Finding Terminating Sanctions Against Defendant “A Close Call,” Court Imposes Negative Inferences for Bad Faith Spoliation of Damaging Email, Awards Attorneys’ Fees and Costs, and Issues Stern Warning

Adams v. Gateway, Inc., No. 2:02-CV-106 TS (D. Utah Mar. 6, 2006) (memorandum decision and order on de novo review of magistrate judge’s reports and recommendations and imposing sanctions)

In this patent case, the U.S. District Court judge adopted two (sealed) Reports and Recommendations prepared by the magistrate judge which found that the defendant had spoliated and failed to disclose evidence, and recommended the imposition of sanctions. Issued under seal on March 6, 2006, the court’s decision adopting the magistrate’s recommendations was unsealed on March 22, 2006.

In his Spoliation Report, the magistrate considered a list of nine items of evidence formerly in defendant’s control that are now missing. He found that the loss of all nine items was prejudicial to the evidentiary record, and that two of them were “evidence that is clearly central to this case and their absence is not ‘remediated or minimized by other evidence.'” One was an email from Charlie Ma to Y.C. Woon.

Defendant admitted that the evidence was missing, but contended that no sanctions were warranted because it did not intentionally destroy the evidence and plaintiff was not prejudiced. It further argued that even if those findings were made, the recommended sanctions were too severe.

Considering the entire record de novo, as well as documents that were provided after the magistrate’s report, the court found that defendant had intentionally destroyed or lost the missing Ma to Woon email. “While the Magistrate did not go that far, this Court does. It is the only interpretation of the entire record of the discovery in this case that makes sense.” The court conceded there was no “direct evidence” of bad faith destruction, but also noted that there was no evidence that it was merely innocently or negligently lost. It found there was “ample circumstantial evidence of bad faith spoliation.” It described the evidence as follows:

The circumstantial evidence includes the information received since the filing of the Spoliation Report regarding a different e-mail – the January 11, 2001 DeRusso to Holstein e-mail – a complete hard copy of which was finally produced by a former employee and which showed incriminating information. As is the case with the Ma to Woon e-mail, Gateway had no explanation as to why it did not have a copy of the complete January 11, 2001 DeRusso to Holstein e-mail. When finally disclosed to the Court, that missing e-mail was accompanied by a stack of Declarations setting forth information that Gateway’s employees and attorneys claim they had previously forgotten, but were reminded of by the re-discovered e-mail. . . . [T]his sequence of events shows the pattern of Gateway’s failure to comply with discovery orders and its willingness to hide important evidence. When viewed against Gateway’s total inability to account for what became of the crucial Ma to Woon e-mail, this pattern of behavior is circumstantial evidence of Gateway’s bad faith spoliation of e-mail.

The court continued:

Going over the entire history of the attempt to discover the e-mail chain that placed the [patented software] in Gateway’s possession at the time of alleged infringement, the Court finds that it is clear that for years Gateway did everything it could to avoid producing complete copies of all of the relevant e-mails. There is no explanation of the reason that this crucial e-mail is missing. Based upon the entire record, this Court concludes that the explanation is that it was destroyed in bad faith by Gateway.

The court concluded that an evidentiary inference that the missing Ma to Woon email would have been favorable to the plaintiff was warranted. As to the other missing evidence, the court stated it would determine at trial whether to impose an adverse inference for such evidence. In addition, the court found that an appropriate sanction should include imposition of attorneys’ fees and costs for all of the proceedings related to the spoliation issue.

The magistrate’s second Report and Recommendation (the “Detector Report”), found that defendant had failed to comply with an order that it provide a complete accounting of the possession, use or transmittal of the patented software at issue in the case, and that defendant had improperly used a consulting expert designation and otherwise improperly used claims of privilege to hide non-privileged evidence. Again, the court agreed with the magistrate’s findings and conclusions, and ordered that the defendant would be prohibited from asserting the attorney-client or work product privileges as to certain specified documents and testimony.

The court further stated that terminating sanctions were “a close call,” but were not appropriate here because: (1) defendant was not warned in advance of such a possibility; (2) the sanctions of evidentiary inferences and imposition of attorneys’ fees and costs constituted an appropriate remedy more tailored to the violation and less drastic than dismissal; and (3) although the spoliation of evidence made it more difficult and expensive for plaintiff to make his case, it had not destroyed his ability to do so, as long as there was an appropriate inference.

Finally, the court warned the defendant that terminating sanctions could be imposed in the event defendant’s discovery misconduct continued. “It is a sorry day when this Court finds it necessary to issue such a warning, but Gateway and its counsel should consider themselves warned.” Thus, the court’s order included the following paragraph:

ORDERED that Gateway and its counsel are warned that if more evidence of a central nature is missing for any reason or is tardily disclosed, impairing the ability of the Court to adjudicate the parties’ rights, entry of judgment against Gateway may be an appropriate remedy. Further, Gateway is warned that conduct which impedes the disclosure or discovery of relevant evidence may also result in dismissal of its counterclaims, striking some defenses or claims, or the entry of conclusive findings on discrete issues.

A copy of the full decision is available here, and the order to unseal here.