From Atpac, Inc. v. Aptitude Solutions, Inc., 2011 U.S. Dist. LEXIS 40043 (E.D. Cal. April 13, 2011):

I. Evidentiary Objections

The parties have filed numerous evidentiary objections. "While the Federal Rules of Evidence do not necessarily apply in the context of a motion for sanctions, evidence relied upon must, at a minimum, bear indicia of reliability." Sentis Grp., Inc., Coral Grp., Inc. v. Shell Oil Co., 559 F.3d 888, 901 (8th Cir. 2009); see Jensen v. Phillips Screw Co., 546 F.3d 59, 66 n.5 (1st Cir. 2008). Similarly, evidentiary objections are inappropriate on a motion to stay. See Network Appliance Inc. v. Sun Microsys. Inc., No. C-07-06053, 2008 WL 2168917, at *6 (N.D. Cal. May 23, 2008) (taking evidentiary objections into account in assessing the weight of the evidence and disregarding any legal argument or conclusions, but overruling objections on motion to stay). The court can find no cases in which evidentiary objections were made on a motion for appointment of a special master, but it is clear in comparing this type of motion to other pretrial, non-dispositive motions that evidence need not be submitted in a form that would be admissible at trial. ***

II. Factual and Procedural Background

Plaintiff provides software and consulting services related to county clerk-recorder information imaging systems. ***

In November of 2008, County of Nevada began discussions with Aptitude to replace plaintiff as the County's clerk-recorder software provider. ***

Plaintiff alleges that County of Nevada *** provided Aptitude with plaintiff's trade secret and copyright-protected information. ***

In May and June of 2009, before the instant action had commenced, plaintiff requested access to both servers in order to "ensure all AtPac software, and CRiis databases, ha[d] been deleted." *** County of Nevada conveyed the request to Aptitude, which confirmed on August 16, 2009, that all data files transferred from the ER-Recorder server had been deleted from the AS-Nevada server. ***

On September 23, 2009, plaintiff filed a government tort claim against the County of Nevada, which addressed defendants' wrongful access to and extraction of data from the ER-Recorder server. *** On October 20, 2009, counsel for plaintiff instructed defendants' counsel in writing that defendants were obligated to "maintain all copies of data (both in hard copy and electronic form) relevant to this dispute." ***

In December of 2009, as part of the virtualization of their physical servers, County of Nevada requested of Aptitude that the AS-Nevada server "be cleaned up and all unnecessary files and configurations removed." *** Defendants then removed all but the files Aptitude "may need in the future to help with support." *** At that time, any CRiis data had already been deleted from the server.

On February 19, 2010, soon after the filing of the complaint, the Deputy Counsel for County of Nevada issued a litigation hold notice to the affected employees***.

Also on February 19, 2010, Kathy Barale, an Information System Analyst for County of Nevada, and Alana Wittig, a Project Manager for Aptitude, began to discuss scrubbing the AS-Nevada server in preparation for returning it to Aptitude. *** Defendants contend that the server was scrubbed because County of Nevada's servers were being virtualized and thus the County did not need to retain the physical server. *** County of Nevada was required by law to remove public data from the server before returning it to Aptitude. *** Despite County of Nevada's Deputy Counsel's litigation hold, staff did not believe that the hold precluded them from scrubbing the server because the data had already been deleted and the contents of the server as it then existed were saved on the virtual server. The AS-Nevada server was placed in queue to be wiped on March 22, 2010 ***, but because of the backlog of servers to be wiped, the task was reassigned and eventually completed in the middle of October of 2010, but was not reported as completed until November 10, 2010. ***

Plaintiff believes that had the server not been scrubbed, it would have been possible for a forensic examination to determine what information from the ER-Recorder server had been transferred to the AS-Nevada server. ***(Menz Decl. in Supp. of Pl.'s Mot. ¶¶ 4-5.) However, defendants contend that the AS-Nevada server was not configured with the capability or software to track if and when particular files were transferred to or from the server, so forensic examination might not have been effective even before the server was scrubbed. ***

