Reliance on Employees’ Judgment in Document Retention Policy Results in Finding of Culpability for Spoliation where Documents were Not Preserved

Phillip M. Adams & Assoc., LLC v. Dell, Inc., 621 F. Supp. 2d 1173 (D. Utah 2009)

In this patent infringement case, plaintiff, Phillip M. Adams & Associates (“Adams”), alleged that defendants ASUSTEK Computer Inc. and ASUS Computer International (collectively “ASUS”) spoliated relevant evidence and should therefore be sanctioned.  Finding that ASUS violated its duty to preserve and that the loss of evidence could not be excused as a “routine, good faith operation of electronic information systems,” the court ruled that sanctions were appropriate, but reserved imposition pending the close of discovery and a determination of prejudice.

This case addresses the alleged infringement of several patents developed to resolve defects discovered in a commonly used floppy disk type in the late 1980’s.  The patents were developed by Dr. Phillip Adams and later assigned to Phillip M. Adams & Associates.  Alleged misuse of those patents gave rise to several lawsuits, including litigation against Gateway that was settled before trial.

In the case at issue, Adams alleged that ASUS destroyed critical evidence.  Adams’ allegations of spoliation were based on the assumption that ASUS had obtained Adams’ proprietary test programs and used them in its own attempts to address the disk defect and thus that ASUS should have had evidence related to such use for production during discovery.  ASUS’ failure to produce such evidence, therefore, was indicative of sanctionable spoliation.  Adams had no direct evidence of spoliation.

ASUS’ response to the allegations of spoliation included an extensive description of its email management practices, meant to explain the absence of email related to subject of the litigation.  ASUS explained that “its email servers are not designed for archival purposes, and employees are instructed to locally preserve any emails of long term value.”  According to ASUS, an employee’s failure to download an email from the server would result in the email being automatically overwritten.  A determination of what emails were of “long term value” was left to the individual employee.  Additionally, ASUS’ employees’ computers were routinely replaced and individual employees were responsible for determining what information should be transferred to a new computer.  Any information not saved by the individual employee was erased.  ASUS also had no centralized storage for other electronic documents, choosing instead to allow employees to maintain the documents on their individual work stations.

Beginning its analysis the court indicated two threshold issues:  establishing the evidence was lost or destroyed and establishing that there was a duty to preserve that evidence.

Addressing the unavailability of the evidence, the court agreed that ASUS should have had far more evidence than was produced.  Moreover, the court noted that ASUS’ own statement that no evidence had been discarded since 2005 indicated that “materials prior to 2005 could have been destroyed because of its information management practices.”

Turning to the issue of ASUS’ duty to preserve, the court rejected ASUS’ assertion that the duty first arose in February 2005 upon receipt of notification from Adams of potential infringement claims.  Instead, the court determined that the duty to preserve arose “in the 1999-2000 environment” in which multiple lawsuits related to the floppy disk errors were ongoing.  Also during this time, the court noted, an ASUS employee was writing emails about his work on the software used to address the disk defect issue and a patent application was filed by that employee in 2001.  (It was this work that Adams alleged infringed upon its software).  Because of the flurry of activity, even at ASUS, related to the disk defect issues, the court concluded that “[t]hroughout this time, computer and component manufacturers were sensitized to the issue” and thus the duty to preserve arose.

ASUS argued that it could find safe harbor against sanctions because of the rule providing protection against sanctions where electronically stored information is lost as the result of the “routine, good faith operation of an electronic information system.”  The court disagreed, noting the absence of evidence supporting the assertion of reasonableness or good faith in ASUS’ document management and highlighting the reliance on individual employees.

To answer the question of what sanction was appropriate, the court first considered the culpability of ASUS in the loss of evidence and stated, “[a] sliding scale of sanctions may be imposed depending on the degree of control the alleged spoliator had over the evidence and the spoliator’s subjective intentions.”

Specifically regarding ASUS, the court stated:

The culpability in this case appears at this time to be founded in ASUS’ questionable information management practices.  A court–and more importantly, a litigant–is not required to simply accept whatever information management practices a party may have.  A practice may be unreasonable, given responsibilities to third parties.  While a party may design its information management practices to suit its business purposes, one of those business purposes must be accountability to third parties.

Quoting a prior opinion, the court continued:

[U]tilizing a system of record-keeping which conceals rather than discloses relevant records, or makes it unduly difficult to identify or locate them, [renders] the production of the documents an excessively burdensome and costly expedition.  To allow a defendant whose business generates massive records to frustrate discovery by creating an inadequate filing system, and then claiming undue burden, would defeat the purposes of the discovery rules.

Regarding the relevance of the information management system to sanctions, the court indicated:

"An organization should have reasonable policies and procedures for managing its information and records."  [Citation omitted.]  "The absence of a coherent document retention policy" is a pertinent factor to consider when evaluating sanctions.  [Citation omitted.]  Information management policies are not a dark or novel art.  Numerous authoritative organizations have long promulgated policy guidelines for document retention and destruction.

Accordingly, the court concluded that “ASUS alone bears responsibility for the absence of evidence it would be expected to possess” and that “it is clear that ASUS’ lack of a retention policy and irresponsible data retention practices are responsible for the loss of significant data.”

Regarding prejudice, the court indicated its belief that “prejudice might be considerable” but determined that the degree of prejudice could not be determined until the close of discovery.  Therefore, the court granted the motion in part and directed the parties to provide specific briefing on outstanding issues.

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