Spoliation — Sixth Circuit Standards — Relevance = More Than Rule 401 — Definition of Abuse of Discretion — Back-Up Tapes Used Only for Disaster Recovery May Be Recycled — Intentional Destruction after Duty Attaches Is Willful

Automated Solutions Corp. v. Paragon Data Sys., 2014 U.S. App. LEXIS 11918 (6th Cir. June 25, 2014):

"A federal court's inherent powers include broad discretion to craft proper sanctions for spoliated evidence." Adkins v. Wolever, 554 F.3d 650, 651 (6th Cir. 2009) (en banc) (hereinafter, "Adkins I"). We review a district court's decision whether to impose sanctions for abuse of discretion. Jones v. Ill. Cent. R.R. Co., 617 F.3d 843, 850 (6th Cir. 2010). "A court abuses its discretion when it commits a clear error of judgment, such as applying the incorrect legal standard, misapplying the correct legal standard, or relying upon clearly erroneous findings of fact." Id. (citation omitted). The severity of a sanction often depends on the party's fault. Adkins I, 554 F.3d at 652-53. However, "the fact-intensive inquiry into a party's degree of fault is for a district court" to determine, and we recognize that district courts enjoy relatively broad discretion in this area. Id. at 653. District courts may "impose many different kinds of sanctions for spoliated evidence, including dismissing a case, granting summary judgment, or instructing a jury that it may infer a fact based on lost or destroyed evidence." Id.

[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  [*16] it at the time it was destroyed; (2) that the records were destroyed with 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.

Beaven v. U.S. Dep't of Justice, 622 F.3d 540, 553 (6th Cir. 2010) (citation omitted). "The test prescribed in Beaven is conjunctive; thus, so long as the district court did not err in determining that [a party] had not satisfied at least one of the prongs, its determination that a spoliation sanction was not warranted should not be upset." Adkins v. Wolever, 692 F.3d 499, 504 (6th Cir. 2012) (hereinafter, "Adkins II"). "Whether an adverse inference is permissive or mandatory is determined on a case-by-case basis, corresponding in part to the sanctioned party's degree of fault." Flagg v. City of Detroit, 715 F.3d 165, 178 (6th Cir. 2013).

On appeal, ASC raises a host of arguments that the district court abused its discretion by denying ASC's motion for sanctions against Paragon. Specifically, ASC asserts that on the basis of Paragon's alleged violations,  [*17] the district court should have terminated the case, entered judgment in ASC's favor, sanctioned Paragon's attorneys, and awarded ASC attorneys' fees. Each of ASC's discovery arguments is addressed in turn.

1. Anderson's Hard Drive and the Sun Server

Regarding both Anderson's hard drive and the Sun Server, the magistrate judge concluded, and the district court agreed, that Paragon had a duty to preserve these pieces of evidence, and that it was negligent in failing to do so. Nevertheless, the magistrate judge and the district court found that ASC had not met its burden in showing that the Sun Server and Anderson's hard drive contained evidence relevant to this litigation. ASC disputes the district court's finding that the Sun Server and hard drive did not contain relevant evidence, and argues that it made a "compelling showing" that information relevant to its claims would have been found in the Anderson hard drive and the Sun Server, had Paragon not discarded them.

In this context, "relevant" means: "something more than sufficiently probative to satisfy Rule 401 of the Federal Rules of Evidence. Rather, the party seeking an adverse inference must adduce sufficient evidence from which a reasonable trier of fact could infer that the destroyed [or unavailable] evidence would have been of the nature alleged by the party affected by its destruction." One Beacon Ins. Co. v. Broad. Dev. Group, Inc., 147 F. App'x 535, 541 (6th Cir. 2005) (quoting Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 108-09 (2d Cir. 2002)) (brackets in original, internal quotation marks omitted).2 "A party seeking an adverse inference may rely on circumstantial evidence to suggest the contents of destroyed evidence." Beaven, 622 F.3d at 555 (citation and brackets omitted).

2.  We note that a new version of Fed. R. Civ. P. 37(e), which would require a higher burden of proof for an adverse inference instruction, is under consideration by the relevant Rules Committees.

