Fourth Circuit Reverses Spoliation Sanctions: Case Remanded to District Court for Additional Findings

In a March 31, 2015 unpublished decision, the Fourth Circuit reversed and remanded the damages portion of an oral contract case decided by the Alexandria district court.  The opinion highlights the difference between a duty  to preserve all documents once there is a reasonable anticipation of litigation as opposed to a duty “to preserve documents that the party knew or should have known were, or could be, relevant to the parties’ dispute.”

The Case Facts: A Failure to Preserve and the Resulting Adverse Inference Instruction

The case, Blue Sky Travel et al. v. Al Tayyer Group, No. 13-2500 (4th Cir. Mar. 31, 2015), involved an oral contract for a US-based travel company to purchase airline tickets for a Saudi entity working for the Ministry of Higher Education of Saudi Arabia.  The front-end of the case focused on the oral contract and the statute of frauds.  The district court decided that the statute of frauds did not apply, and the Fourth Circuit affirmed this part of the decision.  However, the Fourth Circuit reversed on a spoliation instruction that influenced the damages part of the case.  The damages argument centered on an adverse inference instruction that followed the magistrate judge’s determination that defendant ATG spoliated evidence.  Specifically, it appeared that ATG either destroyed or failed to preserve invoices of its dealings with other vendors who also sold airline tickets to ATG. The district court awarded $10 million in damages to Blue Sky Travel for lost profits.

In the discovery phase of the case, the magistrate judge ordered ATG to produce a series of ATG’s 3rd party invoices. ATG failed to do this even after three orders.  It eventually surfaced that the invoices no longer existed.  The magistrate judge’s recommendation to the district court was for an adverse inference instruction as a sanction for the spoliation.  The sanction was appropriate, the magistrate judge concluded, “to address effectively the prejudice caused by defendant’s failure” to preserve.  The district court affirmed the sanction order for the reason given by the magistrate judge, namely the prejudice from the spoliation of evidence.

The magistrate judge had held that once litigation began, ATG had a duty to stop its document destruction policies “and to preserve all documents because you don’t know what may or may not be relevant” (emphasis added in appellate opinion).  The Fourth Circuit held that this is too broad a duty; a party is not required to preserve all its documents but rather only documents that the party knew or should have known were, or could be, relevant to the parties’ dispute.”   The Fourth Circuit determined that the spoliation finding and sanction were an abuse of discretion because the action was based on an erroneous principle of law.

At trial, by agreement between the parties, the lost profits component of damages was decided by the district judge, not by the jury.  The district court treated the adverse inference instruction as “an evidentiary presumption applicable to the damages hearing.”

The Fourth Circuit’s Holding, Reversal in Part, and Instructions on Remand

The Fourth Circuit’s reversal is grounded on the difference between a duty to preserve all documents once there is a reasonable anticipation of litigation as opposed to a duty “to preserve documents that the party knew or should have known were, or could be, relevant to the parties’ dispute.“   The Opinion recites the current Fourth Circuit law:

A party may be sanctioned for spoliation if the party (1) had a duty to preserve material evidence, and (2) willfully engaged in conduct resulting in the loss or destruction of that evidence, (3) at a time when the party knew, or should have known, that the evidence was or could be relevant in litigation.

Opinion at 21 (citing Turner v. United States, 736 F.3d 274, 282 (4th Cir. 2013)).

The Turner case dealt with the United States Coast Guard’s role in a tragic boating accident.  The plaintiff sought copies of audio tapes of Coast Guard communications during a search and rescue operation.  The Coast Guard did not preserved the tapes.  A claim of negligent spoliation followed.  The Fourth Circuit held that spoliation does not result from negligent conduct, and it restricted the preservation duty to evidence “relevant to some issue in the anticipated case.” The court in that case wrote:

[S]poliation does not result merely from the “negligent loss or destruction of evidence.” Rather, the alleged destroyer must have known that the evidence was relevant to some issue in the anticipated case, and thereafter willfully engaged in conduct resulting in the evidence’s loss or destruction.

Turner v. United States, 736 F.3d 274, 282 (4th Cir. 2013) (internal citation omitted).

Based on the appellate record in Blue Sky Travel, the Fourth Circuit was unable to determine whether ATG had a duty to preserve the 3rd party invoices.  Judge Keenan observed that:

In the present case, neither the magistrate judge nor the district court made the crucial finding whether ATG destroyed or failed to preserve the evidence at issue, despite having known or should have known that the evidence could be relevant in the case.

Opinion at 21 (citing Silvestriv. General Motors Corp., 271 F.3d 583, 591 (4th Cir. 2001); Turner, 736 F.3d at 282).

On remand, the Fourth Circuit directed the district court to answer two unresolved questions:

  • First, the district court should ascertain the date by which ATG knew or should have known that invoices relating to other vendors could be relevant in the case.
  • Second, the district court should establish when ATG destroyed the invoices from the other vendors.

 A Different Analysis under Proposed Fed. R. Civ. P. 37(e)

Blue Sky Travel confirms the current Fourth Circuit position on the duty to preserve. Beyond this, the case has little or no precedential value on spoliation issues and related sanctions.  First, it is only an unpublished decision, which the Fourth Circuit reminds us is not binding precedent.  But apart from this designation, the case facts may soon be governed by proposed FRCP Rule 37(e), which would likely dictate at least a different track at the trial level. Following that track, the magistrate would have more guidance on the necessary findings and the available remedies or sanctions.

Proposed Rule 37(e) (to be effective December 1, 2015) requires a party take “reasonable steps” to preserve ESI.  This seemingly limits the duty to preserve to relevant ESI and documents.  Moreover, the preservation duty should be viewed as proportional to the issues in the case and the dollars at stake.  Again, this dictates against an overly broad preservation duty (i.e., against a knee-jerk “all documents” approach) and directs the inquiry back to what is relevant.  As to the sanction, the key finding in the case was of “prejudice” to the plaintiff because of ATG’s spoliation, leading to an adverse inference instruction.  Under the proposed Rule 37(e), an adverse inference instruction may not be based on a finding of only prejudice, but requires a finding of an “intent to deprive” the opposing party of the use of the missing documents.  (Proposed Rule 37(e) applies to ESI only, so it would not cover physical copies of the invoices.  But if the invoice copies were scanned into electronic form, then the Rule would apply.)

The Fourth Circuit split 2-1 on the statute of frauds issue, but it was seemingly unanimous on the spoliation question.  The Appellant has petitioned for rehearing en banc, so practitioners should stay tuned for any further developments in this case