February 11, 2011 Articles

Victor Stanley II: An Attempt at an Analytical Framework for Spoliation and ESI Issues

U.S. Magistrate Judge Paul W. Grimm issued a detailed and thorough opinion concerning spoliation of electronically stored information.

By Beatriz Q. Richmond

On September 9, 2010, U.S. Magistrate Judge Paul W. Grimm, issued a detailed and thorough opinion concerning spoliation of electronically stored information (ESI). The case, Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497 (D. Md. 2010), involved two competitors Victor Stanley, Inc. (VSI) and Creative Pipe, Inc. (CPI). VSI filed a complaint against CPI, Mark Pappas, (president of CPI), Stephanie Pappas (Mark Pappas’s wife at the time), and “John Doe a/k/a/ Fred Bass” alleging violations of copyrights and patents, and unfair competition. Id. at 502. VSI alleged that CPI, through its representatives, wrongfully accessed its website using the pseudonym “Fred Bass,” downloaded design drawings and specifications, and improperly used them to compete against VSI. Id. Upon filing the complaint, the court authorized immediate discovery and VSI served limited discovery on defendants.

Egregious Spoliation
The court extensively details Mr. Pappas’s egregious conduct spoliating evidence, describing the events as “[f]or years, Pappas engaged in a cat and mouse game to hide harmful ESI from production during discovery.” Id. The court organized the egregious behavior into eight discreet preservation failures:

1. Pappas’s failure to implement a litigation hold

2. Pappas’s deletions of ESI soon after VSI filed suit

3. Pappas’s failure to preserve his external hard drive after the plaintiff demanded preservation of ESI

4. Pappas’s failure to preserve files and emails after the plaintiff demanded their preservation

5. Pappas’s deletion of ESI after the court issued its first preservation order

6. Pappas’s continued deletion of ESI and use of programs to permanently remove files after the court admonished the parties of their duty to preserve evidence and issued its second preservation order

7. Pappas’s failure to preserve ESI when he replaced the CPI server

8. Pappas’s further use of programs to permanently delete ESI after the court issued numerous production orders

Id. at 501. Judge Grimm called the collective conduct “the single most egregious example of spoliation that I have encountered in any case that I have handled or in any case described in the legion of spoliation cases I have read in nearly fourteen years on the bench.” Id. at 515. Defendants must have agreed with the judge’s assertion and consented to default judgment on liability for copyright infringement and consented to injunction on the plaintiff’s copyright claim.

Request for Sanctions
he plaintiff’s request for sanctions for the sefendant’s spoliation of evidence, forced the court to address a topic that has caused “collective anxiety” in the area of spoliation and ESI. Id. at 516. The court stated “[w]hen the spoliation involves ESI, the related issues of whether a party properly preserved relevant ESI and, if not, what spoliation sanctions are appropriate, have proven to be one of the most challenging tasks for judges, lawyers, and clients.” Id. The court acknowledged the lack of a uniform national standard and the lack of consensus among the courts in different jurisdictions concerning the issue. The court stated


[r]ecent decisions, . . . , have generated concern throughout the country among lawyers and institutional clients regarding the lack of a uniform national standard governing when the duty to preserve potentially relevant evidence commences, the level of culpability required to justify sanctions, the nature and severity of appropriate sanctions, and the scope of the duty to preserve evidence and whether it is tempered by the same principles of proportionality that Fed.R.Civ.P. 26(b)(2)(C) applies to all discovery in civil cases.

Id. The court attempted to synthesize the law of the circuits (including attaching a 12-page chart identifying the relevant standard for spoliation issues in each circuit) and attempted to “provide counsel with an analytical framework that may enable them to resolve preservation/spoliation issues with a greater level of comfort that their action will not expose them to disproportionate costs or unpredictable outcomes of spoliation motions.” Id. at 517.

Authority to Impose Sanctions
To resolve the issue of appropriate sanctions, the court first identified the two main sources that supply the court with its authority to impose sanctions against a party for spoliating evidence: (1) the “court’s inherent power to control the judicial process and litigation, a power that is necessary to redress conduct which abuses the judicial process,” and (2) Fed.R.Civ.P. 37, “if the spoliation violates a specific court order or disrupts the court’s discovery plan.” Id. (citing United Med. Supply Co. v. United States, 77 Fed.Cl. 257, 263–64 (2007)). In Victor Stanley II, the court found that it had the authority to impose sanctions pursuant to Fed.R.Civ.P. 37, for violation of orders to produce ESI and for violation of preservation orders.

Proof to Establish Spoliation
In several circuits (2nd, 4th, 6th, 7th, and 9th), to prove spoliation that warrants a sanction, a party must show:

(1) The party having control over the evidence had an obligation to preserve it when it was destroyed or altered; (2) the destruction or loss was accompanied by a “culpable state of mind;” and (3) the evidence that was destroyed or altered was “relevant” to the claims or defenses of the party that sought the discovery of the spoliated evidence, to the extent that a reasonable fact-finder could conclude that the lost evidence would have supported the claims or defenses of the party that sought it.

