harmful to its case does not flow from mere negligence -- particularly if the destruction was of ESI 22 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 23 of 40 3. Assistive Relevance Sanctions are not warranted merely because information is lost; the evidence must be shown to have been “relevant.” As the Second Circuit has explained in connection with an application for an adverse inference, “[R]elevant” in this context means something more than sufficiently probative to satisfy Rule 401 of the Federal Rules of Evidence. Rather, the party seeking an adverse inference must adduce sufficient evidence from which a reasonable trier of fact could infer that the destroyed or unavailable evidence would have been of the nature alleged by the party affected by its destruction. Residential Funding, 306 F.3d at 108-09 (quotation marks, citations, and alterations omitted); see also Zubulake V, 229 F.R.D. at 431 (“[T]he concept of ‘relevance’ encompasses not only the ordinary meaning of the term, but also that the destroyed and was caused by the automatic delete function of a program that the party negligently failed to disable once the duty to preserve was triggered. The more logical inference is that the party was disorganized, or distracted, or technically challenged, or overextended, not that it failed to preserve evidence because of an awareness that it was harmful. But an adverse inference need not require the finder of fact to impute any particular state of mind to the spoliator. An adverse inference is imposed to ameliorate any prejudice to the innocent party by filling the evidentiary gap created by the party that destroyed evidence. The logical link suggested by Victor Stanley -- that the spoliator destroyed evidence because it was harmful to his case -- is simply unnecessary. Of course, that link is present in cases where there is proof of the deliberate destruction of evidence. But where there is not, an adverse inference may nevertheless be critical to assisting the innocent party in establishing the nature of the evidence that has gone missing. 23 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 24 of 40 evidence would have been favorable to the movant.”). When evidence is destroyed in bad faith, that fact alone is sufficient to support an inference that the missing evidence would have been favorable to the party seeking sanctions: that it would have been of assistive relevance. Residential Funding, 306 F.3d at 109. Indeed, under certain circumstances “a showing of gross negligence in the destruction or untimely production of evidence” will support the same inference. Id. (citing Reilly v. NatWest Markets Group, Inc., 181 F.3d 253, 267-68 (2d Cir. 1999)). The conduct, however, must be egregious. See Toussie v. County of Suffolk, No. 01 CV 6716, 2007 WL 4565160, at *8 (E.D.N.Y. Dec. 21, 2007) (declining to award adverse inference even though defendant failed to implement litigation hold and delayed litigation through “foot dragging”); cf. Cine Forty-Second Street Theatre Corp. v. Allied Artists Pictures Corp., 602 F.2d 1062, 1068 (2d Cir. 1979) (finding preclusion of evidence justified where plaintiff’s gross negligence froze litigation for four years); Cordius Trust v. Kummerfeld, No. 99 Civ. 3200, 2008 WL 113664, at *4 (S.D.N.Y. Jan. 11, 2008) (defendant’s “long-term and purposeful evasion of discovery requests,” standing alone, was sufficient to support a finding of relevance for purpose of imposing sanctions). In the absence of bad faith or other sufficiently egregious conduct, “‘it cannot be inferred from the conduct of the spoliator 24 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 25 of 40 that the evidence would even have been harmful to him.’” Zubulake IV, 220 F.R.D. at 221 (quoting Turner, 142 F.R.D. at 77); accord Harkabi, 2010 WL 3377338, at *6; Pension Committee, 685 F. Supp. 2d at 467-68; cf. Rimkus, 688 F. Supp. 2d at 607-08 (finding that loss of relevant evidence may be harmful as well as helpful to spoliator). The party seeking sanctions in such cases must therefore affirmatively “demonstrate that a reasonable trier of fact could find that the missing [evidence] would support [his] claims.” Zubulake IV, 220 F.R.D. at 221; see also Residential Funding, 306 F.3d at 109 (“[T]he party seeking an adverse inference must adduce sufficient evidence from which a reasonable trier of fact could infer that the destroyed or unavailable evidence would have been of the nature alleged by the party affected by its destruction.”) (internal quotation marks, citation, and alterations omitted). Such a showing can be made on the basis of extrinsic evidence. Residential Funding, 306 F.3d at 109 (“purposeful sluggishness” in turning over e-mails suggests that they were supportive of opponent’s position); Byrnie, 243 F.3d at 109-10 (relevance of missing interview notes could be inferred from weakness of defendant’s purported reasons for not hiring plaintiff, suggesting that the reasons were a “pretext [for] the real explanation that would be disclosed by the [notes]”); Harkabi, 2010 WL 3377338, at *6 (affidavits describing contents of missing 25 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 26 of 40 laptops); Great Northern Insurance Co. v. Power Cooling, Inc., No. 06 CV 874, 2007 WL 