Timing of Defendant’s Actions Weighs Heavily in Analysis of Spoliation Sanctions

Barrette Outdoor Living, Inc. v. Michigan Resin Representatives, No. 11-13335, 2013 WL 3983230 (E.D. Mich. Aug. 1, 2013)

For Defendant’s bad faith failure to preserve his cellular phone and his deletion of 270,000 files from his personal laptop using scrubbing software, the district court adopted the recommendations of the Magistrate Judge and ordered monetary sanctions equaling $35,000 and an irrefutable adverse inference that the phone and deleted files would have contained information unfavorable to the defendant, including that Defendant was involved with the company allegedly created for the “pass-through” scheme on which Plaintiff’s claims were based.

Following his termination for unrelated reasons, Plaintiff suspected that Defendant had committed fraud during his employment (an alleged pass-through scheme).  In the course of subsequent litigation, Plaintiff accused the defendant of spoliating relevant evidence by deleting files from his work computer on the day of his termination, by failing to preserve his cellular phone, and by using scrubbing software to delete thousands of files from his personal laptop.

The timing of Defendant’s actions was key to the court’s analysis.  First, Defendant deleted files from his work computer on the day he was terminated as the result of Plaintiff’s elimination of his position.  At that time, however, he was offered severance and no mention of the alleged fraud was made.  Plaintiff’s concerns regarding the defendant did not arise until the days following his termination, when another employee accused Defendant of having a financial interest in the company allegedly involved in the pass-through scheme.  Next, Defendant’s phone (which was used to communicate with other defendants) was returned to his cellular service provider on the same day that he acknowledged receipt of a message from the plaintiff indicating “grave concern” regarding Defendant’s actions while still employed and on the same day that he received a Notice to Preserve Electronically Stored Information, which he claimed he did not read until after the phone was returned.  Finally, approximately 270,000 files were wiped from Defendant’s personal laptop with scrubbing software “[n]ot long” after Plaintiff filed a motion to compel production of the laptop and cellular phone for imaging.  Defendant denied that he deleted any files that were relevant to the case and offered expert testimony to rebut Plaintiff’s accusations.

Taking up Plaintiff’s motion for sanctions, the court first addressed the timing of Defendant’s duty to preserve.  Plaintiff asserted that Defendant “‘should have reasonably anticipated litigation’ when he deleted files from his work computer, because ‘during the entire perpetration of the pass-through scheme . . .  [Defendant] was aware that he could have been caught.’”  The court ultimately rejected Plaintiff’s proposed timing and reasoned, among other things, that “[t]here are numerous reasons for a reasonable person to believe that his conduct, while exposing him to liability, will nonetheless not result in suit . . . .”  Moreover, recognizing that determining the timing of the duty to preserve is “guided by the facts of each case,” the court found it most persuasive that at the time Defendant deleted the work files, Plaintiff had no knowledge of Defendant’s allegedly fraudulent activities and was not investigating him and that Defendant had been provided no notice of Plaintiff’s intent to initiate legal action.  The court also rejected Plaintiff’s argument that Defendant’s intentional deletion implied that he anticipated litigation and ultimately found that Plaintiff had not carried its burden of showing that Defendant had a duty to preserve when he deleted the files from his work computer.

As to the cellular phone and personal laptop, however, the court came to a different conclusion.  In short, the court concluded that Defendant’s duty to preserve arose shortly following his termination and cited Defendant’s notice that he was being investigated and the revocation of his severance; a phone call in which Defendant was questioned extensively regarding the suspected fraud; and Defendant’s receipt of two emails from Plaintiff’s President, who indicated “grave concern” regarding Defendant’s suspected activity.  Thus, at the time he returned his cellular phone and wiped the files from his personal laptop, Defendant was under an obligation to preserve evidence.

The timing of Defendant’s actions also weighed heavily in the court’s analysis of culpability and ultimate conclusion that Defendant had acted in bad faith (although other evidence was also considered).  That conclusion, in turn, resulted in a finding that the spoliated evidence was presumed to be relevant.  “This is because ‘[w]hen evidence is destroyed in bad faith[,] . . . that fact alone is sufficient to demonstrate relevance.’ ”

Addressing an appropriate sanction, the court acknowledged that Defendant’s bad faith weighed in favor of default judgment, but indicated that the “scale tip[ped] back some when considering prejudice.”  For example, the court noted its doubts regarding how much relevant information was actually contained on Defendant’s laptop and whether the information on the cellular phone was “critical” to Plaintiff’s case.  The court also indicated that some of the evidence was still available from other sources and further noted that “significant other evidence” was at Plaintiff’s “disposal” (e.g. evidence produced from other defendants).  “In short,” the court concluded that it was “not convinced that [Defendant’s] destruction of evidence [would] deprive [Plaintiff] of its day in court.”  Nonetheless, “[s]evere sanctions” were “justified.”  Accordingly, the Magistrate Judge recommended that Defendant be ordered to pay monetary sanctions equaling $35,000, to compensate for both “some” of Plaintiff’s fees and costs in bringing its spoliation motion and for Plaintiff’s “increased expenses in conducting discovery and proceeding in this litigation without the spoliated evidence” and also recommended the imposition of an irrefutable adverse inference at trial that the cellular phone and laptop contained information unfavorable to the defendant.

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