Barriers to Rule 37(e) Sanctions: Proving the Loss of ESI and Resulting Prejudice

Barriers to Rule 37(e) Sanctions: Proving the Loss of ESI and Resulting Prejudice

The 2015 amendments to Federal Rule of Civil Procedure 37(e), the rule governing spoliation sanctions, have led to a dramatic decrease in such sanctions over the past three years, recent research from Logikcull shows. Today, spoliation sanctions are down 35 percent from their peak in 2014. And when movants seek the harshest penalties, such as adverse inferences and default judgment, they are denied more than 80 percent of the time.

A quick glance at Rule 37(e)’s sanctions workflow shows why. For a court to impose sanctions for the destruction of electronically stored information, movants have to surmount a series of barriers, some which are deceptively difficult to overcome.

Rule 37e Workflow

Take, for example, proving the loss of ESI. In a surprising number of cases, this threshold showing is one that many parties can’t meet. And when spoliation has been shown, it need not result in sanctions, unless the moving party can prove that that loss has prejudiced it. Again, this is not always an easy showing to make, as the below case law demonstrates.

Proving That ESI Has Been Lost May Be Harder Than It Seems

Key Cases:
  • Oracle America, Inc. v. Hewlett Packard Enterprise Co., No. 16-cv-01393 (N.D. Cal. Aug. 17, 2018)
  • Steves & Sons, Inc. v. JELD-WEN, Inc., 327 F.R.D. 96 (E.D. Va. 2018)
  • FiTeq Inc. v. Venture Corp., No. 13-cv-01946 (N.D. Cal. Apr. 28, 2016)

One of the first significant hurdles to overcome by movants seeking sanctions is proving that the ESI is actually lost and “cannot be restored or replaced through additional discovery.” These requirements can blend together at times, and can present a surprisingly difficult issue for movants as well, as the following cases demonstrate.

In a major commercial dispute over support contracts, Oracle America, Inc. v. Hewlett Packard Enterprise Co., No. 16-cv-01393 (N.D. Cal. Aug. 17, 2018), Hewlett Packard Enterprise Company (“HPE”) moved for sanctions against Oracle for destruction of ESI. That ESI consisted of just over 500 emails authored by Oracle’s Co-CEO, Mark Hurd, concerning the reasons for customer cancellations of those contracts. HPE claimed that some of the documents produced by other Oracle custodians should also have been produced from Hurd but were not, and they used the documents Oracle produced from other custodians to argue those additional relevant documents existed.

HPE was able to show that there were at least a few emails missing, and that the production from Hurd had been leaner than expected at times. However, the court rejected HPE’s claim because the company failed to identify which specific documents were missing. While the court was sympathetic to the difficulty of identifying documents not received because they have been deleted, it held that a claimant must at least show that categories of irreplaceable, relevant documents were likely lost. Since HPE could not do so, the ESI was not technically “lost,” and the motion was denied.

Similarly, in Steves & Sons, Inc. v. JELD-WEN, Inc., 327 F.R.D. 96 (E.D. Va. 2018), an antitrust and trade secrets battle between door manufacturers, defendants sought a spoliation jury instruction over missing emails from one of its former employees who had joined with plaintiff to execute a secret scheme to steal manufacturing information. The ex-employee-turned-spy had even gone so far as to send a series of rather incriminating emails to his new employers that were produced through other custodians. In those emails, he:

  • Asked his new employers whether it would “be wise for us to take precautions to be sure that we are not forced to send them anything that would give them even the most remote basis to continue with proceedings.”
  • Proposed “Delet[ing] from all of our email servers, programs, and folders all copies of every email and document we have exchanged to this point, including every copy that is in the ‘SENT’ email folder.”
  • Also proposed “delet[ing] all meeting notes” and “hav[ing] me recompose all of the information that I’ve sent you to remove indications that any of it is verified current information”; and then “[s]end[ing] you re-drafted versions of all the information that I have provided so far—to eliminate any references that indicate that current informa[ti]on was passed to me by current [JELDWEN] employees.”

After making quite clear his various nefarious schemes, the ex-employee then lamented, over email, that “We can’t unring a bell, but perhaps we can replace the bell with one that’s more attractive to Steves... and less attractive to J[ELDWEN].”

Despite this blatant bad faith caught on (virtual) paper, defendants found themselves having difficulty proving that the emails were lost and unrecoverable.

In fact, defendant did not seem to put much effort into actually retrieving the ESI, which the court did not appreciate: “JELD-WEN has done little to establish that Pierce’s deleted ESI outside of Steves’ productions is unrecoverable,” the court wrote.

After receiving Pierce’s paltry response to the Subpoena, JELD-WEN waited several months to even raise the possibility of a forensic examination with Pierce’s counsel, and then, when that request was denied, never filed a motion to compel such an examination in this litigation.”

