Sanctions Imposed for Loss of ESI Transferred in Sale of Business

ILWU-PMA Welfare Plan Bd. of Trs. v. Connecticut Gen. Life. Ins. Co., No. C 15-02965 WHA, 2017 WL 345988 (N.D. Cal. Jan. 24, 2017)

In this case, ESI was lost when Defendant’s parent company sold another of its companies—on whose servers Defendant’s ESI was inexplicably stored—resulting in the transfer of that company’s servers and the ESI thereon to the third-party buyer. Concluding that Defendant failed to take reasonable steps to preserve the at-issue data, the court rejected Defendant’s argument that clauses in the sale agreement providing for “reasonable access to business information” including for “litigation purposes” and requiring the parties to retain information until the sixth anniversary of the agreement and not to destroy such information without notifying the other party were sufficient, particularly where despite such clauses, the information was not, in fact, available.  While the court concluded that additional information was required to proceed with a full Rule 37(e) analysis, it reopened discovery and ordered monetary sanctions to address the prejudice already established.

In this action for breach of duties under ERISA, Plaintiff and the at-issue defendant (“Defendant”), among others, entered into a tolling agreement, effective March 9, 2011, which, according to the court (despite Defendant’s disagreement), triggered the relevant parties’ duty to preserve. In 2012, Defendant’s parent company sold another of its subsidiaries, resulting in the transfer of the subsidiary’s servers and the ESI thereon to the third-party buyer.  Inexplicably, the servers contained Defendant’s ESI.  The sale agreement “provided for reasonable access to business information for both parties” including for “litigation purposes.”  The agreement also provided that “both parties would retain each others’ business information and, until the sixth anniversary of the agreement, not destroy any such information without first notifying the other party and giving it reasonable opportunity to take possession, at its own expense, of the information to be destroyed.”  Counsel for the buyer later attended court and represented that the buyer had complied with the relevant terms, despite Defendant’s representation to Plaintiff that it “may not” have access to the relevant servers and later representations that the buyer had none of Defendant’s data prior to September 2009.

When Plaintiff sought sanctions, the court concluded that Defendant failed to take reasonable steps to preserve the at-issue data, characterizing Defendant’s storage of ESI on an unrelated entity’s servers and the subsequent transfer of those servers to a third-party buyer as “inexplicable” and rejecting Defendant’s argument that the terms of the agreement were sufficient to fulfill its preservation obligation, reasoning in part that “as it turn[ed] out, those clauses [were] unable to effectuate prompt access to, and complete retrieval of” the ESI. The court also reasoned, among other things, that Defendant’s failure to retain copies of its ESI “undermine[d] its bold assertion that it ‘did everything it could reasonably have been expected to do’” and rejected the argument that making copies of the at-issue ESI would have risked breach of the sale agreement (“But even if the sale agreement somehow prevented Carewise from copying its own business records to preserve relevant information for reasonably foreseeable litigation, responsibility for such an obstacle would lie squarely with Carewise anyway insofar as it claims credit for negotiating the sale agreement with ADP.”). [Note: the court acknowledged some “apparent confusion” on the part of Defendant regarding who executed the sale agreement: “Setting aside for the time being, Carewise’s apparent confusion as to whether it . . . or its parent company executed the sale agreement . . .”]

Ultimately, the court concluded it was “difficult to proceed further with the Rule 37(e) analysis given the limited record” on the motion, including the lack of information regarding how the loss of ESI happened and the lack of clarity regarding whether the information could be retrieved, restored or replaced. Nonetheless, the court noted that “at least some prejudice” was already established and thus ordered that discovery be reopened to allow both parties to depose the third-party buyer regarding the extent of the loss of ESI and related issues and that Defendant pay Plaintiff’s reasonable attorney’s fees and cost incurred pursuant to the present order, all reasonable additional expert witness fees attributable to the delay in receiving ESI, and Plaintiff’s reasonable attorney’s fees and costs incurred in bringing the motion.  The court also suggested that Defendant consider joining the third-party buyer as a third-party defendant “so that Carewise may lay before the trier of fact any circumstances that might excuse or mitigate its failure to retain or retrieve relevant information for purposes of this litigation.”  The possibility of additional sanctions was left open.

A full copy of the court’s order is available here.