Judge Refers Defendant’s e-Discovery Abuse to U.S. Attorney for Criminal Prosecution of the Company and Four of Its Top Officers

A defendant in Utah District Court was caught intentionally destroying electronic evidence on five of its laptops, consisting of “17,800 documents that were central to this litigation.” Philips Electronics N.A. Corp. v. BC Technical, 2011 WL 677462 at *2 (D.Utah, Feb. 16, 2011). To make matters worse, top officers tried to cover up the malfeasance. This led to severe sanctions. Judgment was entered against the defendant, fees were awarded, and the defendant and four of its top officers were referred to the United States Attorney for possible criminal prosecution.

Defendant Blames Its Lawyers

The defendant’s empty head, not-so-pure-heart defense to spoliation did not work. So, much like the plaintiff in Qualcomm, they tried another defense. They tried to blame it on their attorneys. As District Court Judge Clark Waddoups explains: “BCT contends its counsel and a handful of its employees are the ones culpable – not it.” Id. That maneuver did not work in Qualcomm. It did not work here either. As Judge Waddoups explains in footnote seven:

The court takes no position on whether BCT’s counsel acted negligently because BCT’s allegation of malpractice is not before the court.

Id.

Factual Background

This is an unfair trade practices case, including a complaint by the plaintiff, Phillips Electronics, that the defendant, BC Technical (“BCT”), “was systematically and deliberately attempting to damage Philips by targeting key Philips employees for employment with BCT.” Philips Electronics N.A. Corp. v. BC Technical, 2010 WL 5838993 at *1 (D.Utah, 2010). Obviously a case like this will involve many important electronic documents, including emails. As the Magistrate Judge Samuel Alba assigned to sort out the discovery battles in this case explained:

This case involves large amounts of electronic information. Under the federal rules, in addition to this court’s discovery orders, the litigants and counsel were expected to take the necessary steps to ensure that relevant records were preserved when litigation was reasonably anticipated or began, and that those records were collected, reviewed, and produced to the opposing party during the discovery process. Unfortunately, as discussed herein, the court has concluded that Defendant and Counter Claimant BC Technical (hereafter “BCT”) did not fulfill its discovery obligations or comply with this court’s orders with respect to five of its laptop computers.

Id.

Phillips filed suit in January 2008. In July 2009 Philips filed a motion to compel BCT to preserve relevant information. In its motion to compel preservation:

Philips expressed concerns that even though this case had been pending for about eighteen months, BCT had (1) failed to issue a litigation hold memo to its employees to preserve information, (2) failed to modify or suspend document destruction practices in light of the litigation, (3) failed to image the hard drives of its key custodians, and (4) continued its practice of routinely overwriting back-up tapes until Philips brought those problems to this court’s attention by motion on July 15, 2009. (Docs.75-76, 79.) Philips expressed its concern that BCT was destroying key evidence.

Id. at *2.

The motion was granted and Judge Alba ordered BCT to finally issue a written litigation hold to key players, send a copy of the hold to the plaintiff along with a list of persons to whom it was sent, turn over the backup tapes to BCT’s own attorneys, and “Cease “wiping” or “re-imaging” the hard drives of employees likely to have relevant information until further order of the Court, or the termination of this litigation.” Id. At the hearing where this order was entered, “BCT’s attorney assured the court that he understood the requirements of the order and BCT would ‘follow it.'” Id. Obviously that did not happen.

An appropriate hold notice was sent out, and it said all of the right things to comply with the order, but it was not followed. Instead, after another order was entered compelling the production of certain computers by BCT for forensic inspection, “BCT executives and employees began deleting a massive number of files from their computers just ahead of the court-ordered collection.” Id. at *5. This then led to a series of investigations and evidentiary hearings where the full extent of defendant’s e-discovery failures and defiance of rules and orders were revealed. The full facts of this e-discovery horror story are laid out in a 48-page opinion by the Magistrate Judge  Samuel Alba. Philips Electronics N.A. Corp. v. BC Technical, 2010 WL 5838993 (D.Utah, 2010).

Defendant Punished For Destroying Evidence

After multiple hearings, Judge Alba determined that case-ending sanctions were appropriate and a criminal investigation should begin as to the conduct of BCT and four of its top officers. His holding and recommended sanctions were appealed to District Court Judge Waddoups. Judge Waddoups affirmed and imposed the recommended sanctions, holding:

[T]he court strikes BCT’s answer, dismisses BCT’s counterclaims, and enters default judgment as to liability in Plaintiffs’ favor. … The Clerk of the Court is directed to send a copy of this Order, along with the Report and Recommendation, to the Acting United States Attorney for the District of Utah for such action as she deems is appropriate.

Philips Electronics N.A. Corp. v. BC Technical, 2011 WL 677462 at *4.

