Welcome to Module 5-G.

This class discusses a trio of sanctions cases decided under 2015 revised Rule 37(e). GN Netcom v. Plantronics, 2016 U.S. Dist. LEXIS 93299 (D. Del. July 12, 2016). CAT3, LLC v. Black Lineage, Inc., 2016 U.S. Dist. LEXIS 3618 (S.D.N.Y. Jan. 12, 2016). Living Color Enters., Inc. v. New Era Aquaculture, Ltd., No. 14-cv-62216, 2016 WL 1105297 (S.D. Fla. Mar. 22, 2016).

TGN Netcom v. Plantronics

Chief United States District Judge Leonard Stark of the United States District Court for the District of Delaware

Chief United States District Judge Leonard Stark of the USDC for the District of Delaware

Plantronics is primarily interesting because of the size of fees and damages involved. GN Netcom v. Plantronics, 2016 U.S. Dist. LEXIS 93299 (D. Del. July 12, 2016). Here the defendant intentionally destroyed emails in bad faith. The very upset, for good cause I might add, U.S. District Judge Leonard P. Stark taxed the defendant $3,000,000 in punitive damages plus other sanctions for the “nearly 18 months of discovery to get [to] the bottom of the deletion story.”

Here is the award, the amounts of which are on the high-end of monetary sanctions.

As sanctions for spoliation, Plantronics, Inc. (“Plantronics”) shall be subject to: (1) monetary sanctions in the form of the reasonable fees and costs incurred by GN in connection with the disputes leading to today’s Order; (2) punitive sanctions in the amount of $3,000,000; (3) possible evidentiary sanctions, if requested by GN and found by the Court to be warranted as this case progresses toward trial; and ( 4) instructions to the jury that it may draw an adverse inference that emails destroyed by Plantronics would have been favorable to GN’ s case and/or unfavorable to Plantronics’ defense.

The opinion by Chief Judge Stark is interesting not only because of the size of the cash award, but also because of the location of the court itself, namely Delaware, where many large corporate disputes are litigated.

rule_37eThe opinion contains an excellent discussion of case law and background on sanctions and Amended Rule 37(e). Here is how Chief Judge Stark sums up Third Circuit law on sanctions:

ln Schmid, 13 F.3d at 79, the Third Circuit listed three “key considerations” for determining appropriate sanctions for spoliation of evidence: “(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.” A court may impose dispositive sanctions for spoliation to remedy prejudice and deter future misconduct. See Micron, 917 F. Supp. 2d at 328 (“Any lesser sanction would, in effect, reward [the spoliator] for the gamble it took by spoliating and tempt others to do the same.”).

Judge Stark summarizes the bad faith conduct of the defendant that required the sanctions.

In light of all this evidence, including Plantronics’ repeated obfuscation and misrepresentations related to Mr. Houston’s email deletion and its investigation of it, the Court finds that Plantronics did act in bad faith, “intend[ing] to impair the ability of the other side to effectively litigate its case.” In re Wechsler, 121 F. Supp. 2d at 423 ; see also Micron , 917 F. Supp. 2d at 318 (“In light of the full record, the court finds that Rambus‘ litigation misconduct further evidences bad faith.”).

The court’s analysis of burden of proof is instructive and follows revised Rule 37(e).

Because the Court has found that Plantronics acted in bad faith, the burden shifts to Plantronics to show a lack prejudice to GN resulting from Mr. Houston’s deletion of emails. See Micron, 917 F. Supp. 2d at 319. Plantronics makes three arguments for why GN has not been prejudiced from Mr. Houston’s deletion of emails.

If you prove intent and bad faith, then you do not have to prove that you have been prejudiced by the ESI deletion. Instead the defending party must try to prove no prejudice. That is hard to do when you do not know what the deleted files were.

__________

CAT3, LLC v. Black Lineage, Inc.

judgejamesfrancisCAT3 is interesting because of its examination of the burden of proof issues and its reminder that the “inherent power” of the court remains as an independent grounds for spoliation sanctions. CAT3, LLC v. Black Lineage, Inc., 2016 U.S. Dist. LEXIS 3618 (S.D.N.Y. Jan. 12, 2016).

The author of this well-written, lengthy, fact intensive  opinion, is U.S. Magistrate Judge James C. Francis, IV. He is known inside the field as a top e-discovery expert. I found his opinion here on Rule 37(e) interesting because it examines the burden of proof issue, specifically the shift after the moving party establishes intent. Judge Francis found in CAT3 that there was “clear and convincing” evidence of intent to alter electronic evidence, namely email domain names. The high standard of clear and convincing is only applicable to the issue of intent. The lower “preponderance of evidence” standard is applicable to other issues, such as proof of prejudice.

