Spoliation Sanctions — Sixth Circuit Test — To Prove Relevance, Movant Must Show Destroyed Evidence Was of Nature Alleged, Not Just Satisfy Rule 401 — Meaning of Abuse of Discretion

Yoder & Frey Auctioneers, Inc. v. EquipmentFacts, LLC, 2014 U.S. App. LEXIS 24301 (6th Cir. Dec. 22, 2014):

Defendant, EquipmentFacts, LLC ("Efacts"), appeals from the judgment entered by the United States District Court for the Northern District of Ohio imposing liability and damages in a civil suit brought by Plaintiffs, Yoder & Frey Auctioneers, Inc. (Yoder & Frey) and RealtimeBid.com, LLC ("RTB"). Specifically, Efacts appeals from the district court's denial of spoliation sanctions; denial of hearsay objections to various documents produced by internet service providers; denial of summary judgment and judgment [*2]  as a matter of law on Plaintiffs' Computer Fraud and Abuse Act ("CFAA") claim; and imposition of sanctions under Federal Rule of Civil Procedure 37. For the reasons set forth below, we AFFIRM the district court's decisions.

I. BACKGROUND

Yoder & Frey is an Ohio company that hosts auctions for used construction equipment. Its largest and most profitable auction is held annually in Florida. Efacts is a New Jersey company owned by Lawrence Garafola that provides auctioneers with online bidding platforms. In 2003, Yoder & Frey began offering the opportunity for buyers to submit live bids over the Internet during the Florida auction, and it contracted with Efacts to provide online bidding services for that purpose. As part of this relationship, Efacts received, stored, and maintained confidential customer information relating to Yoder & Frey's auctions. In early 2008, however, the companies had an acrimonious falling out and Yoder & Frey terminated the contract.

At this point, Yoder & Frey hired RTB, another online bidding services company. RTB created a custom online auction platform and used that software during Yoder & Frey's Florida auction in 2010, which took place from February 8 through February 16, 2010. As part of [*3]  its services, RTB accepted online bidder applications and, in conjunction with Yoder & Frey, reviewed and approved prospective bidders who wished to participate in the auction.

At trial, Plaintiffs presented evidence that on February 7, 8, and 9, 2010, Efacts accessed the RTB bidding platform without authorization by utilizing an RTB administrative username ("test") and password ("test"). The platform recognized this administrative login as bidder number 100051. Specifically, it was Efacts' owner Garafola who improperly accessed the auction. He was aware of the username and password combination from Efacts' prior relationship with Yoder & Frey. Bidder number 100051 submitted two winning bids with a combined price of $41,000 for which it did not pay.

Plaintiffs also put forth evidence that on February 10 and 11, 2010, an Efacts employee gained unauthorized access to the RTB auction platform by posing as one of Yoder & Frey's customers, Allied Erecting.1 During the auction, "Allied Erecting" was assigned bidder number 102703. In that two-day span, the employee placed eighteen winning online bids with a combined purchase price of $1,212,074 for which neither she nor Efacts paid.

1   The actual [*4]  customer neither authorized nor knew of the use of its name and information. The employee registered for the online auction posing as this customer using information learned from Efacts' prior relationship with Yoder & Frey.

Plaintiffs only learned of Efacts' unauthorized access after contacting Allied Erecting for payment of the eighteen items. Allied Erecting informed Yoder & Frey that it had not registered for the 2010 auction and had not placed any bids. After an exhaustive probe by Plaintiffs, it was confirmed that Allied Erecting had not registered and did not bid on the items, but that someone using Allied Erecting's information had gained access to and participated in the auction.

Knowing only that bidder numbers 102703 and 100051 had placed winning bids, Plaintiffs first had to determine the IP addresses from which the bids had been placed. To obtain this information, Justin Clark, who worked for both Yoder & Frey and RTB, contacted Rich Mavrogeanes, the owner of the server hosting the auction. Clark requested, and Mavrogeanes supplied, all the data from the server regarding the auction from February 6 through February 13, 2010, a total of over 35 million lines of information. [*5]  The parties refer to this information as the IIS log or the digital log. It contained a record of all activity that took place on the online bidding system during the relevant time period.

