ESI Lost After Duty To Preserve Had Been Triggered Results In Limited Sanction Under New Rule 37(e)
A federal court in Utah recently applied the newly amended Rule 37(e) and, in doing so, issued relatively limited sanctions following a finding of spoliation. In First American Title Insurance Company, et al v. Northwest Title Insurance Agency, et al, No. 2:15-cv-00229, 2016 U.S. Dist. LEXIS 118377 (D. Utah, Aug. 31, 2016), the plaintiff, First American, sued two ex-employee defendants for taking and using the company’s confidential and trade secret information for use at their new business they formed to compete with the company, defendant Northwest Title. First American sent preservation demand letters to the defendants, and there was evidence that certain documents and ESI were destroyed prior to receipt of the preservation demand. In seeking sanctions, First American argued that the defendant’s duty to preserve arose as soon as they set up Northwest. However, the court held that defendants knew or should have known litigation was “imminent” only upon receipt of the preservation demand letters and, therefore, the defendant’s duty to preserve under Rule 37(e) was not triggered until that date.
Although this ruling resolved the issue regarding the alleged spoliation by Northwest Title that occurred prior to the duty to preserve being triggered, the decision also addressed additional allegations of spoliation that occurred after the duty had been triggered. However, the court found that sanctions were not warranted under Rule 37(e) because First American did not demonstrate that the electronic files at issue were actually “lost” or that they could not be restored or replaced through additional discovery.
The court also addressed the fact that an ex-employee who took numerous hard-copy documents and a thumb drive containing electronic First American files to her new job at Northwest Title subsequently lost the thumb drive and could not recall with specificity all of the ESI files or documents she took with her. She admitted that some of the materials were used in the course of business for Northwest. The evidence showed that the thumb drive likely was lost after the defendants’ receipt of the preservation demand. Looking to Rule 37(e), the court found that First American was prejudiced by not having access to the thumb drive because the lost ESI went to the heart of First American’s claims that defendants took and misused confidential information, and there was no mechanism to enable First American to recover or restore the files through further discovery.
In determining the appropriate sanction, the court reasoned that because there was no evidence that the defendants “acted with intent to deprive another party of the information’s use in the litigation” under Rule 37(e), the sanctions of evidence preclusion, adverse inference, or monetary sanctions were not available and the court could only “order measures no greater than necessary to cure the prejudice.” Based on this framework, the court concluded that the parties would be permitted to present evidence and argument to the jury regarding spoliation of the ESI and documents, but the jury would not be instructed regarding any presumption or inference regarding those materials.
This case highlights the new requirement of Rule 37(e) that a party seeking sanctions for spoliation of ESI must show that the ESI at issue is truly “lost,” and cannot be restored or replaced through additional discovery, as ESI is often stored in multiple locations. The case also illustrates Rule 37’s new guidance for courts in determining appropriate sanctions specific to discovery disputes involving ESI.