Adverse Inference and Monetary Sanctions Warranted for Failures to Issue Litigation Hold, Monitor Preservation

Zest IP Holdings, LLC v. Implant Direct Mfg., LLC, No. 10-0541-GPC(WVG), 2013 WL 6159177 (S.D. Cal. Nov. 25, 2013)

In this case, the court recommended that an adverse inference instruction be imposed and ordered monetary sanctions where Defendants “did not take adequate steps to avoid spoliation of evidence after it [sic] should have reasonably anticipated this lawsuit and did not issue a litigation hold nor implement nor monitor an adequate document preservation policy.”

In the fall of 2008, Defendants informed Plaintiffs that they intended to “make their own clone product” to compete with Plaintiffs’ products, for which Defendants were distributors.  In August 2008, Plaintiffs informed Defendants that they considered Defendants’ planned product to be an infringement of their own.  In October 2008, Plaintiffs sent a letter “stating that they would file a lawsuit for patent infringement against Defendants should Defendants continue their plan to commercialize their product.”  In March 2010, Plaintiffs filed the underlying action in this case. In August 2012, Plaintiffs filed a motion for sanctions alleging that Defendants had failed to preserve relevant evidence.

Taking up the motion, the court found that Defendants’ duty to preserve was triggered in October 2008, when they were notified of the “potential lawsuit against them should they decide to market their alleged infringing product.”  Despite this, Defendants failed to implement a litigation hold at that time, “or at any time before the Complaint was filed, or after the Complaint was filed.”  Nor did Defendants take any steps to preserve electronic documents or instruct their employees to preserve documents.  Defendants asserted that sanctions were not warranted for these failures, however, “because they ha[d] a company policy that ‘no documents are to be deleted’” and because Defendants “did not believe any of [their] employees would delete company documents.”

Because of Defendants’ failure to implement a litigation hold, a key senior employee intentionally deleted emails “because she received so many” and because “no one told her not to delete them.”  Although Defendants nonetheless claimed that all of her emails were produced, they could not confirm that all of the deleted emails had been recovered.  Notably, although Defendants originally claimed that all emails were “automatically preserved” to a server, it was later discovered that emails could be deleted from that server.  The court also found that Defendants’ failure to implement a litigation hold resulted in the loss of at least two relevant emails from Defendants’ President and CEO and noted that additional communications may also have been lost.  In that instance, although the custodian maintained six different email accounts, he did not search them because he “allege[d] to have previously saved all e-mail communications relating to Plaintiffs in a folder on his desktop” that was produced.  Despite this claim, at least two relevant emails from the custodian which were not produced by Defendants were located in third parties’ files.

The court concluded that “Defendants’ conduct with respect to not preserving and destroying discovery materials amount[ed] to gross negligence[,]”* but did not rise to the level of bad faith.  Thus, Plaintiffs’ request for default judgment was denied.  The court recommended that an adverse inference instruction be read to the jury, however, upon finding that Defendants failed to discharge their preservation obligation with a “culpable state of mind” and that Plaintiffs were prejudiced by the resulting loss of relevant emails.  The court also granted Plaintiffs’ motion for monetary sanctions.

* A careful reader of this opinion may note that despite the court’s initial finding of “gross negligence” as quoted above, later statements regarding culpability reference Defendants’ negligence and negligent conduct.  This disparity was not and has not been resolved.

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