Clark searched the digital log using various key words, including the two bidder numbers, the usernames and passwords for the two bidder numbers, and "Allied ER." During this investigation, Clark identified ten IP addresses that were associated with winning bids and other auction activity. Having identified ten suspicious IP addresses, subpoenas were issued to internet service providers ("ISPs") Covad, Century Link, and two Verizon companies, based on the dates and times that each bidding session started for each IP address. All ten IP addresses, including those utilized during the sessions when winning bids were placed, were traced to Efacts.

Upon learning this information, Yoder & Frey and RTB filed suit against Efacts. Following a jury trial of this cause, a verdict was rendered in Plaintiffs' favor. This timely appeal followed.

II. DISCUSSION

A. Spoliation Sanction

We review a district court's decision whether to impose a spoliation sanction for an abuse of discretion. Adkins v. Wolever, 692 F.3d 499, 503 (6th Cir. 2012) (hereinafter, Adkins II). "A [*6]  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." Jones v. Ill. Cent. R. Co., 617 F.3d 843, 850 (6th Cir. 2010) (internal quotation marks omitted).

"[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). A party seeking a spoliation sanction because evidence was destroyed 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." Beaven v. U.S. Dep't of Justice, 622 F.3d 540, 553 (6th Cir. 2010) (internal quotation marks omitted).2 A district court "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." Automated Solutions Corp. v. Paragon Data Sys., Inc., 756 F.3d 504, 513 (6th Cir. 2014) (internal quotation marks omitted). The severity of sanction issued is determined on a case-by-case basis, depending in [*7]  part on the spoliating party's level of culpability. Flagg v. City of Detroit, 715 F.3d 165, 178 (6th Cir. 2013).

2   This test is conjunctive; accordingly, as long as the district court correctly concluded that the moving party did not satisfy at least one of the test's prongs, its determination that a spoliation sanction should not issue cannot be upset. Adkins II, 692 F.3d at 504.

In its motion in limine, its motion for reconsideration, and again in its post-trial Rule 50 motion for judgment as a matter of law, Efacts argued that the software and hardware RTB used during the Florida auction, and the original logs those systems produced, were essential pieces of evidence. Efacts denied placing the false bids, contested the accuracy and reliability of the RTB system and its logs, and raised the possibility that the system was infected by a virus or otherwise corrupted. Efacts contends that the destruction of the software, hardware, and logs severely hampered its ability to defend itself.

The district court, after recounting the elements of the Beaven test, denied the motion on the basis that Efacts had not made a sufficient showing of relevance. Specifically, the court held that Efacts "needed to show that what it would discover was actually relevant, not just that it may have [*8]  found relevant material if it uncovered a defect in the plaintiffs' software system." Yoder & Frey Auctioneers, Inc. v. EquipmentFacts, LLC, 2013 WL 6180696, at *1 (N.D. Ohio Nov. 25, 2013). The district court never made an explicit finding on the first two prongs of the Beaven test.

To establish relevance under Beaven, the moving party must make "some showing indicating that the destroyed evidence would have been relevant to the contested issue." 622 F.3d at 554. In this context, we have held that "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.

Automated Solutions, 756 F.3d at 514 (internal quotation marks omitted; brackets in original). To make this showing, the moving party "may rely on circumstantial evidence to suggest the contents of destroyed evidence." Beaven, 622 F.3d at 555.

As previously discussed, Efacts argues that because it only had access to the digital copy of the logs and not the underlying evidence, it was unable to properly challenge Plaintiffs' claims and determine whether the RTB system accurately and reliably recorded associations between specific bids and IP addresses. [*9]  Before the district court, Efacts pointed out that RTB's auction platform was a "prototype" and that bugs and errors are to be expected in any new software. It also made much of the fact that the system may have had security vulnerabilities and was "fully exposed to the public internet." ... However, the testimony Efacts cited for these propositions does not bear out its claims. The third-party software developer expressed full confidence in RTB's system's ability to accurately log bids placed during the auction and explained that it was protected by a firewall and sophisticated antivirus software.

Whether Efacts presented evidence whereby the jury could infer that the auction platform was error-prone is a question of fact. The district court implicitly found that conjecture does not constitute evidence, and that Efacts did not otherwise provide any evidence for a reasonable trier of fact to infer that the RTB system was faulty or corrupted. Because this finding was not clearly erroneous, we will not disturb the district court's determination that a spoliation sanction was unwarranted.

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