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Finding Plaintiffs’ Ex-Employee and his New Employers Culpable for the Spoliation of Ex-Employee’s Laptop, Court Orders Adverse Inference and Monetary Sanctions

Posted in CASE SUMMARIES

Beard Research, Inc. v. Kates, 981 A.2d 1175 (Del. Ch. 2009)

In this case, arising from plaintiffs’ claims that defendants interfered with business relationships and misappropriated trade secrets, plaintiffs sought sanctions against defendants for the destruction of information on a laptop computer which belonged to defendant Michael Kates, a former employee of plaintiffs.  The court refused to award default judgment, as requested, but ordered an adverse inference against Kates and ordered monetary sanctions against Kates and defendants Advanced Synthesis Group (“ASG”) and ASDI, Inc. (“ASDI”) resulting from Kates’s destruction of a relevant hard drive and ASG’s and ASDI’s failure to take reasonable steps to prevent that destruction.

Dr. Michael Kates was employed by plaintiffs between 1997 and February 2004.  In mid-2003, while still employed by plaintiffs, Kates purchased a Gateway laptop for business purposes.  Between 2003 and early 2004, Kates’s relationship with plaintiffs deteriorated.  In December 2003, Kates resigned from plaintiff C&B Research & Development, Inc. (“CB”) and on February 13, 2004, Kates also resigned from plaintiff Beard Research, Inc. (“BR”).  Kates began working at ASG three days later and eventually went to work for ASDI; he continued to use the Gateway laptop.  ASDI provided management services for ASG and both plaintiffs and defendants were involved in the sale of chemical compounds through a catalog, among other things.  On May 4, 2005, CB and BR filed suit against Kates, ASDI, ASG and others.

Discovery was contentious and plaintiffs eventually filed three motions to compel.  The third motion sought production of Kates’s Gateway laptop.  Upon production of the laptop, plaintiffs’ expert discovered evidence of extensive deletions.  Accordingly, plaintiffs filed a motion for sanctions.  Following the court’s discussion of the relevant facts, it concluded that defendants had a duty to preserve arising no later than June 2005 and that “three separate sets of actions require[d] discussion:”

1) In October 2005, Kates was laid off from ASG and subsequently deleted all ASG data and files from his laptop and emptied the recycle bin.  Kates claimed the action was taken because he was angered by the lay off.

2) In December 2007, following several alleged hard drive crashes after which Kates reformatted the drive and reinstalled system software, Kates provided the hard drive to an employee of ASDI’s in-house technology support and electronic discovery consultant who determined the drive could not be saved and therefore replaced it with a new hard drive (“the new drive”).  This was done despite Kates being warned by defense counsel not to “trash” the computer.  Moreover, despite the alleged return of the old drive to Kates, Kates could not produce the old drive as requested and hypothesized that he had discarded it.

3) On July 23, 2008, upon being informed of the need to produce the laptop, Kates reinstalled the new drive, which had also allegedly failed, and then defragmented the new drive before producing it to the plaintiffs the next day.  At the time of production, Kates failed to inform plaintiffs that the new drive had been installed and that the old drive was lost.

Plaintiffs’ motion for sanctions argued that Kates, ASDI, and ASG were all liable for the spoliation of discoverable materials and requested default judgment as to two claims.

In a lengthy discussion of each separate action, the court ultimately determined that Kates, ASDI, and ASG were responsible for the spoliation “with varying degrees of culpability.”  Specifically, the court faulted Kates for his failure to comply with his preservation obligations by deleting information, by replacing and losing his original hard drive (particularly where plaintiffs presented evidence that relevant data may have been retrieved from the drive), and by defragmenting the new drive prior to production, among other things.  As to ASDI and ASG, the court found they violated their discovery obligations by doing “virtually nothing” to preserve the computer and its contents.  Moreover, the court found heightened culpability where the replacement of the old hard drive was accomplished with the assistance of ASDI’s in-house technology support, also serving as e-discovery consultant for the litigation.  Notably, the court discussed defense counsel’s failure to act to ensure preservation but did not include counsel in the sanctions discussed below.

Discussing first the requested sanction of default judgment, the court established that such a sanction was appropriate only as “a last resort” and that “to impose a default judgment, the spoliator must have acted ‘willfully or in bad faith and intended to prevent the other side from examining evidence.’”  In the case before it, the court found that plaintiffs failed to establish the existence of certain incriminating evidence on the spoliated hard drive or that such evidence would have supported their position and that an adverse inference would be a sufficiently appropriate sanction under the circumstances.  The court also found that plaintiffs failed to establish that defendants acted with the purpose of misleading plaintiffs or the court. Accordingly, default judgment was denied.

Moving to the appropriateness of an adverse inference, the court highlighted the standard for drawing such an inference as articulated by the Delaware Supreme Court:

An adverse inference instruction is appropriate where a litigant intentionally or recklessly destroys evidence, when it knows that the item in question is relevant to a legal dispute or it was otherwise under a legal duty to preserve the item. Before giving such an instruction, a trial judge must, therefore, make a preliminary finding that the evidence shows such intentional or reckless conduct.

[Citation omitted].  Pausing to “define some key terms,” the court established that “for spoliation, the spoliator must have intended to ‘act with purpose’” and again cited the Delaware Supreme Court which reasoned that “an adverse inference is consistent with human nature and common sense: if a party intentionally destroys evidence, it is reasonable to infer that the evidence was not favorable to that party.”  Specifically discussing recklessness, the court laid out the relevant burden, as established by the Delaware Supreme Court:  “‘Where the claim of recklessness is based on an error in judgment, a form of passive negligence, plaintiff’s burden is substantial,’ because the ‘precise harm which eventuated must have been reasonably apparent but consciously ignored in the formulation of the judgment.’”

Concluding that “drawing an adverse inference is appropriate when an actor is under a duty to preserve evidence and takes part in the destruction of evidence while being consciously aware of the risk that he or she will cause or allow evidence to be spoliated by action or inaction and that the risk would be deemed substantial and unjustified by a reasonable person,” the court determined that an adverse inference was appropriate for Kates’s deletion of ASG data and Kates’s replacement/loss of the original drive.  The court’s discussion then outlined the specific inferences to be drawn from Kates’s behavior.

Turning finally to the imposition of monetary sanctions, the court stated, “To impose monetary sanctions, this Court need only find that a party had a duty to preserve evidence and breached that duty.  Essentially, this means that negligence alone may be sufficient to support the imposition of monetary sanctions.”  Once again excoriating Kates’s behavior, the court also found ASDI and ASG responsible for the loss of evidence resulting from their failure to “take reasonable steps to ensure that Kates preserved his laptop computer…”  The court’s discussion also condemned defendants’ failure to inform plaintiffs that the old drive had been replaced when producing the new drive.  Accordingly, the court awarded plaintiffs their attorneys’ fees and expenses, including expert’s fees, jointly and severally against Kates, ASDI, and ASG.