“The Death Penalty Lives”: Magistrate Judge Recommends Entry of Default Judgment After Defendants Manipulate and Permanently Delete Electronic Data

This blog has previously discussed cases in which district courts considered and sometimes ultimately entered the so-called sanctions “death penalty” – a default judgment order of terminating sanctions, pursuant to Rule 37(e)(2), as a result of a party’s destruction of evidence. Recently, a U.S. District Court for the Southern District of Texas magistrate judge recommended granting terminating sanctions, i.e., default judgment, after finding that the defendants “delayed discovery, manipulated electronic data, and permanently deleted a significant amount of electronic data.” The magistrate judge noted that the deletions that occurred required the user to “go into the bowels of the system, requiring advanced knowledge,” and the electronic data was deleted “within days” of an agreed upon preliminary injunction.

In Calsep Inc. v. Intelligent Petroleum Software Solutions, LLC, the plaintiffs alleged misappropriation of trade secrets after their employee, one of the defendants, left their employment and allegedly downloaded the plaintiffs’ trade secret information to a personal device. According to the plaintiffs, the former employee then used the trade secret information with the other defendants to develop oil and gas industry software to compete with the plaintiffs’ software. The plaintiffs attempted to obtain discovery, including specifically the defendants’ “source code control system, which ordinarily contains the complete, auditable, and accurate history of the creation and evolution of software source code over time,” but the plaintiffs claimed that “only days before the last court ordered production, Defendants permanently deleted files from their source control code system.” Both the plaintiffs’ and defendants’ experts agreed that the data was permanently deleted, but the experts did not agree “on the extent of the permanent destruction or what [was] still available for Plaintiffs to prove their case.” On the plaintiffs’ motion for sanctions pursuant to Rule 37(e), the court focused on “the duty to preserve, culpability, and relevance/prejudice.”

First, the court determined that “[w]ithout question, the duty to preserve arose no later than when the litigation was filed” in March 2019. Next, the court addressed the defendants’ culpability and provided an extensive analysis of the defendants’ conduct, which included delaying productions, filing false affidavits, manipulating electronic data, and failing to produce specific storage devices, “containing the allegedly illegally downloaded software from Plaintiffs.” The court specifically noted that the plaintiffs’ expert testified that he reviewed data showing that “eight minutes after Plaintiffs sent a follow up email to Defendants’ counsel asking for a status report, the requested database…was permanently deleted.” And, according to the expert, “the deletion was intentional, requiring advanced skill, and responding to the warning that the deletion would be irreversible.” Indeed, the defendants admitted that they destroyed the database, and their own expert testified that “there were files permanently deleted and that the way Defendants stored the data [was] not best practices.”

Moreover, after making two productions, the defendants produced two servers, but until then, the plaintiffs did not know the defendants were using two servers. The plaintiffs’ expert testified that “separate and different destructions occurred on both servers, permanently deleting files in its source code control system.” The defendants suggested that “because they needed more room, a new bigger server was created,” and “data from one server was copied to the other server and duplicate files were deleted.” However, according to the plaintiffs’ expert, a complete record did not exist at all between the two servers, and even the defendants admitted that files were permanently deleted. Thus, the court concluded that the defendants’ actions “reveal[ed] a pattern of behavior that raise[d] the inference of bad faith and intent to deprive the Plaintiffs of the information on the Defendants’ source code control system in this litigation.”

The court then considered the relevance of the lost information and concluded that “Defendants willfully prevented the Plaintiffs from obtaining evidence necessary to establish their claim that [defendant] stole trade secret information and shared it with them to develop a competing product.” The court explained that, typically, it is the party asserting spoliation that has “the burden to show that the lost information is relevant and prejudicial,” but, “[i]n the case of willful spoliation, ‘the spoliator’s mental culpability [is] itself evidence of the relevance of the documents destroyed.’” The court found that “Defendants permanently deleted data and consequently the contents and volume of the deleted data is not knowable.”

Finally, the court considered the appropriate sanctions to impose, noting that “Rule 37 death penalty sanctions are ‘justified only in the most egregious cases, such as…intentionally destroying evidence by burning, shredding or wiping out computer hard drives.’” The court further noted that “[d]efault judgment against a noncompliant party is appropriate when no lesser sanction could achieve the appropriate level of deterrence.” The court concluded that it had given the defendants “multiple opportunities to comply, and particularly instructed counsel that the last order was a last chance. Nonetheless, even after that warning, Defendants deleted multiple change sets in defiance of this Court’s order.” Accordingly, the magistrate judge recommended granting the plaintiffs’ motion for sanctions requesting a default judgment against the defendants and awarding the plaintiffs their expert and attorneys’ fees.

The Calsep decision highlights the type of egregious conduct – intentionally destroying electronic evidence with the obvious purpose of depriving the requesting party of the evidence in the litigation – that can result in severe, case-ending sanctions under Rule 37(e)(2). It is imperative for attorneys to advise their clients as to their preservation obligations and for clients to strictly adhere to those obligations. Moreover, it is essential for parties to follow the court’s production and discovery orders closely, and to produce the requested information that is useable without any manipulation. And finally, although it should go without saying, any thought of manipulating or deleting relevant data that may harm a party’s position in the case, perhaps with the hopes that “no one will ever find out,” should be banished at the earliest stages of any dispute. Calsep teaches that the Rule 37(e)(2) death penalty sanction is real, and devastating. Proceed with caution.