Federal Judge in Louisville Imposes Sanctions for Pre-Suit Spoliation

chess and strategyI generally do not like motions for sanctions against a defendant when they are based on alleged destruction of ESI before suit is filed. All too often these motions are not part of a legitimate pursuit of truth. Instead, they are litigation tactics, just chess moves in litigation as a game. As Bobby Fischer said: “Chess is life.” The players here exploit the frequent inability of a defendant to know when and if a potential plaintiff will sue and exactly claims they will bring if they do sue. The plaintiff causes this vagary to begin with, and then exploits it. This is an unfair strategy and I wish more judges would wise up to this trick.

When to Pull the Trigger?

The timing of the trigger of a pre-litigation hold is often just guesswork. A litigation hold in a large organization, especially when there is just a vague dispute of unknown parameters (again, this vagary is typically controlled by the plaintiff), can be very expensive and burdensome to implement. That burden is a good reason not to trigger a hold prematurely. The expense and disruption may prove to be totally unnecessary. Yet, if you guess wrong, you are susceptible to this kind of tactical attack.

This question of timing of a hold is a huge issue for all large organizations, corporations and government agencies alike. I recall talking to David Shonka, the Assistant General Counsel for Litigation for the Federal Trade Commission, about this issue. The FTC sometimes get sued just like everybody else. He told me that timing of a pre-litigation trigger is a very troubling problem. He found that it is often impossible for him, or anyone else, to know when to impose a litigation hold.  Yet, the penalties for guessing wrong can be draconian. See my prior article, e-Discovery at the Harvard Club in New York City, for more on David Shonka’s views on e-discovery.

chess menSome counsel know very well how to take advantage of this grey area. No matter when you decide to pull the trigger and implement a hold, they will argue that it was too late. You should have done it earlier. Again, this is just a chess tactic, not the good faith pursuit of justice. Plaintiffs make the argument to the court with nothing to lose, and everything to gain. All too often judges are persuaded by these Monday morning quarterbacking type arguments. Since a suit is in place, it is easy to argue that the defendant should have seen it coming. After all, it did come. What judges often do not know is the many false alarms of litigation that a big company is faced with every day. Nor do most fully appreciate the tremendous expense and burden of a hold.

Just think how foolish an assistant general counsel looks to management for pulling the trigger,  doing the full drill, imposing an expensive hold, and then nothing happens. Worse, the company is forced to keep it in place and just wait to see if a suit is filed. The company could be left guessing for years whether or not the danger is gone. In the meantime, the very real expenses and harassment of the hold continues. Then in situations where counsel guessed wrong and a suit is never filed, the attorneys are left with egg on their face. Statutes of limitation give plaintiffs way too much leeway to delay suit for years.

The bar is sometimes encouraged in this misbehavior by incredible opinions like Phillip M. Adams & Associates, L.L.C., v. Dell, Inc., 2009 WL 910801 (D.Utah March 30, 2009). In Adams a magistrate actually held that a defendant should have imposed a hold eight years before the suit was filed. I found this decision so egregious that I wrote a long, two-part blog about it: Utah Court Mines Safe Harbor Rule 37(e) Into Oblivion – Part One and Part Two: Eight Years of Imminence. I was surprised that some experts, including my friend Craig Ball, argued to the contrary that I was wrong and the Adams was correctly decided. I stand by my opinion and encourage you to read the Adams case and see what you think. As Bobby Fischer said: “My opponents make good moves too. Sometimes I don’t take these things into consideration.”

BOBBY FISCHER in 1971

Although Craig and I agreed to disagree on that one, a a new case has come along where I can easily agree with Craig and side with the plaintiff.  KCH Services, Inc. v. Vanaire, Inc. 2009 WL 2216601 (W.D.Ky. July 22, 2009). Here the plaintiff was correct to move for sanctions against the defendant for pre-suit spoliation. KCH Services shows that the imposition a pre-suit duty to preserve is good law in the right circumstances. I just wish the application of the rule was restricted to the kind of factual scenario you see in KCH Services and not applied to every case in town by a trigger happy plaintiffs Bar.

KCH Services, Inc. v. Vanaire, Inc.