However, the court had to reluctantly admit that the defendant had indeed crossed “the apparently low bar” for proving the “loss” element. Where the court did not give the defendant a pass was on proving that the ESI was unrecoverable. “JELD-WEN has failed to show,” the court explained, “that Pierce’s lost ESI cannot be replaced or restored. This factor does not require that JELD-WEN pursue every possible avenue for replacing or restoring the ESI, but it must show that it made some good faith attempt to explore its alternatives before pursuing spoliation sanctions…”

“Here,” the court continued,” JELD-WEN could have taken the obvious step of seeking a forensic examination.” The failure to do so left the court “ill-equipped to decide the restoration question without such evidence, which is unobtainable at this extremely late date in the litigation.”

As a result, the court denied defendant’s motion despite all of the dramatic proof of ill-intent.

This was not a unique outcome, as can be seen by FiTeq Inc. v. Venture Corp., No. 13- cv-01946 (N.D. Cal. Apr. 28, 2016). There, the court denied plaintiff’s motion in limine for a spoliation instruction to the jury for emails deleted by the defendant’s executive vice president.

Once again, the moving party had failed to show that the deleted ESI was unrecoverable. Indeed, because the executive’s emails, it turned out, were discovered from his old computer as well as obtained and produced from the email accounts of others, they were duplicative of other produced ESI.

Once again, an incompetent spoliator stood in the way of Rule (37)(e) sanctions.

And as more and more information moves to the cloud—where it can be backed up, stored, and replicated across dozens, if not hundreds, of machines in dozens, if not hundreds, of versions—we may be reaching a point where the true loss of ESI is incredibly rare.

As more and more information moves to the cloud— we may be reaching a point where the true loss of ESI is incredibly rare.

Finding Spoliation, But Not Prejudice

Key Cases:

  • Brewer v. BNSF Ry., No. cv-14-65 (D. Mont. Feb. 27, 2018)
  • Eshelman v. Puma Biotechnology, Inc., No. 7:16-cv-18 (E.D. N.C. June 7, 2017)
  • Best Payphones, Inc. v. New York, No. 01-cv-3924 (E.D.N.Y. Feb. 26, 2016)

If there is any part of the sanctions regime that has changed the least, it would be the requirement to show prejudice to the party deprived of the lost ESI. Long before the 2015 amendments, the aggrieved party needed to show that they suffered some sort of disadvantage by being deprived of the lost ESI. Of course, proving the crucial importance of ESI that no longer exists is not always an easy task. Indeed, going all the way back to the case that many believe sparked the movement towards eDiscovery, Zubulake v. UBS, the court focused on only one lost email that could be identified with certainty—and only in the fifth of five opinions.

That difficulty continues well into the present, as parties that cannot prove the specific intent needed to prevail under Rule 37(e)(2) can find themselves derailed by the requirements of (e)(1). For example, in Brewer v. BNSF Ry., No. cv-14- 65 (D. Mont. Feb. 27, 2018), the defendant railroad admitted that, while they sent litigation hold notices to custodians, they did not take any other actions to preserve emails or other documents. The plaintiff sought severe sanctions as a result of this admission. But that was not enough for the court:

“Mr. Brewer seems to argue that failing to meet a preservation obligation is in itself so prejudicial that dispositive sanctions are the only appropriate remedy.”

Despite various mistakes by the defendant, the plaintiff simply could not prove what, if anything, was actually missing—and thus how it might have damaged his case. As a result, sanctions were unavailing.

Similarly, the lack of prejudice shielded a defendant biotech company from
sanctions in Eshelman v. Puma Biotechnology, Inc., No. 7:16-cv-18 (E.D. N.C. June 7, 2017). Here, the plaintiff sought adverse jury instructions due to the defendants’ failure to preserve web browser and search history logs relating to the preparation of an alleged defamatory investor presentation.

However, the plaintiff was unable to specify what this missing ESI would have shown. As the court explained, “In order to impose a sanction under Rule 37(e)(1), the court must have some evidence regarding the particular nature of the missing ESI in order to evaluate the prejudice it is being requested to mitigate.”

While further discovery might have helped demonstrate prejudice, the court found that “based on what has been presented to the court at this point, it is difficult to gauge the amount of prejudice to Eshelman due to the lost ESI and what type of remedy would be no greater than necessary to cure that prejudice.”

As well, the deprived parties were unable to show prejudice due to the lack of
preservation of potentially important ESI in Best Payphones, Inc. v. New York, Nos. 1-CV-3924, 1-CV-8506, 3-CV-0192 (E.D.N.Y. Feb. 26, 2016).

In a series of cases extending back all the way to the late 1990’s, the plaintiff payphone business claimed that various New York regulators deliberately drove his company into bankruptcy.

Yet, despite the ongoing litigation, the plaintiff admittedly failed to implement a legal hold to preserve substantial ESI, including bank statements, revenue reports, and emails with potential third-party buyers for his business. Such information could have shown the value of his business and potential other causes of its decline.

The court found that while this ESI likely should have been preserved, there was no proof of any prejudice from its loss. The fact that defendants could have obtained similar information from subpoenas they could have, but chose not to, sent to third parties did not impress the court.

“Defendants’ decision not to pursue obvious non-party discovery leads,” the court explained, “ is not a reason to grant the serious spoliation sanctions requested.”

Eshelman, Brewer, and Best Payphones are not unique cases. For a growing number of litigations, prejudice stands as a significant barrier to sanctions, even when the spoliation of ESI has been found.

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