Thursday, November 21, 2013

Scheindlin Rejects Proposed Federal Rule Regarding Electronically Stored Information (ESI) Discovery Sanctions

On August 15, 2013, U.S. District Court Judge Shira Scheindlin (Southern District of New York), of Zubulake fame and described as, “[p]erhaps the most influential jurist in the e-discovery arena,” published another notable opinion on electronic discovery issues Sekisui America Corp. v. Hart, 2013 WL 4116322 (S.D.N.Y. Aug. 15, 2013). Coincidentally, or perhaps not, the opinion was issued the same day that proposed changes to the Federal Rules of Civil Procedure relating to sanctions for electronic discovery abuse were released for public comment.

The Sekisui opinion is notable because 1) it came out of the U.S. District Court for the Southern District of New York, a court with significant influence in e-discovery law, 2) it involved spoliation (failure to preserve ESI) by the plaintiff, and 3) the Court rejects the prejudice standard proposed in the revised rules. Sekisui America Corporation sued Richard Hart and his wife, Marie Louise

Trudel-Hart, for breach of contract arising out of the purchase of America Diagnostica, Inc., a company owned by the Harts and of which Mr. Hart was President. Hart remained in an executive position with America Diagnostica up until a year and a half later, at which time he was fired and issued a notice of intent to bring a legal claim by Sekisui. Fifteen months after the notice of intent to sue was issued, Sekisui filed its complaint, choosing to wait to institute its litigation hold.  Even then, Sekisui waited another six months to notify its outside technology vendor of the need to preserve its electronic information.

As a result, Sekisui permanently deleted Hart’s email and the email of another person, who was in a position to have material information relating to the breach of contract claim. Not surprisingly, Hart sought to have the Court impose spoliation sanctions, specifically an adverse inference instruction. The Magistrate Judge, Frank Maas, (another respected member of the e-discovery bar) rejected Hart’s request, finding that, although Sekisui’s destruction of ESI “may well rise to the level of gross negligence,” Hart had not met the burden of proving prejudice by the destruction of the lost emails. Judge Scheindlin reversed the Magistrate Judge’s order, disagreeing with imposing the burden of proof regarding prejudice on the party seeking sanctions, and determining that an adverse inference instruction was warranted.

Utilizing the analytical model developed by the Second Circuit Court of Appeals in Residential Funding Corp. v. DeGeorge Financial Corp, 306 F. 3d 99, 107 (2d Cir. 2002) for determining the propriety of adverse inference instructions when a party has destroyed evidence, Judge Scheindlin had little trouble finding that Sekisui’s conduct was sanctionable. The model states that the party seeking adverse inference instruction based on opposing party's failure to produce evidence in time for trial must show that 1) the party having control over evidence had the obligation to timely produce it, 2) the party that failed to timely produce evidence had culpable state of mind, and 3) missing evidence is relevant to seeking party's claim or defense such that reasonable trier of fact could find that it would support that claim or defense. The Judge noted that a party is “culpable” for purposes of the adverse inference test if the party destroyed evidence, knowingly or negligently. (2013 WL 4116322, head note 4). The Judge stated, “The law does not require a showing of malice to establish intentionality with respect to the spoliation of evidence…In the context of an adverse inference analysis, there is no analytical distinction between destroying evidence in bad faith, i.e. with a malevolent purpose, and destroying it willfully.” (Id. at * 6)

Regarding the relevance prong of the Residential Funding test, despite noting that a finding that the evidence in question was destroyed intentionally or through gross negligence is usually sufficient to establish relevance by itself, Judge Scheindlin found that the ESI at issue was relevant because it involved the email of “key players” in the litigation. (Id. at * 7) In other words, Judge Scheindlin held that a finding of relevance can be made by simply looking to whose data was destroyed.

With respect to Residential Funding’s prejudice requirement, Judge Scheindlin rejected the concept that the innocent party should bear the burden of proving prejudice. Rather, she explained that prejudice to the innocent party may be presumed whenever relevant evidence is destroyed, whether intentionally or through gross negligence, stating “Prejudice is presumed for the purposes of determining whether to give an adverse inference instruction when, as here, evidence is willfully destroyed by the spoliating party.”  (Id.* 7) Any other rule, she asserted, would “incentivize bad behavior on the part of would-be spoliators” and “would allow parties who have destroyed evidence to profit from that destruction.” (Id.)

In contrast to Judge Scheindlin’s Sekisui position, the proposed new F.R.C.P. 37 (e) rejects imposing sanctions for any degree of negligence. Under the proposed rule, a court can issue sanctions only if it finds that the failure to preserve ESI “(i) caused substantial prejudice in the litigation and w[as] willful or in bad faith; or (ii) irreparably deprived a part of any meaningful opportunity to present or defend against the claims in the litigation.” (David G. Campbell, Report of the Advisory Committee on Civil Rules 35 (2013)). Judge Scheindlin was critical of the proposed new rule’s limitation on the ability of a court to impose sanctions to situations where the spoliator’s conduct was “willful or in bad faith.” (Sekisui at * 4, n.51). Judge Scheindlin also criticized the proposed new rule’s “placing the burden of proving prejudice on the innocent party.” She stated, “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.” (Id.)

Judge Scheindlin’s opinion contained the adverse inference instruction that was to be read to the jury. It is significant to note that, per the terms of the Court’s instruction, prejudice is only presumed in the threshold determination of whether an adverse inference instruction should be given. According to the Court’s instruction, it is up to the jury to decide whether to adopt a presumption that the destroyed evidence would have been favorable to the Harts. Specifically, the Court’s instruction states that “relevant evidence was destroyed after the duty to preserve arose…[therefore] you may presume, if you so choose, that such lost evidence would have been favorable to the Harts. In deciding whether to adopt this presumption, you may take into account the egregiousness of the plaintiffs’ conduct in failing to preserve the evidence.” (Id. at *8)

The Sekisui case opinion provides several valuable ESI lessons for businesses:
  • Logically, because plaintiffs know if and when the decision to sue was made, courts will be inclined to hold plaintiffs to a stricter litigation hold obligation than a defendant;
  • A malevolent state of mind (i.e. intent or bad faith) may not be necessary for the imposition of spoliation sanctions. In Judge Scheindlin’s court, some form of negligence is sufficient; and,
  • At least according to Judge Scheindlin, but maybe not according to the revised federal rules, the innocent party does not have to prove prejudice resulting from the destruction of ESI. Rather, prejudice is presumed when evidence is willfully destroyed.
About the Author: Michael Palumbo is a Member with the law firm of Jennings, Strouss & Salmon, PLC. Mr. Palumbo's practice focuses on commercial and real estate litigation. Particular areas of experience include title insurance, escrow agent and Deed of Trust litigation; and quiet title, adverse possession, homeowners' associations and real estate agent disputes. For questions, contact Mr. Palumbo at or 602.262.5931.
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