Timing Is Everything: SDNY Limits Relief for Plaintiffs Prematurely Seeking Serious ESI-Related Sanctions Under Rule 37(e)(2)
In DoubleLine Capital LP v. Odebrecht Finance, Ltd., the Southern District of New York issued a decision with important implications regarding the timing of spoliation motions and imposition of e-discovery sanctions under Federal Rule of Civil Procedure 37(e)(2). The decision highlights the challenges litigants face when seeking relief under this provision and, in particular, satisfying the onus to establish an “intent to deprive” the opposing party of deleted discovery. As this blog has previously discussed, the sanctions available under this subsection are available only in “egregious cases,” require a high evidentiary bar, and are highly dependent on timing and the proper development of a factual record.
In this securities fraud case, the plaintiffs sought a mandatory adverse inference based on the claim that the defendants destroyed encryption keys needed to access the “MyWebDay” platform, an internal “shadow” accounting system used to track illicit bribe payments, which they contended contained evidence essential to the litigation. Despite ultimately admitting to destroying the encryption keys, the defendants argued that it was too early in discovery for the court to impose sanctions. Specifically, the defendants argued that spoliation sanctions would be inappropriate because the plaintiffs “have not (and cannot) demonstrate that the lost information cannot be replaced in discovery, and therefore have not shown that any relevant facts ‘have been rendered unavailable by virtue of the 2016 destruction of the MyWebDay encryption keys.’”
The court ruled that the plaintiffs would be permitted to present evidence to the jury concerning the intentional destruction of the encryption keys, but declined to impose an adverse jury inference based on the spoliation. Of particular interest, the court expressed confusion as to the timing of the plaintiffs’ sanctions motion, when the discovery period had not yet closed and when they lacked a full record of the evidence that was available to them. The plaintiffs filed their spoliation motion, pursuant to Federal Rule of Civil Procedure 37(e)(2)(B), approximately a year before the end of discovery.
When the court assessed the plaintiffs’ application, it applied the following, now-familiar three-part inquiry under Rule 37(e): (i) whether a party failed to take “reasonable steps” to preserve electronically stored information “that should have been preserved in the anticipation or conduct of litigation”; (ii) whether there had been “prejudice to another party from loss of the information,” in which case the court “may order measures no greater than necessary to cure the prejudice”; and (iii) whether the destroying party “acted with the intent to deprive another party of the information’s use in the litigation,” in which event a court may consider whether to impose the most severe of measures such as mandatory presumptions, instructions that the lost information was unfavorable, or entry of default judgment.
Applying this test, the court determined that the defendants knew or should have known that the evidence they destroyed “may be relevant to future litigation,” the plaintiffs were prejudiced by the destruction of the information, and the lost ESI (electronically stored information) could not be “restored or replaced through additional discovery.” However, the court noted that to impose the “particularly harsh” sanctions listed in subsection (e)(2), including the adverse inference instruction requested by the plaintiffs, the court must first find that the party to be sanctioned acted with “an intent to deprive.” The intent standard is both “stringent and specific,” requiring plaintiffs to demonstrate that the offending party destroyed the ESI at issue specifically to deprive the other party of evidence. The court ultimately concluded that the plaintiffs “have not shown, and cannot show, that defendants destroyed the physical encryption keys with the intent of depriving plaintiffs in this litigation of that evidence.” Observing that discovery was not yet complete, and the precise scope of the issues that would be presented to the jury was not yet known, the court limited sanctions to permitting the plaintiffs to present evidence and argument to the jury concerning the defendants’ intentional destruction of evidence, as well as permitting the jury to consider that evidence, along with all other evidence, in making its decision. Such a sanction, unlike those under Fed. R. Civ. P. 37(e)(2), is permitted under subsection (e)(1) without a predicate finding of an intent to deprive.
The DoubleLine decision highlights the strategic implications of timing sanctions motions under Federal Rule of Civil Procedure 37(e)(2). Even where destruction of evidence is undisputed, parties seeking relief in the form of harsh sanctions under subsection (e)(2) should ensure that any motion they bring can be supported by the requisite proof based on the applicable standards in the jurisdiction at issue. Thus, even when an ESI-related misstep is particularly egregious, litigants should tread carefully before seeking relief prior to the close of discovery. This decision, when read collectively with others previously discussed in this blog, outline certain best practices litigants can follow in order to adequately remediate discovery violations.