- Three Million Reasons to Understand the New Federal Rules: Deleting Emails Results in Multi-Million-Dollar Rule 37(e) Sanction
- August 2, 2016 | Authors: Francis X. Nolan; Robert D. Owen; Jim L. Silliman; Phillip E. Stano
- Law Firms: Eversheds Sutherland (US) LLP - New York Office; Eversheds Sutherland (US) LLP - Houston Office; Eversheds Sutherland (US) LLP - Washington Office
- On July 12, a federal district court imposed a $3 million punitive sanction pursuant to the recently amended Federal Rule of Civil Procedure 37(e). GN Netcom, Inc. v. Plantronics, Inc., No. CV 12-1318-LPS, 2016 WL 3792833 (D. Del. July 12, 2016). The sanction was imposed on a corporate defendant because one of its executives deleted emails in anticipation of, and during, litigation. In imposing the sanction, the district court attributed the executive’s bad faith email deletions to the corporate defendant, despite the corporation’s extensive document preservation efforts.
Sutherland Observation: The decision shows that some courts will still hold corporations to a high compliance standard for preservation of electronically stored information (ESI).
The Rule 37(e) Analysis
In GN Netcom, the court found that the defendant Plantronics took extensive steps to preserve ESI by implementing litigation holds when it received
GN Netcom’s pre-suit demand letter. But Plantronics’ senior vice president for sales blatantly ignored the litigation holds, deleted relevant emails, and even instructed his subordinates to do the same.
Learning of the executive’s improper actions, Plantronics’ associate general counsel attempted to undo the email deletion by hiring a lead forensic expert to conduct recovery and a third-party discovery vendor to back up existing files and devices, and by agreeing to produce documents from 21 additional custodians. The forensic expert restored certain files but learned that there were 40,000 to 90,000 unrecoverable deleted emails. In another twist that likely turned the court against Plantronics, the few restored files were subsequently “unrestored” and lost forever when Plantronics decided to disengage its forensic expert to save less than the $5,000 needed to finalize the analysis. (Plantronics subsequently penalized the executive approximately $1 million.)
In reviewing GN Netcom’s motion for sanctions, the district court conducted a three-part analysis. First, the court found that the steps taken by Plantronics to preserve ESI were not sufficiently reasonable and did not absolve it of responsibility for the intentional destructive behavior of a top-level executive. Plantronics’ decisions to not finalize the forensic investigation and to limit certain data recovery efforts contributed to this finding.
Sutherland Observation: “Penny wise and pound foolish” parties should consider the substantial award in this case when exploring cost-savings measures at the expense of preserving data.
The court next held that Plantronics had acted in bad faith with the intent to impair GN Netcom’s ability to present its case. The court expressly attributed the executive’s bad faith actions to Plantronics, pointing to a number of factors that cast suspicion on the company’s argument that it should be held blameless. Among those factors were the seniority of the executive, the likely relevance of the emails to the legal matters in dispute, the suspiciously close timing of the deletions to the date the lawsuit was filed, and the date the court denied Plantronics’ motion to dismiss. The court also referenced the executive’s double-deleting (from inbox and deleted items folders) and his refusal to acknowledge misconduct, in addition to Plantronics’ use of “code words” to evade discovery, and failure to disclose and complete its forensic expert analysis.
Finally, the court found that GN Netcom suffered prejudice because of the ESI loss. Because the court found that the ESI had been destroyed in bad faith, the burden shifted to Plantronics to carry the “heavy burden” of showing lack of prejudice. Plantronics was unable to persuade the court that the ESI loss was harmless, and the court held that the lost ESI would likely affect the outcome of the trial.
Rule 37(e) Sanctions
In determining the level of sanctions to impose, the court assessed three “key considerations”: (1) the degree of fault; (2) the degree of prejudice; and (3) whether there was a lesser sanction that would deter future spoliation while avoiding substantial unfairness to Plantronics. Interestingly, the court ultimately ordered sanctions under both prongs of Rule 37(e)—namely (e)(1)—which is applicable where prejudice resulted but intent was not shown, and (e)(2)—applicable only where there was an “intent to deprive” the spoliating party’s adversary of the destroyed ESI.
Under subsection (e)(1), the court granted: (1) all fees and costs incurred by GN Netcom relating to the discovery dispute; and (2) a $3 million punitive sanction payable by Plantronics directly to GN Netcom, as well as (3) permission for the plaintiff to file future evidentiary sanctions as needed. Finding that the monetary sanctions did not fully redress the prejudice against GN Netcom, the court also ordered an adverse instruction regarding the email deletions, pursuant to subsection (e)(2)(B).
Sutherland Observation: The court’s $3 million sanction was calculated by trebling the financial penalty Plantronics had imposed on its own offending executive.
GN Netcom confirms that even when a company employs its best efforts to preserve ESI, it can still be on the hook for the bad behavior of its top-level employees. Companies should reevaluate ESI preservation practices to avoid a similar fate, including bolstering advanced training and education efforts for corporate executives whose actions are more likely to be attributed to the company, and implementing data loss prevention technologies for matter-specific files.
Sutherland Observation: Invoking (e)(2)(B) in addition to the (e)(1) remedies because the latter were “inadequate to fully redress the prejudice” is a unique and unheralded application of (e)(2) powers, because (e)(1) was designed to address prejudice and (e)(2) intentional destruction.