Lookout for Spoliation Attacks

A recent appeal of a decision from Judge Gerald Bruce Lee of the Eastern District of Virginia is another cautionary example that counsel defending corporate clients in civil litigation must be ever-vigilant against plaintiff’s claims of evidence spoliation.  In today’s modern commercial litigation, careful lawyers are (rightly) concerned about spoliation claims of Electronically Stored Information (“ESI”).  Civil practitioners in the Eastern District of Virginia are seeing more and more of such claims from parties attempting to gain a decisive advantage in litigation.  The stakes are obviously high: few corporate clients can hope to overcome the sanction of a judge’s jury instruction that the corporation has acted improperly to destroy relevant evidence.  Considering how easy it is to demonize corporate parties in a jury trial, such an obstacle usually leads to a generous settlement offer.

In Zellers v. NexTech Northeast, LLC, Case No. 1:11-cv-00967 (GBL/TRJ), Ms. Zellers sued her former employer, Rite Aid, after she was allegedly exposed to refrigerant coolant that leaked from a gas line in a freezer.  After the leak was discovered, a technician plugged the leak, which presumably contained the remaining refrigerant within the gas line.  Ms. Zellers then filed suit against the employer.  Several weeks later, another technician serviced the gas line after another reported leak and performed a triple evacuation of the freezer system,which removed all traces of the refrigerant in the system.

This technician was never aware of the newly-filed litigation, and instead, was simply following his instructions to service the freezer.  Later in the litigation, an issue developed that turned on the chemical composition of the refrigerant allegedly inhaled by the plaintiff.  But due to the evacuation of the gas lines, there was no refrigerant to test.

The plaintiff filed a motion seeking spoliation sanctions against the defendant which included an adverse inference instruction to be delivered to the jury by the trial judge.  The proposed instruction stated that the defendant had improperly released the refrigerant, and the jury was free to presume that the refrigerant was harmful to the defendant’s case.  As a practical matter, such adverse inference instructions are difficult for defense counsel to overcome.

Ultimately in this case, Judge Lee denied the plaintiff’s motion for sanctions as moot after he excluded the plaintiff’s proffered experts on Daubert grounds and granted summary judgment to the defendant.  But this case is an example and warning to corporate defense counsel.  The routine operations of a company can lead to spoliation claims under expected circumstances.  Thus, defense counsel must be vigilant to safeguard evidence that is connected to claims raised in any lawsuit.

Zellers v NexTech Northeast, LLC Opinion (PDF)

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Before Receiving Spoliation Sanctions, a Party Must Demonstrate Prejudice

In a recent decision, Magistrate Judge Ivan D. Davis of the U.S. District Court for the Eastern District of Virginia denied a spoliation motion aimed at a corporate defendant using a new formulation of necessary legal elements.  In Professional Massage Training Center, Inc. v. Accreditation Alliance of Career Schools and Colleges, 1:12-cv-00911, the plaintiff argued that a telephone call from the plaintiff’s lawyer nine months prior to the filing of the Complaint triggered the defendant’s duty to suspend its regular document retention policy and institute a litigation hold.  After a full-day evidentiary hearing, including expert witness testimony, Judge Davis rejected this argument and instead noted that a mere “conditional threat of litigation” expressed over the telephone, coupled with the plaintiff’s failure to send a written litigation hold letter to the defendant, did not put the defendant on notice of potential litigation.

Judge Davis’s opinion is a useful reminder to practitioners:  Send a written litigation hold letter after any telephone conversation if you anticipate asserting a spoliation claim down the road.  While what is said during a telephone call can be disputed and is subject to the vagaries of memory, a written letter is definite and inexpensive.  (Of course, be careful that your own client has properly initiated its own litigation hold before you announce that “litigation is reasonably anticipated.”).

Judge Davis’s opinion is also noteworthy for his legal analysis.  In addition to finding that the defendant had no duty to initiate a litigation hold prior to receiving the complaint, Judge Davis made the alternate finding that the plaintiff suffered no prejudice from the operation of the defendant’s document retention policy.  While the opinion does not expressly say so, it appears that Judge Davis followed the reasoning of Judge Paul Grimm, a leading e-Discovery jurist from the Federal trial bench in Maryland, and his influential opinion in Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.d. 497 (D. Md. 2010).  In that case, Judge Grimm set forth three elements necessary to warrant spoliation sanctions: 1) a triggered duty to preserve documents or evidence, 2) destruction of relevant evidence accompanied by a “culpable state of mind,” and 3) prejudice resulting to the other party.

This is a subtle yet significant extension (or perhaps modification) of the Fourth Circuit’s controlling spoliation case law, Silvestri v. Gen. Motors Corp., 271 F.3d 583 (4th Cir. 2001).  Silvestri is nearly 13 years old, and the case did not involve the destruction of electronic or digital evidence.  Further, Silvestri states that spoliation sanctions could be ordered under two alternative situations: either that the spoliator’s conduct was sufficiently egregious or the effect of the spoliator’s conduct was sufficiently prejudicial.  Contrast that with Victor Stanley where a party must show all three elements (including prejudice) to warrant an order of spoliation sanctions.  In today’s modern e-Discovery era, Victor Stanley offers better guidance for practitioners than Silvestri, and it appears that Judge Davis finds Victor Stanley persuasive and useful in the e-discovery context.

Spoliation claims against institutional or corporate defendants are becoming more frequent, especially in high-stakes, aggressive litigation.  It is easy to see why:  a successful spoliation motion that leads to an adverse inference jury instruction can be a death knell for a corporate defendant.  It is critical for plaintiff’s counsel to adequately prepare for future spoliation claims through litigation hold letters and early Rule 30(b)(6) depositions of corporate representatives.  On the flip-side, defense counsel should argue the Victor Stanley three-element requirement when defending against spoliation claims.

A copy of Judge Davis’s opinion is available here.

Disclosure:  Redmon, Peyton & Braswell, LLP served as counsel of record for Defendant Accreditation Alliance of Career Schools and Colleges in this case.

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