Spoliation Redux in Virginia: Rule 37(e) in the Spotlight

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.

And, importantly:

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.

4. Summary

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.

The Duke Rules Ahead: Part 2 Rule 37(e) Amendment and No Presumption of Prejudice when Seeking an Adverse Inference Instruction

In June 2013, the Standing Committee on Rules of Practice and Procedure approved a series of proposed amendments to the Federal Rules of Civil Procedure.  These proposals were published in August 2013.  The amendment process has several remaining steps, but if the process remains on course, then the new rules will take effect on December 1, 2015, subject to Supreme Court approval and Congressional inaction.

The focus in this Part 2 discussion is on one of the hot-button eDiscovery issues—whether a party aggrieved by spoliation must prove both relevance and resulting prejudice for the court to order an adverse inference instruction.  Since the lost data is obviously not available, proof in either direction will almost certainly be difficult.  Whether or not the law provides presumptions of both relevance and prejudice sharply tilts the playing field in a sanctions fight in one direction or the other.  The proposed amendment to Rule 37(e) would preclude a presumption of prejudice. Thus, a party seeking sanctions must prove prejudice.  In practice, this will limit the availability of an adverse inference instruction. 

Introduction and Summary

While the proposed Rule 37(e) amendment included in the Duke Rules identifies proof elements for serious sanctions, the broader issue is the breadth of the duty to preserve ESI under a litigation hold.  The availability and likelihood of serious sanctions for spoliation will dictate the ESI preservation efforts undertaken by parties.  Preservation costs are high; whatever preservation-related rule amendments emerge in the Duke Rules will impact these costs.

The Committee’s Comments show that it considered three approaches to the preservation issue:  1)  An explicit preservation rule that details when and how ESI must be preserved, 2)A a general preservation rule, but still contains a “front end” solution, that is, directions or guidelines for the ESI preservation process, and 3) A “back end” approach that focuses on the sanctions for failure to preserve relevant evidence.  The Committee has pursued option three.

The impact of a “back end” approach hinges on proof requirements given that the essential ESI has been destroyed.  Does the innocent party get the benefit of certain presumptions?  Or must that party prove the relevance of the destroyed ESI and the resulting prejudice to its case?

We begin with a short analysis of the August 2013 decision by Judge Shira Scheindlin in Sekusui American Corp v. Hart, No. 12 Civ. 3479, 2013 WL 4116322 (S.D.N.Y. Aug. 15, 2013).  Judge Scheindlin, applying 2nd Circuit precedent, started with a showing of willfulness.  Based on this, she provided the aggrieved parties with a presumption of prejudice, which led to an adverse inference instruction.

We then consider the same facts under the proposed replacement for the current Rule 37(e).  The amendment would preclude the prejudice presumption, with the consequence that adverse inference instruction ordered under the Sekusui test likely would not be available.

The sanctions provisions are one of the keys to eDiscovery rules.

Sekusui American Corp v. Hart

In Sekusui, the plaintiff corporation sued the Harts, the former owners of the company, for breach of contract tied to representations made at the time of the company sale.  Sekusui did not impose a litigation hold until 15 months after filing its lawsuit, and then waited another six months before notifying its eDiscovery vendor to preserve data.  During the 15-21 month period, the Harts’ ESI on the company’s servers, including years of email, was intentionally erased by Sekusui employees.  The Harts claimed spoliation and sought an adverse inference instruction.  The magistrate judge denied their motion, refusing to presume prejudice even through the evidence showed gross negligence by Sekusui.

Judge Scheindlin set aside the magistrate’s ruling and ordered the adverse inference instruction. The judge reasoned:

When evidence is destroyed intentionally, such destruction is sufficient evidence from which to conclude that the missing evidence was unfavorable to that party. As such, once willfulness is established, no burden is imposed on the innocent party to point to now-destroyed evidence which is no longer available because the other party destroyed it.

 Id. at 7 (emphasis in original).  Essentially, Judge Scheindlin decided  the fairest way to deal with problem of destroyed ESI is to place the burden on the party that destroyed it.  Her solution is to provide the innocent party with the necessary presumption of prejudice.  The opposing party has the opportunity to rebut the presumption, but it faces the obvious problem that the ESI itself is no longer available.