2687666, at *11 (E.D.N.Y. Sept. 10, 2007) (“‘[W]here the culpble party was negligent, there must be extrinsic evidence to demonstrate that the destroyed evidence was relevant and would have been unfavorable to the destroying party.’” (quoting Reino de Espana v. American Bureau of Shipping, No. 03 Civ. 3573, 2007 WL 1686327, at *6 (S.D.N.Y. June 6, 2007)); Heng Chan, 2005 WL 1925579, at *8-9 (relevance of spoliated employment and business records could be inferred from other documentary and testamentary evidence of defendant’s business practices); Zubulake V, 229 F.R.D. at 427-29 (relevance of deleted e-mails inferred from other e-mails that had been recovered and eventually produced); Barsoum v. New York City Housing Authority, 202 F.R.D. 396, 400-01 (S.D.N.Y. 2001) (notes of meeting between employment discrimination plaintiff and supervisor suggesting non-discriminatory motive for adverse action tended to show that audiotape of meeting destroyed by plaintiff would have been unfavorable to her). Without such evidence, severe sanctions are not warranted. See Great Northern, 2007 WL 2687666, at *12 (adverse inference not warranted without showing that missing evidence was favorable to plaintiff); Reino de Espana, 2007 WL 1686327, at *8 (adverse inference inappropriate because “[t]here is no evidence that [party seeking sanctions] asked any deponent whether lost or destroyed e-mails included information concerning 26 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 27 of 40 its proposed adverse inferences”); Sovulj v. United States, No. 98 CV 5550, 2005 WL 2290495, at *5 (E.D.N.Y. Sept. 20, 2005) (same result where any assertion that missing evidence was relevant was “pure speculation”); Zubulake IV, 220 F.R.D. at 221 (same result where there was no evidence that missing e-mails were “likely to support [plaintiff’s] claims”); Turner, 142 F.R.D. at 77 (in personal injury action regarding motor vehicle accident, plaintiff not entitled to adverse inference where there was “no evidence that the destroyed records would have shown whether the brakes were in good working order”). It is not sufficient for the moving party merely to point to the fact that the opposing party has failed to produce requested information. See Mitchell v. Fishbein, No. 01 Civ. 2760, 2007 WL 2669581, at *5 (S.D.N.Y. Sept. 13, 2007); Cortes v. Peter Pan Bus Lines, Inc., 455 F. Supp. 2d 100, 103 (D. Conn. 2006). Nevertheless, “[T]he burden placed on the moving party to show that the lost evidence would have been favorable to it ought not be too onerous, lest the spoliator be permitted to profit from its destruction.” Heng Chan, 2005 WL 1925579, at *7; see also Residential Funding, 306 F.3d at 109; Kronisch, 150 F.3d at 128 (“[To] hold[] the prejudiced party to too strict a standard of proof regarding the likely contents of the destroyed evidence would subvert the prophylactic and punitive purposes of the adverse 27 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 28 of 40 inference, and would allow parties who have intentionally destroyed evidence to profit from that destruction.”). Thus, “it is not incumbent upon the plaintiff to show that specific documents were lost.” Treppel IV, 233 F.R.D. at 372. 4. Discovery Relevance Use of the term “relevance” in Residential Funding, where the court was referring to assistive relevance, should not be confused with broad discovery relevance; for discovery purposes, information is relevant to the extent that it “appears reasonably calculated to lead to the discovery of admissible evidence.” Fed. R. Civ. P. 26(b)(1). Thus, prior to assessing whether a party has breached a preservation obligation, whether it did so with a culpable state of mind, and whether the lost information would have been helpful to the innocent party, a court considering a sanctions motion must make a threshold determination whether any material that has been destroyed was likely relevant even for purposes of discovery. Some decisions appear to omit such a requirement. In Pension Committee, for example, the court stated that “[r]elevance and prejudice may be presumed when the spoliating party acted in bad faith or in a grossly negligent manner.”13 685 F. Supp. 2d at 467 13 As authority for this proposition, Pension Committee cites Residential Funding, 306 F.3d at 109. Pension Committee, 365 F. Supp. 2d at 467 n.31. That decision, however, dealt solely with a presumption of prejudice -- that is, with assistive relevance. The court made clear that when it spoke of “relevance” in connection 28 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 29 of 40 (emphasis added). Indeed, the court drew a distinction between the types of sanctions available based on whether information had in fact been lost at all: For less severe sanctions -- such as fines and cost- shifting -- the inquiry focuses more on the conduct of the spoliating party than on whether documents were lost, and, if so, whether those documents were relevant and resulted in prejudice to the innocent party. . . . [F]or more severe sanctions -- such as dismissal, preclusion, or the imposition of an adverse inference -- the court must consider, in addition to the conduct of the spoliating party, whether any missing evidence was relevant and whether the innocent party has suffered prejudice as a result of the loss of evidence. 