United States District Court, D. Alaska
SECURITY ALARM FINANCING ENTERPRISES, L.P., a California Limited Partnership, Plaintiff,
v.
ALARM PROTECTION TECHNOLOGY, LLC, a Utah Limited Liability Company; ALARM PROTECTION TECHNOLOGY ALASKA, LLC, a Utah Limited Liability Company; ALARM PROTECTION ALASKA, LLC, a Utah Limited Liability Company; and ALDER HOLDINGS, LLC, a Utah Limited Liability Company, Defendants.
ORDER RE MOTION FOR SPOLIATION SANCTIONS
Sharon
L. Gleason UNITED STATES DISTRICT JUDGE.
Before
the Court is Defendant Alarm Protection Technology's
Motion for Spoliation Sanctions at Docket 236. The motion has
been fully briefed;[1] oral argument was held on September 30,
2016.[2]
BACKGROUND
This
motion comes after several years of litigation between two
home security companies, Security Alarm Financing
Enterprises, L.P. (“SAFE”) and Alarm Protection
Technologies, LLC[3] (“APT”). In June 2013, SAFE
filed its complaint alleging that APT had illegally
“poached” its customers and defamed
SAFE.[4] In August 2013, APT filed its answer and
counterclaim alleging that SAFE had tortuously interfered
with APT's contractual relationships and defamed
APT.[5]
The present motion arises from the alleged spoliation of
evidence: SAFE had recorded all of the calls that came into
its call center, but when APT sought in discovery to obtain
the recordings of SAFE's calls with its Alaska-based
customers, it became apparent that nearly all of the
recordings had been overwritten pursuant to SAFE's
database's overwriting process.[6] Indeed, it appears that SAFE
selectively preserved fewer than 150 of the
“thousands” of recordings it had, and that these
preserved recordings are generally favorable to
SAFE.[7] APT contends that this loss of the
recordings of all the other phone calls entitles it to
sanctions against SAFE.
DISCUSSION
Before
the Court can address the merits of APT's motion, it must
answer two preliminary questions: First, is the motion
timely? And, second, if it is timely, does the newly revised
or the former version of Federal Rule of Civil Procedure 37
apply?
SAFE
asserts that the motion is untimely because it was filed
three months after the close of fact discovery, instead of
immediately after APT learned of the underlying
facts.[8] APT counters that the motion was filed
well before the motion deadline, and just one month after
SAFE finally admitted that the recordings had been
erased.[9] The Court does not find the motion
untimely; a party need not file a motion at the first inkling
of spoliation but is entitled to gather evidence-such as
discovery responses[10]-before filing a motion. And SAFE has not
argued that it was prejudiced by any delay in filing. The
Court thus answers the first question in the affirmative: the
motion is timely.
APT
asks the Court to apply Rule 37 as it existed prior to the
December 2015 revisions. APT points out that this litigation
commenced, and the underlying spoliation occurred, before the
rule was amended. Thus, they argue, it would be
“unjust” to apply the revised rule.[11]
Former
Rule 37(e) provided that, except in exceptional
circumstances, “a court may not impose sanctions under
these rules on a party for failing to provide electronically
stored information lost as a result of the routine,
good-faith operation of an electronic information
system.” The former rule carved out a
safe-harbor-good-faith operation of an electronic information
system-from a court's power to impose sanctions. But upon
a finding of bad faith, a court could impose whatever
sanctions it deemed appropriate.[12]
New
Rule 37(e) provides additional guidance and limitations to
courts faced with the loss of electronically stored
information (“ESI”). It provides:
If electronically stored information that should have been
preserved in the anticipation or conduct of litigation is
lost because a party failed to take reasonable steps to
preserve it, and it cannot be restored or replaced through
additional discovery, the court:
(1) upon finding prejudice to another party from loss of the
information, may order measures no greater than necessary to
cure the prejudice; or
(2) only upon finding that the party acted with the intent to
deprive another party of the information's use in the
litigation may:
(A) presume that the lost information was unfavorable to the
party;
(B) instruct the jury that it may or must presume the
information was unfavorable to the party; or
(C) dismiss the action or enter a default
judgment.[13]
Thus,
under the new rule, a district court may not impose the
harshest sanctions- a presumption that lost information was
unfavorable, a permissive or mandatory presumption
instruction to the jury, or a dismissal-unless it also finds
that the spoliating party “acted with the intent to
deprive another party of the information's use in the
litigation.” Because APT seeks these harsher sanctions,
it understandably wants to avoid this higher standard.
