Court Orders Potential Jail Time As An Unusual Sanction For ESI Discovery Abuse

September 2010

In Victor Stanley, Inc. v. Creative Pipe, Inc., et al. (D.MD, Sept. 9, 2010), Chief United States Magistrate Judge Paul Grimm extensively analyzes the law on electronically-stored information (ESI) spoliation claims and related sanctions. Because of the defendant’s particularly bad behavior, the Court rendered a default judgment, an injunction, payment of plaintiff’s legal fees & costs, and the possibility of jail time for civil contempt of court.

The Order includes a 12-page appendix that summarizes the state of ESI sanction law in each of the Circuits. Even if for no other reason, the appendix makes this case useful.

The case involves a defendant who copied a competitor’s product design drawings and specifications, manufactured the knock-offs, and sold the copies in direct competition to the plaintiff. The plaintiff sued for copyright infringement, patent infringement, unfair competition, and Lanham Act violations.

The Court described the evidence spoliation in enormous detail. “Pappas” is the Defendant’s President and owner. The Court’s summary follows:

“… the volume and timing” of Defendants’ spoliation is telling: Defendants deleted thousands of files and ran programs to ensure their permanent loss immediately following preservation requests and orders, and immediately before scheduled discovery efforts. And, as in Metropolitan Opera Ass’n, 212 F.R.D. at 224-25, Defendants’ destruction of evidence was compounded by their failure to comply with numerous court orders. In sum, Defendants took repeated, deliberate measures to prevent the discovery of relevant ESI, clearly acting in bad faith, and in affidavits, depositions, and in open court, Pappas nonchalantly lied about what he had done. …

Plaintiff VSI is fortunate that Pappas’s zeal considerably exceeded his destructive skill and his judgment in selecting confederates to assist in his efforts to destroy ESI without detection. While Pappas succeeded in destroying a considerable amount of ESI, Plaintiff was able to document this fact and ascertain the relevance of many deleted files. At the end of the day, this is the case of the “gang that couldn’t spoliate straight.” All in all, in addition to the attempted deletions that caused delay but no loss of evidence, there were eight discrete 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 Plaintiff demanded preservation of ESI;
4. Pappas’s failure to preserve files and emails after 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; and (8) Pappas’s further use of programs to permanently delete ESI after the Court issued numerous production orders”

In ESI discovery and related sanction cases, the potentially-offending parties generally complain that the costs of compliance are far greater than the related benefits. In prescribing an onerous result here, the Court expressed a similar concern by those reading the decision, as follows:

“ … courts have tended to overlook the importance of proportionality in determining whether a party has complied with its duty to preserve evidence in a particular case. This should not be the case because Fed. R. Civ. P. 26(b)(2)(C) cautions that all permissible discovery must be measured against the yardstick of proportionality before ordering spoliation sanctions to ensure against “‘the burden or expense of the proposed discovery outweigh[ing] its likely benefit’”) (quoting Rule). Moreover, the permissible scope of discovery as set forth in Rule 26(b) includes a proportionality component of sorts with respect to discovery of ESI, because Rule 26(b)(2)(B) permits a party to refuse to produce ESI if it is not reasonably accessible without undue burden and expense. Similarly, Rule 26(g)(1)(B)(iii) requires all parties seeking discovery to certify that the request is “neither unreasonable nor unduly burdensome or expensive, considering the needs of the case, the amount in controversy, and the importance of the issues at stake in the action.” Thus, assessment of reasonableness and proportionality should be at the forefront of all inquiries into whether a party has fulfilled its duty to preserve relevant evidence.” [Citations omitted]

“Recent decisions, discussed below, 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. Moreover, concern has been expressed by some commentators that court decisions finding spoliation and imposing sanctions have, in some instances, imposed standards approaching strict liability for loss of evidence, without adequately taking into account the difficulty—if not impossibility—of preserving all ESI that may be relevant to a lawsuit, the reasonableness of the measures that were taken to try to preserve relevant ESI, or whether the costs that would be incurred by more complete preservation would be disproportionately great when compared to what is at issue in the case. The lack of a national standard, or even a consensus among courts in different jurisdictions about what standards should govern preservation/spoliation issues, appears to have exacerbated this problem. It is not an exaggeration to say that many lawyers, as well as institutional, organizational, or governmental litigants, view preservation obligations as one of the greatest contributors to the cost of litigation being disproportionately expensive in cases where ESI will play an evidentiary role.

Nothing in this memorandum should add to this collective anxiety.”

Even with a consideration of proportionality, the Court ordered a default judgment on the primary copyright infringement claim, including a related injunction. More importantly, Judge Grimm awarded attorney fees and costs, and found the defendant to be in civil contempt of court for violating its prior Orders. The Court then added the potential for jail time if payment is not made timely. The possibility of jail time is a creative and unusual way of enforcing the payment obligation:

I have found that Pappas violated both preservation orders and production orders that this Court issued in Plaintiff’s favor, and the above discussion manifestly establishes the factual record to show that he knew of the orders and acted willfully to thwart those orders, thereby causing harm to Plaintiff. Therefore, Pappas’s civil contempt is established by clear and convincing evidence. For such clearly contemptuous behavior, a very serious sanction is required.

Accordingly, I order that Pappas’s acts of spoliation be treated as contempt of this court, and that as a sanction, he be imprisoned for a period not to exceed two years, unless and until he pays to Plaintiff the attorney’s fees and costs that will be awarded after Plaintiff has submitted an itemized accounting of the attorney’s fees and costs associated not only with filing this motion, but also with respect to all efforts expended throughout this case to demonstrate the nature and effect of Pappas’s spoliation. These costs and fees likely will amount to a significant figure, and that will properly vindicate this Court’s ability to enforce its discovery orders. The commencement of Pappas’s confinement will be determined at the conclusion of the proceedings to quantify the amount of attorney’s fees and costs.

Despite the fact that, if Pappas refuses to pay the attorney’s fees and costs ordered by the Court, he will be imprisoned for two years, it is quite clear that this is a civil—not a criminal— contempt sanction, because the relief is compensatory and the sanction will be imposed to coerce Pappas’s compliance with this Court’s order to pay attorney’s fees and costs to Plaintiff; Pappas can avoid imprisonment by promptly paying the fees and costs.

Spoliation of evidence is not that uncommon. When discovered, it provides an enormous motivation to resolve the case by the party engaging in the discovery wrongdoing. Because of the complexity of software in modern systems, cover-up of ESI spoliation is exceptionally difficult. If the investigating party timely (i) employs the right professionals, and (ii) obtains access to the computers and ESI, the wrongdoing can be often proven. In some cases, the “destroyed” data may be recoverable.

Fulcrum Inquiry performs computer forensics and financial investigations.