Proposed Rule 37(e)

The proposed amendment to Rule 37(e) would entirely replace the current rule.   The amendment language plainly requires proof of “substantial prejudice.” Nothing is said about a presumption, but the requirement of proof and the silence regarding any presumption tell all:  This is the opposite of the Sekusui approach.

The core of the amendment is proposed Rule 37(e)(1)(B), which reads:

(1)  Curative measures; sanctions. If a party failed to preserve discoverable information that should have been preserved in the anticipation or conduct of litigation, the court may:

* * * *

(B) impose any sanction listed in Rule 37(b)(2)(A) or give an adverse inference jury instruction, but only if the court finds that the party’s actions:

(i) caused substantial prejudice in the litigation and were willful or in bad faith; or

(ii) irreparably deprived a party of any meaningful opportunity to present or defend against the claims in the litigation.

The critical language is in subsection (1)(B)(i).  Where Judge Scheindlin applied a presumption of prejudice when there was proven willfulness or bad faith, the amended rule requires proof of “substantial prejudice.”

There is a caveat to this rule in subpart (B)(ii) where a party could prove conduct that “irreparably deprived a party of any meaningful opportunity to present or defend against the claims.”  Note that this is more demanding than “substantial prejudice.”

The outcome under the Sekusui facts would therefore likely be different under the proposed amendments.  Amended Rule 37(e)(1)(B)(i) would permit a court to give an adverse inference jury instruction only after proof that the party to be sanctioned has “caused substantial prejudice in the litigation and was willful or in bad faith,” or if the innocent party is “irreparably deprived . . . of any meaningful opportunity to present or defend“ claims in the litigation.

Summary

In sum, the proposed amendment to Rule 37(e) would require in most cases proof of prejudice from the spoliation, with no available presumption, which is in contrast to Judge Scheindlin’s Sekusui opinion.

The flood of comments to this amendment has already begun.  The proposed Rule 37(e) wades straight into a heated debate.  Suffice it to say that the fate of the proposed Rule 37(e) amendments is far from certain.

Committee MemorandumProposed Discovery Rules

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Proposed FRCP Rule 37(e) Cleared by the U.S. Judicial Conference

[This Blog post is an abbreviated version of an article published in the Fall 2014 Edition of the Northern Virginia Chapter of the Federal Bar Association’s Rocket Docket News and also available on the Redmon Peyton & Braswell LLP website here.]

The U.S. Judicial Conference has approved proposed FRCP Rule 37(e). The rule now goes to the U.S. Supreme Court. If the Court approves the changes before May 1, 2015, and Congress leaves the proposed amendments untouched, the amendment will become effective December 1, 2015.

The proposed rule presents a uniform process and standard which will resolve the split among the circuits on the availability of the most serious ESI spoliation sanctions. Proposed Rule 37(e) will replace entirely the current subpart, and, as stated in the Committee Note, “forecloses reliance on inherent authority or state law to determine when certain [curative or sanctioning] measures should be used.” The new standard will permit the most serious sanctions only when there is proof of “intent to deprive” the harmed party of the use of the ESI in its case.

This blog post outlines the workings of the proposed rule. Given the complexity of the challenge, the rule is surprisingly simple.

First, rather than generally dealing with lost evidence, the proposed rule addresses only lost ESI and applies only if a 3-part test is met. Second, if there is a finding of prejudice because the ESI has been lost, then a court may impose remedies to cure the prejudice, but no more. And third, the most serious remedies (including case dismissal and giving an adverse inference jury instruction) may only be utilized after a finding of “intent to deprive” the use of the lost ESI.

Rule 37(e) decision tree - wordpress1.    When Does the Rule Apply? The 3-Part Test.

