“Essentially Non-existent Document Retention Policy” Renders Defendants an “Unreliable Source of Discovery;” Court Grants Sanctions for False Statements, Discovery Violations

Peter Kiewit Sons’, Inc. v. Wall Street Equity Group, Inc., No. 8:10CV365, 2012 WL 1852048 (D. Neb. May 18, 2012)

In this case, the court addressed several motions, including plaintiff’s motion for sanctions.  Upon analysis of the facts presented, the court determined that defendants made repeated misrepresentations to the court; failed to conduct an adequate search for responsive documents; and wrongfully discarded a relevant server, among other things.  Accordingly, the court ordered monetary sanctions, including payment of the costs of a forensic examination, and recommended an adverse inference instruction at trial.

In this case, plaintiff alleged several trademark-related claims arising from defendants’ use of plaintiff’s service mark in its attempts to solicit clients.  Specifically, plaintiff alleged that defendants falsely represented an association with plaintiff to potential clients, including representing plaintiff as a possible buyer of those potential clients’ businesses.

In the course of discovery, plaintiff suspected that defendants were not participating in good faith and eventually filed a motion for sanctions.  Among other things, plaintiff claimed that defendants had acted in bad faith to retake possession of relevant hardware in third-party custody (with defendants’ landlord, who provided defendants “computer services” including server storage) to prevent the production of relevant information pursuant to a court-authorized subpoena.  That subpoena was approved as a result of defendants’ allegedly insufficient production; sworn testimony from a former employee that additional information existed which had not been produced; and defendants’ insufficient document retention policy, as discussed below.  Notably, defendants claimed that their search—conducted by an employee with no professional computer training and consisting of one key word search (“Kiewit”) of defendants’ network—had resulted in the discovery of only two documents, neither of which were of the type sought by plaintiff.  They also aggressively claimed, including through counsel’s assertions, that the former employee was not telling the truth, which was not true.

Interestingly, the court initially granted plaintiff’s motion for leave to subpoena the landlord to produce defendants’ ESI in part because of its determination that defendants had shown themselves an unreliable source of discovery*:

For the reasons stated on the record during the hearing, and in the court’s memorandum and order filed thereafter, the court granted the plaintiff’s motion to issue a subpoena, granted in part and denied in part the motion to compel, and denied the motion to strike the affidavit of Tara Bethel.  Filing No. 128.  The court determined Defendants’ essentially non-existent document retention policy rendered them an unreliable source of discovery thereby “open[ing] avenues of third party discovery which would have been closed had the defendant retained documents consistent with standard business practices….”

(Emphasis added.)  This same reasoning also contributed to the court’s decision to allow plaintiff to contact defendants’ clients regarding defendants’ invocation of the Kiewit mark:

More importantly, Defendants share the majority of the responsibility for whatever peril they face if Plaintiff contacts Defendants’ clients.  Defendants’ lack of records retention, its disorganized method of storing the documents they do keep, and its lack of candor with the Plaintiff and this court during the discovery process convinces me that Plaintiff must contact Defendants’ clients to reliably obtain relevant discovery.

Returning to the motion for sanctions, despite evidence of defendants’ efforts to thwart the success of plaintiff’s subpoena, evidence of the inadequacy of defendants’ search, and evidence of defendants’ prior misrepresentations to the court, a ruling was delayed pending a court-ordered forensic examination of defendants’ computer equipment.  As a result, it was discovered that an individual defendant had discarded a relevant server, claiming (without support) that it was “fried” but that all of the information had been successfully transferred to other, available repositories.  Additionally, the examination of the remaining hardware revealed the existence of thousands of previously unproduced documents containing the keyword “Kiewit” (either on the face of the document or in metadata), as opposed to two, as claimed by defendants.  Those documents also included several examples of defendants’ communications with potential clients of the type that initially prompted plaintiff’s lawsuit.  The court also noted that at least one previously produced document was not found in the examination, lending additional credence to the claims of spoliation.

Sparing the details, the court ultimately found that defendants made repeated misrepresentations to the court, including in sworn testimony; removed equipment from third-party custody on the eve of service of a court ordered subpoena in bad faith; failed to conduct a good faith search for responsive information (and could not establish that the information was not reasonably accessible); and intentionally destroyed evidence “with a desire to suppress the truth.”

Accordingly, the court ordered defendants to pay the costs related to the forensic search and various portions of plaintiff’s attorney costs and fees related to other discovery efforts and recommended that an adverse inference instruction be given to the jury, allowing them to assume that information on the discarded server would have been harmful to defendants’ case.

* For those interested in additional information regarding the court’s analysis of defendants’ document retention policies, the court’s order granting plaintiff’s motion for an order to issue a subpoena is attached, HERE.

Summarizing broadly, the court’s determination that defendants were an unreliable source of discovery was based largely on defendants’ claim that they did not retain any correspondence unless it resulted in a completed sale and evidence that suggested defendants had failed to produce responsive documents that, according to their document retention policy, should have been available.  Notably, the court indicated that while there was nothing “necessarily improper” about defendants’ retention policy, it may nonetheless have “unintended consequences:”

By failing to retain any documentation, a defendant may lose its ability to credibly defend claims asserted against it, and it may open avenues of third party discovery which would have been closed had the defendant retained documents consistent with standard business practices, and thereby been considered a reliable and complete source of relevant discovery.