Third, the appropriate standard of proof depends in part on the specific issue to be decided. For example, clear and convincing evidence of bad faith may be appropriate, see id. at 1477, while prejudice is better judged by the preponderance standard, see Residential Funding, 306 F.3d at 109; Kronisch v. United States, 150 F.3d 112, 128 (2d Cir. 1998) (“[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 inference, and would allow parties who have intentionally destroyed evidence to profit from that destruction.”), overruled on other grounds, Rotella v. Wood, 528 U.S. 549 (2000); Rimkus Consulting Group, Inc. v. Cammarata, 688 F. Supp. 2d 598, 616 (S.D. Tex. 2010) (holding “[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.” (quoting Heng Chan v. Triple 8 Palace, Inc., No. 03 Civ. 6048, 2005 WL 1925579, at *7 (S.D.N.Y. Aug. 11, 2005))).

There is clear and convincing evidence, then, that the plaintiffs manipulated the emails here in order to gain an advantage in the litigation. To be sure, that evidence is largely circumstantial. But circumstantial evidence may be accorded equal weight with direct evidence, see Tyler v. Bethlehem Steel Corp., 958 F.2d 1176, 1184 (2d Cir. 1992), and standing alone may be sufficient to support even a determination that requires proof beyond a reasonable doubt, see United States v. Newman, 773 F.3d 438, 451 (2d Cir. 2014), cert. denied, _U.S. , 136 S. Ct. 242 (2015); United States v. Lorenzo, 534 F.3d 153, 159 (2d Cir. 2008).

rule_37eredThese findings provide the basis for relief under Rule 37(e). First, each of the threshold requirements of the rule is met. The emails are plainly “electronically stored information.” There is no dispute that the plaintiffs were obligated to preserve them in connection with this litigation. As discussed above, information was “lost” and cannot adequately be “restored or replaced.” And the plaintiffs’ manipulation of the email addresses is not consistent with taking “reasonable steps” to preserve the evidence.

Next, remedies are available under subsection (e)(1) of Rule 37. The defendants have been prejudiced by the fabrication of the substitute emails because, as discussed above, the existence of multiple versions of the same document at the very least obfuscates the record. This was demonstrated by the presentation of the doctored email to the president of Black Lineage at his deposition. Moreover, the defendants have been put to the burden and expense of ferreting out the malfeasance and seeking relief from the Court.

CAT3, LLC is also instructive for the clarification that the Court’s inherent power encompasses that of Rule 37(e) and more.

If the plaintiffs were correct that Rule 37(e) is inapplicable here, relief would nonetheless be warranted under the Court’s inherent power. A “particularized showing of bad faith” is necessary to justify exercising that power. United States v. International Brotherhood of Teamsters, 948 F.2d 1338, 1345 (1991); accord Braun ex rel. Advanced Battery Technologies, Inc. v. Zhiguo Fu, No. 11 Civ. 4383, 2015 WL 4389893, at *17 (S.D.N.Y. July 10, 2015); Novick v. AXA Network, LLC, No. 07 Civ. 7767, 2014 WL 5364100, at *5 (S.D.N.Y. Oct. 22, 2014). Spoliation designed to deprive an adversary of the use of evidence in litigation qualifies as bad faith conduct.

Thank you Judge James C. Francis. This was an excellent contribution to the fast evolving jurisprudence of electronic discovery, especially sanctions under Rule 37(e).

My only criticism here is the mysterious ending to the case which throws the facts recited in the opinion in doubt. On Apr. 4, 2016 the parties stipulated to dismissal, with prejudice, of all remaining claims in the case. Not surprising there to settle, but the language in the stipulation stated that in light of newly discovered evidence provided by the plaintiffs, “neither plaintiffs nor any of their owners or agents engaged in any discovery misconduct or wrongdoing.” This suggests that the domain name changes to the emails were merely an artifact of a the migration of the email system as one expert had speculated, but not yet proven. This surprise ending shows the necessity to use good computer experts and avoid over speculation.

______________

Living Color Enters., Inc. v. New Era Aquaculture, Ltd.

judge_william_matthewmanThis sanctions opinion arises out of an unfair competition case in West Palm Beach, Florida, District Court involving the destruction of text messages. Living Color Enters., Inc. v. New Era Aquaculture, Ltd., No. 14-cv-62216, 2016 WL 1105297 (S.D. Fla. Mar. 22, 2016). The opinion was written by Magistrate Judge William Matthewman. It provides some good news for defendants struggling to preserve all ESI that might be relevant to a case and so avoid spoliation sanctions. On the other hand, the ruling will make it more difficult to prove spoliation by former employees who have deleted text messages. This is, we know, a fairly common issue these days

Judge Matthewman denied Plaintiff’s motion for sanctions under new Rule 37(e) for a Defendant’s deletion of text messages. The motion was against one of several individual defendants included in the suit, Daniel Leyden. As background note that District Court Judge Kenneth Marra later – 9/9/16 – granted SJ for Leyden because he found that “Leyden was not covered by a non-solicitation agreement and was therefore free to compete against Living Color once he resigned.” In the Judge Marra Order, Leyden appears to have won a Summary Judgment on all other counts against him, and is no longer a party to the case, albeit still a key witness on the remaining counts. We suspect the absence of wrongdoing on his part may have colored the earlier sanctions ruling by the Magistrate.

