September 4, 2013

JUDGE SCHEINDLIN REASSERTS SEVERE SANCTIONS FRAMEWORK FOR DESTRUCTION OF ELECTRONIC INFORMATION

In a new decision, Judge Shira A. Scheindlin of the Southern District of New York - whose Zubulake series of opinions a decade ago established the framework for the preservation of electronically stored information ("ESI") in litigation - has imposed an adverse inference sanction on a plaintiff for the destruction of email data. In Sekisui American Corp. v. Hart, No. 12 Civ. 3479 (SAS) (S.D.N.Y. Aug. 15, 2013), during a very lengthy interval between the plaintiff's written threat of litigation and the issuance of a litigation hold, relevant ESI was permanently destroyed by employees who were responding to unrelated business technology needs. The Sekisui decision reviews Judge Scheindlin's own guidance concerning e-discovery preservation obligations while addressing the most recent Second Circuit jurisprudence concerning the standards for the issuance of an adverse inference sanction.

Background

Sekisui America Corporation and Sekisui Medical Company ("Sekisui") brought an action for breach of contract against Richard Hart ("Hart") and Marie Louise Trudel-Hart (the "Harts") concerning Sekisui's acquisition of America Diagnostics, Inc. ("ADI"), of which Hart was president. Sekisui acquired ADI in 2009 pursuant to a stock purchase agreement containing certain representations and warranties. In October of 2010, Sekisui terminated Hart and sent a Notice of Claim evidencing an intent to sue. Fifteen months passed before Sekisui put a litigation hold into place in January 2012. Sekisui filed its lawsuit in May 2012. Even then, Sekisui had not notified its outsourced information technology ("IT") vendor of the need to preserve data -- and did not do so until July 2012.

The discovery process revealed that Hart's email files from the period when he was president of ADI had been deleted by Sekisui in March 2011, five months after Sekisui had sent its Notice of Claim. Moreover, a former ADI employee, who was head of Human Resources, had directed the deletion of that email data notwithstanding warnings by the IT vendor that there was no backup. The employee "made the unilateral decision to delete Hart's email in order to free up space on the ADI server after determining that Hart was no longer receiving work-related email." Decision at 8. Although 36,000 emails to and from Hart were produced from other sources, Judge Scheindlin concluded that "[i]t is impossible to say how many emails were permanently deleted and remain unrecoverable." Id. at 9. Separately, the emails of an ADI employee responsible for ensuring compliance with FDA regulations were also deleted more than a year after the Notice of Claim was sent, at the direction of the Human Resources director and with the approval of ADI's then-president and chief operating officer.

Attorney Advertising www.kramerlevin.com © 2013 Kramer Levin Naftalis & Frankel LLP

Initial Decision, Overturned

The original request for sanctions was referred to Magistrate Judge Maas, who concluded that Sekisui's destruction of ESI '"may well rise to the level of gross negligence'" but that no sanctions should be imposed because the Harts had failed to show prejudice. Decision at 11 (quoting Sekisui America Corp. v. Hart, 2013 WL 2951924 at *4 (S.D.N.Y. June 10, 2013). Judge Scheindlin overturned this decision, finding that it was "contrary to law and clearly erroneous." Decision at 22.

Legal Analysis and Application

As described in Sekisui, the decision to impose an adverse inference instruction turns on the elements set out in Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99 (2d Cir. 2002), which requires the party seeking an adverse inference for spoliation of ESI to establish that (a) there was a duty to preserve ESI; (b) that ESI was destroyed with a "culpable state of mind"; and that (c) the destroyed ESI was relevant and its loss prejudicial to the innocent party. See Decision at 13.

Culpable State of Mind

In Sekisui, Judge Scheindlin reiterates her original guidance that the "culpable state of mind" element "is satisfied by a showing that the evidence was destroyed knowingly, even if without intent to [breach a duty to preserve it], or negligently." Id. at 14, quoting Residential Funding, 306 F.3d at 108. Addressing Chin v. Port Auth. of N.Y. & N.J., 685 F.3d 135, 162 (2d Cir. 2012), in which the Second Circuit recently found sanctions to be unwarranted, Judge Scheindlin writes that a finding of gross negligence "permits, but does not require, a district court to give an adverse inference instruction." Decision at 15 n. 54.

With respect to Sekisui's conduct, Judge Scheindlin concludes that the requisite culpable state of mind had been established because "Hart's ESI was willfully destroyed" at the direction of an employee. Decision at 20. It was irrelevant that Sekisui provided a good-faith explanation concerning the need to free up server space. "In the context of an adverse inference analysis, there is no analytical distinction between destroying evidence in bad faith, i.e. with a malevolent purpose, and destroying it willfully." Decision at 21-22.