This is a case by one air scrubber company against another suing for unfair competition. The primary complaint appears to be an allegation that the defendant misappropriated and illegally used the plaintiff’s custom software.  The dispute started when the president of the plaintiff corporation called the president of the defendant corporation in October 2005. The plaintiff alleges that he told defendant that he knew he had taken his software and he was going to sue him, or words to that effect. No doubt the defendant had a different recollection of the phone call, but everyone seems to agree about what happened next. The president of the defendant company ordered his employees to delete all copies of plaintiff’s software from his computer systems and any other software on his company’s computers “that he did not purchase or did not own.” Id. at * 1. The defendant’s employees apparently admitted as much, and even admitted they received the instructions right after he got off the phone with the plaintiff. It is hard to imagine a more obvious case of intentional destruction of evidence.

This plaintiff did not then wait eight years to sue, he filed suit the next month, November 2005. The next month he followed up with a preservation demand letter. Of course, the software at issue in the case had already been deleted, but the defendant had not yet deleted all of his responsive email and other ESI. The court found that he went ahead and continued to delete relevant ESI even after the complaint and  preservation demand letter had been served. According to the findings made in this opinion, the defendant was obviously a hard core spoliator. The motion for sanctions was based on deletion of ESI both before and after the suit was filed.

Based on these circumstances, District Court Judge Jennifer B. Coffman granted plaintiff’s motion for sanctions and imposed an adverse-inference instruction to the jury at trial. Judge Coffman made the following rulings to explain her application of the law in this case:

The federal law of spoliation governs in this case. See Adkins v. Wolever, 554 F.3d 650, 652 (6th Cir.2009). “As a general matter, it is beyond question that a party to civil litigation has a duty to preserve relevant information, including ESI, when that party ‘has notice that the evidence is relevant to litigation or … should have known that the evidence may be relevant to future litigation. ’ ” John B. v. Goetz, 531 F.3d 448, 459 (6th Cir.2008) (quoting Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423, 436 (2d Cir.2001)). FN1. The Sixth Circuit also cites Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 216-18 (S.D.N.Y.2003), an employment discrimination case, in which the duty to preserve arose as soon as the plaintiff’s superiors became reasonably aware of the of the possibility of litigation, rather than when an EEOC complaint was filed months later. See Goetz, 531 F.3d at 459 (6th Cir.2008). See generally The Sedona Principles: Best Practices Recommendations & Principles for Addressing Electronic Document Production, Second Edition 11, 28 (The Sedona Conference Working Group Series, 2007), available at http://www.thes edonaconference.org/content/miscFiles/TSC_ PRINCP_2nd_ed_607.pdf.

Hankinson’s telephone call to Vanegas, Sr. in October 2005 should have put the defendants on notice that issues of software may be relevant to future litigation. For the duty to preserve to have attached, it is not required that Vanegas, Sr. actually knew that litigation was on the horizon, or that the software would be relevant, but only that he “should have known” the software “may be” relevant to future litigation. Id. In October 2005, the defendants were familiar with their competitor’s willingness and ability to file suit; Vanegas, Sr. had been personally involved with Vanaire during the 1995 litigation with KCH. See KCH Services, Inc. v. Brooks, et. al., No. 3:95-cv-672-S, Dep. (R. 19), Dec 4., 1995. Even with such experience, Vanegas, Sr. ordered the software deleted immediately after the telephone call, before KCH had an opportunity to inspect. FN2. Vanegas Sr.’s conversations with Vanaire employees and other correspondence among Vanaire employees immediately after Hankinson’s telephone call show clearly that the defendants were, in fact, alerted to the problem and saw it as such. FN3.

FN2. Cf. Fujitsu, 247 F.3d at 435-36 (2d Cir.2001) (Trial court denied sanctions where the defendant destroyed evidence but not before the plaintiff had an opportunity to inspect.).

FN3. See, e.g., e-mail from Scott Freeman to Guillermo Vanegas, Ray Steele, Gary Vanegas, and Michael Vanegas (Oct. 17, 2005, 11:45 a.m.) (“I am currently working with Keith to insure [sic] there is nothing left on the computers….”).

