Establishing “Intent to Deprive” Under Rule 37(e): District Court Imposes Adverse Inference Instruction Based on Timing of Spoliation

This blog has previously discussed the challenges a litigant faces in moving for the so-called “severe sanctions” pursuant to amended Rule 37(e). With the 2015 amendment to Rule 37(e), a moving party seeking severe spoliation sanctions must establish that the opposing party “acted with the intent to deprive” the requesting party of the electronically-stored information (ESI) in the litigation at issue. In the absence of an explicit admission that a responding party deleted ESI with the subjective intent to deprive the requesting party of the same, a requesting party often faces an uphill battle establishing the “intent to deprive” requirement. A recent decision from the District Court for the District of Arizona provides an example of the type of circumstantial evidence – including the timing of the spoliation at issue – a moving party can rely on to potentially support the imposition of severe sanctions.

In Federal Trade Commission v. Noland, the Federal Trade Commission (FTC) was investigating defendant Noland and his business, Success By Health (“SBH”), for allegedly “operat[ing] as an illegal pyramid scheme” and making false statements to SBH’s affiliates. In May 2019, Noland inadvertently discovered the FTC’s investigation and, when the FTC realized Noland found out about the investigation, the FTC advised SBH and Noland to preserve relevant documents. The day after learning about the investigation, the defendant instructed other members of SBH’s leadership team (the other individual defendants) to start using Signal, an ephemeral messaging platform, and ProtonMail, both encrypted communication platforms that emphasized “user privacy.” Thereafter, the defendants stopped using the messaging platforms they previously used, and activated Signal’s “auto-delete” function. The defendants also encouraged other SBH employees to install and use Signal and ProtonMail.

In late May 2019, Noland, through his attorney, contacted the FTC and offered to cooperate in its investigation. The FTC responded that it “‘did not have any requests’ at that time and that ‘[Noland] and the company should suspend any ordinary course destruction of documents, communications, and records.’” Despite this instruction, throughout the remainder of 2019, the defendants instructed each other and SBH employees “to use Signal or ProtonMail for ‘anything sensitive’ or ‘important things.’” In January 2020, the FTC filed the action and obtained a temporary restraining order (TRO) that appointed a receiver to assume control over the business and required the defendants to produce their electronic communications and turn over their cell phones that they used to operate the business. The defendants continued their use of Signal and Proton and did not deactivate the auto-delete function.

Significantly, in August 2020, the day before the defendants were to turn over their cell phones for forensic imaging, they deleted the Signal app from their phones “in coordinated fashion.” The defendants deleted the app “without the knowledge or approval of their counsel, the Receiver, or the FTC,” and the deletion of the app resulted in a “total inability of the parties or outside forensic experts to recover the contents of the Signal messages.” During the defendants’ depositions, they admitted that the deletion of the Signal app was “part of a coordinated plan…to delete the app.”

The court granted the FTC’s subsequent spoliation motion, finding that “the requested adverse-inference sanction [was] appropriate,” pursuant to Rule 37(e)(2). The court first found that ESI (i.e., messages from Signal and ProtonMail) was indeed lost because the defendants deleted the app prior to providing their cell phones for forensic imaging, and Noland admitted to deleting an email from ProtonMail, which provided instructions to potential third-party witnesses for declarations to be submitted to the court. The court further concluded that the defendants’ document preservation obligations arose in May 2019, when the FTC emailed Noland’s counsel stating that the defendants “‘should suspend any ordinary course destruction of documents, communications, and records.’”

The court also found that “the lost messages cannot be restored or replaced through additional discovery,” noting that the FTC and defendants’ counsel worked together to try to retrieve the ESI, but were unsuccessful. The defendants did not dispute that the ESI was not recoverable and acknowledged that “the ‘forensic expert attempted to recover the Signal data and could not.’” However, the defendants disputed that they acted with the “intent to deprive” the FTC of the Signal and ProtonMail communications, arguing that that they switched to Signal in May 2019 “to avoid the hacking, eavesdropping, and infiltration efforts of [a] former SBH associate…and ‘a small group of saboteurs.’”

The court rejected this implausible argument and concluded that the FTC “easily carried its burden” of showing that the defendants “acted with the intent to deprive the FTC of the information contained in the Signal and ProtonMail messages.” The court determined that the “most decisive factor” was the “timing of the installation and use of Signal and ProtonMail,” noting that there was no other evidence supporting the defendants’ argument that they were being hacked at that time. The court also reasoned that Noland’s failure to disclose the existence of Signal and ProtonMail during his deposition, “despite being asked targeted questions on this exact topic,” raised the inference that “the motivation for switching to the accounts was more nefarious.” The court added that the “coordinated deletion of the Signal app” from the defendants’ cell phones, without the knowledge or approval of their counsel, was “an outrageous maneuver that raises a strong inference of bad faith.”

The Noland decision serves as an example of the type of circumstantial evidence that may satisfy the “intent to deprive” requirement of Rule 37(e)(2) in the absence of an explicit admission by the responding party. In particular, the court emphasized the timing of the installation of Signal and ProtonMail, the lack of any other evidence supporting the proffered reasoning for the company switching to these communication platforms, and the timing of the deletion of the programs just before the forensic examination of the defendants’ devices. If a company has a legitimate business objective to switch to new communication platforms during the course of a litigation – always a risky proposition, but even more so when ephemeral applications are involved – the company must document and be able to support its good faith, business-related basis for the transition. In fact, to the extent a company contemplates such a transition after the duty to preserve ESI has been triggered in an active or threatened litigation, it would be well-served to advise its adversary of this intention before it acts, to allow both sides to engage in a collaborative discussion regarding preservation of relevant ESI and avoid the implication of evidence tampering or destruction.