Plaintiff complains of several other alleged discovery abuses by defendants: defendants (1) failed to identify the AS-Nevada server as the device corresponding to an IP address known to have accessed the ER-Recorder server; (2) failed to produce any documents related to the spoliation of the AS-Nevada server until after the scrubbing took place, making it impossible for plaintiff to prevent the scrubbing; (3) failed to produce documents relating to Placer County, another county in which Aptitude was engaged in converting from plaintiff's software to its own; and (4) failed to produce handwritten notes until the day before a hearing on plaintiff's motion to compel production. ***

B. Terminating Sanctions

District courts may impose sanctions as part of their inherent power "to manage their own affairs so as to achieve the orderly and expeditious disposition of cases." ***

A district court's inherent power to sanction may be invoked in response to spoliation of evidence.***

Courts may sanction parties responsible for spoliation of evidence in three ways. First, a court can instruct the jury that it may draw an adverse inference against the party or witness responsible for destroying the evidence. *** Second, a court can exclude witness testimony proffered by the party responsible for destroying the evidence and based on the destroyed evidence. *** Finally, a court may enter default judgment against the party responsible for destroying the evidence. ***

A party's destruction of evidence need not be in "bad faith" to warrant a court's imposition of sanctions. District courts may impose sanctions against a party that merely had notice that the destroyed evidence was potentially relevant to litigation. See Glover, 6 F.3d at 1329; Akiona, 938 F.2d at 161; cf. Unigard, 982 F.2d at 368 n.2 (sanctions may be imposed for "willfulness or fault by the offending party"). However, a party's motive or degree of fault in destroying evidence is relevant to what sanction, if any, is imposed. Baliotis v. McNeil, 870 F. Supp. 1285, 1291 (M.D. Pa. 1994); see also Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76, 79 (3d Cir. 1994) (courts should choose "the least onerous sanction corresponding to the willfulness of the destructive act and the prejudice suffered by the victim").

When considering a default sanction in response to spoliation of evidence, the court must determine "(1) the existence of certain extraordinary circumstances, (2) the presence of willfulness, bad faith, or fault by the offending party, (3) the efficacy of lesser sanctions, [and] (4) the relationship or nexus between the misconduct drawing the dismissal [or default] sanction and the matters in controversy in the case . . . ." *** In addition, the court may consider the prejudice to the party victim as an "optional" consideration where appropriate. Id. This multi-factor test is not "a mechanical means of determining what discovery sanction is just," but rather "a way for a district judge to think about what to do." ***

Valley Eng'rs Inc. v. Elec. Eng'g Co., 158 F.3d 1051, 1057 (9th Cir. 1998). ***

Plaintiff asked defendants to delete all CRiis-related data from their servers when the parties were in settlement discussions and before any claim or lawsuit was filed; defendants cannot be at fault for deleting the files at that time. However, by the time defendants scrubbed the server, the instant case had been filed and they were on notice of their obligation to retain evidence. Thus, the court will consider whether sanctions are appropriate in response to defendants' scrubbing of the server, but not their deletion of the files from the server.***

2. Willfulness, Bad Faith, or Fault ***

Even if an individual employee for County of Nevada or Aptitude may have misunderstood that the litigation hold applied to the AS-Nevada server, which the court doubts for reasons discussed below, defendants cannot escape responsibility by arguing that no willfulness, bad faith, or fault was involved. High-level employees for both defendants must have known that the AS-Nevada server was extremely relevant to the litigation, and it was their responsibility to see that the server was preserved. See In re Napster, 462 F. Supp. 2d at 1070 ("Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a 'litigation hold' to ensure the preservation of relevant documents." (citing Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 220 (S.D.N.Y. 2003)); Nat'l Ass'n of Radiation Survivors, 115 F.R.D. at 557-58 ("The obligation to retain discoverable materials . . . requires that the agency or corporate officers having notice of discovery obligations communicate those obligations to employees in possession of discoverable materials."). The circumstances surrounding the scrubbing indicate that either the high-level employees failed in their duty to explain the extent of the litigation hold or that the employees responsible for the scrubbing acted in bad faith.