After the plaintiff filed the complaint on November 23, 2005, the defendants not only “should have known” that e-mail and other electronic evidence concerning the plaintiff’s claims “may be” relevant to litigation, but had notice that they were relevant to litigation. See Goetz, 531 F.3d at 459. However, the defendant Vanaire, Inc. failed to preserve them by continuing to delete and overwrite, even after receipt of a preservation letter. See Vanegas, Jr. 30(b)(6) Dep. 211:10-18. The defendants’ conduct in regard to electronically stored evidence falls beyond the scope of “routine, good faith operation of an electronic information system.” See Fed.R.Civ.P. 37(e). Vanegas Sr.’s order to delete the software and the defendants’ continued unwillingness to place a meaningful litigation hold on relevant electronic information after being placed on notice resulted in a loss of evidence relevant to the plaintiff’s case. Whether the evidence was lost in good faith or was “an intentional attempt to destroy evidence,” Fujitsu, 247 F.3d at 436, the plaintiff is bereft of the very subject of the litigation as well as any e-mail correspondence contemporaneous to the software’s installation and use. FN4.

FN4. For example, the evidence of software on Vanaire’s computers may have been important for the plaintiff to show that it is the same software that originated at KCH and that it was used by Vanaire in “layout,” resulting in enhanced profits vis-à-vis KCH, Vanaire’s competitor in the industry. The deleted e-mails may have been relevant to the plaintiff’s other claims, such as unfair competition.

Id.

Conclusion

It makes sense to impose a duty not to destroy ESI after you “become reasonably aware of the of the possibility of litigation,” but this trigger date should be strictly construed in favor of the allegedly burdened party. This rule is designed to protect our system of justice from the intentional spoliator, not to serve as a gotcha ploy for win-at-all-costs chess playing lawyers. As Bobby Fischer said: “Chess is war over the board. The object is to crush the opponents mind.” But litigation is not a game; it is not chess; it is not war like some mistakenly believe. It is far more than that. As George Bernard Shaw said: “Chess is a foolish expedient for making idle people believe they are doing something very clever when they are only wasting their time.” Litigation is no place for games. The pursuit of justice is more important than that. As Justice Felix Frankfurter said: “Litigation is the pursuit of practical ends, not a game of chess.”

felix frankfurter

The courts should only impose sanctions for pre-litigation spoliation in cases like KCH Services where there is strong evidence of intentional destruction of evidence. They should otherwise exercise great restraint and caution in deciding that a defendant “should have known” that certain ESI “may be” relevant to future litigation. The present always seems obvious and inevitable, yet few are able to predict the future. We must look carefully at yesterday to seek how murky today then looked. As Justice Frankfurter said: “Judicial judgment must take deep account of the day before yesterday in order that yesterday may not paralyze today.”

6 Responses to Federal Judge in Louisville Imposes Sanctions for Pre-Suit Spoliation

  1. Craig Ball says:

    Hi Ralph:
    Did a plaintiff’s lawyer run your dog over this weekend?

    Speaking of the uncertainty of pre-suit preservation, you say, “The plaintiff causes this vagary to begin with, and then exploits it.” It’s one thing to dump on plaintiffs’ lawyers for vague claims once made or want to revise the liberal rules of notice pleadings; but, how do you fault the plaintiffs lawyers for pre-suit vagary? When was the lawyer hired? Was there a demand or notice?

    You want shorter statutes of limitations? Okay, tell it to the legislature. I’ve not met the plaintiffs lawyer who wasn’t fast and furious in terms of telling a defendant where they screwed up. I thought people criticized plaintiffs’ lawyers as being too quick to assert a claim?

    If you really think that plaintiffs’ lawyers are deliberately vague in their claims in hopes of entrapping an opponent into effectuating a flawed ESI hold, you are giving the plaintiffs’ bar WAY too much credit. Trust me, that ain’t happening. You think they’re making a brilliant gambit when they are really still looking for the chess board and trying to remember where the pieces go.

    Be fair. Every jurisdiction offers a means to demand a more particular statement of a claim. How many defendants jump out there and do this? Seriously, how many preservation holds fail because the defendant didn’t understand what the claim would be? It’s really not a vagueness issue.

