Does Deleted ESI Warrant An Adverse Inference? Sekisui Am. Corp. And Proposed Rule 37(e) Differ

Thursday, March 13, 2014 - 09:32

Spoliation motions, a common litigation strategy, are at “an all-time high,”[1] and corporate litigants are engaging in costly over-preservation of electronically stored information (“ESI”) to avoid the risk of sanctions. In Sekisui Am. Corp. v. Hart, 945 F.Supp.2d 494 (S.D.N.Y. 2013), Judge Scheindlin, a leading jurist in the e-discovery arena,[2] articulated a standard for granting an adverse inference for spoliation when a party has “willfully” destroyed evidence, even if the destruction was not malicious and the relevance of the destroyed evidence is merely presumed. The proposed amendment to Federal Rule of Civil Procedure 37(e) differs significantly.

Background

Sekisui commenced an action against Richard and Marie Hart for breach of contract arising from Sekisui’s acquisition of America Diagnostics, Inc. (“ADI”), of which Mr. Hart was president. Sekisui had acquired ADI in 2009 and subsequently terminated Hart. In October 2010, Sekisui sent a Notice of Claim evidencing its intent to sue the Harts but failed to implement a litigation hold for 15 months, during which time Sekisui deleted ESI belonging to Hart and another employee. Sekisui delayed an additional six months before communicating the litigation hold to its IT vendor. 

When the Harts learned that ESI had been deleted, they sought an adverse inference jury instruction and spoliation sanctions. Sekisui argued that the deletion was not malevolent but rather an independent act by the head of Human Resources to free up storage space on company servers. Although the magistrate judge concluded that Sekisui’s conduct “may well rise to the level of gross negligence,” he declined to issue sanctions. His decision was guided by proposed Rule 37(e) and the Harts’ failure to show any prejudice from the ESI destruction. See Sekisui, 2013 WL 2951924 at *4 (S.D.N.Y. June 10, 2013).

Judge Scheindlin’s Decision

On review, Judge Scheindlin found the magistrate’s reasoning “contrary to the law and clearly erroneous,” as inconsistent with the Second Circuit’s analysis in Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99, 107 (2d Cir. 2002). See Sekisui, 945 F.Supp. at 507. Under that standard, a party seeking an adverse inference for spoliation is required to show: (i) there was a duty to preserve the ESI; (ii) the ESI was destroyed with a “culpable state of mind;” and (iii) the destroyed ESI was relevant to a party’s claims or defenses “such that a reasonable trier of fact could find that it would support that claim or defense.” 

As Sekisui destroyed emails months after its duty to preserve arose, the first element was easily satisfied. However, the crux of Judge Scheindlin’s analysis involved the treatment of the second and third elements. With respect to the “culpable state of mind” requirement, Judge Scheindlin observed that in the Second Circuit this term implies “a continuum of fault – ranging from innocence through the degree of negligence to intentionality.” Id. at 503-4. Although acknowledging the Second Circuit’s holding that a failure to timely implement a litigation hold is not gross negligence per se, Judge Scheindlin reasoned that courts are permitted to reach such a conclusion. Id. at 507, fn. 77. In doing so, Judge Scheindlin relied on a case-by-case analysis endorsed by the Second Circuit in Chin v. Port Authority of New York and New Jersey, 685 F.3d 135 (2d Cir. 2012), even though Chin had used this approach to narrow, rather than widen, the category of cases warranting the imposition of sanctions.

Judge Scheindlin was sufficiently persuaded that the facts in Sekisui justified a broad reading of the Residential Funding standard and was unmoved by Sekisui’s explanation that the destruction of emails resulted largely from an employee’s good-faith actions. The court also found it immaterial that the employee retained hard copies of all emails she considered relevant, or that Sekisui recovered approximately 36,000 of the deleted emails. Although Judge Scheindlin agreed that Sekisui had made “real efforts to minimize the harm done,” ESI was nonetheless “willfully destroyed” by a Sekisui employee.  Id. at 509. This was enough. “[I]n the context of an adverse inference analysis, there is no analytical distinction between destroying evidence in bad faith, i.e. with a malevolent purpose, and destroying it willfully.” Id. at 506. The term “willfully” thus covers a range of conduct between “knowingly” and “negligently.” In every scenario, a presumption of prejudice arises.    

Not only does this definition of “willful” cast a wide net for culpable conduct, but the fact that this conduct may result in a presumption of prejudice appears to undermine the purpose of the third element of the Residential Funding standard, i.e., that the destroyed evidence be found relevant. By concluding that “[w]hen evidence is destroyed willfully, the destruction alone is sufficient circumstantial evidence from which a reasonable fact finder could conclude that the missing evidence was unfavorable to that party,” Judge Scheindlin has effectively blended the two prongs of the test together.  Id. at 504.   

