Wilson v. Thorn Energy, LLC, 2010 WL 1712236 (S.D.N.Y. Mar. 15, 2010)
In this case, the court ordered sanctions for defendants’ failure to preserve relevant data where defendants failed to back up a flash drive containing all relevant financial records and where that data was lost as the result of the flash drive’s failure.
In short, a dispute arose between the parties related to plaintiffs’ loans to and investment in defendants’ petroleum-related project in Africa. In the course of litigation, plaintiffs sought an accounting of defendants’ use of their funds.
At an initial pretrial conference, defendants’ counsel agreed to provide the accounting. Despite a subsequent court order compelling its production and defendants’ continued promises to comply, the accounting was never provided. Seven months after defense counsel promised to provide the accounting, defendants’ 30(b)(6) deponent testified that “all of the LLC’s records concerning the monies that allegedly were sent to Africa had been stored on a USB ‘flash drive’ that she maintained” and that the drive failed in the summer of 2008 – long before the promised production of the accounting. The deponent further asserted that efforts to recover the information in a useable form were unsuccessful and the drive was eventually discarded. Accordingly, plaintiff sought an order finding defendants in contempt and for sanctions.
For sanctions to be imposed, plaintiffs needed to show that defendant had a duty to preserve the data, that the data was lost or destroyed with a “culpable state of mind”, and that the evidence was relevant. As to the first element, the court determined a duty to preserve arose upon plaintiffs’ demand for payment of their money, “well before the flash drive allegedly failed.” Addressing defendants’ state of mind, the court noted that negligence was sufficient to warrant sanctions and, citing the recent case, Pension Comm. of Univ. of Montreal Pension Plan v. Bank of Am. Secs., LLC, 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010), found that “the failure to collect evidence in a timely manner from a key witness, such as [the 30(b)(6) deponent], constitutes ‘gross negligence or willfulness’” and that “[i]t was consequently at least grossly negligent for the Defendants not to have made a copy of the flash drive before it allegedly failed.” The lost data was also found to have been relevant.
In their defense, defendants asserted that they were protected by the “safe harbor” provisions of Fed. R. Civ. P. 37(e). The court disagreed and held that safe harbor was inapplicable:
That rule provides that a court may not sanction a party "for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system." Fed.R.Civ.P. 37(e). As the Advisory Committee notes explain, the term "routine operation" relates to the "ways in which such systems are designed, programmed, and implemented to meet the party’s technical and business needs." Id., advisory committee’s notes (2006). Here, however, the data on the flash drive was not overridden or erased as part of a standard protocol; rather, it was lost because the Defendants failed to make a copy. Moreover, even if the loss of the data could be described as "routine," by the summer of 2008, the Defendants were fully aware that the Plaintiffs contemplated litigation to recover the funds that they were owed. Accordingly, the Defendants had a duty to preserve their data. Fujitsu Ltd., 247 F.3d at 436. At a minimum, that duty required that they make a copy of the files on the flash drive. . . The Defendants’ failure to do so means that they failed to act in good faith. Rule 37(e) consequently does not preclude an award of sanctions.
The court also cited evidence in the record of the existence of “at least some underlying documentation” that was available to defendants but not produced.
Granting plaintiffs’ motion for sanctions, the court ordered that defendants would be precluded from offering evidence at trial concerning their financial records or the data allegedly contained on the discarded flash drive.