Here is Judge Waddoups’ (shown right) summary of BCT’s conduct:

In this case, the individuals who destroyed evidence were not low-level employees. Rather they were largely upper management and executives at BCT. Moreover, after documents were destroyed, BCT’s founder and Chief Executive Transition Officer, its Chief Technical Officer, and its Chief Operating Officer lied about their actions under oath.

The discovery abuses in this case were egregious. Court orders were disobeyed, documents were intentionally and irretrievably destroyed, efforts were made to erase evidence of the destruction, and BCT employees lied under oath. Were the court to ignore such behavior, it could not “administer orderly justice, and the result would be chaos.” FN17 Moreover, a lesser sanction would fail to have a deterrent effect given the egregiousness of BCT’s actions. “One who anticipates that compliance with discovery rules and the resulting production of damning evidence will produce an adverse judgment, will not likely be deterred from destroying that decisive evidence by any sanction less than the adverse judgment [it] is tempted to thus evade.” FN18 Willful spoliation of evidence deserves the harshest sanctions because it is antithetical to our system of justice. The evidence is sufficient to show such willfulness here. The court therefore concludes both attorney’s fees and terminating sanctions are appropriate in this case.

Id. at *2, *4.

Defendant and Its Leaders Further Punished for the Cover Up Attempt

Now you see why the company was sanctioned so harshly. But why the reference to the U.S. Attorney and implied threat of arrest and prosecution of certain of its officers? Once again, here is Judge Waddoups explanation:

Because certain individuals lied under oath, Judge Alba recommends that his matter be referred to the United States Attorney’s Office for investigation. The court adopts that recommendation.

Id. at *4.

Makes you wonder about the exact findings in Judge Alba’s order, doesn’t it? There are 48-pages of details in his order, but here are two highlights worthy of Perry Mason:

At the Hearing, after being confronted with Exhibits 30 and 32, Hale himself admitted that he had not been truthful when he testified that he never tried to buy any competitor’s confidential information.

Q: So when you testified in your deposition that you have never tried to buy any competitor’s confidential information, that was not really an accurate statement in your deposition, was it?

A: Okay.

Q: Do you agree with that?

A: Yes.

Tr. at 207-08.

Of course, a critical issue in Philips’ three motions currently before the court is whether BCT did, in fact, delete relevant information and data from its five laptop computers and then tried to hide it. At the Hearing, when Hale was asked whether anyone at BCT deleted relevant ESI and tried to cover that fact up, Hale adamantly responded, “No, No, No. No one did that. That’s what I am saying.” Tr. at 209. Obviously, as the evidence at the Hearing demonstrated, BCT employees did, in fact, delete thousands of relevant electronic files from the five laptops, took deliberate steps to cover up what they had done, and then lied about it. Therefore, Hale’s testimony on this issue, like his testimony on so many other issues, lacks credibility.

Philips Electronics N.A. Corp. v. BC Technical, 2010 WL 5838993 at *34.

This is just the tip of the iceberg of bad faith, intentional destruction of evidence. When this kind of activity is exposed by good lawyering on the other side, most judges (but alas, not all) respond like Judge Alba did in Philips Electronics:

BCT’s dishonesty and efforts (perhaps even strategy) to hide and destroy ESI shred BCT’s credibility and reveal BCT’s overall contumacious and dishonest attitude toward this case, this court, and the system of justice. This inexcusable behavior and attitude greatly contribute to this court’s finding of bad faith. BCT must be excoriated for filing false sworn declarations, giving testimony riddled with lies and deceit, and making false representations to this court.FN39

Id. at *49.

The excoriation did not stop with the business entity. It went on to denounce the men in charge:

In addition to the findings made above, based on the court’s analysis and observations during the Hearing, the court finds that Dan Gasparovich, Jerry Williams, Marcus Carter, and Charles Hale lied under oath before this court at the evidentiary hearing held on February 10 and 11, 2010.

In addition, in light of the above findings, the court recommends that this matter be referred to the United States Attorney’s Office for investigation and criminal prosecution.

Id. at *57.

This is Not a Case of Innocent Mistakes

I want to stress that this is a case where there was clear and convincing evidence of intentional destruction of evidence. A court should not respond like this if it is unsure, if  the spoliation may have been the result of negligence. No sanctions are appropriate where reasonable good faith efforts by experts have been made, but evidence is still lost. Missing files are not res ipsa loquitur negligence. Sometimes it just happens despite the best efforts of skilled practitioners.

The ESI preservation challenge can be very complex and difficult. Mistakes can still made and evidence lost, even when experts are acting in good faith. Yes, it can be that complicated. In circumstances like that, no sanctions are appropriate. The truth is, mistakes and innocent spoliation are inevitable in any large project, even if the head is filled with knowledge, not empty. Electronic discovery is not a game of perfect. But it is a game where cheaters are punished and that is what happened here. As Judge Alba (shown right) pointed out:

As discussed and examined at length above, the deletions at issue were not an accident, but were made intentionally and methodically. The deletions were then, in some cases, followed by deliberate and calculated behavior meant to cover up the deletions through sophisticated wiping, shredding, or overwriting, all in direct disobedience to this court’s orders. Furthermore, several BCT employees gave false or misleading statements to the court denying their behavior until evidence was set forth that directly contradicted their assertions; and employees appear to have given false statements to the court on more than one occasion.