Counsel for County of Nevada sent an e-mail to inform the relevant employees of the litigation hold, instructing them to preserve all information related to the County's involvement with AtPac and Aptitude. Later that very day, Kathy Barale, the Information System Analyst for County of Nevada and one of the recipients of the e-mail regarding the litigation hold, began discussing scrubbing the AS-Nevada server with Alana Wittig, a Project Manager for Aptitude. Even if the timing was coincidental and not itself evidence of bad faith, the employees should have at least investigated the issue before irrevocably damaging potentially relevant evidence. There is no indication that Barale, Wittig, or anyone else at County of Nevada or Aptitude even attempted to ensure that the scrubbing would comply with their obligation to retain potentially relevant evidence.

While many other servers were virtualized and presumably scrubbed by County of Nevada, only the AS-Nevada server was owned by Aptitude, stored at County of Nevada, and used for making the transfer from AtPac's software to Aptitude's software. Its relevance to the dispute involving AtPac and Aptitude, and the need for treating it differently than other servers, was clear. The fact that all evidence relating to the scrubbing was concealed from plaintiff until after it took place is further indication that defendants knew the scrubbing was not appropriate. Scrubbing the server despite its potential relevance demonstrates willful ignorance or worse, not an innocent misunderstanding. ***

5. Prejudice Defendants argue that no actual prejudice will result, contending that even before having scrubbed the server it would have been impossible to determine what files were transferred to the server and when, because any relevant files were already deleted and the server was not configured to log such activities. However, the fact that a server did not log activities does not preclude the possibility of a forensic examination uncovering deleted files. As the party at fault for scrubbing the server, defendants bear the consequences of this uncertainty. See Nat'l Ass'n of Radiation Survivors, 115 F.R.D. at 557 (holding that where "the relevance of and resulting prejudice from destruction of documents cannot be clearly ascertained because the documents no longer exist . . . [the culpable party] can hardly assert any presumption of irrelevance as to the destroyed documents" (quoting Alexander v. Nat'l Farmers Org., 687 F.2d 1173, 1205 (8th Cir. 1982))) (alteration in original); see also Computer Assocs. Int'l, Inc. v. Am. Fundware, Inc., 133 F.R.D. 166, 170 (D. Colo. 1990).

Defendants also point out that there may be other sources for the same evidence, such as examining the ER-Recorder server, which might shed light on what files were transferred from it to the AS-Nevada server, or the virtualized server containing all the files from the AS-Nevada server before it was scrubbed. Plaintiff responds that the virtualized server would only contain files that existed on the AS-Nevada server, not the traces of previously-deleted files that might have been discovered on the physical server.***

Defendants scrubbed a server that they had a duty to preserve and produce to plaintiff. The server was related to the merits of the action, and plaintiff has almost certainly been prejudiced by its destruction. The spoliation, combined with other deceptive discovery practices by defendants, indicates that without some sort of sanction, a fair and just resolution of the action will be impossible.

6. Evidentiary Sanctions [Adverse Inference]

"[A] party seeking an adverse inference instruction based on the destruction of evidence must establish (1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense." In re Napster, Inc. Copyright Litig., 462 F. Supp. 2d 1060, 1078 (N.D. Cal. 2006) (quoting Hamilton v. Signature Flight Support Corp., No. C 05-0490, 2005 WL 3481423, at *3 (N.D. Cal. Dec. 20, 2005)).

As discussed above, defendants had an obligation to preserve the AS-Nevada server at the time it was destroyed, and they willfully destroyed it. In addition, information on the server was relevant to the action. By instructing the jury that it may infer the truth of what plaintiff might have been able to prove, under the best case scenario, if the evidence had not been destroyed, the court believes it can cure any prejudice resulting from defendants' spoliation of the evidence. Therefore, the court will instruct the jury to the effect that it may infer that any files on the ER-Recorder server were transferred to the AS-Nevada server. The precise wording of the instruction will be determined at trial.