Willful or Grossly Negligent Destruction of ESI Allows Presumption of Prejudice

Sekisui Am. Corp. v. Hart, —F. Supp. 2d—, 2013 WL 4116322 (S.D.N.Y. Aug. 15, 2013)

Previously in this case, the Magistrate Judge declined to impose spoliation sanctions for Plaintiff’s deletion of emails and other ESI belonging to two important custodians absent a showing that the defendants were prejudiced by the destruction.  Upon Defendants’ objections, the district court reversed the denial of sanctions and imposed an adverse inference and monetary sanctions.  In doing so, the court reasoned that prejudice was presumed because the evidence was destroyed intentionally and explained that no showing of malice was required.

Briefly stated, this case arises out of Plaintiff’s claim that Defendant Richard Hart and his wife breached the contract for the sale of their company—American Diagnostics, Inc. (“ADI”)— to the plaintiff.  In the course of litigation, Defendants sought spoliation sanctions for Plaintiff’s intentional deletion of ESI, including emails belonging to Defendant Hart (who had briefly been employed by the plaintiff as chief executive officer of ADI), “perhaps the key witness” in the case, as well as ESI belonging to Leigh Ayres—a former ADI employee who was responsible for compliance with FDA regulations.  The emails and other ESI were destroyed by a third party vendor at the express direction of Plaintiff’s head of Human Resources, despite a duty to preserve (a Notice of Claim had previously been sent to the defendants).  Moreover the deletion of Ayers’ ESI was undertaken with at least the knowledge of ADI’s then-president, if not his outright approval.  Business-related explanations were offered for the deletions (e.g., to free up space on the company’s server).  At the time the ESI was deleted, no litigation hold had been issued.  Ultimately, because Defendants failed to show any prejudice resulting from the destruction, the Magistrate Judge declined to impose sanctions.  A summary of that opinion is available, here.

Upon Defendants’ objections, the district court reversed the denial of sanctions and imposed an adverse inference and monetary sanctions.  Beginning its analysis, the court noted that a party seeking an adverse inference must establish that there was a duty to preserve, that the records were destroyed with a “culpable state of mind” and that the destroyed evidence was “relevant to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.”  The court instructed that “[t]he culpable state of mind factor is satisfied by a showing that the evidence was destroyed knowingly, even if without intent to [breach a duty to preserve it], or negligently” and that it followed that “gross negligence also satisfie[d] the culpability requirement.”  As to relevance, the court indicated that willful destruction is sufficient to allow the conclusion that the missing evidence was unfavorable to the party who destroyed it, and that grossly negligent destruction will also suffice in some circumstances.  Finally, as to prejudice, the court reasoned that “[w]hen evidence is destroyed willfully or through gross negligence, prejudice to the innocent party may be presumed . . . .”  The court went on to note that a case-by-case approach was most appropriate and that the failure to adopt “good preservation practices” was one factor in determining whether to impose sanctions.

Turning to whether Plaintiff had a culpable state of mind with regard to the destruction of Hart’s emails, the district court concluded that the Magistrate Judge’s finding that the destruction was not willful (because there had been no showing of malevolence in the destruction) was “contrary to law and clearly erroneous.”  Rather, the district court found that the emails were “willfully destroyed” and went on to reason that “[t]he law does not require a showing of malice to establish intentionality with respect to the spoliation of evidence” and that “[i]n the context of an adverse inference analysis, there is no analytical distinction between destroying evidence in bad faith . . . and destroying it willfully.”  Thus, that Plaintiff provided a “good faith explanation” for the deletion did not change the fact that the ESI was “willfully” destroyed.  Regarding Ayres’ ESI, the district court noted the Magistrate Judge’s failure to assess Plaintiff’s culpability, and thus determined his findings to be “contrary to law and clearly erroneous” and went on to find that the deletion of Ayres’ emails was also intentional.

Turning next to Plaintiff’s failure to timely issue a litigation hold the district court “clarif[ied]” that “such failure constitutes gross negligence in these circumstances, ” i.e., where there was a 15 month delay in issuing the litigation hold and where, even after the hold was issued, it took Plaintiff 6 more months to notify its IT vendor (who deleted the at-issue ESI at Plaintiff’s request) of the duty to preserve.  Accordingly, the court found that the destruction of both custodians’ ESI was intentional and that Plaintiff’s “further failure to meet even the most basic document preservation obligations consitut[ed] gross negligence.”

The court next addressed the question of relevance and concluded that there was “no question” that the information was relevant.  Thus, the court turned to whether Defendants were prejudiced. The court reasoned that “[w]hen evidence is destroyed intentionally, such destruction is sufficient evidence from which to conclude that the missing evidence was unfavorable to that party.  As such,” the court continued, “once willfulness is established, no burden is imposed on the innocent party to point to now-destroyed evidence which is no longer available because the other party destroyed it.”  In short, “[p]rejudice is presumed for the purpose of determining whether to give an adverse inference instruction when, as here, evidence is willfully destroyed by the spoliating party.”

Accordingly, the district court concluded that “[a]s the result of the destruction of Hart’s and Ayres’ ESI, the Harts are left without an untold amount of contemporaneous evidence of ADI’s operations prior to purchase by Sekisui” and went on to note that despite Plaintiff’s “real effort to minimize the harm done,” it was unable to rebut the presumption of prejudice because “an unknowable amount of ESI . . . was permanently destroyed and remains irretrievable.”  Ultimately, the district court found that the Magistrate Judge’s Memorandum Decision was “clearly erroneous and contrary to law,” and thus reversed its holding as to the denial of sanctions.  Concluding that Plaintiff “willfully and permanently destroyed the ESI of at least two key players,” that Plaintiff “failed to impose a litigation hold for more than a year after the duty to preserve arose” despite being the plaintiff (and thus knowing that litigation could arise), and that Plaintiff “failed to advise its IT vendor of such litigation hold [sic] for nearly six months after (belatedly) imposing such a hold,” the district court granted Defendants’ request for an adverse inference.

The court also awarded monetary sanctions, namely the “reasonable costs, including attorneys’ fees, associated with bringing this motion.”

In footnote 51, the district court offered comments regarding proposed amendments to Rule 37(e)—currently published for public comment (with other proposed amendments), here.  As described by the district court, the proposal would permit sanctions “only if the destruction of evidence ( 1) caused substantial prejudice and was willful or in bad faith or (2) irreparably deprived a party of any meaningful opportunity to present or defend its claims.”  Ultimately, however, the court concluded that the proposed amendment was irrelevant for purposes of the motion.

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