685 F. Supp. 2d at 467. The implication of Pension Committee, then, appears to be that at least some sanctions are warranted as long as any information was lost through the failure to follow proper preservation practices, even if there has been no showing that the information had discovery relevance, let alone that it was likely to have been helpful to the innocent party. If this is a fair reading of Pension Committee, then I respectfully disagree. “[F]or sanctions to be appropriate, it is a necessary, but insufficient, condition that the sought-after evidence actually existed and was destroyed.” Farella v. City of New York, Nos. 05 with sanctions, it meant evidence likely to be harmful to the spoliator and helpful to the innocent party. Residential Funding, 306 F.3d at 108-09. The court did not address the need to demonstrate the relevance of the information for discovery purposes because there was no dispute: the missing (and tardily produced) evidence was directly responsive to discovery requests. Id. at 102-06. 29 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 30 of 40 Civ. 5711 & 05 Civ. 8264, 2007 WL 193867, at *2 (S.D.N.Y. Jan. 25, 2007). To be sure, once it has been established that discovery- relevant material has been destroyed in bad faith or through gross negligence, it may be presumed that it would have been harmful to the spoliator. See Residential Funding, 306 F.3d at 109. But that is a far cry from presuming that evidence is discovery-relevant merely because it has been destroyed as the result of a party’s failure to abide by recommended preservation practices. It is difficult to see why even a party who destroys information purposefully or is grossly negligent should be sanctioned where there has been no showing that the information was at least minimally relevant. Demonstrating discovery relevance is not a difficult burden to meet, even in the face of spoliation. Thus, for example, in Pension Committee, the court concluded that relevant records had been lost on the basis of the failure of fiduciary parties to produce documents that they must “surely” have maintained: “records . . . documenting the due diligence, investments, and subsequent monitoring of these investments.” 685 F. Supp. 2d at 476. The consequences of omitting any requirement that a party seeking sanctions demonstrate the loss of discovery-relevant information could be significant. Because of the likelihood that some data will be lost in virtually any case, there is a real 30 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 31 of 40 danger that “litigation [would] become a ‘gotcha’ game rather than a full and fair opportunity to air the merits of a dispute.” Id. at 468. In order to avoid sanctions, parties would be obligated, at best, to document any deletion of data whatsoever in order to prove that it was not relevant or, at worst, to preserve everything. Nor are sanctions warranted by a mere showing that a party’s preservation efforts were inadequate. In Pension Committee, the court held that “[a]fter a discovery duty is well established, the failure to adhere to contemporary standards can be considered gross negligence.” Id. at 471. Those standards, according to the court, include issuing a written litigation hold, identifying all key players to ensure that their records are preserved, ceasing the deletion of e-mails or otherwise preserving the records of relevant former employees, and preserving backup tapes that contain unique relevant information from key players that is not otherwise readily available. Id. Indeed, the court found one set of parties grossly negligent precisely because they failed to issue a written litigation hold in a timely manner.14 Id. at 476-77. 14 As the court pointed out in Victor Stanley, if the the showing of a failure to follow a preferred practice leads both to a presumption that relevant and prejudicial material has been destroyed and also warrants a finding that the producing party was grossly negligent, then the innocent party may be immediately entitled to a sanction as severe as an adverse inference. 2010 WL 3703696, at 35 n.34. 31 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 32 of 40 But, depending upon the circumstances of an individual case, the failure to abide by such standards does not necessarily constitute negligence, and certainly does not warrant sanctions if no relevant information is lost. For instance, in a small enterprise, issuing a written litigation hold may not only be unnecessary, but it could be counterproductive, since such a hold would likely be more general and less tailored to individual records custodians than oral directives could be. Indeed, under some circumstances, a formal litigation hold may not be necessary at all. See Victor Stanley, 2010 WL 3703696, at *25; Haynes v. Dart, No. 08 C 4834, 2010 WL 140387, at *4 (N.D. Ill. Jan. 11, 2010). Rather than declaring that the failure to adopt good preservation practices is categorically sanctionable, the better approach is to consider such conduct as one factor, see Haynes, 2010 WL 140387, at *4, and consider the imposition of sanctions only if some discovery-relevant data has been destroyed. B. Application to the Facts There