Rule 37(e) remains a lightning rod among the eDiscovery amendments to the Federal Rules. The Rule, which governs ESI spoliation instructions, produced by far the most heated discussions in the 12-year FRCP eDiscovery amendments process. The Rule is now the subject of a May 1, 2018 Judge Robert E. Payne opinion in Steves and Sons, Inc. v. JELD-WEN, Inc. 2018 WL 2023128. The Rule also seems to have been adopted at least in part by the Supreme Court of Virginia in Emerald Point v. Hawkins, 294 Va. 544 (2017). Proposed Virginia legislation that would have overruled Emerald Point breezed through the Virginia House of Delegates on a 99-0 vote in February 2018 but stalled just short of becoming law.
Current Rule 37(e) finally made its way into the Federal Rules effective December 1, 2015. The process to shape a spoliation rule, however, had dogged the rule-makers for a more than a decade. An earlier version was included in the 2006 eDiscovery rules amendments but was recognized as a weak placeholder. The rule-makers returned to the task starting with the 2010 Duke Conference. The history and shape of the eventual rule are fully covered in our RPB Rule 37(e) White Paper, The Long-Awaited Proposed FRCP Rule 37(e) and Its Guidance for ESI Preservation (attached and also available for download from the RPB-law.com website).
The battle behind Rule 37(e) is all about the appropriate sanction for the loss or destruction of relevant ESI. The Holy Grail for plaintiffs is an adverse inference jury instruction devoid of any bad faith element—an in limine ruling granting such an instruction likely produces a favorable settlement or puts a defendant in a high-risk gamble. From the other side, a principal target is a requirement for a showing of bad faith.
1. Steves and Sons Inc. v. JELD-WIN, Inc. — EDVa May 2018 Decision
A procedural oddity in this massive case (more than 1500 PACER entries) led to double jury trials in antitrust/trade secrets litigation before Judge Payne. The antitrust trial went to a jury in February 2018, with the result of a $58 million plaintiff’s verdict (which can be trebled to $170 million) for Steves. In May 2018, another jury heard JELD-WEN’s trade secrets claims against Steves. In competing press releases, both sides claim victory in the second trial.
Prior to the second trial, JELD-WEN moved in limine for a spoliation instruction. Judge Payne denied the motion. The case went to trial, but hobbled by the ruling.
The facts featured John Pierce, a former JELD-WEN employee who consulted for Steves. Discovery showed that before litigation erupted Pierce proposed purging the files of emails, notes, and information that Pierce might have passed to Steves.
Rule 37(e) has four threshold requirements to be met before a court decides if any spoliation sanction is appropriate: (1) ESI should have been preserved; (2) ESI was lost; (3) the loss was due to a party’s failure to take reasonable steps to preserve the ESI; and (4) the ESI cannot be restored or replaced through additional discovery. Sanctions are available under subparts (e)(1) and (e)(2), with the possibility of an adverse inference instruction fund only in subpart (e)(2). Subpart (e)(2) requires proof of “an intent to deprive another party of the information’s use” element. Rule 37(e) does not specify the burden of proof—Judge Payne concludes that the party seeking spoliation sanction must prove all elements by clear and convincing evidence.
Judge Payne’s analysis starts with the threshold issues, with a focus on two issues. Was there a duty to preserve? And then, did JELD-WEN show that Pierce’s lost ESI could not be replaced or restored? Regarding preservation, Judge Payne turned to the eDiscovery stalwart Zubulake and Victor Stanley decisions:
“… a party generally “must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents.” … More or less might be required for preservation in unusual cases, but those principles reflect the standard reasonableness framework.
The finding that Pierce failed to take reasonable preservation steps followed.
It was on the restoration/replacement requirement that the Court found JELD-WEN failed. “This factor does not require that JELD–WEN pursue every possible avenue for replacing or restoring the ESI, but it must show that it made some good-faith attempt to explore its alternatives before pursuing spoliation sanctions.” The Opinion then faults JELD–WEN for not taking “the obvious step of seeking a forensic examination in this litigation of Pierce’s several hard drives, which might have confirmed the impossibility of restoration.”
Having found that JELD-WEN did not clear the threshold issues, John Payne could have stopped. But he continued with the observation that the Fourth Circuit “has not spoken about the level of intent that a court must find to impose a sanction under Rule 37(e)(2).” Pre-2015 amendment cases indicate, however, “that that the spoliating party’s conduct does not need to be in bad faith to qualify as intentional.” The Court concludes that evidence of Pierce’s intent was missing as well, and “[a]n adverse inference instruction would, therefore, not be warranted even if JELD–WEN could satisfy all the threshold Rule 37(e) requirements.”
