Closing The Loop

Prior to the dramatic changes to Federal Rule of Civil Procedure 37(e) just more than a year ago, fear of sanctions played a disproportionately large role in controlling the behavior of lawyers in civil litigation. While headline-making penalties have set the tone for litigants’ preservation obligations, in reality, sanctions are rarely imposed. A study by the 2010 Judicial Conference Advisory Committee on Civil Rules revealed that only 0.15% of all civil cases within recent history involved motions related to spoliation. Far fewer of these cases actually involved a sanctions award.

Nevertheless, the inconsistency with which district court judges decided sanctions motions created uncertainty among practitioners and their clients. This uncertainty lead to fear, which lead to overwork, which lead to higher costs and over-billing.

Thus, in an attempt to quell these concerns and stem rising costs associated with over-preservation, the Federal Rules Committee carefully crafted a new Rule 37(e) designed to add uniformity to sanctions decisions across federal courts. The Committee summarized:

"Federal circuits have established significantly different standards for imposing sanctions or curative measures on parties who fail to preserve electronically stored information. These developments have caused litigants to expend excessive effort and money on preservation in order to avoid the risk of severe sanctions if a court finds they did not do enough."

The question, more than a year into the new Rule 37 regime, which took effect in December 2015, is, Did the Committee do what it set out to? Have the new rules created more uniformity in how spoliation sanctions are imposed?

The answer, to the extent a year of case studies can provide one, is “maybe.” While the rule changes have resulted in some measure of consistency, a handful of oddball decisions and general uneven application have undermined the uniform sanctions standard the committee sought.

Of course, some of this is due to the fact that every case is different, with unique facts, unique parties, unique history and a judge with a unique viewpoint. Still, there are some positive patterns to be derived from the chaos.

Below we offer five cases decided by the new Rule 37(e). Each offers both a positive lesson, a note of caution and a “Law and Order”-style twist. 

(A refresher on how the rule has changed is available here.)

Five Rule 37(e) sanctions cases, each with a special twist

Case 1: Nuvasive, Inc. v. Madsen Med., Inc., No. 13cv2077, 2016 WL 305096 (S.D. Cal. Jan. 26, 2016)

In July 2015, the Southern District of California imposed an adverse inference order against the plaintiff, Nuvasive, for failing to prevent the destruction of text messages requested by defendants. Fortunately for the plaintiff, the case continued past the effective date of the 2015 amendment to FRCP 37(e), giving it a chance to argue that the motion for sanctions should be analyzed under the new rule. The new rule requires a finding of intent to harm the opposing party in order for judges to levy the most severed sanctions. Specifically, it reads:

Failure to Preserve Electronically Stored Information. If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court:

(1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or

(2) only upon finding that the party acted with the intent to deprive another party of the information's use in the litigation may:

(A) presume that the lost information was unfavorable to the party;

(B) instruct the jury that it may or must presume the information was unfavorable to the party; or

(C) dismiss the action or enter a default judgment.

The court decided that it should re-examine the prior granting of sanctions under this new language and, ultimately, decided to vacate the prior order and deny sanctions. As the language of the new rule makes clear in Subsection 2, severe, case-impacting sanctions are only available if the party acted with intent to deprive another party of the ESI.

The court found that while it was clear that the plaintiff was at fault for failing to enforce a litigation hold, there was no finding it had intentionally failed to preserve text messages to deny them from defendants. Absent intent, the court could not, it reasoned, impose an adverse inference.

The Twist: One may think we’ve already given away the surprise: that courts can apply the new FRCP 37(e) language to cases that began before the effective date of the amendment. But courts have a history of retroactively applying new procedural rules.

The more provocative notion is that the Nuvasive court used Rule 37(e) to deny sanctions, marking perhaps the first such occasion. This is to say, prior to the time of Nuvasive and other early 2016 cases, no court had ever used FRCP 37(e) as a reason to deny sanctions. Really.

We asked expert litigators and law professors whether they knew of any cases where courts denied sanctions using the 2006 version of the rule and the answer was unanimous: no.