are numerous respects in which Mr. Ronsen and Orbit One failed to adopt appropriate preservation procedures in this case: • The initial litigation hold for Axonn documents was established by counsel without any apparent input from persons familiar with Orbit One’s computer system; it lacked detailed instructions; there is no indication that 32 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 33 of 40 it was disseminated to all persons who might have possessed relevant data; and the attorney who issued the hold evidently did not monitor compliance in any way. • There is no evidence that litigation counsel imposed any formal litigation hold when the instant litigation was commenced. • When information was deleted from servers, archived, or otherwise manipulated, the employee responsible for information technology was not informed of the Axonn litigation hold or of the pendency of the instant case. • Primary responsibility for safeguarding information often remained with Mr. Ronsen, the very individual with the greatest incentive to destroy evidence harmful to Orbit One and to his own interests. • Mr. Ronsen’s treatment of the information within his control was cavalier: he removed computer hardware from Orbit One’s premises, he permitted it to leave his control, and he failed to document his archiving practices. Nevertheless, as will be discussed in further detail, there is insufficient evidence of any loss of discovery-relevant information. 33 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 34 of 40 1. Removal of Data from Servers Numerex’s application for sanctions relates first to Mr. Ronsen’s purging of some six gigabytes of information from the Orbit One servers during the first week of December 2007. In a number of respects, this process was poorly designed to preserve information for litigation. First, when Mr. Dingman requested that Mr. Ronsen remove data from the servers, Mr. Ronsen failed to advise him that Orbit One was subject to a litigation hold in connection with Axonn’s threat of litigation. By the time Mr. Ronsen implemented Mr. Dingman’s request and actually began purging information, there is little doubt that he was contemplating litigation against Numerex and should have so advised Mr. Dingman as part of a further litigation hold. Then, after archiving the removed files on an external hard drive, Mr. Ronsen apparently kept possession of the hard drive for some period before turning it over to his counsel. However ill-advised this conduct might be, it does not amount to spoliation. First, Mr. Dingman requested the removal of data from the servers for reasons entirely independent of any potential lawsuit; indeed, he was unaware that any litigation was anticipated. Although the purge was undertaken without regard for the Axonn litigation hold then in effect, a violation of a preservation obligation in that matter does not provide a basis for 34 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 35 of 40 sanctions in this case.15 More to the point, although Mr. Ronsen removed information when he was under a duty to retain it because he was then contemplating litigation, he did not breach his obligation because the data was archived and there is no evidence that any of it was lost. There has also been no showing that the information on the external drive was more expensive or burdensome for Numerex to obtain in discovery by virtue of its having been deleted from the servers. To be sure, once Numerex took physical possession of the Bozeman facility, it could no longer simply download that information from the servers. But it was in no worse position than any litigant who obtains discovery at arm’s length from an adversary. 2. Removal of the Desktop Computer Next, Numerex contends that Mr. Ronsen’s removal of the desktop constituted spoliation. Again, his conduct was less than exemplary. When Mr. Ronsen complied with Mr. Dingman’s request to take the desktop off the network, he again failed to inform Mr. Dingman of the Axonn litigation hold. He removed the computer to his home and retained it there, apparently after this litigation was commenced and certainly after it was contemplated. Then, he actually permitted the hard drive to be extracted and removed from 15 Evidence of “serial” spoliation would of course be relevant to establishing the willfulness of any destructive conduct. See Victor Stanley, 2010 WL 3703696, at *3 n.10. 35 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 36 of 40 his possession. As cavalier as this conduct might be, it again did not amount to spoliation. As with the culling of data from the servers, the request to remove the desktop originated with Mr. Dingman. Because the desktop was part of the network, it was synchronized with the servers and, through them, with the laptop. Consequently, any information not stored exclusively on the desktop’s local drive would have been preserved in those locations. Furthermore, the hard drive from the desktop was ultimately recovered and provided to counsel. Again, though Mr. Ronsen was careless with this information, there is no basis for finding that any of it was destroyed. 