The rule starts with the 3-part test:

a.    ESI Preservation Duty and Trigger. The inquiry begins with the preservation trigger event—the proposed rule applies only to ESI “that should have been preserved in the anticipation or conduct of litigation…” The Committee Note confirms that this does not create a new duty to preserve, but draws on the existing common law duty:

Committee Note:  Many Court decisions hold that potential litigants have a duty to preserve relevant information when litigation is reasonably foreseeable. Rule 37(e) is based on this common-law duty; it does not attempt to create a new duty to preserve. The rule does not apply when information is lost before a duty to preserve arises.

b.    Reasonable Steps to Preserve.   The proposed rule next limits its application to ESI that was lost “because a party failed to take reasonable steps to preserve the information . . .” The Committee Note explicitly identifies that only “reasonable steps” should be required:  “This rule recognizes that “reasonable steps” to preserve suffice; it does not call for perfection.”

In practice, the pursuing party will show that ESI has been lost, and that the other party was on notice to preserve. The defense then likely centers, as least initially, on the preservation steps taken. If the defending party demonstrates that it took reasonable steps to preserve ESI, then the spoliation claim should fail. The Committee Notes then adds proportionality as a “factor in evaluating the reasonableness of preservation efforts is proportionality.”

The Committee Note also recognizes that the party’s sophistication should be considered when a court analyzes whether a party realized what should have been preserved.

c.    Will Curative Measures Remedy the ESI Loss?   A court should not go any further in the analysis if the ESI loss can be “restored or replaced through additional discovery.”  The Committee Note repeats this point:

Committee Note:  Rule 37(e) directs that the initial focus should be on whether the lost information can be restored or replaced through additional discovery…If the information is restored or replaced, no further measures should be taken.

In many ESI cases, this third part will end the inquiry. ESI that may appear to be lost can often be located elsewhere. Before a court explores prejudice and searches for appropriate remedies, it must consider the possibility that seemingly-lost ESI can be restored or replaced.

2.    If there is a Finding of Prejudice, what may a Court Order?

Under the proposed rule, only when the 3-part test above is met does a court continue with its analysis. The question in subpart (e)(1) of proposed Rule 37(e) is whether there is a “finding of prejudice.” If so, then a court may reach into its bag of remedies, but is limited to “order[ing] measures no greater than necessary to cure the prejudice.” The remedies available at this stage do not include the most serious sanctions –the adverse inference jury instruction or dismissal. Those sanctions may be imposed only under subpart (e)(2).

The Committee Note emphasizes that the proposed rule is purposefully vague on which party has the burden of proving or disproving prejudice.

Committee Note: The rule does not place a burden of proving or disproving prejudice on one party or the other.

As to the available remedies, the Committee Note provides:

Committee Note: The rule leaves judges with discretion to determine how best to assess prejudice in particular cases.

The available remedies are not listed in the proposed rule, but case law identifies financial penalties, payment of attorneys’ fees, evidentiary limitations, and that certain facts are deemed proved. A close reading of the proposed rule and the Committee Note identifies these actions as remedies, not “sanctions.”

3.  A Court may Order the Most Serious Remedies only after a Finding of “Intent to Deprive” the Use of the ESI.

The center of the ongoing debate has been the required showing before a court may order the most serious remedies:  an adverse inference jury instruction, dismissal of claims, or a default judgment. Some courts have required proof of black-hearted destruction of ESI, while the Second Circuit has authorized giving an adverse inference instruction based on a mere finding of negligence or gross negligence. The rule-makers intend a uniform national standard, and they reject the Second Circuit’s approach.    

Committee Note:  It is designed to provide a uniform standard in federal court for the 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.

The chosen test centers on proof of “intent to deprive.” The proposed rule language reads: “only upon a finding that the party acted with the intent to deprive another party of the use of the information in the litigation.”  f there is any confusion in this language, the Committee Note emphasizes the restriction:

Committee Note: Subdivision (e)(2) limits the ability of courts to draw adverse inferences based on the loss of information in these circumstances, permitting them only when a court finds that the information was lost with the intent to prevent its use in litigation.

Only if this hurdle is cleared does the door open to the serious sanctions.

In conclusion, the proposed amendments to Fed. R. Civ. P. 37(e) are intended to apply a uniform standard in federal courts regarding a party’s obligation to preserve ESI and the remedies available to the court when ESI is lost. The remedies are intended to be remedial, rather than punitive, and the most serious remedies are reserved to instances where dark-hearted intent is shown.