The simple, and ugly, truth was that the “old” FRCP 37(e) just didn’t work. It’s intended “safe harbor” was not to be, never providing any genuine protection against sanctions. The problem was inherent in the very wording of the rule, in that it protected against sanctions resulting from the loss of ESI “from the routine, good-faith operation of an electronic information system.” But the Committee Notes make clear that “good faith” can only be established if ESI is lost while a party is not under an obligation to preserve ESI. Thus, a party could only prevail under the 2006 version of 37(e) if it lost ESI at a time when it was not subject to a duty to preserve. But a party that loses ESI that isn’t subject to a preservation obligation hasn’t actually violated any rule, and thus no sanction could ever apply.  Thus, the sanctions exemption of the old FRCP 37(e) was a perfectly-closed circle that could have applied to no party, ever.

Thus, our first big “twist” is that the new FRCP 37(e) is actually useful for the purpose for which it was originally intended.

Case 2: O’Berry v. Turner, Archer Daniels Midland, Civil Action Nos. 7:15-CV-00064-HL, 7:15-CV-00075-HL, (M.D. Ga., April 27, 2016)

This is another case that ended with an adverse inference against a party for the loss of ESI.  Unlike the Nuvasive case, however, the court in O’Berry did not change its mind. This was a seemingly run-of-the-mill traffic accident case in which the defendant made a series of mistakes in properly preserving a key piece of ESI (the internal driver’s log documenting the accident that was filed by the defendant’s driver). ADM’s former loss control manager testified as to the steps he took to preserve the log – and the mistakes that ensued:

  • The folder in which he kept a paper copy of the accident report and driver log was lost in an office move performed by a maintenance crew while he was on medical leave;
  • He unsuccessfully attempted to secure a backup copy of the driver log from PeopleNet, the provider ADM uses to generate those reports; and
  • Electronic copies of the accident report had been overwritten according to PeopleNet’s standard procedures.

ADM’s loss control manager also testified to not knowing of any policies his company may have relating to preservation, collection and storage of accident files, and that it was simply a part of his job to print and store a single paper copy of these documents.

The Twist: The surprise in O’Berry is that, despite no evidence of an intent to deprive, the court nevertheless entered the type of severe sanctions on which Rule 37(e)(2) seems to explicitly foreclose. Instead, the court simply inferred intent, reasoning:

“All of these facts, when considered together, lead the Court to conclude that the loss of the at-issue ESI was beyond the result of mere negligence. Such irresponsible and shiftless behavior can only lead to one conclusion—that ADM… acted with the intent to deprive Plaintiff of the use of this information at trial.”

To be clear, mistakes were made by ADM and its employees. One could even judge these mistakes harshly, which the judge here clearly did. But no matter how bumbling these mistakes might have been, there does not appear to have been any proof of intent — even if the series of mistakes collectively amounted to gross negligence. The Committee Notes, in pertinent part:

"This subdivision authorizes courts to use specified and very severe measures to address or deter failures to preserve electronically stored information, but only on finding that the party that lost the information acted with the intent to deprive another party of the information’s use in the litigation. It is designed to provide a uniform standard in federal court for use of these serious measures when addressing failure to preserve electronically stored information. It rejects cases such as Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99 (2d Cir. 2002), that authorize the giving of adverse-inference instructions on a finding of negligence or gross negligence.

Adverse-inference instructions were developed on the premise that a party’s intentional loss or destruction of evidence to prevent its use in litigation gives rise to a reasonable inference that the evidence was unfavorable to the party responsible for loss or destruction of the evidence. Negligent or even grossly negligent behavior does not logically support that inference."

Despite this, the judge entered an adverse inference order that the jury must presume that the lost driver’s log was unfavorable to ADM – which pretty much all but ended the case for them.  The end result is that instead of promoting uniformity in sanctions decisions and the certainty that can come from that, this opinion furthers fears that judges will continue to interpret the FRCP 37(e) to reach the result that they want.  Fortunately, most cases have been far closer in compliance to the amended rule, so that O’Berry is an outlier – a troubling one, but still an outlier.  Bigger problems can from when judges decide to go completely around the rule, even when the rule says they can’t do that . . .

Case 3: CAT3 LLC v. Black Lineage, Inc, No. 14 Civ. 5511 (AT) (JCF), 2016 WL 154116 (S.D.N.Y. Jan. 12, 2016)

In another early case interpreting the new Rule 37(e), Chief Magistrate Judge James Francis, of the Southern District of New York, was asked to rule on a motion for sanctions as a result of the plaintiffs allegedly altering emails in a trademark infringement case. Judge Francis granted the motion in part, and barred plaintiffs from using the altered versions of the emails, which would have been favorable to them, at trial, along with fees and costs. 