3. Removal of the Laptop Hard Drive The “swapping out” of the hard drive from Mr. Ronsen’s laptop computer also did not result in spoliation. It is true that the exchange occurred when Mr. Ronsen was about to resign and that he did not tell Mr. Dingman, who effected the swap, of his intentions. In addition, it was ultimately determined that as of September 2008, neither the reconstituted laptop nor the servers contained certain information that had been on the system in January 2008 and was retained on the backup drive from that time. However, there is no credible evidence that the need to replace the hard drive was fabricated. The idea that Mr. Ronsen 36 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 37 of 40 would damage the hard drive and then seek its replacement in order to destroy evidence is far-fetched. And there is no dispute that Mr. Dingman properly diagnosed a serious malfunction. Furthermore, the process of swapping the drives was conducted by Mr. Dingman, not Mr. Ronsen, and he explained that he synched the laptop with the servers both before and after the exchange so that it should have acquired all of the information that had been on the old hard drive. It is, of course, conceivable that, after January 3, 2008 but prior to swapping the hard drives, Mr. Ronsen deleted the “missing” documents from the laptop and synched the laptop with the network so that they were removed from the servers as well. The documents would then be retained only on the backup tape from January 3, 2008. But Mr. Bolstad, Numerex’s own forensic expert, testified that it would be “speculative” to conclude that this is what happened. (Tr. at 89). Furthermore, when Numerex proffered 114 documents as examples of the “missing” files, Mr. Ronsen’s counsel demonstrated that every one had previously been produced by the plaintiffs in discovery with the exception of a very few privileged or non-substantive documents. (Letter of R. Scott Thompson dated July 30, 2010 & Exhs. 1-114; Declaration of Robert Bolstad dated March 5, 2010, Exh. A). Of course, it is always possible that other documents were 37 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 38 of 40 deleted from the system but did not appear on the backup disk because they were created after January 3, 2008. But there is no evidence that this in fact is the case. No witness has identified any significant document that has not been produced in discovery. This is true even though former employees of Mr. Ronsen’s, like Mr. Dingman, are now employees of Numerex and might well be expected to provide such information if it would assist their current employer. 4. Preservation of Backup Disks It is not clear whether Numerex is contending that any spoliation took place with respect to the backup disks. At the time the disks were removed from rotation, this litigation had already been commenced. Yet there is no indication that Mr. Ronsen, Orbit One, or plaintiffs’ counsel initiated any formal litigation hold at that time. Instead, it was Numerex, and specifically Mr. Nicolaides, who directed that the backup disks be preserved. Yet Mr. Dingman stored them in the office of Numerex’s litigation adversary. Moreover, that adversary, Mr. Ronsen, removed them from the premises and took them home. Still, there had been no showing that the integrity of the disks was compromised in any way, and therefore there is no basis for sanctions. 5. E-mail Forwarding Protocol Finally, it is not clear whether Numerex considers the e-mail 38 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 39 of 40 forwarding protocol to be a ground for spoliation sanctions. Whatever the propriety of Mr. Ronsen's continuing an e-mail forwarding rule after he had resigned from Numerex, his perpetuation of that protocol is not spoliation, since the rule created copies of information rather than destroying it. And there is no allegation that the 200 forwarded e-mails that Mr. Ronsen did delete were lost; they remained not only in the individual accounts of the senders, but also on the Numerex exchange server. * * * The plaintiffs did not engage in model preservation of electronically stored information in this case. But they are not liable for spoliation sanctions, much less a severe sanction such as an adverse inference, because there is insufficient evidence that any relevant information has been destroyed. Conclusion For the reasons set forth above, Numerex's motion for sanctions is denied. SO ORDERED. C. FRANCIS IV ITED STATES MAGISTRATE JUDGE Dated: New York, New York October 26, 2010 39 Case 1:08-cv-11195-LAK Document 152 Filed 10/26/10 Page 40 of 40 Copies mailed this date: R. Scott Thompson, Esq. Khizar A. Shiekh, Esq. Lowenstein Sandler, PC 1251 Avenue of the Americas New York, NY 10220 Kent A. Yalowitz, Esq. Emily A. Kim, Esq. Arnold & Porter LLP 399 Park Avenue New York, NY 10022 4690 40 550 Our Firm in Brief Wilson Elser is a large, full-service firm with clients for the profession. In addition to being recognized in the United States, Latin America, Europe, and as leaders in today’s legal profession, some of our Asia. Domestically, we are ranked among the top lawyers are experienced accountants, architects, law firms identified byThe American Lawyer and former judges and engineers along with legal nurse listed in the Top 50 by The National Law Journal. consultants. 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