When
the Supreme Court approved the new rules and transmitted them
to Congress, it ordered that they “shall take effect on
December 1, 2015, and shall govern . . ., insofar as just and
practicable, all proceedings then pending.” Thus, to
avoid the new rule, APT must show that its application would
be either unjust or impracticable. It is clearly not
impracticable to apply the new rule, and APT does not argue
so.
APT
cites to a District of Connecticut case, Thomas v.
Butkiewicus, to support its position that it is
“unjust” to apply the current rule. The Court
does not find that case persuasive. The district court in
Thomas relied on Second Circuit precedent to
conclude that the old rule should apply when “the
allegedly sanctionable conduct . . . occurred prior to the
effective date” of the amendments.[14] But in the
Second Circuit case Thomas relied on, the court of
appeals was clearly concerned that the amendments to Rule 11
at issue in that case changed the type of conduct
that was sanctionable. The court of appeals held:
“Because the allegedly sanctionable conduct in this
case occurred prior to the effective date of the 1993
amendments, the district court was required to apply the
standard of conduct set forth in the pre-1993
Rule.”[15]
It
would be unjust to apply a new rule retroactively when that
rule governs a party's conduct. But Rule 37(e) does not
govern conduct; a party has the same duty to preserve
evidence for use in litigation today as before the
amendments.[16] It is not unjust to apply the new rule
when it merely limits the Court's discretion to impose
particular sanctions, especially when the motion seeking
sanctions was filed after the amendment took
effect.[17] APT argues that if SAFE had not
obfuscated for so long, it would have had the benefit of the
old Rule 37. But even if APT had filed its motion before the
revised rule took effect, any sanction would not be imposed
until trial, well after the revision of the rules, and so it
would still be just to apply the revised Rule
37.[18] The Court therefore answers the second
question in the affirmative as well, and will apply Rule
37(e) as amended in December 2015.
I.
Spoliation
“Spoliation
occurs when one destroys or materially alters evidence or
fails to preserve property for another's use as evidence
in pending or reasonably foreseeable
litigation.”[19] Revised Rule 37(e) provides that
sanctions may be appropriate if ESI that “should have
been preserved” is “lost because a party failed
to take reasonable steps to preserve it” and cannot be
replaced. Thus, before the Court can impose any sanction
under Rule 37(e), several things must be established. First,
the ESI must be information that that party had a duty to
preserve; second, there must have been a loss of that ESI
because a party failed to take reasonable steps to preserve
it; and third, the lost ESI must be irreplaceable.
A.
Duty to Preserve
The
duty to preserve relevant information arises when litigation
becomes “reasonably foreseeable, ” and the party
possessing the information has “‘some notice that
the documents [are] potentially relevant' to the
litigation.”[20] “When litigation is
‘reasonably foreseeable' is a flexible
fact-specific standard that allows a district court to
exercise the discretion necessary to confront the myriad
factual situations inherent in the spoliation
inquiry.”[21] Here, the phone recordings were
apparently destroyed after SAFE had filed suit against APT,
and after APT had asserted its counterclaims. Litigation was
not only reasonably foreseeable, but ongoing. When SAFE
initiated this lawsuit in June 2013, it should have been
readily apparent to SAFE that these phone calls were
“potentially relevant” to the
litigation.[22] In the exchange of letters immediately
preceding this litigation, APT alleged that SAFE was defaming
APT during SAFE's contacts with Alaska
customers.[23] On June 5, 2013, SAFE circulated a
memorandum warning its employees not to use certain words on
its calls with Alaska customers.[24] Perhaps the strongest
evidence that SAFE not only should have known but in fact did
know that the recordings of phone calls with Alaska customers
were potentially relevant is that SAFE flagged the existence
of the recordings for APT in August 2013. In its initial
disclosures under Rule 26, SAFE noted that SAFE
“maintains . . . [a]udio recordings of incoming and
outgoing telephone calls with customers.”[25] The Court
therefore concludes that SAFE had a duty to preserve the
recordings, and that this duty arose by no later than June 5,
2013-the date SAFE warned its employees not to use certain
terms when speaking with its Alaska customers.