ASC does not cite any evidence that suggests that either Anderson or the Sun Server that he worked on were used to develop the DRACI software. ASC repeats its assertions (and the magistrate judge agreed) that Paragon was under a duty to preserve the hard drive and the Sun Server and that Paragon was negligent in failing to preserve both pieces of equipment.  [*19] However, whether Paragon was negligent in failing to preserve the Sun Server and hard drive does not advance a showing of relevance, which is a necessary finding for the district court to impose sanctions. To the extent that ASC cites a transcript of an interview that its investigator held with Anderson as support for its argument that Paragon used the SCDS as a model for DRACI, we note that the interview appears to have been highly suggestive, and in any event, Anderson's statements during the interview are unsworn, and thus of limited reliability. The district court did not clearly err in determining that a reasonable trier of fact could not find that the missing Anderson hard drive and Sun Server would support ASC's claims.

2. Paragon's Back-up Tapes

ASC argues that the magistrate judge improperly concluded that Paragon's back-up tapes were not subject to Paragon's duty to preserve evidence. ASC asserts that a back-up system used by Paragon from 2003-2005 should have been preserved and produced in the course of the instant litigation. According to Manias, Paragon used an "I-Omega" back-up system to insure that its electronically stored information would be recoverable in the event  [*20] of a problem with its main storage system. However, as part of this system, the back-up tapes were overwritten daily. At some point, the system failed, and Paragon discarded the back-up tapes because the information on the tapes was not retrievable.

The magistrate judge rejected ASC's assertion that the back-up tapes should have been subject to Paragon's duty to preserve. The magistrate judge reasoned that in Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003), the court noted that a "litigation hold does not apply to inaccessible backup tapes (e.g., those typically maintained solely for the purpose of disaster recovery), which may continue to be recycled on the schedule set forth in the company's policy." Id. at 218; see also Forest Labs., Inc. v. Caraco Pharm. Labs., LTD, No. 06-CV-13143, 2009 WL 998402, at *4 (E.D. Mich. April 14, 2009) (concluding that where defendants had offered no evidence that the tapes in question were maintained for any purpose other than disaster recovery, the tapes were not subject to the duty to preserve);  [*21] The Sedona Principles, Second Edition: Best Practices, Recommendations & Principles for Addressing Electronic Document Production at 35-36 (The Sedona Conference Working Group Series, 2007) available at https://thesedonaconference.org/download-pub/81 ("Absent specific circumstances, preservation obligations should not extend to disaster recovery backup tapes created in the ordinary course of business."). The magistrate judge criticized Paragon for not having a systematic document retention policy in place, but nevertheless concluded that because the only evidence in the record suggested that the back-up tapes were rewritten daily and used only for disaster recovery, they were not subject to Paragon's duty to preserve.

ASC argues that the magistrate judge did not properly apply Zubulake's reasoning because once Anderson and Atkin's hard drives failed, the back-up tapes became the only way to access Anderson and Atkin's information, and thus should have been preserved. See Zubulake, 220 F.R.D. at 218. However, this argument does not address the unrebutted facts that the back-up tapes were re-written daily and only used for disaster recovery.  Further, the only evidence before the magistrate  [*22] judge suggested that the back-up tapes failed and were effectively useless as a disaster recovery system. Although ASC asserts that once Anderson and Atkin's hard drives failed, Paragon should have immediately preserved the back-up tapes, there is no indication as to when the hard drives failed in relation to when the back-up tapes ceased working properly.

Even assuming that Paragon had retained the back-up tapes, it is not at all clear that useful evidence would have been gleaned from the tapes, or that any data would have been recoverable. Based on the evidence before it, we conclude that the  [*23] district court did not abuse its broad discretion in adopting the R&R's conclusion that the back-up tapes were not subject to Paragon's duty to preserve evidence.

3. Paragon's Culpability

ASC asserts that the magistrate judge wrongly found that Paragon's failure to preserve evidentiary items was "at most" negligent, rather than willful or grossly negligent. "The ultimate determination of culpability is within the district court's discretion so long as it is not a clearly erroneous interpretation of the facts. . . . Even if we were to disagree with the district court's ultimate conclusion on culpability, it does not necessarily follow that the district court's determination should be upset." Adkins II, 692 F.3d at 505-06.

