Timing is Everything: Court Declines to Impose Spoliation Sanctions where Critical Evidence was Destroyed Before Duty to Preserve Arose

U.S. v. Maxxam, Inc., 2009 WL 817264 (N.D. Cal. Mar. 27, 2009)

In this case, which arose from the joint purchase of the Headwaters Forest by the United States Government and the State of California, plaintiffs moved for sanctions due to the alleged spoliation of “critical” evidence by defendants Maxxam and Hurwitz.  Despite finding that “certain evidence was not preserved,” the court declined to impose spoliation sanctions where there was no evidence that the destruction was intentional and where, at the time of the destruction, there was no duty to preserve.

In the 1990’s, the U.S. Government and the State of California agreed to purchase the Headwaters Forest from Pacific Lumber, which had recently been taken over by defendant Maxxam, Inc., a company controlled by defendant Hurwitz.  As a condition of purchase, Pacific Lumber agreed to develop and implement a sustained yield plan (“SYP”) for its retained properties, subject to approval.  An SYP was prepared by Pacific Lumber’s consulting company, VESTRA, using computer modeling and was eventually approved.  Later, plaintiffs determined that the SYP was fraudulent in many respects and a lawsuit was filed in December 2006.

Plaintiffs’ lawsuit was not the first dispute surrounding the SYP.  In 1999, the Environmental Protection Information Center (“EPIC”) filed an administrative mandamus challenging the approval of the SYP.  In 2001, a relator assigned to review Pacific Lumber’s timber harvesting plan (“THP”) for another piece of property discovered discrepancies in the modeling, among other problems, allegedly resulting in Pacific Lumber’s use of an alternative modeling program in the future.  In January 2006, Pacific Lumber filed its own suit against the State of California related to the Headwaters Agreement.

During discovery, it was revealed that certain “critical” evidence could not be found.  The evidence included some data underlying the computer modeling used to create the SYP.  Eric Johnson, a former VESTRA employee, explained that the inputs for the modeling simulations were “typically not saved,” and that it was “general practice” to “discard material that no longer had business value.”  Johnson also indicated that by the time he left the company in 2006, “not all of the data related to the [relevant computer modeling] existed” and that he was unable to locate certain “critical” input files.  Thus, he believed the data went missing prior to his departure.

Plaintiffs alleged the data was destroyed sometime in August 2007 when Johnson briefly returned to VESTRA to utilize its modeling software in furtherance of his work.  Also of note was defendants’ failure to instruct VESTRA employees to preserve evidence related to the SYP and declaration testimony that many back up tapes and files were thrown away during an office move in 2007.  In fact, VESTRA’s 30(b)(6) deponent testified that he had never received any instruction to preserve and that he had discarded “hundreds of old tapes and files” by throwing them away prior to the move.

Based on the information provided in discovery, plaintiffs’ experts opined that there was substantial evidence of manipulation of the modeling underlying the SYP.  However, the experts indicated their inability to conclusively state certain of their opinions without examining files which were no longer available.

Beginning its analysis, the court first established its inherent authority to sanction litigants for the destruction of evidence.  The court then addressed the duty to preserve and stated, “‘[s]anctions may be imposed against a litigant who is on notice that documents and information in its possession are relevant to litigation, or potential litigation, or are reasonably calculated to lead to the discovery of admissible evidence, and destroys such documents and information.”  Finally, the court indicated the need for restraint to ensure an appropriate sanction and laid out the proper consideration of the court.

In its discussion of the case before it, the court first answered the question of whether parties (i.e., Maxxam and Hurwitz) could be held liable for the spoliation of evidence by their agent, concluding, after some explanation of the relationships of the parties, that they could.  Thus, if VESTRA was deemed to have spoliated evidence, defendants could be sanctioned.  Turning to the substantive issue of spoliation, then, the court stated, “[o]f course, there is no spoliation without a duty to preserve evidence,” and indicated its intention to address the pivotal question of whether the files were destroyed after the duty to preserve arose.

First addressing the question of whether evidence was in fact destroyed, the court concluded that plaintiffs had met the burden of establishing that certain evidence was not preserved.  The court also concluded, however, that the destruction was not intentional noting that plaintiffs’ conclusion of intentionality was based “entirely upon it experts’ speculation” and not upon “any direct evidence of spoliation or misconduct.”

Turning to the key question of when the duty to preserve arose, the court addressed each of three possible triggers presented by plaintiffs:  1) the EPIC lawsuit in 1999, 2) the 2001 investigation into Pacific Lumber’s THP and the resulting change in modeling software, and 3) Pacific Lumber’s 2006 filing of the lawsuit against the State of California.  The court’s analysis resulted in its conclusion that defendants’ duty to preserve arose in 2006, upon Pacific Lumber’s filing of the lawsuit (where again, a discussion of the relationships between parties became relevant).

Accordingly, the court asked:  “Did the missing evidence exist in January 2006?”  The court found that plaintiffs had not satisfied their burden of establishing the evidence was destroyed after the duty to preserve arose.  In support of this conclusion, the court cited plaintiffs’ lack of evidence to show the spoliated evidence existed in 2006.  Conversely, defendants presented several pieces of evidence indicating it did not.  For example, Eric Johnson indicated the information sought was missing in June 2006, when he searched for the files and could not locate them.  Moreover, the court stated, “there is no evidence to suggest that the files were in existence during the previous six months” and that “there is evidence that files of these types – inputs to the computer model – were not routinely saved or destroyed as matter of ordinary business practice.”  The court also noted the abandonment of the particular modeling software used for the SYP (presumably following the 2001 THP investigation).  Thus, the court concluded, “if the data did not exist in June 2006, it is likely that it also did not exist in January of that year” and that “[i]n any event, Plaintiffs have not shown to the contrary that the SYP inputs files existed after January 2006.”

Because plaintiffs could not meet the burden of establishing the existence of the evidence at the time the duty to preserve arose, the court concluded:  “Defendants cannot be held liable for evidence that was lost or destroyed before they had an obligation to preserve it.”