B.
Loss of Information and Reasonable Steps to Preserve It
The
parties agree that SAFE at one time possessed recordings of
all of its calls with its Alaska customers and that those
recordings are now lost.[26] But to satisfy Rule 37(e), the
recordings must have been lost because SAFE “failed to
take reasonable steps to preserve”
them.”[27] SAFE argues that it took reasonable
steps to preserve the information by issuing a general
litigation hold, even if that litigation hold did not
encompass the lost recordings.[28] APT argues that SAFE's
failure to include the recordings within its litigation hold
was unreasonable.[29]
The
recordings here were apparently lost due to the normal
operation of a data retention policy.[30] “It is,
of course, not wrongful for a manager to instruct his
employees to comply with a valid document retention policy
under ordinary circumstances.”[31]However, “[o]nce a
party reasonably anticipates litigation, it must suspend its
routine document retention/destruction policy and put in
place a ‘litigation hold' to ensure the
preservation of relevant documents.”[32]
SAFE
cites an out-of-circuit district court case to support its
contention that the scope of its litigation hold was
reasonable. In that case, a plaintiff preserved information
relating to “competitiveness” with a defendant,
but did not preserve information relating to how
“competitiveness” information was gathered in the
first instance. That information only became relevant once
the defendant asserted an “unclean hands”
defense. The district court found that the plaintiff had no
reason to anticipate such a defense at the time it deleted
the records.[33] Thus, that case was not focused on
whether the steps taken were reasonable so much as whether
the spoliating party had notice that the information was
potentially relevant when the information was lost. Here, as
noted above, SAFE did have clear notice that its phone calls
with Alaska customers were potentially relevant, and it had a
duty to take reasonable steps to preserve those recordings.
And reasonable steps were available: SAFE preserved some of
its Alaska phone calls, and admits that it “had the
ability to extract calls with customers in Alaska from [its]
recording system to avoid such calls from being
overwritten.”[34] The litigation hold SAFE put in place
plainly did not encompass the recordings; the scope of the
litigation hold was not reasonably calculated to preserve
information SAFE knew or should have known was relevant to
the litigation. The Court therefore finds that the phone
recordings were “lost because a party failed to take
reasonable steps to preserve” them.
C.
Irreplaceable
The
last prerequisite to a spoliation finding is that the
information “cannot be restored or replaced through
additional discovery.”[35] This requirement precludes a
court from awarding sanctions when ESI has been lost, but,
for example, the very same information is recoverable from a
third party or from a back-up source. No party has suggested
that the lost call recordings are available from any other
source.
In
light of the foregoing, the Court finds that spoliation has
occurred. The Court will therefore consider the appropriate
sanctions.
II.
Sanctions
Rule
37(e) authorizes two tiers of sanctions for spoliation. If
there has been a finding of prejudice, the Court “may
order measures no greater than necessary to cure the
prejudice.” But Rule 37(e) reserves the harshest
sanctions for instances where the spoliating party
“acted with the intent to deprive another party of the
information's use in the litigation.”[36] If the Court
makes such a finding-and only if it makes such a finding- it
may “presume that the lost information was
unfavorable” to SAFE, “instruct the jury that it
may or must presume the information was unfavorable” to
SAFE, or “dismiss the action or enter a default
judgment.”[37] But the Court is not required to impose
any particular sanction, even if it does make such a finding.
A.
...