ASC cites Pension Committee of University of Montreal Pension Plan v. Banc of America Securities, 685 F. Supp. 2d 456 (S.D.N.Y. 2010). In Pension Committee, the court stated that in the context of discovery misconduct: "Conduct is either acceptable or unacceptable. Once it is unacceptable the only question is how bad is the conduct." Id. at 463. The Pension Committee court placed great emphasis on Zubulake's effect on electronic discovery standards:

A failure to preserve evidence resulting in the loss or destruction of relevant information is surely negligent, and, depending on the circumstances, may be grossly negligent or willful. For example, the intentional destruction of relevant records, either paper or electronic, after the duty to preserve has attached, is willful. Possibly after October, 2003, when Zubulake IV was issued, and definitely after July, 2004, when the final relevant Zubulake opinion was issued, the failure to issue a written litigation hold constitutes gross negligence because that failure is likely to result in the destruction of relevant information.

Id. at 465 (footnotes omitted) (emphasis in original). The Pension Committee court further stated that: "Relevance and prejudice may be presumed when the spoliating party acted in bad faith or in a grossly negligence manner." Id. at 467. ASC cites Pension Committee's language to argue that the magistrate judge misapplied the relevant law, and thus abused his discretion, by concluding that despite Paragon's lack of any systematic document retention system, its conduct was merely negligent, rather than willful or  [*25] grossly negligent. ASC therefore argues that the relevance of Paragon's spoliated evidence is therefore presumed, making it a further abuse of discretion for the district court to deny severe sanctions for Paragon's conduct.

There is reason to doubt Pension Committee's persuasive effect. To begin with, the Second Circuit directly criticized Pension Committee's broad language: "We reject the notion that a failure to institute a 'litigation hold' constitutes gross negligence per se." Chin v. Port Auth. of N.Y & N.J., 685 F.3d 135, 162 (2d Cir. 2012).  The Second Circuit reasoned instead that "the better approach is to consider [the failure to adopt good preservation practices] as one factor in the determination of whether discovery sanctions should issue[,]" and that a finding of gross negligence does not mandate an adverse inference instruction. Id. (quotation marks omitted). Rather, "[the Second Circuit has] repeatedly held that a case-by-case approach to the failure to produce relevant evidence, at the discretion of the district court, is appropriate." Id. (quotation marks omitted).

This case-by-case approach is the law in our circuit as well. We recognize that district courts are best  [*26] positioned to adjudicate discovery disputes, as they have the most contact with the parties, the personalities, and the litigation. We have previously characterized the inquiry into a party's degree of fault as "fact-intensive" and within the "broad discretion" of the district courts. Adkins, 554 F.3d at 653. Additionally, we have declined to impose bright-line rules, leaving it instead to a case-by-case determination whether sanctions are necessary, and if so, what form they must take. See Flagg, 715 F.3d at 178. Thus, the appropriate inquiry on appeal is whether the district court committed a "clear error of judgment," not a de novo fact-based determination of which party was more at fault. Jones, 617 F.3d at 850. Our review of the record in this case demonstrates that there was ample support for the district court's determination that Paragon was at most negligent.

The magistrate judge first noted an affidavit from Manias, who attested that Paragon never intentionally withheld or destroyed evidence, and at all times complied in good faith with its discovery obligations. Manias also stated that Paragon is a small  [*27] company with only eleven employees. Additionally, Paragon submitted affidavits from many of its prior attorneys in both the state and federal ligation, all attesting that they were not aware of any evidence withholding, and that they believed Paragon's discovery responses were truthful and accurate when they were made. Despite ASC's attempts to cast doubt on the notion that Paragon and its counsel acted in good faith, it did not submit any evidence suggesting that Paragon willfully withheld evidentiary material.

This is not to say that we applaud Paragon's conduct in this litigation. As ASC repeatedly points out in its brief, Paragon is an information-technology company, and thus could be expected to have a better-than-average understanding of electronic discovery and the necessity for functioning back-up tapes and the preservation of data. Paragon's behavior was negligent; but we are unwilling to say that the district court abused its discretion in determining that it was not grossly so.  Instead, after considering all of the evidence before it, the district court determined that severe sanctions were improper. Given the support found in the record for this determination, the district  [*28] court did not commit a clear error of judgment, and thus, did not abuse its discretion in finding that Paragon was negligent.

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