by Brad Harris
On Thursday, September 9, 2010, Judge Paul Grimm of the U.S. Fourth Circuit (D.MD) continuedthe 2010 tradition of huge opinions with his 89-pager about the ongoing spoliation saga in Victor Stanley, Inc. v. Creative Pipe, Inc., et al. (D.MD, Sept. 9, 2010). Craig Ball was the first to get the word out about Judge Grimm’s opinion the day after it was issued and this is another blockbuster coming on the heels of Pension Committee, Rimkus and Jones v. Bremen H.S.
Judge Grimm, in light of egregious spoliation, writes an existential essay on the meaning of spoliation and how it should be sanctioned. In fact, the length of the opinion is due mainly to his frustrations regarding inconsistencies about how sanctions have been handed out across the country. As he states on p. 38, this is his “attempt to synthesize” opinions, and his citations read like a “Greatest Hits of Spoliation” as he embarks on his quest to bring it all together.
Since this blog focuses on legal holds and the duty to preserve, that will be our concentration. However, this opinion is an important read so you may want to check it out in its entirety. Following Craig Ball’s convention, we’ll also refer to this opinion as Victor Stanley II.
He’s a Bad, Bad Man
This case has been around for some time, so let’s recap the story briefly. The CEO of Creative Pipe is Mark Pappas, and he’s a bad guy. It all started when he went to his competitor’s web site, downloaded their proprietary product design drawings and specs for office and public furnishings. (Think park benches, trash cans, bike racks and the like.) He surreptitiously took said plans, manufactured them and then sold them in direct competition to Victor Stanley, Inc., the originator of the designs.
Once Victor Stanley discovered what was going on, the company sued Creative Pipe for copyright infringement, patent infringement, unfair competition and Lanham Act violations. Those items have become a footnote because the real action started when the civil action was filed. Realizing that he was going to be caught red-handed, Pappas began purposefully destroying and overwriting files in order to obfuscate incriminating evidence.
He went to great lengths to do so, and enlisted co-conspirators to help him destroy electronic records. He deleted files, defragged disks, replaced servers, used “scrubbing” programs – and then he lied about it to the Courts. Even after two court orders to preserve data that were acknowledged – he continued to attempt to hide things. Judge Grimm characterized what he saw this way:
“Collectively, they constitute 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.” (p.34)
Suffice it to say that Judge Grimm is not a member of the Mark Pappas Fan Club.
Following Pappas’ epic attempts to cover up information, years of e-discovery effort and countless hours invested by attorneys and experts on both sides, in the end not much key evidence was lost. As Judge Grimm humorously put it, they were “the gang that couldn’t spoliate straight.” (p.5) Any information that was actually irretrievably lost was acknowledged as prejudicial by the Defendants.
Different Standards in Different Jurisdictions
This last point is what brings Judge Grimm to his judicial crossroads. If one engages in wanton spoliation efforts yet ultimately it fails and does little to prejudice the case, how is that sanctioned? In his quest, he noticed that “[r]ecent decisions…have generated concern…regarding the lack of uniform national standard governing” preservation and spoliation issues. (pp. 36-7)
The judge continues: “I will attempt to synthesize and provide counsel with an analytical framework that may enable them to resolve preservation/spoliation issues with greater level of comfort.” (p38) Without a doubt, the legal community owes Judge Grimm a debt of gratitude for taking on this weighty discussion.
In particular, he acknowledges that the courts are struggling with the following specifics (pp. 36-7):
- To know when the duty to preserve attaches,
- The level of culpability required to justify sanctions,
- The nature and severity of sanctions, and
- The scope of the duty to preserve and whether it is tempered by proportionality
At this point, Judge Grimm goes on a 50-page quest to bring some semblance of order to the disparate rulings. As mentioned earlier, we’ll focus on the areas pertinent to preservation and legal holds since that is our focus. A section discussing the duty to preserve (pp. 47-72) is most pertinent to this discussion.
First of all, the opinion accepts that companies must issue a legal hold but he bristles at the different standards. He suggests that this causes concern among corporations, business and governments that operate in different jurisdictions because they have to design a preservation policy that complies with the most demanding standard. (p.51)
Judge Grimm cites examples about what courts deem information under their “control” but some Districts extend that duty to preserve information held by third parties while others do not (pp. 51-2). He also cites the fact that “courts differ in the fault they assign when a party fails to implement a legal hold.” (p.53) He compares Pension Committee’s automatic ruling of gross negligence versus Haynes v. Dart (N.D. Ill, Jan. 11, 2010) that a failure to implement a legal hold is relevant to the court’s consideration but in and of itself is not sanctionable.
Then he looks at scope which he starts by saying that it is not necessary for companies to preserve every shred of information forever. However, does a company need to retain multiple copies of pertinent files, i.e. back-up files, when the original is already preserved? He cites Zubulake IV that says that one must preserve “unique, relevant evidence.”
