Where “Entire Computer and Component Manufacturer’s Industry” was on Notice of Potential for Litigation, Defendant’s Failure to Preserve Warrants Sanctions

Phillip M. Adams & Assoc., LLC v. Winbond Elecs. Corp., 2010 WL 3767318 (D. Utah Sept. 16, 2010)

In this ongoing multi-defendant patent litigation, the court has previously addressed allegations of spoliation.  In March 2009, the court found sanctions were warranted for defendant ASUS Computer International’s violation of its duty to preserve which arose in the “1999-2000 environment” of litigation surrounding the technology to resolve a defect in a particular floppy disk controller (“FDC”).  In this case, the court reaffirmed its earlier holding regarding the trigger for defendants’ duty to preserve, namely that “[i]n late 1999 the entire computer and component manufacturer’s industry was put on notice of a potential for litigation regarding defective floppy disk components (“FDCs”) by the well publicized settlement in a large class action lawsuit against Toshiba.”  Accordingly, for defendant MSI’s failure to uphold its duty to preserve, the court found sanctions were warranted.

Plaintiff sought sanctions for defendant MSI’s spoliation of documents.  Specifically, MSI was unable to produce certain information, including “a utility used at least once to test for FDC problems”, and admitted that when it switched its email server in 2003, “it simply deleted the emails stored on the previous server.”  The Magistrate Judge denied plaintiff’s motion and, upon plaintiff’s objection, the matter went before the District Court Judge.

Following a short recitation of the “background” of this case, including its statement that “the entire computer and component manufacturer’s industry” had been put on notice of the potential for litigation in late 1999, the court reviewed the relevant legal standard for imposing sanctions, including the threshold questions of 1) whether evidence had indeed been lost and 2) whether there was a duty to preserve that evidence.  Upon a showing that the threshold standards are met, the court explained, a five factor test is employed to determine the proper sanction.  Those factors are the degree of actual prejudice to the plaintiff, the amount of interference with the judicial process, the culpability of the litigant, whether the party was warned in advance of terminating sanctions for noncompliance, and the efficacy of lesser sanctions.

Regarding the threshold questions, the court first found it was “clear” that “evidence ha[d] been ‘lost, destroyed, or made unavailable”.  As to the existence of a duty to preserve, MSI argued it had no such duty because 1) it did not work in the FDC business (and thus "was not concerned in the least with the Toshiba settlement") and 2) it “lacked experience with patent litigation.”  The court rejected MSI’s assertion that it did not work in the relevant industry because “it was testing FDCs in the period”.  The court found further evidence of MSI’s notice of its obligation to preserve in communications from its customer, Gateway, in mid-2000, which, according to the court, ensured that MSI was aware of the FDC liability issue.  The court further noted that as early as April 2000 another MSI customer, Sony, was sued over the FDC issue and that Gateway was likewise sued in 2002.  The court also rejected MSI’s assertions of inexperience citing evidence of its participation in eleven U.S. lawsuits between 1997 and 2007.  Accordingly, the court found that MSI had a duty to preserve evidence beginning in 1999-2000:

The court finds that MSI should have preserved evidence pertinent to future FDC litigation.  From 1999-2000 the industry as a whole was aware of potential litigation.  Also, MSI’s understanding that FDC litigation was imminent should have been reinforced by its experience in litigation and the cases filed against its own customers.

Applying the five-factor test, the court concluded that the first three factors weighed in favor of sanctions.  As to the first factor – the degree of prejudice – the court reasoned that “there was no way to know if other relevant evidence would have been produced had MSI preserved all of their documents regarding potential FDC litigation."  The court also rejected defendant’s argument that there was no prejudce because "key evidence" had been produced by a third party where, as the result of an order in limine, such evidence was largely excluded from use at trial.  Regarding the final two factors, the court found that MSI had been given no warning of severe sanctions and that “[t]he lesser sanction of a jury instruction seem[ed] sufficient.”

Accordingly, the court indicated that the jury would be instructed that it “may, but is not required to, draw assumptions from the fact that MSI did not preserve and has not produced evidence.”  The court further ordered that although plaintiff was free to put on evidence of MSI’s spoliation and may argue that MSI should have preserved evidence, “[p]laintiff may not directly or impliedly state that the Court has made a finding of wrongdoing” because of “the degree of danger of prejudicing the jury.”