Id. at *50.

Another obvious lesson here, if you find out some of your employees or witnesses have done bad, come clean about it. Do not make matters worse by trying a cover-up. The next thing you know, you’ll be the one asked to fall on the sword.

What About the Attorneys?

If you are like me and are interested in legal ethics and the kinds of things lawyers will sometimes do, you must be wondering about the defense attorneys in this case. You know, the one’s the defendant later threw under the bus after the Magistrate ruled. See if you can figure out what the judges think. I’m not sure I can, at least not exactly. Look at the attorneys listed on the opinion. Some are from Salt Lake City, but others on each side are from far out-of-town. (The case was transferred to Salt Lake City by BCT over the plaintiff’s objection. Ironic, eh?) Here is what Judge Alba had to say about defense counsel.

In his opening statement at the Hearing, counsel for BCT stated that the “question is whether evidence is fully and currently lost.” Tr. at 13-14. BCT’s counsel went on to represent to the court that: (1) BCT has “reconstructed all information” which Philips’ expert said was deleted from Gasparovich’s computer; (2) BCT has furnished all deleted information from Carter’s computer; and (3) all but a few of the files which Williams deleted have now been reconstructed and sent to Philips. Tr. at 14. To the contrary, the evidence at the Hearing established that each of these representations was false. Even Hooper, BCT’s forensic computer expert, testified to the contrary of these representations.

Id. at *41.

BCT is represented by sophisticated counsel. Case law – even that which the court relies on in this Report and Recommendation – provides that default judgment is a possible sanction; therefore, BCT’s counsel should have been and likely was aware that default judgment may result from destruction of evidence.

Id. at *53. Yet, remember District Court Judge Waddoups’ footnote seven where he will not judge the actions of defense counsel, beyond to say that “BCT’s allegation of malpractice is not before the court.” Philips Electronics N.A. Corp. v. BC Technical, 2011 WL 677462 at *2.

Conclusion

I don’t particularly like lawyer jokes. Perhaps I’ve heard one too many told by non-lawyers with a smug countenance and empty smile. Anyway, here’s a joke I’m sure you’ve heard before. Question: How do you know when a lawyer is not lying? Answer: His lips have stopped moving.

But lying in court is no laughing matter. Neither is trying to mislead a judge or jury. As the founder of Mormonism, Joseph Smith, Jr., said: “No one can ever enter the celestial kingdom unless he is strictly honest.” Lawyers in the United States take sacred oaths to uphold the Constitution and the justice system that it underlies. We take that very seriously. So do our judges. You may have good cause to suspect the veracity of a lawyer’s statement of their client’s bottom line in a negotiation. But not when a lawyer speaks to the judge, not in court. That is our kind of celestial kingdom. Although I am not a Mormon, I am inclined to agree again with the sentiment of their second prophet, Brigham Young, who said: “Honest hearts produce honest actions.”

The legal process is sacred to those who devote their lives to the law. We do not countenance fraud on the court, nor shy away from its punishment. We applaud when strong judges do their job and uphold the integrity of the legal system. We give thanks to Judges like Waddoups and Alba who send a strong message to all who would undermine our system of justice. I conclude with the words of Judge Alba.

Further, spoliation sanctions serve a dual function. Not only are they meant to penalize litigants, but they also serve to deter those who might be tempted to cause the spoliation of evidence. Lesser sanctions would not establish deterrence some litigants need regarding this behavior, especially as it relates to ESI. “One who anticipates that compliance with discovery rules, and the resulting production of damning evidence, will produce an adverse judgment will not likely be deterred from destroying that decisive evidence by any sanction less than the adverse judgment he … is tempted to thus evade.” Computer Assocs. Int’l Inc., 122 F.R.D. at 170. In other words, courts have recognized that if parties are willing to take the risk and balance destroying evidence against turning over the proverbial smoking gun, knowing that the destruction will not result in the ultimate judgment, destruction of important evidence will occur. The court must not inherently reward the misbehavior of companies and individuals who want to destroy incriminating evidence rather than produce it and have a judgment entered against them; litigants must be strongly discouraged, rather than encouraged in any way, to become more and more clever about how to delete and hide the destruction of electronic documents.

*54 In addition, the court must maintain order and punish those who violate its direct orders. If parties could “ ‘ignore court orders … without suffering the consequences, then the district court cannot administer orderly justice, and the result would be chaos.’ “ Ehrenhaous, 965 F.2d at 921 (citation omitted). It is extremely important that courts maintain faith in the integrity of the judicial system. Further, courts must be able to rely on litigants and their counsel to follow court orders.

Philips Electronics N.A. Corp. v. BC Technical, 2010 WL 5838993 at *53-*54.