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Avoiding Spoliation Sanctions Under the New Federal Rules of Civil Procedure

By Jonathan C. Scott1
Scott and Scott, LLP


Introduction

While the new federal rules governing electronic discovery appear on the surface to offer parties a relatively simple means of avoiding discovery sanctions should discoverable electronic information be destroyed, the new rules, in reality, are not so simple. A careful litigant will also review the body of law already established in the federal courts dealing with destruction of information and consider how those precedents may apply to future disputes regarding electronic discovery. Prior to the codification of guidelines regarding electronic discovery in Fed. R. Civ. P. 26 and 37, effective December 1, 2006, the federal courts addressed a litigant's obligations with respect to preservation and production of electronic evidence on a case by case basis. Not surprisingly, given that the version of the Federal Rules of Civil Procedure initially adopted in 1970 did not explicitly address electronic discovery at all, judges have taken different views as to the nature of those discovery obligations, and the consequences of a violation. This article addresses how a federal litigant's failure to timely produce relevant documents in electronic form was dealt with before the rule change and the probable effect of the new rules. It concludes with recommendations for entities that create documents in electronic form, whether they are currently in a federal litigation or may become a litigant in such a case in the future.

Under existing precedent, where a party who created electronic documents either delays or fails to produce relevant materials to the opposing party, a district judge has substantial discretion in crafting a sanction which takes into consideration the nature of the violation. Amongst the range of sanctions that are possible are those known as spoliation sanctions. In such a case the party that failed to preserve evidence relevant to the case will face a trial in which the jury will be instructed that it may infer that the unproduced evidence was damaging to that party's case and supported the claims of the adverse party. According to the Third Circuit, courts have admitted evidence tending to show that a party destroyed evidence relevant to the dispute being litigated since the early seventeenth century. Schmid v. Milwaukee Elec. Tool Co., 13 F.3d 76, 78 (3d Cir. 1994). The rationale for the rule that the fact finder may draw an adverse inference is predicated on the "common sense observation that a party who has notice that [evidence] is relevant to litigation and who proceeds to destroy [evidence] is more likely to have been threatened by [that evidence] than is a party in the same position who does not destroy the document." Nationwide Check Corp. v. Forest Hills Distributors, Inc., 692 F.2d 214, 218 (1st Cir. 1982) (Breyer. J.) Such an instruction is extremely damaging to the litigant's case and may be far worse than the inference that the jury would have drawn if the evidence was produced. This Article addresses the likely interplay between the new version of Rule 37 and the existing framework for sanctions.

The new rule and the good faith requirement

While the newly promulgated Fed. R. Civ. P. 37(f) appears to provide a safe harbor protecting the party against sanctions for the routine destruction of electronic evidence, except in exceptional circumstances, the Committee notes qualify that language. The qualification requires that for the safe harbor provision to apply, the loss of evidence must have been in good faith and that the exception cannot be used to exploit the new rule. The juxtaposition of an extraordinary circumstances standard against a requirement that the loss be in good faith to claim the safe harbor protection will make the availability of sanctions for the destruction of electronic evidence a fertile ground for litigation.

In pertinent part, Fed. R. Civ. P. 37(f) provides:
Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.
This language suggests that a party not the subject of litigation could adopt a document retention policy that provided for the routine and frequent destruction of electronic evidence and thereby generally be immune from civil sanctions when the party became a litigant in federal court and was unable to produce relevant electronic evidence because of that policy. The rule should not be interpreted in such absolute terms because the inclusion of a requirement of good faith places the issue of the reasonableness of the party's conduct squarely before the court for its determination. In that reasonableness assessment, the court will likely consider 1) whether the party adopted a policy of destroying core electronic information central to its business more frequently than documents less critical to business operations; 2) whether at the time of the destruction the litigant reasonably anticipated that the documents might be needed for future reference; 3) whether the destruction occurred after the party was put on notice of a potential claim in which the documents would be relevant in a subsequent proceeding or after a discovery demand or evidence preservation demand was made; 4) the time and circumstances of the destruction; 5) whether the party was at fault; 6) whether the documents destroyed were required by law to be maintained because of industry record keeping requirements in order to confirm compliance with agency regulations.

In the First, 2 Second, 3 Third, 4 and Ninth5 Circuits, where the only culpable mental state for the imposition of spoliation sanctions under the existing framework is that of negligence, a party at fault for failing to timely produce electronic discovery or for its unavailability has no safe harbor in the argument that the destruction was not done for the purpose of gaining a strategic advantage. In the leading Second Circuit authority on the subject, Residential Funding Co. v. DeGeorge Financial Co., 306 F.3d 99 (2d Cir. 2002), the court deemed an adverse inference instruction appropriate where the party failed, without good cause, to preserve and produce complete electronic evidence for use by the opposing party, even though the party did not intentionally destroy the evidence.