A key fact in Judge Matthewman’s sanctions ruling is that text messages were admittedly deleted, but Defendant claimed it happened because “he has always used the cell phone feature that automatically deletes text messages after 30 days and that he, admittedly, neglected to disable the feature when the lawsuit was filed.” Oops.

Defendant argued no harm, however, because the other key party to most of the text messages, Mark Vera, had preserved his messages and they were produced.

Plaintiff countered that text messages were still missing and explained that a “subpoena to Defendant’s cell phone carrier yielded no results and that Plaintiff is still entitled to other communications that Leyden had with other potential witnesses regarding the circumstances at issue in this case.” Note subpoena’s to carriers are always a fruitless way to obtain the content, although you can get information on the existence of the account, etc. The carriers do not maintain the messages after a user deletes, and even if they did have them, that are not permitted to produce them without the message owners consent or court order.

The sanctions motions was decided based on a series of counter-affidavits, not live testimony. Other courts might well convene an evidentiary hearing, but, as mentioned, it looks like Judge Matthewman was disinclined to believe the “trumped up” charges against this defendant and other exaggerated rhetoric plaintiff’s counsel here seemed fond of.

rule_37eredThe opinion has a good summary of the law of spoliation under new Rule 37(e), citing to 11th Circuit law. You will want to refer to this opinion in any sanctions research. I will not bother repeating the black letter here, but suggest you read it for a good summary (pgs. 9-13). All criteria were met for imposition of sanctions except for the final criteria of prejudice or bad faith. Rule 37(e)(1) (“if there is a finding of prejudice’)’ and (e)(2) (“if there is a finding of intent to deprive.”) On this issue the court followed the Committee Commentary which says “The rule does not place a burden of proving or disproving prejudice on one party or the other.”

Under the affidavits presented the court did not see any prejudice to the plaintiff by the destruction of evidence. Moreover, “if there was any prejudice to Plaintiff at all, it was so minimal that the Court does not find it necessary to order measures to cure the alleged prejudice.” (pg 11). The court’s further explanation of the ruling shows plaintiff counsel’s failure of proof and thus provides a guide for what you need to do to obtain sanctions under Rule 37(e):

Plaintiff argues in its Motion that Stlweyden’s participation in the scheme outlined in the Second Amended Complaint (D.E. 1 18) is crucial to Plaintiff’s claims against Leyden and the evidence would have established he was involved in the scheme to misappropriate Plaintiffs business and customers.” This is an extremely conclusory statement that really does not establish any prejudice to Plaintiff. Plaintiff has not explained any direct nexus between the missing text messages and the allegations in its Complaint.

The asserted missing text messages appear to be unimportant, and the abundance of preserved information
appears sufficient to meet the needs of Plaintiff. The Court does not find spoliation sanctions to be proper pursuant to Rule 37(e)(1).

Next the court considered the alternate grounds for sanctions under 37(e)(2) – “intent to deprive.” Evidence of bad faith intent can support sanctions even without evidence of prejudice. The court did not find any bad faith here noting:

… it is common practice amongst many cell phone users to delete text messages as they are received or soon thereafter. There is nothing nefarious about such a routine practice under the facts presented here.

While Defendant clearly had an obligation to retain the relevant text messages after this law suit was initiated, the Court finds that Defendant simply acted negligently in erasing the text messages either actively or passively. … There is no evidence that he intended to deprive Plaintiff of the text messages or that he acted in bad faith. No sanctions should be imposed pursuant to Rule 37(e)(2).

______________________

SUPPLEMENTAL READING: Read these cases and see if you can learn what the final disposition was of any of them.

EXERCISEConsider whether you think the outcome of these cases would have been any different under the prior version of Rule 37(e). Why or why not?

Students are invited to leave a public comment below. Insights that might help other students are especially welcome. Let’s collaborate!

Copyright Ralph Losey 2017

 

Ralph Losey is a practicing attorney who specializes in electronic discovery law. He is a principal in a U.S. law firm with over 50 offices & 800 lawyers where he supervises electronic discovery work and litigation support. Ralph has written over two million words on law and technology, including six books on electronic discovery. His latest books are "E-Discovery for Everyone" (ABA 2017) and "Perspectives on Predictive Coding" (ABA 2017) (ed. & contributor). His blog is widely read in the industry: "e-DiscoveryTeam.com." Ralph is the founder and principal author of "Electronic Discovery Best Practices" and "e-Discovery Team Training," a free online course covering all aspects of e-discovery. Ralph's sub-speciality is the search and review of electronic evidence using multimodal methods, including artificial intelligence. He also has a free online training program to teach these advanced methods - the "TAR Course." Ralph has devoted a month of his time each year since 2013 to research and test various AI-enhanced document review methods. In 2015 and 2016 Ralph and his Team participated in the TREC Total Recall Track experiments sponsored by the National Institute of Standards and Technology. Ralph has been involved with computers and the law since 1978. His full biography is found at RalphLosey.com. Ralph is the proud father of two children, Eva M. Losey and Adam Colby Losey, a high-tech lawyer married to another e-discovery lawyer, Cat Jackson Losey, and, best of all, Ralph has been married since 1973 to Molly Friedman Losey, a mental health counselor and life-long friend.

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