    “Trigger happy” misbehavior?!? Don’t mistake ignorance for guile. The plaintiffs bar is generally further behind on ESI than the defense bar (who have clients with sophisticated IT systems and routinely deal with ESI issues). Imagine a chess game where you can’t see the other side of the board, and you’ll better understand what it’s like to be a plaintiffs’ lawyer in e-discovery.

    To appreciate the Adams decision (or at least my view on same) requires some walking in the Court’s moccasins. It’s clear from the context that the judge believed that ASUS deliberately destroyed evidence and lied about it. Not long, long ago, but recently. It’s essential to note what the Court reports about ASUS claiming not to have a copy of source code for which it recently pursued a patent claim!! No wonder ASUS had no credibility. Did that color the Court’s language? How could it not?

    They say, “Hard cases make bad law.” Egregious misconduct and deceitful behavior do, too
    I agree the anticipation of litigation language was perhaps more onerous than it needed to be in order to reach a just result; but, I believe the decision won’t be reversed because of the way sanctions were deferred and because of the standard required for reversal. In the face of egregious misconduct and bald-ass lies to the bench, I don’t see the appellate court disturbing the outcome on an abuse of discretion standard. If I’m wrong, I have to come to Orlando and buy you a great steak. If not, I like a good Béarnaise sauce with my filet. By the way, a settlement of the case isn’t a reversal. 😉

    And while I’m muddying the waters, I’ve seen cases where management of a company accused of benefiting from a competitor’s stolen software (typically brought over by a new hire) acts quickly to eradicate the purloined material from their systems. It may even be in knee-jerk response to a demand by the other side to cease-and-desist using stolen software.

    In the calm light of day, that deletion looks much like spoliation; but, sometimes it’s just a rash-but-well-intentioned act. That’s not a comment on KCH Services, but you should look at a decision in a Texas Federal case called “Anadarko Petroleum Corp. v. Davis,” where a good faith effort to meet a demand to eradicate ran afoul of the duty to preserve.

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  2. Ralph Losey says:

    You’re so funny its hard to get up a good head of steam to debate you. After almost 30 years of experience with lawyers of all kinds, including plaintiff’s lawyers, I know what game players many of them are. I never make the mistake (any more) of under estimating opposing counsel or what they are capable of. I am particularly wary of the “ah shucks” kind that claim to barely know what moves the knight can make. Still, having said that, I have met many honorable lawyers too and I should not paint a whole class of lawyers, like plaintiff’s lawyers, with a broad brush. Force of habit. My apologies to you and all of the many other honest plaintiff’s lawyers out there.

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  3. Craig Ball says:

    Hi Ralph:

    No apologies necessary, leastwise not to me as I’m only a former plaintiffs’ lawyer. I no longer have skin in the game, and now work for both sides (and most often the middle, as a neutral)

    The more time I spent in the plaintiffs’ practice, the more convinced I became that compelling an opponent to spend money on pointless discovery efforts put no dollars in my client’s pocket. I just wanted the evidence needed to make my case, and I came to view every dollar spent to get it as depleting the pool of funds available for early settlement. Any case whose value hinged on maximizing defense costs wasn’t much of a case to begin with.

    But there was one exception to this rule: I couldn’t get a case settled–I couldn’t even get the other side to fairly look at settlement–until I’d afforded opposing counsel a sufficient number of hours billed such that they felt the case was “ripe” for settlement. That is the game, and it stinks.

    Until there is the same incentive for a defense bar charging by the hour to promptly dispose of a meritorous case as there is for a plaintiffs’ lawyer on a contingent fee, waste is built in and intractable. Severe financial stresses within defense firms have only increased the pressure in support of the “defense tax.” We can talk ethics until we turn blue, but the fox is guarding the hen house in terms of the people .

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  4. Ralph Losey says:

    I too am trying to transcend a perspective, the defense Bar perspective. Even though I stopped focusing on the defense side three years ago, it is still hard to do. Like you I have seen many abuses over the years by both sides. But since I primarily interacted with the Plaintiffs Bar, it was their abuses that I become the most familiar with. One thing I must say in response to your last comments is that insurance companies are very sophisticated consumers of legal services, whereas most plaintiffs are not. Of course, there is some merit in your criticisms too. The whole profession is still stuck in the time billing trap.