Although a party that has deleted ESI has an opportunity to rebut this presumption of prejudice, it is no easy feat. For example, although Sekisui argued that “the missing emails would be of only marginal relevance” and that 36,000 emails had been recovered, Judge Scheindlin held that since “an unknowable amount of [e-mail] . . . was permanently destroyed and remains irretrievable,” there was no way for Sekisui to satisfy its burden of rebutting prejudice to the Harts. Id. at 509. This may be a harsh result when one considers that the vast majority of information subject to a litigation hold is often irrelevant.  For example, Microsoft Corporation has reported that “[f]or every 2.3 MB of data that are actually used in litigation, Microsoft preserves 787.5 GB of data – a ratio of 340,000 to 1.”[3]

Ultimately, however, the effect of Sekisui was tempered by the fact that Judge Scheindlin did not impose a mandatory adverse inference but rather instructed the jury that it had discretion to conclude that the destroyed evidence had been unfavorable to Sekisui. Unquestionably, the decision also turned largely on Sekisui’s uncommonly “egregious” behavior, amplified by virtue of its position as plaintiff in the action. Id. at 507. It is difficult to predict how much practical effect the decision will have. Only a handful of cases have discussed Sekisui, and at least two have distinguished it on the basis of its own remarkable facts.[4]

Proposed Rule 37(e)

The detailed analysis in Sekisui may also have little precedential value if the proposed amendment to Rule 37(e) is approved.[5] The amendment conflicts directly with the Sekisui decision as it rejects the standard articulated in Residential Funding and permits sanctions only if the destruction of evidence either (i) causes substantial prejudice and was willful or in bad faith, or (ii) irreparably deprives a party of any meaningful opportunity to present or defend its claims. If the proposed amendment is approved, litigants may be less concerned with preserving ESI, safe in the knowledge that the innocent party bears a near-impossible burden of proving the relevance of deleted data. This burden runs counter to the established proposition that courts must take care not to “hold the prejudiced party to too strict a standard of proof regarding the likely contents of the destroyed or unavailable evidence, because doing so would subvert the purpose of the adverse inference, and would allow parties who have destroyed evidence to profit from that destruction.” Kronisch v. United States, 150 F.3d 112, 128 (2d Cir. 1998). Notably, Judge Scheindlin disapproved of the proposed amendment in a footnote to Sekisui: “I do 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.” Sekisui at 503, n. 51. Judge Scheindlin also cautioned that “imposing sanctions only where evidence is destroyed willfully or in bad faith creates perverse incentives and encourages sloppy behavior.” Id. It is clear from the public comments filed in response to the proposed Rule that many share these concerns.[6]

The divergent standards articulated by Judge Scheindlin and the Advisory Committee on Civil Rules may be best attributed to a difference in priorities. Judge Scheindlin’s approach is to ensure that “each party [bears] the risk of its own negligence,” while recognizing the realistic difficulties of asking an innocent party to prove the relevance of documents that have been destroyed. The Advisory Committee’s approach seems “to address the overbroad preservation many litigants and potential litigants felt they had to undertake to ensure they would not later face sanctions.”[7] Neither approach provides a standard for awarding an adverse inference that meaningfully balances the burden of (i) establishing the relevance of destroyed evidence, and (ii) preserving everything.   

Until this issue is settled, litigants are advised to err on the side of over-preservation, to timely institute litigation holds, and to be mindful that even a good faith explanation for the loss of evidence may not be sufficient to avoid the imposition of an adverse inference. 


[1] See Dan H. Wiloughby, Jr. et al., Sanction for E-Discovery Violations: By the Numbers, 60 Duke L. J. 789, 791 (2010).

[2] Over a decade ago, Judge Scheindlin issued the seminal Zubulake decisions, which continue to provide a framework for the preservation of ESI.  

[3] Letter from Microsoft Corporation to Hon. David G. Campbell, chair, Advisory Committee on Civil Rules (August 31, 2011). 

[4] See, e.g., Taylor v. City of New York, 2013 WL 4744806 (S.D.N.Y. Sept. 4, 2013) and Mastr Adjustable Rate Mortgages Trust 2006-OA2 v. UBS Real Estate Sec. Inc., 2013 WL 5745855 (S.D.N.Y. Oct. 23, 2013).  In Taylor v. City of New York, 2013 WL 4744806 (S.D.N.Y. Sept. 4, 2013), the court was quick to distinguish Sekisui, but the fact that the court proceeded to issue an adverse inference instruction upon a finding of mere negligence suggests that it joined in the Sekisui sentiment nonetheless.

[5] These proposed amendments were published for comment on August 15, 2013.

[6] See public comments filed at http://www.regulations.gov/#!docketDetail;D=USC-RULES-CV-2013-0002

[7] Civil Rules Advisory Committee, Memorandum, 35 at note 13 (May 8, 2013).

 

Lauren Fox is an Associate at Leader & Berkon LLP, where she focuses her practice on commercial and business litigation. Ms. Fox also has extensive arbitral experience and has represented major broker dealers, investment advisory firms and multinational corporations in industry and private arbitral forums. She was named a New York Super Lawyers Rising Star for 2013.

Please email the author at lfox@leaderberkon.com with questions about this article.