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Hold It! A Reminder about the Importance of Document Preservation and Litigation Holds

Client Advisory

October 8, 2013

Introduction  

Judge Shira A. Scheindlin of the United States District Court for the Southern District of New York, and author of the seminal Zubalakedecisions governing e-discovery, recently held that an adverse inference jury instruction was appropriate following the willful destruction of electronically stored information (“ESI”) even absent a showing that the destroyed documents would have been helpful to the innocent requesting party. Her decision in Sekisui Am. Corp. v. Hart, No. 12 Civ. 3479 (SAS)(FM), 2013 WL 4116322 (S.D.N.Y. August 15, 2013) contrasts markedly with proposed amendments to Federal Rule of Civil Procedure 37(e) that would require an innocent party to establish that it was prejudiced by the spoliation before being awarded sanctions.[1] Judge Scheindlin’s decision serves as a reminder to parties of the importance of properly preserving evidence, and the consequences for failing to do so.  

Facts  

In 2009, Plaintiffs Sekisui American Corporation and Sekisui Medical Co. (collectively, “Sekisui”) acquired America Diagnostica, Inc. (“ADI”) from Defendant Richard Hart, ADI’s president and CEO, and Marie Louise Trudel-Hart (collectively, the “Harts”).[2]  

On October 14, 2010, Sekisui sent Richard Hart a Notice of Claim evidencing its intent to file a lawsuit, and on May 2, 2012, Sekisui commenced its lawsuit. Despite acknowledging an intent to sue in October 2010, Sekisui did not institute a litigation hold – i.e., a direction to its personnel to preserve evidence that may be relevant to the claims or defenses in the upcoming action – until January 2012, fifteen months later. Sekisui did not inform its information technology provider of the litigation hold until July 2012, a further six months after it was instituted.[3] 

In October 2011, prior to the institution of the litigation hold, Sekisui “willfully and intentionally” deleted the emails of Richard Hart and Leigh Ayres, both key witnesses in the action, to save space on its server. Thereafter, the Harts moved for an adverse jury instruction based on Sekisui’s email destruction.[4] 

Law 

In accordance with the Second Circuit’s decision in Residential Funding Corp. v. DeGeorge Financial Corp., a party seeking an adverse inference jury instruction must establish that (i) the party had an obligation to preserve records at the time they were destroyed, (ii) the records were destroyed with a culpable state of mind, and (iii) the records were relevant, i.e., their destruction would prejudice the innocent party. Where the conduct is sufficiently egregious, prejudice to the innocent party will be presumed.[5]

Judge Scheindlin’s Decision  

Judge Scheindlin initially referred the Harts’ motion to the Magistrate Judge assigned to handle discovery matters in the case, who declined to impose sanctions because the Harts had not demonstrated that they were prejudiced in any way by the spoliation.[6] However, reviewing the motion following the Harts’ objection, Judge Scheindlin reversed the Magistrate Judge’s decision and granted the Harts’ motion for sanctions. The Court had little difficulty in finding that Sekisui destroyed records when it had a duty to preserve them, because at the time of Sekisui’s destruction, it “had full knowledge of the possibility of future litigation.” Similarly, there was “no question” that the emails were relevant as both Richard Hart and Ayres were key players in the pending litigation.[7]   

The Court also found that Sekisui had the requisite culpable state of mind because it willfully deleted the emails. No showing of bad faith was required because “there is no analytical distinction between destroying evidence in bad faith, i.e., with a malevolent purpose, and destroying it willfully.” Ultimately, the Court found that Sekisui’s conduct – inexcusable delay in instituting a litigation hold coupled with willful deletion of emails – was egregious and failed “to meet even the most basic document preservation obligations.”[8] 

In light of the willful destruction of emails, Judge Scheindlin held that prejudice to the Harts could be presumed. In so ruling, Judge Scheindlin sharply critiqued the proposed amendment to Federal Rule of Civil Procedure 37(e), which would require the innocent party to establish prejudice prior to an award of sanctions, noting: 

I do not agree that the burden to prove prejudice from missing evidence lost as a result of willful or intentional misconduct should fall on the innocent party. Furthermore, imposing sanctions only where evidence is destroyed willfully or in bad faith creates perverse incentives and encourages sloppy behavior. Under the proposed rule, parties who destroy evidence cannot be sanctioned (although they can be subject to 'remedial curative measures') even if they were negligent, grossly negligent, or reckless in doing so.[9] 

Ultimately, Judge Scheindlin held that an instruction informing the jury that it could presume that the deleted emails were favorable to the Harts was appropriate but also noted that the jury could still determine, based on the evidence, that the Harts were not prejudiced by the spoliation of evidence by Sekisui. Judge Scheindlin also awarded the Harts the costs incurred in bringing their motion.[10] 

Conclusion  

As evidenced by Sekisui, a party’s failure to comply with preservation obligations can result in significant sanctions. In addition to adverse inference jury instructions and an award of costs, such sanctions may include an award of attorneys’ fees, deeming certain facts established for the purposes of trial and even the dismissal of the entire action. 

Sekisui serves as a reminder to all litigants and counsel of the importance of preserving all relevant records, including ESI, as soon as litigation can be reasonably anticipated. Such preservation measures should include, but are not limited to, instituting a proper litigation hold, instructing relevant employees regarding their preservation obligations, and monitoring employees to ensure compliance with the litigation hold. 

For those interested in providing comments on the proposed change to Federal Rule of Civil Procedure 37(e), public comments on the proposed amendment can be made on the U.S. Court’s website, http://www.uscourts.gov/RulesAndPolicies/rules/proposed-amendments.aspx. The public comment period is open until February 15, 2014. 


For more information concerning the matters discussed in this publication, please contact the authors, Leonardo Trivigno (212-238-8724, trivigno@clm.com) or Bryce Bernards (212-238-8884, bernards@clm.com), or your regular CL&M attorney.

Endnotes 


[1]   The full text of the proposed amendment to Rule 37(e) can be found at page 34 of the Preliminary Draft of Proposed Amendments to the Federal Rules of Bankruptcy and Civil Procedure, available at http://www.uscourts.gov/uscourts/rules/preliminary-draft-proposed-amendments.pdf, last visited September 30, 2013.

[2]   Sekisui America Corporation, et al. v. Hart, No. 12 Civ. 3479 (SAS) (FM), 2013 WL 2951924 at *1 (June 10, 2013).

[3]   Id. at *1-2.

[4]   Id. at *2, 8.

[5]   Id. at *3-4; Residential Funding Corp. v. DeGeorge Fin. Corp. 30 F.3d 99 (2d Cir. 2002).

[6]   Id. at *1.

[7]   Id. at *6-7.

[8]   Id. at *6.

[9]   Id. at *6, n. 51.

[10] Id. at *8.



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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