A Bad “Day” for a Company Whose In-House Attorney Failed to Properly Preserve Relevant Documents

An Arizona federal court has determined that default judgment, an adverse instruction and monetary damages are proper remedies for in-house counsel’s failure to take the proper steps to preserve potentially relevant evidence after receiving notice of potential litigation. In Day v. LSI Corporation, Docket No. CIV-11-186-TUC-CKJ, the United States District Court for the District of Arizona granted, in part, the plaintiff-employee’s motion for entry of a default judgment and imposed additional sanctions against the defendant-employer, concluding that the employer’s in-house attorney had a “culpable mind” and acted willfully in failing to carry out the company’s preservation obligations.

During his October 2010 exit interview, the employee complained about alleged discrimination. Three months later, in January 2011, the company received a letter from an attorney representing the employee setting forth various contractual and other claims. In-house counsel was aware of both the exit interview complaint and the attorney letter and, in January 2011, issued a written document retention notice. The notice was not sent to a critical witness with relevant knowledge of some of the claims, though the company maintained that the witness was not identified in the attorney letter and that it was not aware that the witness had potentially relevant knowledge until receiving the employee’s initial disclosures seven months later. By then, the witness was no longer with the company and his emails had been purged from the company’s server.

The Court’s decision contains a lengthy discussion of the parties’ spoliation-specific discovery dispute, which included the depositions of the in-house attorney and members of the company’s IT department. There are some important lessons to be learned from the missteps in this case:

1. A legal hold notice directing employees to preserve paper and electronically stored documents and information should be issued to all witnesses with potentially relevant knowledge or information, not just those specifically identified in an attorney letter or lawsuit. Here, the Court determined that the witness’ involvement “should reasonably have been known” to the company and that had notice been issued as required, relevant documents would have been preserved. A “culpable mind” or willfulness on the part of the non-preserving party may be imputed where, as here, the in-house counsel knew or should have known of the importance of the witness.

2. Where in-house counsel assumes responsibility for litigation hold and preservation activities, s/he should investigate not only the identity of potential witnesses, but also work closely with the company’s IT professionals to identify the sources of or locations where relevant data may be stored. In this case, the in-house attorney testified that he directed the preservation of data and electronic files, wherever they may have been located (a “universal hold”), though the company disputed that a universal hold was required, relying on Fed.R.Civ.P. 26(b)(2(C) and Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212 (S.D.N.Y. 2003). Contradictory testimony was offered by the company’s IT staff that only specific locations were identified by the in-house counsel and only those were searched and preserved. Whether the search was intentionally limited or the result of mere miscommunication, the end result for this company was a default judgment as to the claim for which the employee was substantially prejudiced because of the missing documents, an adverse instruction as to the remaining claims, and an award of $10,000 in monetary damages.

3. Courts are not afraid to impose serious sanctions for spoliation. The District Court for the District of Arizona determined that a default judgment was appropriate as to one of the claims because the company’s conduct led to the destruction of evidence that would have assisted the employee in the litigation, the public’s interest in expeditious litigation was hampered by the company’s failure to timely provide relevant discovery, and the employee was substantially prejudiced by the destruction of evidence, which “threatened to interfere with the rightful decision of the case.” Lesser, though still severe, sanctions were imposed concerning the employee’s other claims only because the Court determined that the risk of substantial prejudice was not significant.

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