Commercial Litigation and Arbitration

Refusal to Grant Attorneys’ Fees as Inherent Power Sanction Upheld Even Though Intentional Spoliation May Have Been Found by Jury

From Union Pump Co. v. Centrifugal Tech. Inc., 2010 U.S. App. LEXIS 25761 (5th Cir. Dec. 16, 2010):

Plaintiff, Union Pump Company, sued three of its former employees after the former employees formed a competing business. Union Pump alleged that the defendants misappropriated its trade secrets and engaged in unfair competition because the defendants were using Union Pump's proprietary drawings to operate their competing business. Union Pump also alleged that the defendants spoliated evidence by deleting and destroying electronically stored information. Following a two-week trial, the jury returned a verdict in Union Pump's favor. Union Pump appeals the district court's refusal to award attorney's fees as a sanction for the defendants' spoliation of evidence. ***

Spoliation of evidence is among the offenses for which a court may assess sanctions using its inherent powers. See Hodge v. Wal-Mart Stores, Inc., 360 F.3d 446, 449 (4th Cir. 2004) ("The imposition of a sanction . . . for spoliation of evidence is an inherent power of federal courts."). Union Pump complains that the defendants engaged in the following acts of spoliation: (1) [Defendant] Cleveland, after conferring with [Defendant] Goodrich, destroyed at least three computer disks containing information belonging to Union Pump; (2) the defendants disposed of a computer alleged to contain information belonging to Union Pump; (3) the defendants failed to ensure that the tapes used to back up their computer server were properly working; (4) the defendants destroyed information on the backup tapes; (5) the defendants failed to institute a "litigation hold" to ensure that relevant evidence would not be destroyed or deleted; and (6) the defendants used disk-wiping software to delete and destroy information on their computer hard drives after the district court's entry of a protective order, and, in the case of one computer, the disk-wiping occurred just days before turning the computers over to the court-appointed expert for forensic imaging.

There can be no dispute that these are serious charges, which, if true, would constitute particularly deplorable conduct on the part of the defendants that would justify the imposition of sanctions. See Leon v. IDX Sys. Corp., 464 F.3d 951, 961 (9th Cir. 2006) (approving dismissal of suit and award of attorney's fees as a sanction for plaintiff's intentional deletion of electronic information); Arista Records, L.L.C. v. Tschirhart, 241 F.R.D. 462, 466 (W.D. Tex. 2006) (entering default judgment against a defendant that used disk-wiping software to destroy electronic information). In this case, however, the district court chose not to award attorney's fees as a sanction for the defendants' conduct, and we are reluctant to disturb that ruling.

A court's inherent power to sanction "is not a broad reservoir of power, ready at an imperial hand, but a limited source." FDIC v. MAXXAM, Inc., 523 F.3d 566, 591 (5th Cir. 2008) (quoting NASCO, Inc. v. Calcasieu Television & Radio, Inc., 894 F.2d 696, 702 (5th Cir. 1990), aff'd sub nom. Chambers v. NASCO, Inc., 501 U.S. 32 (1991)). We therefore do not believe that the district court abused its discretion in failing to award attorney's fees in this case. One of the most powerful, and perhaps the most common, remedies for spoliation is an adverse inference instruction given to the jury. The district court instructed the jury that if it found that the defendants intentionally destroyed relevant evidence in bad faith, the jury could "infer that such evidence was unfavorable to [the defendants]." Given that the jury ultimately found the defendants liable, we do not fault the district court for limiting its sanction to the adverse inference instruction due to the requirement that the court, in remedying offensive conduct through sanctions, must "try the less restrictive measure first." Natural Gas Pipeline, 86 F.3d at 467. ***

We are not blind to the egregious nature of the defendants' conduct in this case. Spoliation is a serious offense and a party's intentional destruction of relevant evidence threatens the sanctity and spirit of the judicial process. However, the imposition of sanctions under the court's inherent power is powerful medicine that should be administered with great restraint. We are unaware of any case from this circuit, or any other circuit, in which an appellate court has directed the imposition of sanctions where the district court has failed to do so. Here, the district court found that Union Pump had been made whole by the jury's verdict and that the adverse inference in the jury instructions sufficiently remedied the alleged spoliation. We decline to substitute our judgment for that of the district. That is not to say an appellate court may never reverse a district court's refusal to award sanctions. See AHP Subsidiary Holding Co. v. Stuart Hale Co., 1 F.3d 611, 620 (7th Cir. 1993) (remanding for "a more plenary explanation" for the district court's denial of attorney's fees as a discovery sanction under Rule 37 because "the denial of sanctions with no explanation may constitute an abuse of discretion"). In this case, however, given the district court's intimate familiarity with the case and Union Pump's failure to renew its request for sanctions related to spoliation, we do not find that the district court abused its discretion in refusing to award attorney's fees using its inherent powers as a sanction for the defendants' spoliation of evidence.

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