He then addresses reasonableness. The duty to preserve is breached when a party fails “to take positive action to preserve material evidence,” citing Jones. (p.54)
Finally he goes on a riff of how the failure to preserve is a huge burden on the courts, which was a big element in both Pension Committee and Rimkus. Citing Metropolitan Opera Association v. Local 100, 212 F.R.D. 178, 228 (S.D.N.Y. 2003):
For the judicial process to function properly, the court must rely “in large part on the good faith and diligence of counsel and the parties in abiding by these rules [of discovery] and conducting themselves and their judicial business honestly.” (p.56) Adding the following:
“The truth cannot be uncovered if information is not preserved. That the duty is owed to the court, and not to the party’s adversary is subtle, but consequential, distinction.” (pp.56-7)
Judge Grimm is adamant that the failure to preserve also injures civil justice by putting focus on e-discovery rather than merits of the case and that it is “frustrating to the courts that there is no way to sanction for the courts time.” (p.59)
The court’s conundrum in Victor Stanley II is how to match the appropriate sanction to the spoliating conduct (p.57). What’s worse: intentional spoliation that results in no prejudice or simple negligence that results in “total loss of evidence essential to an adversary?” Clearly, the judicial process is damaged more by the latter than the former.
His beef isn’t whether or not a hold is needed, but what the punishment should be. This opinion is not about whether the preservation duty was triggered, or whether reasonable and proportional steps were taken to preserve it, or whether this duty was breached. That is well established. The issue is what sanctions are appropriate. (p.62)
In the end, Judge Grimm metes out some harsh sanctions, but he does it thoughtfully. His approach to sanctions is captured in this statement: “In fashioning spoliation sanctions, Courts must strive to issue orders that generate light, rather than heat.” (p.74) He grants default judgment on the account of copyright infringement, but not on others since the spoliation did not result in “irreparable or substantial prejudice.” (p.83) The remaining claims will be “tried to the Court.” (p.84) Similarly, he issued a permanent injunction on the copyright violation which the Defendant did not oppose. (p.85)
He granted reasonable attorney’s fees and costs – which will be sizable. Since the Court believes the Defendant may avoid payment, he will hold him in prison for civil contempt for up to two years until the fees are paid. Finally, Judge Grimm admitted that Pappas’ conduct was likely criminal, but is not referring for criminal prosecution due to the burden it would place on the overstretched criminal system.
What’s Victor Stanley II’s Impact on Legal Holds?
Victor Stanley II is a meaty opinion and it is impossible to summarize all of the key points here, so let’s focus on some of the highlights. Despite Judge Grimm’s intentions, his conclusions understandably turn on the facts of this case – and what a set of facts they are! Here are four conclusions:
- Legal holds are a de facto standard, but the courts don’t agree on every nuance. – Judge Grimm examines Pappas’ failure to implement a legal hold as one of the preservation failures, so it stands to reason that he is not calling that action into question. Exactly what constitutes a trigger event? What information must a litigant preserve? What is the punishment for failure? What is a proportional and reasonable legal hold? It depends on where the case is being tried and takes into account those precedents but he doesn’t navigate any new territory here.
- When bad faith is involved, a legal hold will preserve very little. – Legal hold processes are only effective when implemented in good faith. If there is a bad actor (and in this case, a very bad actor!), little can be done to stop them. However, this is no reason not to implement a legal hold. They are designed to be processes to preserve responsive data and demonstrate a good faith effort to do so. “Spoliation stems from alleged destruction of or failure to preserve potentially relevant evidence” – legal holds address the latter. (p.35) This case is not about legal holds – probably because one was never implemented! – it’s about the “crime and punishment” of spoliation.
- Judges are really tired of dealing with spoliation motions. – Judge Grimm allocates a chunk of this opinion about how spoliation harms the judicial process. Echoing Judge Scheindlin’s famous “300-hours” footnote in Pension Committee, he writes about the “hundreds of hours of my time and my law clerk’s time” (p.4) consumed by this motion and how it prevented work on other work in other cases. He added, if a sanction were available for consuming the court’s time “this case would be the poster child.” (p.5) “The duty to preserve evidence relevant to litigation of a claim is a duty owed to the court, not to a party’s adversary.” (p.55) What it really shows is that the Courts probably need more recourse to deter litigants of such bad behavior.
- Egregious spoliation doesn’t always result in the harshest sanctions. – If there is any good news, it is this: If you willfully spoliate and you get a thoughtful jurist like Judge Grimm you may escape default judgments and your case will go to trial instead. However, you may also be put in prison for civil contempt. Good luck with that.
Why are all of these opinions appearing this year? A lot of it has to do with the provocative position that Judge Shira Scheindlin took in Pension Committee. Judge Rosenthal of Rimkus and Judge Grimm in this opinion seem to be reacting to the “bright lines” that she drew, saying that they might not be so bright after all. The point that comes up often with Judge Grimm is that failure to issue a written legal hold is gross negligence. He sets that as one end of the sanction spectrum.
Does Victor Stanley II diminish the necessity for an effective legal hold? Not in the least. What a legal hold is designed to do is to act as a mechanism to help preserve information that can be used to communicate what information is needed to the people who control it. Then the system relies on them doing it. If you suspect someone will destroy evidence, then the hold may entail denying them the opportunity to destroy it. You need a fact record of that action tool. It’s not a magic wand, just a tool that can be effective process for making sure your organization is respecting the judicial process.
Author’s Note: Readers should read “The Enlightened Legal Hold” by Brad Harris and Craig Ball for a more in-depth look at recent case law relating to legal holds. A PDF of this white paper is available for download immediately at no cost.