Steves and Sons demonstrates how difficult the Rule 37(e) test can be in practice. JELD-WEN had seemingly strong evidence on all points, even on Pierce’s intent, but faced a heightened evidentiary standard and came away short-handed. The case will no doubt be cited in future EDVa spoliation fights for the general proposition that trial courts dislike spoliation instructions.
2. Supreme Court of Virginia – Emerald Point LLC v. Hawkins.
Virginia adopted into the Virginia Rules in 2009 nearly all of the 2006 Federal Rules eDiscovery amendments. Virginia did not adopt, however, the 2006 predecessor to Rule 37(e), and Virginia has not incorporated the current Rule 37(e). The Emerald Point case presented the Supreme Court of Virginia with a fairly clean slate to consider spoliation sanctions.
In Emerald Point, a landlord was sued over CO levels from a newly installed furnace. The evidence was that Hawkins suffered permanent injuries from the dangerous CO levels. Hawkins sought a jury instruction that directed the jury to accept as undisputed that the furnace had a “burned through” combustion chamber and that this was the source of the dangerous levels of CO in the apartment. The landlord had stored the furnace for about a year after the events, but the furnace was disposed of before the lawsuit was filed. While the landlord failed to preserve the furnace, there was no evidence of any “bad faith” by the landlord.
The Supreme Court of Virginia turned to FRCP Rule 37(e) for guidance. The Court first acknowledged that Rule 37(e) applies only to spoliation of ESI; nonetheless, it directed that “resolution of a spoliation issue in the Commonwealth should be guided by the same standard and applicable to all forms of spoliation evidence.” That standard, the Court concluded, requires some level of intentional loss or bad faith:
“… that the evidence must support a finding of intentional loss or destruction of evidence in order to prevent its use in litigation before the court may permit the spoliation inference. In short, we agree that “[t]o allow such a severe sanction as a matter of course when a party has only negligently destroyed evidence is neither just nor proportionate.” Brookshire Bros., Ltd. v. Aldridge, 438 S.W.3d 9, 24 (Tex. 2014). (Emphasis added.)
The Supreme Court’s favorable reliance on Rule 37(e) suggests the overall Rule provides the best available guidance for spoliation instructions in the Virginia state courts, and this means that the party pursuing an adverse inference instruction likely must meet the four threshold requirement in Rule 37(e) and then has to prove an intent to destroy the evidence or bad faith.
That is, unless the Legislature directs otherwise.
3. Virginia HB 1336—Spoliation of Evidence; Jury Instruction.
Emerald Point sparked an effort to write a much more lenient spoliation instruction standard into Virginia law. In February 2018 the Virginia House of Delegates voted 99-0 in favor of HB 1336, legislation that would remove any proof of intentional destruction or bad faith requirement for a permissive spoliation instruction. The bill, as amended by the Senate Committee for the Courts of Justice, provided:
If a party, or such party’s agents, employees, or servants, has possession, custody, or control of evidence that such party, or such party’s agents, employees, or servants, has been put on notice that such evidence is material to pending or probable litigation, and such evidence is disposed of, altered, concealed, destroyed, or not preserved by such party, or such party’s agents, employees, or servants, or by another person or entity at the direction or with the consent or knowledge of such party, or such party’s agents, employees, or servants, a court may instruct that a jury may infer, subject to any explanation that may be made by such party, that, if such evidence had been introduced, such evidence would be detrimental to the case of such party.
The party seeking such instruction need not show that the disposal of, alteration of, concealing of, or failure to preserve such evidence was undertaken intentionally or in bad faith in order for such instruction to be given. (Emphasis added.)
The bill would require that a party at one time had possession of the evidence and had actual notice of litigation, but it would eliminate required proof of intentional destruction or bad faith. Read literally, the proposed law would erase the intent element that anchors Rule 37(e).
The bill did not make it into law in the 2018 Legislative Session but came very close. The 2018 Session ended with the bill still in the Senate Committee. The same bill, or a similar bill, could be introduced in the 2019 Session.
The spoliation war rages on. Rule 37(e) was a victory for parties fighting off spoliation challenges. Steves and Sons raises the bar in the federal courts even higher and it confirms again the courts’ dislike of spoliation instructions. Emerald Point opens the door to Virginia’s wholesale application of Rule 37(e) in state court litigation. Given the intensity of the fight, Virginia’s consideration of a legislative reversal that eliminates the requisite showing of intentional destruction or bad faith should come as no great surprise.