Judge Scheindlin also clarified her view of the role of the litigation hold in the sanctions analysis. "While the failure to timely institute a litigation hold does not constitute gross negligence per se, the facts here are egregious and establish that Sekisui was grossly negligent." Decision at 23. This ostensibly represents a change from previous decisions in which Judge Scheindlin had written that failure to issue a written litigation hold notice is per se gross negligence. However, the decision in Sekisui appears fundamentally to turn on the failure to issue a litigation hold in a timely manner. Among the facts noted as key in Sekisui were that 15 months had passed between the Notice of Claim and the issuance of the litigation hold, and that Sekisui took another six months to notify the IT vendor. "Such failure is inexcusable given that Sekisui is the plaintiff in this action and, as such, had full knowledge of the possibility of future litigation." Decision at 24.

Relevance

With respect to relevance, Judge Scheindlin writes that "[w]hen evidence is destroyed willfully, the destruction alone 'is sufficient circumstantial evidence from which a reasonable fact finder could conclude that the missing evidence was unfavorable to that party.'" Decision at 16 (quoting Kronisch v. United States, 150 F.3d 112, 127 (2d Cir. 1998)). With respect to the lost ESI in Sekisui, Judge

www.kramerlevin.com 2

Scheindlin wrote that "[t]here is no question" that the emails were relevant. Her conclusion is apparently based "solely on whose data was destroyed." Decision at 25. That is because Hart and the compliance employee held positions that were "directly related to the claim in the action" and Hart is a defendant. Id. In other words, they were "key players." Decision at 28.

Prejudice

With respect to the element of prejudice, Judge Scheindlin writes that when evidence is destroyed willfully or through gross negligence, "prejudice to the innocent party may be presumed." Decision at 18. Acknowledging again the Second Circuit's recent guidance in Chin, she then writes that "a case-by- case approach" is appropriate and that the failure to adopt good preservations practices is '"one factor in the determination of whether discovery sanctions should issue."' Decision at 19 (citation omitted).

In Sekisui, Judge Scheindlin found that as a result of the destruction, "the Harts are left without an untold amount of contemporaneous evidence of ADI's operations prior to purchase by Sekisui" and that Sekisui "is unable to rebut the presumption of prejudice" because an unknown amount of data remains permanently irretrievable. Decision at 27-28. For example, the inability to use the emails "to prove 'routine compliance' with FDA regulations may be as prejudicial to the Harts as depriving a party of access to a 'smoking gun' document." Decision at 28. Notably, "prejudice is only presumed when determining whether an adverse inference instruction will be given. The jury may still determine that the Harts were not prejudiced. . . . and decline to draw any adverse inference." Decision at 28 (emphasis in original).

Adverse Inference Instruction

In addition to granting an adverse inference instruction, the Sekisui decision includes the actual adverse inference instruction that will be given to the jury. That instruction indicates that "relevant evidence was destroyed after the duty to preserve arose," but provides the jury with discretion as to the finding of prejudice: "you may presume, if you so choose, that such lost evidence would have been favorable to the Harts. In deciding whether to adopt this presumption, you may take into account the egregiousness of the plaintiffs' conduct in failing to preserve the evidence." Decision at 29. The court also imposed a monetary sanction upon Sekisui, requiring it to pay the Harts' reasonable expenses incurred in connection with their motion for sanctions.

Conclusion

Sekisui represents a rearticulation of Judge Scheindlin's decade-old framework for litigation hold obligations and spoliation sanctions. While reflecting the Second Circuit's move away from a per se gross negligence standard concerning the issuance of a litigation hold, the court's issuance of an adverse inference instruction appears to turn almost entirely on the lengthy delay between the written threat of litigation by a plaintiff and its implementation of a litigation hold. During that interval, relevant ESI was permanently destroyed by employees who appear to have responded in good faith to unrelated business needs. This new decision serves as a continuing reminder of the potentially severe consequences of the failure to undertake reasonable preservation efforts in a timely manner upon the reasonable anticipation of litigation. However, the "case-by-case" analysis articulated in the decision suggests that each ESI spoliation situation will be evaluated in its own context.

* * * Kramer Levin Naftalis & Frankel LLP was counsel to defendant in the pre-trial phase of Zubulake v. UBS Warburg.

www.kramerlevin.com 3

* * *

If you have any questions or need additional information about this Alert or any electronic discovery topic, please contact:

Norman C. Simon Litigation Partner E-Discovery Practice Chair 212.715.7816 [email protected]

Brendan M. Schulman E-Discovery Counsel Special Counsel 212.715.9247 [email protected]

*** This memorandum provides general information on legal issues and developments of interest to our clients and friends. It is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters we discuss here. Should you have any questions or wish to discuss any of the issues raised in this memorandum, please call your Kramer Levin contact.

Kramer Levin Naftalis & Frankel LLP www.kramerlevin.com 1177 Avenue of the Americas 990 Marsh Road 47 avenue Hoche New York, NY 10036 Menlo Park, CA 94025 75008 Paris Phone: 212.715.9100 Phone: 650.752.1700 Phone: (33-1) 44 09 46 00