An electronic document retention or destruction policy that is unreasonable because it fails to preserve information that might be reasonably anticipated to be needed in future or pending litigation likely would also fail the requirement under Fed. R. Civ. P. 37(f) that the operational loss of electronic documents be the result of good faith and be reasonable. While the new rule has carved out a safe harbor exception, the scope of that exception in practice remains to be clarified by litigation under the new rule. It would be unwise for a company or municipal entity to interpret this rule as a broad-based immunity against sanctions for the routine destruction of electronic evidence. Also left unanswered by the Committee notes is the question of whether the courts are to apply a subjective standard or an objective standard in determining whether the party against whom sanctions were sought acted in good faith. If an objective standard is applied, the professed good faith of the spoliator would not be controlling.

What is the scope of evidence to be preserved and when is the obligation triggered?

It is commonly understood that destroying relevant evidence after entry of a federal court order requiring its production to the adverse party will support severe sanctions. See Recinos-Recinos v. Express Forestry, Inc., 2006 WL 2349459, *8-11 (E.D. La. 2006) There is nothing in Rule 37(f) creating a safe harbor in those circumstances because the continuation of a policy that causes the destruction of evidence subject to an outstanding court order is unreasonable as a matter of law.

The Committee notes to the Rule 37(f) make reference to the destruction of evidence related to "a discovery obligation" without defining the contours of that obligation. In particular, it is unclear as to whether Rule 37 spoliation sanctions will only be available if the destruction of relevant electronic evidence occurs after the action is filed or whether, consistent with prior precedent, the courts will hold that a party's obligation to preserve evidence encompasses a pre-suit responsibility to maintain evidence for another's use in a reasonably foreseeable litigation.

Even in the absence of a court order, litigants have an obligation to preserve relevant evidence for the use of the adverse party. Kronisch v. United States, 150 F.3d 112, 126 (2d Cir. 1998). When a party causes "the destruction or significant alteration of evidence, or [] fail[s] to preserve property for another's use as evidence in pending or reasonably foreseeable litigation,", they are guilty of spoliation. Reilly v. Natwest Mkts. Group, Inc., 181 F.3d 253, 267 (2d Cir. 1999).

The pre-suit obligation to preserve evidence is derived from common law principles and the recognition by the federal courts that the unavailability of documentary evidence in whatever form can prejudice the fact-finding function. If electronic documents are destroyed as a result of a document retention policy when federal litigation is reasonably anticipated as a result of a document retention policy, the court may find that the policy was unreasonable and the safe harbor provision of Rule 37(f) inapplicable.

A parties' document retention obligations also derive from record keeping regulations intended to verify compliance with business, entity, or industry- specific regulations. Examples include regulations by the Securities and Exchange Commission regulations requiring a broker-dealer to maintain records of electronic communications for a certain time period and state document retention rules related to documents created by municipal entities. While it is true that a private litigant in a federal civil action seeking such information because it is relevant to his or her case against a party has no private right of action under industry record keeping rules, there is a strong argument that a document retention policy that destroys evidence for use in federal court that the party was required by law to independently maintain is unreasonable as a matter of law.

Conclusion

The new federal rules concerning electronic discovery provide a helpful framework as well as a process for dealing with how electronic documents will be handled in federal litigation. The new rules attempt to strike a balance between many competing considerations. But like any other rules providing guidance for the courts and litigants, the rules must be considered in the broader context of the interests advanced or impaired, as well as the policies involved. An aggressive document destruction policy may be perceived by a court as unreasonable if it impairs the fact finding function without a countervailing policy which justifies it. A document retention policy that requires a business or entity to retain every electronic communication may be perceived by the court as being unduly burdensome.

The applicability of the safe-harbor provision for routine operational loss is likely to be at issue in every case in which a litigant seeks to excuse its inability to produce relevant electronic documents because of its document retention policy. Companies and entities that have taken the time pre-suit to measure the reasonableness of their document retention policies against industry standards, to ensure compliance with applicable document retention compliance regulations, and to review and modify those policies to be more inclusive when federal court litigation is anticipated or filed, are those most likely to win the safe harbor fight. Companies and entities that read Fed. R. Civ. P. 37(f) as a blanket authorization to adopt a policy that is intended to ensure that documents needed by the adverse party for fact finding are routinely unavailable are likely to be without safe harbor protection and at substantial risk for spoliation sanctions.




Jonathan C. Scott is the senior partner of the law and technology services firm Scott & Scott, LLP. Mr. Scott is the chair of the litigation section of the firm and litigates complex commercial and intellectual property disputes nationwide. Mr. Scott may be reached at jcscott@scotandscottllp.com.

1. The author thanks Aimee Hitchner and Lawrence R. Lassiter, litigators in the firm, for their valuable assistance in the preparation of this article.

2. Trull v. Volkswagen, 187 F.3d 88 (1st Cir. 1999).

3. Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99 (2d Cir. 2002).

4. Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76 (3d Cir. 1994).

5. Glover v. BIC Corp., 6 F.3d 1318 (9th Cir. 1993).




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1 The author thanks Aimee Hitchner and Lawrence R. Lassiter, litigators in the firm, for their valuable assistance in the preparation of this article. 2Trull v. Volkswagen, 187 F.3d 88 (1st Cir. 1999). 3Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99 (2d Cir. 2002). 4Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76 (3d Cir. 1994). 5Glover v. BIC Corp., 6 F.3d 1318 (9th Cir. 1993). ?? ?? ?? ??