Id. at 520–521 (citing Goodman v. Praxair Servs., Inc., 632 F. Supp.2d 494, 505 (D. Md. 2009)).

“The first element [to prove spoliation] involves both the duty to preserve and the breach of that duty through the destruction or alteration of the evidence.” Id. at 521 (citing Jones v. Bremen High Sch. Dist. 228, No. 08-C-3548, 2010 WL 2106640, at *5 (N.D. Ill. 2010)). Generally, there is no duty to preserve documents, things, or information. However, all circuits agree that “[t]he common law imposes the obligation to preserve evidence from the moment that litigation is reasonably anticipated.” Id. “The duty to preserve evidence includes an obligation to identify, locate, and maintain, information that is relevant to specific, predictable, and identifiable litigation.” Id. at 522 (citing Silvestri v. Gen. Motors Corp., 271 F.3d 583, 591 (4th Cir. 2001)). Again, Judge Grimm emphasized the uncertainty in this area of the law, noting that although caselaw has developed guidelines for what the preservation duty entails, it is not consistent among the circuits or even within the individual circuits. “A party breaches its duty to preserve relevant evidence if it fails to act reasonably by taking positive action to preserve material evidence.” Id. at 525 (citing Jones, 2010 WL at *6 (N.D. Ill. 2010)). In Victor Stanley II, there was no question that the defendants were under a duty to preserve ESI and continuously destroyed evidence, thus, failing to comply with the duty to preserve.

The second element to prove spoliation requires a showing of a culpable state of mind. This is a fact-specific inquiry that requires that a court “rely on its gut reaction based on years of experience as to whether a litigant has complied with its discovery obligations and how hard it worked to comply.” Id. at 529 (citing Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., 685 F. Supp.2d 456, 465 (S.D. N.Y. 2010)). As with the first element, the circuits differ in the standards employed to determine what level of intent is required before sanctions may be warranted. Id. at 531. In Victor Stanley II, the court found that the defendants acted with a capable state of mind, stating that “Defendants took repeated, deliberate measures to prevent the discovery of relevant ESI, clearly acting in bad faith, and i[n] affidavits, depositions, and in open court, [Mr.] Pappas nonchalantly lied about what he had done.” Id.

The third element to prove spoliation requires a finding that the evidence spoliated was relevant and that the spoliation prejudiced the party’s case. In the context of spoliation, lost or destroyed evidence is relevant if “a reasonable trier of fact could conclude that the lost evidence would have supported the claims or defenses of the party that sought it.” Id. (citing Thompson v. U.S. Dep’t of Hous. & Urban Dev., 219 F.R.D. 93, 101 (D. Md. 2003)). “Moreover, for the court to issue sanctions, the absence of the evidence must be prejudicial to the party alleging spoliation of evidence.” Id. (citing Pension, 685 F.Supp.2d at 467 (S.D. N.Y. 2010)). “Spoliation of evidence causes prejudice when, as a result of the spoliation, the party claiming spoliation cannot present evidence essential to its underlying claim.” Id. at 532 (citing Krumwiede v. Brighton Assocs., L.L.C., No. 05-C-3003, 2006 WL 1308629, at *10 (N.D. Ill. 2006)). In Victor Stanley II, relying on Fourth Circuit jurisprudence, which allows for the relevance of evidence to be presumed when it is shown that the party acted willfully in failing to preserve evidence, the court found that the evidence destroyed was relevant and the spoliation was prejudicial to the plaintiff. Id. at 533 (citing Sampson v. City of Cambridge, 251 F.R.D. 172, 179 (D. Md. 2008)).

Sanctions Imposed
Finally, in determining what sanctions were appropriate the court stated that it “must consider the extent of prejudice, if any, along with the degree of culpability.” Id. “The [s]anctions that a federal court may impose for spoliation include assessing attorney’s fees and costs, giving the jury an adverse inference instruction, precluding evidence, or imposing the harsh, case-dispositive sanctions of dismissal or judgment by default.” Id. “Appropriate sanctions should (1) deter parties from engaging in spoliation; (2) place the risk of an erroneous judgment on the party who wrongfully created the risk; and (3) restore the prejudiced party to the same position he would have been in absent the wrongful destruction of evidence by the opposing party.” Id. at 534. The court again addressed that the possible sanctions and the level of culpability that must be shown varies among the circuits. In Victor Stanley II, Judge Grimm, after reviewing the record of egregious acts committed by CPI and Mr. Pappas, imposed severe sanctions, including a permanent injunction as to the copyright claim (which the defendants had consented to and did not oppose); ordering the defendants to pay monetary sanctions equivalent to the plaintiff’s attorney fees and costs associated with all discovery that would not have taken place; and treating Mr. Pappas’s acts of spoliation as contempt, ordering that Mr. Pappas be “imprisoned for a period not to exceed two (2) years, unless and until he pays to Plaintiff the attorney’s fees and costs” awarded. Id. at 541.

Beatriz Q. Richmond is an associate with Baker, Donelson, Bearman, Caldwell, & Berkowitz, P.C., in New Orleans, Louisiana.

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