    My main point now is to at least try to stop the discovery gamesmanship and focus on cooperation in the mutual pursuit of the facts. Then we can argue all night long on the law and how to apply the law to the facts, what facts are important, etc.

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  5. Jeff Reed says:

    Ralph:

    Its painfully obvious from your exchanges with Craig Ball that Phillip M. Adams v. Dell and KCH Services are the two extremes of the spoliation scenario. (One point that seems vague, however, is where the “8 years” comes from in adams – the Court focuses on information from 1999/2000 and suit was brought in 2005 [the docket number is a -05 number]. ASUS claimed it preserved everything from 2005 on once it received a letter from counsel in February.)

    One way out of the dilemma may be to overlay the law of spoialtion with the equitable principle of laches (as well as unclean hands, when appropriate). It’s not so much that defendant ASUS didn’t destroy evidence. It did. ASUS didn’t even have a copy of the source code from an attempted competing patent application terminated after Adams filed suit against it.

    However, if a plaintiff’s delays either lull a potential defendant into realistically believing that no suit is coming or make the various burdens associated with maintaining the evidence unreasonable or provide some other basis for believing that the plaitiff has, at least temporarily, given up on a particular dispute, then it is the plaintiff that should shoulder that responsibility. After all, ASUS may have been worse off because of the delay as the lost ESI may have been beneficial to it, rather than the plaintiff. Moreover, the laches defense focuses not on the tactics of the attorneys or the presumed content of the alalegedly lost material, but the conduct of the parties. And isn’t that where we should be looking anyway?

    Going back to the Adams case, the Court points out that Adams sued Gateway in 2002, but does not provide any information that explains the delay in filing suit against ASUS until 2005. Moreover, although ASUS defends itself on the basis that Adams delays caused the problem, the delays are still not discussed in the opinion. See Adams at *12.

    After re-reading the opinion and blogs on Adams, what got under the magistrate’s fingernails is the absence of a written retention policy with documentation as to how and when it was followed. I agree with you that, generally speaking, the “policy” as described is not of itaself offensive, but no documentation seems to have been submitted or quoted setting forth the standards that governed retention/destruction or compliance with those standards. In reviewing the information submitted about the ESI preservation at ASUS the magistrate notes that “Neither the expert nor ASUS speak of archiving ‘policies;’ they speak of archiving ‘practices.'” At *13. These “practices” were conducted by the employees, but no standards guiding the employees’ conduct seems to have been explained to the Court as, again, none are quoted.

    Indeed, at *15 the magistrate explains that “ASUS’ practices invite the abuse of rights of others, be-cause the practices tend toward loss of data. The practices place operations-level employees in the position of deciding what information is relevant to the enterprise and its data retention needs. ASUS alone bears responsibility for the absence of evidence it would be expected to possess. While Adams has not shown ASUS mounted a destructive effort aimed at evidence affecting Adams or at evidence of ASUS’ wrongful use of intellectual property, it is clear that ASUS’ lack of a retention policy and irresponsible data retention practices are responsible for the loss of significant data.”

    So what was the magistrate left with? A company that had no written, documented and enforced retention policy, whose employees could have been following any ad hoc standards they thought would serve their immediate interests, that was missing at least some information that it should have had and claimed to have preserved but did not (like that pesky patent application whose source code might or might not have been a lot like Adams’), and one that produced “so little.” At *5.

    I’m with you on the magistrate’s misplaced reliance on the busway case. It’s silly and detracts from an otherwise thoughtful effort. Maybe he was just tired at that point. But because the magistrate goes to some lengths to point out the problems with Adams’ claims of infringement (at *4) I’m not inclined to go with you on the “presumed infringement, judging the merits” conclusion. On the contrary, I think you can read the Phillip M. Adams opinion as demonstrating that there is no safe harbor for any kind of conduct when there is no documented and enforced retention policy. All defenses become suspect; all behavior sinister.

    Your blog is, obviously, thought-provoking. Keep up the good work.

    Jeff Reed

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  6. The exchange of comments outshone the post. You are well matched. 🙂

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