E-Discovery Update: Changes to Rule 37’s Failure-to-Preserve-ESI Sanctions Impact Recent Rulings

Changes to Rule 37’s Failure-to-Preserve-ESI Sanctions Impact Recent Rulings

March 1, 2016

For years, companies have battled different sanction standards for the failure to preserve documents. This led to over-preservation, where, to avoid accusations of “negligent” failure, companies preserved every shred of potentially relevant material. Now that Rule 37 of the Federal Rules of Civil Procedure has been amended to impose more stringent standards, the tide is shifting, at least in federal court. Effective December 1, 2015, Rule 37(e) was amended and now states:

If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be re-stored or replaced through additional discovery, the court:

(1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or

(2) only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation may:

(A) presume that the lost information was unfavorable to the party;

(B) instruct the jury that it may or must presume the information was unfavorable to the party; or

(C) dismiss the action or enter a default judgment.

In Nuvasive v. Madsen, the Southern District of California reversed course on a previously decided sanctions ruling, after reconsidering the matter under the new rules. Nuvasive, Inc. v. Madsen Med., Inc., 2016 U.S. Dist. LEXIS 8997 (S.D. Cal., January 26, 2016). In that case, Nuvasive unintentionally failed to preserve certain text messages that were potentially relevant to Madsen’s counterclaim. In July 2015, the court granted Madsen’s motion for sanctions for Nuvasive’s spoliation of electronically stored information (ESI) and awarded a permissive adverse inference instruction. Following the amendment to Rule 37(e), the court reconsidered its ruling, and vacated its sanctions order due to lack of evidence of intentional spoliation. The court said, however, evidence could be introduced on spoliation at trial (although no adverse inference instruction would be given).

A similar result occurred in Securities and Exchange Commission v. CKB168 Holdings, LTD, No 13-CV-5584 (RRM) 2016 U.S. Dist. LEXIS 16533 (E.D. N.Y. Feb. 2, 2016). In November 2015, the Eastern District of New York found that the defendants were grossly negligent for failing to preserve materials or, alternatively, found that defendants’ refusal to confirm the materials never existed was bad faith. Accordingly, the court ordered an adverse inference instruction. On February 2, 2016, following the amendment to Rule 37(e), the court modified its earlier findings and denied the Securities and Exchange Commission’s (SEC’s) amended motion for sanctions, without prejudice. The court granted the SEC the right to renew the motion, should the case proceed to trial, to attempt to make the requisite showing of intent.

Thus, the change to Rule 37(e) is making a significant impact in at least some cases.