“[A] a party is not required to preserve all its documents but rather only documents that the party knew or should have known were, or could be, relevant to the parties’ dispute.”

Blue Sky Travel & Tours, LLC v. Al Tayyar, —Fed. Appx.—, 2014 WL 1451636 (4th Cir. Mar. 31, 2015)

In this case, a magistrate judge imposed severe sanctions for Defendants’ failure to preserve “all documents” once litigation began.  Specifically, the magistrate judge held that “once litigation began, [Defendants] had a duty to stop its document retention policies ‘and to preserve all documents because you don’t know what may or may not be relevant.’ (Emphasis added.)”  The sanction was upheld by the district court and resulted in a $10 million award for lost profits damages.  On appeal, however, the Fourth Circuit found that the “standard applied by the magistrate judge constituted an abuse of discretion, because a party is not required to preserve all its documents but rather only documents that the party knew or should have known were, or could be, relevant to the parties’ dispute.”  Accordingly, the circuit court vacated the lower court’s profit-based damages award and remanded the case for a determination regarding: 1) when Defendants should have known that the at-issue evidence  (original invoices) could be relevant; 2) when the at-issue evidence was destroyed; and 3) whether a new trial on lost profits damages was necessary.

“This case involves a breach of contract dispute between two travel agencies and their respective principals.”  Broadly summarized, Plaintiffs agreed to (and did) assist Defendants in procuring tickets to be re-sold to the Saudi Arabian Ministry of Higher Education (“the Ministry”) for Saudi Arabian students traveling outside of the country.  When the relationship soured, Plaintiffs filed a Complaint alleging, among other things, that Defendants had not upheld the agreement to share 50% of the profits generated from sales to the Ministry.

In the course of discovery, Plaintiffs sought the production of invoices involving other ticket vendors who provided tickets to Defendants.  When Defendants failed to produce the invoices despite an order of the court, sanctions were imposed.  In their motion for reconsideration, Defendants indicated that the original invoices had not been retained.  Accordingly, the court addressed the question of spoliation:

At a hearing held in September 2013 to determine whether ATG spoliated evidence, the magistrate judge admonished counsel for ATG, stating that “when this litigation started, the defendants were required by law to preserve. Any document retention policy you had had to be stopped.” The magistrate judge further informed counsel for ATG that “[o]nce you are put on notice that there is litigation pending or once litigation starts, you are required … to stop [your] normal document retention policies and to preserve all documents because you don’t know what may or may not be relevant.” The magistrate judge rejected ATG’s argument that Blue Sky’s complaint did not put ATG on notice that invoices relating to vendors other than Blue Sky could be relevant in the case. Additionally, the magistrate judge did not make any credibility findings concerning Ragaie’s affidavit.

At the conclusion of the hearing, the magistrate judge ordered an adverse inference “permitting the jury to presume that ATG made $20 million in profits in reselling to the Ministry the tickets originally purchased by [Plaintiffs].”  The sanction was affirmed by the district court.  Ultimately, it was the district court, and not a jury, that determined the amount of lost profits damages.  Accordingly, the court construed the adverse inference sanction “as creating an evidentiary presumption applicable at the damages hearing,” resulting in an award of $10 million in damages related to the alleged 50% profit sharing agreement.

Defendants appealed and argued that the magistrate judge and district court “applied an incorrect legal standard” when assessing Defendants’ preservation obligation.   The circuit court agreed:

A party may be sanctioned for spoliation if the party (1) had a duty to preserve material evidence, and (2) willfully engaged in conduct resulting in the loss or destruction of that evidence, (3) at a time when the party knew, or should have known, that the evidence was or could be relevant in litigation.   Turner v. United States, 736 F.3d 274, 282 (4th Cir.2013). In the present case, neither the magistrate judge nor the district court made the crucial finding whether ATG destroyed or failed to preserve the evidence at issue, despite having known or should have known that the evidence could be relevant in the case. See Silvestri, 271 F.3d at 591; see also Turner, 736 F.3d at 282.

Instead, the magistrate judge held that once litigation began, ATG had a duty to stop its document retention policies “and to preserve all documents because you don’t know what may or may not be relevant.” (Emphasis added). The standard applied by the magistrate judge constituted an abuse of discretion, because a party is not required to preserve all its documents but rather only documents that the party knew or should have known were, or could be, relevant to the parties’ dispute. See Turner, 736 F.3d at 282. Further, the district court’s imposition of the sanction based on spoliation created severe prejudice, because the evidentiary presumption effectively relieved Blue Sky of its burden to prove its damages claim for lost profits.

The lower court’s profit-based damages award was vacated.  On remand, the district court was therefore ordered to determine “whether [Defendants] spoliated evidence, what sanctions, if any, are appropriate, and whether a new trial on lost profits damages is necessary.”

A full copy of the court’s opinion is available here.

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