Security Alarm Financing Enterprises, L.P. v. Alarm Protection Technology, LLC

          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.

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