The judge found that Rule 37(e) was applicable because there was a clear showing of circumstantial evidence that the emails were altered. Moreover, the ESI was, according to the court, “’lost’ and cannot adequately be ‘restored or replaced,’” adding, “the plaintiffs' manipulation of the email addresses is not consistent with taking ‘reasonable steps’ to preserve the evidence.” Still, he was hesitant to enter drastic sanctions, cautioning that even under Rule 37(e)(2) “such drastic sanctions are not mandatory.”  Ultimately, he declined to dismiss the case, instead entering strong, but not terminating sanctions.

The Twist: In a twist that would not have likely changed the outcome of the case, but is still surprising, Judge Francis justified the sanctions not only under FRCP 37(e) but also under the court’s inherent authority. Judges have long cited inherent authority to maintain order and fairness in their courtrooms. It is something of a catchall rationale to enter discovery sanctions when parties commit the type of misconduct that, while clearly going against the dictates of justice, doesn’t present a clear violation of any specific federal rule.

However, the Federal Rules Committee appears to have taken this power away with the 2015 Amendments:

"New Rule 37(e) replaces the 2006 rule. It authorizes and specifies measures a court may employ if information that should have been preserved is lost, and specifies the findings necessary to justify these measures. It therefore forecloses reliance on inherent authority or state law to determine when certain measures should be used."

The Committee was explicit. Yet the New York court maintained its inherent powers, writing:

"If, notwithstanding this reasoning, Rule 37(e) were construed not to apply to the facts here, I could nevertheless exercise inherent authority to remedy spoliation under the circumstances presented."

Judge Francis even recognized the Rules Committee’s dismissal of inherent authority. But, in citing a 1991 US Supreme Court case, it invoked a line of precedent going all the way back to 1812: 

"It [The US Supreme Court in Chamber v. NASCO, Inc., 501 U.S. 32, 43 (1991)] stated that "the inherent power of a court can be invoked even if procedural rules exist which sanction the same conduct."

As you might imagine, this ruling has not gone without controversy. Judge Francis has been a visible figure in e-discovery jurisprudence and so Cat3 has become the subject of much public debate. Some judges have been in favor of maintaining their power of inherent authority, even in the face of a clear indication by the Committee, while others have been less willing.

The key takeaway is that judges will find ways to punish parties they believe break the rules, even rules that aren’t actually “Rules.”

Case 4: First Fin. Sec., Inc. v. Freedom Equity Grp., LLC, No. 15-cv-1893-HRL, 2016 WL 5870218 (N.D. Cal. Oct. 7, 2016)

In this breach of contract and unfair competition case, the court imposed adverse inference instructions against the defendant pursuant to Rule 37(e)(2) for failure to preserve text messages. The defendant conceded that the text messages had been deleted, but claimed it was an innocent mistake by “people who did not understand their discovery obligations.”

The court was not convinced. Instead, it cited to the defendant’s counsel’s own representation that the custodians had agreed not to communicate electronically regarding legal claims, reasoning that such an explicit agreement suggested “a shared intent to keep incriminating facts out of evidence.” 

The court was “satisfied” that defendant acted with the intent to deprive and ordered a permissive adverse inference pursuant to Rule 37(e)(2).

The Twist: The judge here followed the new Rule 37(e)(2) as it applied to one form of ESI, but then found a way to bypass it as to another form of ESI: a native format copy of a database which had been subject to previous court orders. The defendant had already produced a copy of the database in spreadsheet format, and there was no indication that the database had been lost or destroyed. But the defendant had failed to produce it pursuant to court orders and deadlines.

The sanctions order relating to the database was imposed pursuant to Rule 37(b)(2), which authorizes the court to “remedy the violation of a discovery order with a ‘just’ sanction.” The court concluded that the defendant’s failure to produce the native format database resulted in substantial prejudice to the plaintiff. But instead of making any determination as to whether the defendant acted in bad faith, the court used the lower culpability standard of Rule 37(b)(2) to impose a sanction upon a determination of gross negligence.

