Court has Broad Discretion to Fashion Sanctions for Breach of Discovery Obligations

Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99 (2d Cir. 2002)

The litigation involved cross claims for, among other things, breach of contract stemming from events occurring in late 1998. At a discovery planning conference, the parties agreed that discovery would be completed by August 1, 2001, and the case would be ready for trial by September 1, 2001. Defendant’s discovery requests sought the production of email; plaintiff raised no objection to the requests and agreed to “work diligently” to produce the responsive email. 306 F.3d at 102.

Subsequently, plaintiff encountered difficulties in retrieving the email from backup tapes. Throughout the summer, plaintiff made a series of inaccurate or misleading representations about the status of the production and when the email would be produced. On several occasions plaintiff indicated it had retained, or was going to retain, an outside vendor to assist with the recovery of email. When defendant offered to attempt the recovery through its own experts, the plaintiff refused to provide the tapes. When plaintiff eventually did produce email, none were from the critical factual time period. Plaintiff explained the void by stating that responsive email either did not exist or was not accessible.

Ultimately, the plaintiff agreed to produce the backup tapes so that the defendant could search for email from the critical time period. Three days before trial was to begin, plaintiff finally produced the tapes, but refused to provide information about the tapes’ technical characteristics. Only after defendant brought the matter before the court did plaintiff agree to provide the information. Within four days of obtaining the tapes, the defendant’s vendor had located almost a million emails on the November and December 1998 tapes. Of the 4,000 emails that were printed, approximately 30 emails were responsive, though none appeared to be damaging to the plaintiff. Id. at 104-5.

Defendant moved for sanctions and asked the judge to instruct the jury that it should presume the emails during the critical time period, which were not produced, would have disproved plaintiff’s theory of the case. The trial court denied defendant’s motion, concluding that it had not established that the plaintiff had acted with bad faith or gross negligence. The court found that plaintiff’s decision to use an outside vendor to retrieve the emails rather than turn over the backup tapes was ” neither implausible nor unreasonable.” Id. at 105. Further, although she recognized that plaintiff’s subsequent conduct “‘suggests a somewhat purposeful[] sluggishness on [plaintiff’s] part,'” the trial judge found that plaintiff’s acts “would not have resulted in the unavailability of the evidence absent the ‘compressed timeline both parties were operating under.'” Id. at 105-6

On appeal, the court vacated the order denying defendant’s motion for sanctions, finding that the district court had applied the wrong legal standard. It remanded with instructions for a renewed hearing on the matter. Stating the correct legal standard to be applied, the court held:

1. where, as here, the nature of the alleged breach of a discovery obligation is the non-production of evidence, a District Court has broad discretion in fashioning an appropriate sanction, including the discretion to delay the start of a trial (at the expense of the party that breached its obligation), to declare a mistrial if trial has already commenced, or to proceed with a trial with an adverse inference instruction;
2. discovery sanctions, including an adverse inference instruction, may be imposed where a party has breached a discovery obligation not only through bad faith or gross negligence, but also through ordinary negligence;
3. a judge’s finding that a party acted with gross negligence or in bad faith with respect to discovery obligations is ordinarily sufficient to support a finding that the missing or destroyed evidence would have been harmful to that party, even if the destruction or unavailability of the evidence was not caused by the acts constituting bad faith or gross negligence; and
4. in the instant case, the District Court applied the wrong standard in deciding [defendant’s] motion for sanctions.

   Id. at 101. The court also questioned a number of the district court’s factual findings. It noted that the plaintiff had offered conflicting testimony about the precise timing of plaintiff’s decision to hire an outside vendor, and the actual hiring of the vendor. The court questioned the reasonableness of plaintiff’s continued reliance on the outside vendor throughout months of apparently fruitless attempts to retrieve the critical emails, in light of the ability of defendant’s vendors to retrieve those emails in just four days. The court also noted that the record contained a number of careless, if not misleading, statements by the plaintiff to defendant and to the court regarding the effort to retrieve the email. Finally, the court observed:

   [W]e are uncertain whether the District Court appreciated that as a discovery deadline or trial draws near, discovery conduct that might have been considered “merely” discourteous at an earlier point in the litigation may well breach a party’s duties to its opponent and to the court. In the circumstances presented here – i.e., trial was imminent and [plaintiff] had repeatedly missed deadlines to produce the e-mails – [plaintiff] was under an obligation to be as cooperative as possible. Viewed in that light, [plaintiff’s] “purposefully sluggish” acts – particularly its as-yet-unexplained refusal to answer basic technical questions about the tape until prompted to do so by the District Court – may well have constituted sanctionable misconduct in their own right.

   Id. at 112 (emphasis in original).