'Sekisui' Shakes Up Sanctions Analysis for Evidence Spoliation
In our last column, we explored the encouraging trend of courts determining the propriety of sanctions for spoliation of electronically stored evidence with reference to the proposed amendment to Federal Rule of Civil Procedure 37(e). Judge Shira Scheindlin of the Southern District of New York, one of the federal judiciary's leading experts on e-discovery and author of some of its most consequential e-discovery decisions, has recently weighed in on the future of sanctions for the destruction of evidence, however, and expressed serious reservations about the proposed changes to Rule 37(e). In Sekisui American v. Hart,1 Judge Scheindlin reversed Magistrate Judge Frank Maas' report and recommendation denying the defendants' motion for sanctions. Scheindlin instead granted the defendants' motion and sanctioned Sekisui for destroying email files relevant to the litigation long after having sent the defendants a notice of claim.
Sekisui American Corporation and Sekisui Medical Co. (collectively, Sekisui) sued Richard Hart and Marie Louise Trudel-Hart for breach of contract arising out of Sekisui's acquisition of American Diagnostica Inc. (ADI) in 2009. Hart had been the chief executive officer of ADI, but was fired after Sekisui determined that ADI had violated the sale agreement governing the acquisition. In that contract, ADI represented that it had complied with relevant federal regulations, that its facilities were adequate to conduct business, and that its products contained no material defects. Sekisui sent the Harts a notice of claim on Oct. 14, 2010, and filed a complaint on May 2, 2012.
During discovery, Sekisui revealed that in March 2011, it had deleted Hart's email file from its server, as well as that of another employee relevant to the breach of contract action. Moreover, Sekisui did not implement a litigation hold until January 2012 and did not advise its information technology vendor of its duty to preserve until July 2012. The emails, apparently deleted at the direction of ADI's director of human resources to free up space on the server, were "permanently deleted and irretrievable."2 Sekisui was, however, able to produce about 36,000 emails to and from Hart using other sources. The Harts sought an adverse inference jury instruction based on Sekisui's destruction of the electronically stored information associated with the email files.
Magistrate Judge Maas, citing the proposed amendment to Rule 37(e), found that the Harts were not entitled to sanctions because they had not proved any prejudice from the destruction of the email files.3 Judge Scheindlin, however, ruled that an adverse inference instruction was an appropriate sanction for Sekisui's destruction of the evidence. At the core of her ruling lies the principle that the burden should not rest upon the innocent party to prove the relevance of the destroyed evidence and any resultant prejudice. To the extent that proposed Rule 37(e) would mandate a different conclusion in the case, the court disagreed with the proposed rule's allocation of the burden.
Judge Scheindlin applied the Second Circuit's existing framework for sanctions in response to spoliation of electronically stored information. Under Residential Funding v. DeGeorge Financial, a party seeking an adverse inference instruction for spoliation of evidence must demonstrate: (1) that the party that had control over the evidence was obligated to preserve it when it was destroyed; (2) that the evidence was destroyed with a culpable state of mind; and (3) that the spoliated evidence was relevant to the claim or defense of the party seeking sanctions.4
Scheindlin found that each of the three elements was met, and that an adverse inference instruction was therefore justified. In so ruling, Judge Scheindlin pointed to three particularly problematic elements of Sekisui's conduct:
Sekisui (1) willfully and permanently destroyed the [electronically stored information] of at least two key players in this litigation; (2) failed to impose a litigation hold for more than a year after the duty to preserve arose, despite the fact that Sekisui is the Plaintiff in this action and, as such, irrefutably knew that litigation could arise; and (3) failed to advise its [information technology] vendor of such litigation hold for nearly six months after (belatedly) imposing such hold.5
Judge Scheindlin also acknowledged the Second Circuit's more recent decision in Chin v. Port Authority of New York and New Jersey, which "reject[ed] the notion that a failure to institute a 'litigation hold' constitutes gross negligence per se."6 Rather, the Chin court endorsed a "case-by-case approach," in which the adequacy of a litigant's preservation practices should be considered as one factor in a sanctions determination.7 The practical effect of the Second Circuit's ruling was to afford district courts greater latitude to decide against ordering sanctions. The Second Circuit thus affirmed the district court's decision not to issue an adverse inference instruction, even assuming that the spoliating party was grossly negligent and that the destroyed evidence was relevant. In so holding, the Second Circuit disagreed with Pension Committee of University of Montreal Pension Plan v. Banc of America Securities,8 a seminal e-discovery decision in which Judge Scheindlin had held that the failure to implement a litigation hold constituted gross negligence per se. Despite the shift away from per se spoliation sanctions in Chin, Scheindlin found the culpability requirement satisfied in Sekisui because, while the Chin decision held that a finding of gross negligence did not require an adverse inference instruction, it nonetheless continued to permit such instructions.
Judge Scheindlin explicitly rejected the approach of the proposed amendment to Rule 37(e) for several reasons in an important footnote of the Sekisui opinion. She first observed that the proposed rule would abrogate Residential Funding by largely limiting the imposition of sanctions to cases of willful or bad faith destruction of evidence. The court flatly stated that it "d[id] not agree that the burden to prove prejudice from missing evidence lost as a result of willful or intentional misconduct should fall on the innocent party."9 Moreover, Scheindlin concluded that failing to order sanctions for negligent conduct "creates perverse incentives and encourages sloppy behavior."10 In any event, the court concluded that the proposed rule was "irrelevant" to the motion for sanctions because it has not yet been adopted.11
Sekisui sets forth multiple holdings of note in the ever-evolving doctrine of sanctions for electronic evidence spoliation. First, the court reiterated that the culpability requirement is satisfied by knowing or negligent destruction of the evidence. The court's reasoning, which it derived from Residential Funding, is that the "sanction of an adverse inference may be appropriate in some cases involving the negligent destruction of evidence because each party should bear the risk of its own negligence."12 This holding is fundamentally incompatible with the proposed amendment to Rule 37(e), which "rejects the view adopted in… Residential Funding" that allows for imposition of spoliation sanctions for negligence, reserving them instead for instances of willfulness or bad faith.13
Second, Judge Scheindlin stated that intentional destruction of evidence after the duty to preserve attaches constitutes willful destruction—even if the evidence was not destroyed "with a malevolent purpose" or in bad faith.14 Thus, Sekisui's good faith explanation that the files were deleted to clear room on the server did not prevent a finding of willfulness on Sekisui's part.15 This definition of willfulness captures a very broad swath of the spoliation landscape, apparently excluding only a party's inadvertent destruction of evidence once the duty to preserve has attached. In fact, the court recognized that "Sekisui ha[d] made a real effort to minimize the harm done by [its] destruction" of the email files, but imposed sanctions nonetheless.16 The proposed amendment to Rule 37(e), by contrast, emphasizes curative measures as recourse, and permits sanctions only for those situations in which a party suffers substantial prejudice due to the willful spoliation of evidence or is irreparably deprived of "any meaningful opportunity to present or defend against the claims in the litigation."17