Blue Sky Travel and Tours, LLC v. Aqeel, 2015 U.S. App. LEXIS 5166 (4th Cir. Mar. 31, 2015):

In this appeal concerning the breach of an oral contract, we consider whether the district court erred in denying the defendants' motion for judgment as a matter of law asserting a defense of the statute of frauds. We also consider [*2]  whether the district court abused its discretion in affirming the magistrate judge's imposition of an evidentiary sanction after determining that the defendants spoliated evidence.  Upon our review, we conclude that the district court did not err in rejecting the defendants' defense of the statute of frauds. However, on the sanction issue, we hold that the court applied an incorrect legal standard in concluding that the defendants spoliated evidence, and we remand the matter to the district court for application of the correct legal standard and further factual development. Accordingly, we affirm in part, and vacate in part, the district court's judgment, and remand the case for further proceedings.

I.

This case involves a breach of contract dispute between two travel agencies and their respective principals. Dr. Nasser Aqeel Al Tayyar (Nasser) is the founder and vice chairman of the "Al Tayyar Group" (ATG), a large travel agency based in the Kingdom of Saudi Arabia (Saudi Arabia). ATG has a contract with  the Ministry of Higher Education of Saudi Arabia (the Ministry), under which ATG facilitates the travel of Saudi students outside Saudi Arabia whose travel arrangements are [*3]  paid by the Ministry.

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At the conclusion of the hearing [on spoliation], the magistrate judge  determined that additional sanctions were appropriate because ATG "completely failed to fulfill [its] obligation[] to preserve documents subsequent to the initiation of this litigation." The magistrate judge held that entry of default judgment was not warranted, but that the jury would be given an adverse instruction permitting the jury to presume that ATG made $20 million in profits in reselling to the Ministry the tickets originally purchased by Blue Sky.

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We next address ATG's argument that the district court abused its discretion by upholding the evidentiary sanction issued against ATG on the ground of spoliation.¹⁰ ATG asserts that the magistrate judge and the district court applied an incorrect legal standard concerning ATG's document preservation obligations in concluding that ATG destroyed documents that it had a duty to preserve. Blue Sky argues in response that the sanction was imposed on the basis of general discovery violations rather than spoliation, and that ATG waived any objections to the magistrate judge's holdings. We disagree with  Blue Sky's arguments.

10  Spoliation refers to the destruction or material alteration of evidence or to the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation." Silvestri v. Gen. Motors Corp. , 271 F.3d 583, 590 (4th Cir. 2001) (citation omitted). 18

We find no merit in Blue Sky's argument that the sanction at issue was imposed for general discovery abuses rather than for sanction was imposed on the basis of general discovery violations rather than spoliation, and that ATG waived any objections to the magistrate judge's holdings. We disagree with  Blue Sky's arguments. of evidence. The magistrate judge stated in the order imposing the adverse jury instruction that the sanction was being imposed "[f]or reasons stated from the bench" at the September 2013 hearing. Unmistakably, the reasons given by the magistrate judge from the bench at [*23]  that hearing addressed spoliation. The magistrate judge stated that the hearing was being held to determine whether ATG spoliated evidence, set forth his view of the legal standard applicable to spoliation, and applied that standard in concluding that ATG "completely failed to fulfill [its] obligation[] to preserve documents subsequent to the initiation of this litigation." ... It was on that basis, rather than on the mere failure to produce the documents or because of any other discovery failures, that the magistrate judge decided to impose the sanction at issue.

Similarly, we find no merit in Blue Sky's argument that the district court's affirmance of the magistrate judge's sanction order was not based on the magistrate judge's spoliation holding. In affirming the adverse jury instruction sanction, the district court noted the possibility that ATG's actions may have "entirely eliminated" Blue Sky's ability to establish its damages for lost profits. The court's use of the term "eliminated" indicates that it was ATG's failure to preserve the documents, rather than ATG's mere failure to timely produce  them, that justified the extreme sanction in the court's view.  Moreover, [*24]  the district court did not make an express statement that the court was affirming the sanction on a basis independent  from the magistrate judge's analysis. To the contrary, the court grounded its holding on the magistrate judge's decision, concluding that ATG failed to show that "the Order of the Magistrate Judge with respect to damages was clearly erroneous or contrary to law." Accordingly, we conclude that the district court affirmed the sanction order for the reason provided by the magistrate judge, namely, spoliation of evidence.

We also disagree with Blue Sky's argument that ATG waived its appeal of the sanction order. Although a party's failure to file timely exceptions under Rule 72 to a magistrate judge's order waives the party's right to appeal that order, Wells v. Shriners Hosp. , 109 F.3d 198, 201 (4th Cir. 1997), ATG timely 20  filed such exceptions to the magistrate judge's spoliation finding and imposition of the adverse jury instruction.¹¹

We proceed to analyze for abuse of discretion the sanction imposed on ATG for spoliation. Silvestri v. Gen. Motors Corp. , 271 F.3d 583, 590 (4th Cir. 2001). Among other circumstances, a court abuses its discretion when it bases its ruling on an erroneous principle of law. Georgia Pac. Consumer Prods., LP v. Von Drehle Corp. , 710 F.3d 527, 533 (4th Cir. 2013).

A party may be sanctioned for spoliation [*25]  if the party (1) had a duty to preserve material evidence, and (2) willfully engaged in conduct resulting in the loss or destruction of that evidence, (3) at a time when the party knew, or should have known, that the evidence was or could be relevant in litigation. Turner v. United States , 736 F.3d 274, 282 (4th Cir. 2013). In the present case, neither the magistrate judge nor the district  court made the crucial finding whether ATG destroyed or failed  to preserve the evidence at issue, despite having known or  should have known that the evidence could be relevant in the  case. See Silvestri , 271 F.3d at 591; see also Turner , 736 F.3d  at 282.

Instead, the magistrate judge held that once litigation began, ATG had a duty to stop its document retention policies "and to preserve all documents because you don't know what may or may not be relevant." (Emphasis added). The standard applied by the magistrate judge constituted an abuse of discretion, because a party is not required to preserve [*26]  all its documents but rather only documents that the party knew or should have known were, or could be, relevant to the parties' dispute. See Turner , 736 F.3d at 282. Further, the district court's imposition of the sanction based on spoliation created  severe prejudice, because the evidentiary presumption  effectively relieved Blue Sky of its burden to prove its damages  claim for lost profits.

 Accordingly, applying the principles expressed in Turner , we conclude that two unresolved issues are essential to the spoliation analysis and should be addressed in the first  instance by the district court. First, the district court should ascertain the date by which ATG knew or should have known that invoices relating to other vendors could be relevant in the  case. Second, the district court should establish when ATG  destroyed the invoices from the other vendors. The  determination whether ATG committed spoliation will rest in large part on the district court's findings regarding these two questions.

  On remand, therefore, the district court should determine whether ATG spoliated evidence, what sanctions, if any, are appropriate, and whether a new trial on lost profits damages is necessary. However, because [*27]  the spoliation sanction did not have a material impact on the liability proceedings before the jury, a new trial will not be required on the issue of liability, or on the jury's award of $1,940,050.89 in other damages.