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DiscoverReady Client Alert: Judge Grimm Surveys the Landscape of Spoliation and Sanctions in Victor Stanley v. Creative Pipe

The Case
While pursing a suit centered on a copyright infringement claim, Plaintiff Victor Stanley faced in Defendant Creative Pipe, and its President Mark Pappas, a litigant determined to prevent discovery of any adverse electronic evidence.

Over the course of four years of discovery, Pappas and his employees at Creative Pipe engaged in a number of acts to destroy evidence.  They failed to implement a litigation hold at the beginning of the dispute, actively deleted files upon filing of the suit, destroyed or lost a key external hard drive, failed to preserve data despite Plaintiff’s preservation demand, deleted files following both the court’s first and second preservation orders, conducted a server migration without preserving all existing files, and employed programs that rendered deleted files unrecoverable despite extant production orders to the contrary.

Judge Paul W. Grimm, U.S. District Court for the District of Maryland, described Defendant’s actions as “…the single most egregious example of spoliation … 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.”  Addressing Plaintiff’s motion for sanctions, Judge Grimm took the opportunity to survey the caselaw and guidance across the circuits on litigants’ duty to preserve, and provide what he called an “analytical framework” for counsel to follow when trying to meet the duty to preserve or when facing spoliation motions.

Spoliation That Warrants Sanctions
Finding that the authority to impose sanctions flows from a court’s need to maintain the order and integrity of the judicial process, Judge Grimm moved to a discussion of when spoliation warrants sanctions.  Generally, the moving party must show that:  1) the opposition had a duty to preserve evidence under their control, 2) the opposition had a culpable state of mind in the loss or destruction, and 3) the missing evidence was relevant and its loss prejudicial.

The difficulty for counsel and litigants, however, is that the definitions of these elements vary from circuit to circuit, and sometimes district to district.  For instance, the Judge examined the “under control” element of the duty to preserve.  The Third, Fifth, and Ninth Circuits consider evidence to be “under control” only when it is in the party’s actual possession, while the Fourth and Second Circuits find that evidence is “under control,” and thus the duty to preserve applies, when the party can secure the evidence from non-parties.  In the First and Sixth Circuits, the duty to preserve comes with an obligation to notify the opposition of evidence held by third parties.  Entities subject to these varying standards face a difficult decision:  apply the highest standard and bear the added preservation burden, or apply lower standard and face the risk of sanctions.  It is a thorny problem, and as Judge Grimm observed in his opinion, the solution “has proven elusive.”

Next, the Judge tackled the “culpable state of mind” element.  Again, the circuits apply a variety of standards, ranging from a mere “showing of fault” to a requirement of “bad faith.”  The Fourth Circuit considers any fault sufficient – negligence, gross negligence, willfulness, or bad faith will meet the standard, although the severity of the sanction flows from the level of fault.  Other circuits and courts require a finding of gross negligence or bad faith to trigger sanctions.  As Judge Grimm observed, “the nuanced, fact-specific differences among these states of mind become significant in determining what sanctions are appropriate.”  Again, the variations among the circuits and even districts is a cause of concern for counsel and clients alike.

The Judge continued with a discussion of relevance and prejudice.  When asking for sanctions, the moving party must show that the lost evidence was relevant to their case, and that their case was prejudiced by the loss.  Prejudice results in a party losing access to evidence necessary to prove their case, and can include lost or deleted files, delayed discovery response, and modification of metadata in electronic files.  Relevance is often trickier; it can be hard to determine the nature of evidence a party has never seen.  In some cases, however (as in Victor Stanley), the relevance can be determined by looking to information about the lost evidence (for example, the names of lost files can indicate relevance, even if the files themselves were lost).  Where no information about the lost evidence is available, the courts may find a presumption of relevance.  As Judge Grim noted, the standard for this finding varies from circuit to circuit:  the Fourth Circuit finds a presumption of relevance where the failure to preserve was willful.  However, the Second Circuit finds that gross negligence is sufficient, while the Fifth Circuit has not addressed “whether even bad-faith destruction of evidence allows a … [presumption] … the evidence was relevant.”  Counsel and their clients face a shifting legal landscape on this issue as they move from one jurisdiction to another.

The Nature and Severity of Available Sanctions
Sanctions are determined by the combination of culpability and prejudice:  minimal culpability and severe prejudice may result in sanctions similar to those imposed for serious culpability and minimal prejudice.  In Victor Stanley, Judge Grimm walked through the various approaches taken by the circuits, and found that the type and severity of sanctions imposed varies from circuit to circuit.  The Fifth and Eleventh Circuits require a showing of bad faith to trigger severe sanctions, while the First, Fourth, and Ninth will impose severe sanctions upon the showing of severe prejudice.  The uncertainty in approaches is a source of continued concern to litigants.  Judge Grimm also discussed the menu of sanctions available to a court before he issued his specific ruling on Victor Stanley’s motion for sanctions.

Resolution in Victor Stanley
Judge Grimm found, and Creative Pipe agreed, that its actions were in bad faith, that the evidence lost had been relevant, and the result was prejudicial to Victor Stanley.  The Court entered a default Judgment on the copyright infringement count, to which Creative Pipe consented.  However, default judgment on the other counts was denied, without prejudice.  The Judge found that Victor Stanley had failed to establish the elements of spoliation as to those counts, and left a resolution of that question open pending further evidence.

Moving to attorney’s fees and costs, Judge Grimm ruled that all fees and costs related to the spoliation proceedings be paid by Creative Pipe.  While denying Victor Stanley’s request that the matter be referred to the U.S. Attorney for criminal contempt charges, Judge Grimm entered an order for civil contempt against Mark Pappas.  In order to ensure that the fees and costs were paid, the Judge ordered Pappas jailed for two years upon quantification of fees and costs, until they were paid in full.

Conclusion
While recognizing the uncertainly faced by counsel and their clients, Judge Grimm used his opinion in Victor Stanley to provide a helpful aid to navigating the issue of spoliation – indeed, the Judge prepared and attached to his decision a chart summarizing the law in this area circuit by circuit.  This “analytical framework,” as the Judge calls it, paired with the cautionary tale of the underlying case, makes Victory Stanley v. Creative Pipe a fascinating and instructive opinion for anyone dealing with preservation and discovery of electronic information.