The court was “mindful” of the fact that defendant’s “discovery misconduct is consistent with technological ignorance and is not necessarily the result of subjective bad faith” — an admission that, by the rule, it may not have the power to impose the same type of severe sanction it did for the flagrant loss of text messages.

And yet, ultimately, the court imposed the same sanctions for the database as it did for the text messages, a permissive adverse inference order.

The lesson here? Judges can and will get creative in imposing sanctions to remedy discovery violations, regardless of whether that entails acting by the letter of the law.

Case 5: BMG Rights Management LLC v. Cox Communications, Inc., No. 1:14-cv-1611, 2016 WL 4224964 (E.D. Va. Aug. 8, 2016)

Our final case comes with the biggest twists. The BMG decision arises in a seemingly endless battle by the music companies against online piracy. In this particular episode, one of the music companies attempted to pin the damage done from a form of file sharing, known as BitTorrent, on an internet service provider.

Much of the case revolved around issues relating to a third-party system, from a company called Rightscorp, used by the plaintiff to detect BitTorrent use on ISP systems and notify the ISPs and infringers. The defendant claimed that the piracy instances identified by Rightscorp were inaccurate because the system software was flawed. Since the defendant claimed that the Rightscorp-identified piracy events were the only evidence plaintiff had of direct copyright infringement, the judge agreed that the technical manner by which Rightscorp identified piracy violations was material evidence.

Unfortunately for the plaintiff, it had altered the source code of its Rightscorp system during the time period that was relevant in the dispute. The defendant claimed, and the judge agreed, that this was spoliation:

"That by altering the source code, deleting portions of the source code, and by overwriting portions of the source code without maintaining a record of those alterations, deletions, or overwrites, material information was intentionally destroyed and it was not lost through inadvertence or mistake."

While the plaintiff made available to defendant the source code for the updated system, along with the deposition of the person who made the changes, the judge did not see this as remedy, concluding that the defendant:

"made a strong showing that the deposition testimony provided by Rightscorp is a poor substitute for a documented, historical version of the Rightscorp system."

Based upon this spoliation and the lack of sufficient remedies, the judge granted sanctions, entering an order requiring that a permissive adverse inference instruction should be given to the jury, allowing but not requiring them to consider the absence of the earlier version of the source code.

The Twist: Here’s the surprise ending: despite the imposition of strong sanctions against the opposing party, the defendant lost the case after a two week jury trial, with the jury entering a $25 million judgment against it.

As part of its extensive post-trial motion, the defendant protested what it characterized as an “anemic” spoliation instruction and the court’s refusal to impose a stronger sanction, such as dismissal or the preclusion of evidence. 

The reviewing court, in reviewing the post-trial motions, noted that the trial court had indeed made a finding of intentionality, but that per the Committee Notes, such a finding does not end the discussion under Rule 37(e)(2). It reasoned:

"Such a finding, however, “does not require a court to adopt any of the measures listed in subdivision (e)(2).” (citing the Committee Notes). The Advisory Committee Notes instructs that “[t]he remedy should fit the wrong, and the severe measures authorized by this subdivision should not be used when . . . lesser measures such as those specified in subdivision (e)(1) would be sufficient to redress the loss.”

The reviewing court found that the trial judge had properly used two measures contemplated by the Advisory Committee in lieu of stricter sanctions: “permitting [Cox] to present evidence and argument to the jury regarding the loss of information” and “giving the jury [an] instruction… to assist in its evaluation of such evidence or argument.” The reviewing court did not believe that Rule 37(e)(2) or circuit case law required any stronger sanction be entered. As a final note, the court mentioned that defendant had itself been less than stellar in meeting its own preservation obligations.

As a result, the court denied any reconsideration of the sanctions order that had been entered.

Finding order in chaos

So, what, if any lessons can be learned here?  For starters, we now know that for responding parties in discovery, seeking protection under Rule 37(e) is no longer a doomed cause. However, we also see that federal judges do not necessarily feel like they are bound by the letter of the new rule, and are exercising both their inherent powers and pre-rule change precedent to justify the imposition of the most severe sanctions.

To learn more about important recent e-discovery sanctions cases and what smart practitioners can learn from them, check out our newest sanctions eBook below.

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