Signs of Life? – Judge Francis Opines that “Inherent Authority” to Sanction Spoliation Related Conduct Survives Amended Rule 37(e)

In perhaps the first published decision since the amended Federal Rules took effect on December 6, 2015, United States Magistrate Judge James C. Francis IV, a preeminent judicial e-discovery authority, relied upon amended Rule 37(e) and, somewhat controversially, his inherent authority, to sanction a litigant for evidence tampering and spoliation. For prior posts on the amended rules, see our previous blogs from May 5, 2015; September 24, 2014; June 19, 2014; May 27, 2014; and May 6, 2013. The opinion is significant, not solely because it invokes the newly-minted rule, but because it interprets amended Rule 37(e) as not foreclosing the court’s inherent authority as a viable alternative to sanction spoliation-related conduct that may not strictly satisfy the new Rule’s elements.

In CAT3 v. Black Lineage, Judge Francis sanctioned plaintiffs CAT3, LLC and Suchman LLC based both on satisfaction of Rule 37(e)’s stringent standards for imposition of serious sanctions, including an adverse inference, and what Judge Francis opined was the court’s still viable inherent authority to sanction spoliation.

In this matter involving claims of trademark infringement, unfair competition, and cybersquatting under the Lanham Trademark Act of 1946, defendants Black Lineage and Vahe Estepanian sought sanctions, including dismissal of the complaint, imposition of an adverse inference, an order for preclusion, and attorneys’ fees, after discovering that plaintiffs intentionally altered relevant emails before producing them. During discovery, plaintiffs’ counsel deposed Black Lineage’s President, Defendant Vahe Estepanian, and it was revealed that there were multiple versions of a key email proposed as a deposition exhibit. Some of Black Lineage’s employees were listed as email recipients containing a domain name of “@blacklineage.com” while other email recipients contained the domain name “@thecollective.com.” Additionally, Jeremiah Myers, one of plaintiff’s employees, was listed as a recipient at an email address with the “@slamxhype.com” domain name, but another version contained the domain name of “@ecko.com.” Defendants investigated the discrepancy and, after a court ordered production of the emails at issue, defendants’ forensic expert determined there were two versions of each email message: the “top” level version and, “behind each email message,” a “near-duplicate copy.” However, there were different email domains for a number of authors and recipients. In layman’s terms, defendants’ expert opined that “the presence of the deleted emails [was] the result of intentional human action, and not of an automatic or inadvertent computer process.” Plaintiffs argued the discrepancies were caused by technical issues, including the migration of emails from one system to another, but Judge Francis concluded “[t]here [was] clear and convincing evidence . . . that the plaintiffs manipulated the emails here to gain an advantage in the litigation.”

Plaintiffs argued “no harm no foul” because their “misdeeds were discovered and the information recovered,” but Judge Francis disagreed, noting:

In effect, the plaintiffs argue that even if they are the “gang that couldn’t spoliate straight,” see Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497, 501 (D. Md. 2010) {TA\1 “Victor Stanley, Inc. vs. Creative Pipe, Inc., 269 F.R.D. 497 (D. Md. 2010″ \s “Victor Stanley” \c 1}, they cannot be sanctioned because their misdeeds were discovered and the information recovered. They are incorrect. First, it cannot be said that the information lost has been “restored or replaced.” . . . Prior to the amendment of Rule 37(e) {TA \s “Rule 37(e)”}, the court in Victor Stanley {TA \s “Victor Stanley”} reached a similar conclusion, finding that even though the information destroyed there was “cumulative to some extent,” the loss still caused substantive prejudice to the innocent plaintiff because “Plaintiff’s case against Defendants is weaker when it cannot present the overwhelming quantity of evidence it otherwise would have to support its case.”
Id. at *18.

Accordingly, Judge Francis found imposition of Rule 37(e) sanctions – including precluding plaintiffs from relying upon the altered emails – was appropriate. And the court did not stop there.

Citing Pension Committee, Judge Francis noted that even if “Rule 37(e) were construed not to apply to the facts here, I could nevertheless exercise inherent authority to remedy spoliation under the circumstances presented.” He concluded that “even if the authentic evidence is not ultimately successfully deleted,” and the threshold elements of amended Rule 37(e) {TA \s “Rule 37(e)”} are therefore not satisfied, a party’s attempt to do so or to take other steps which “threaten the integrity of judicial proceedings” can be redressed by the court’s inherent authority to sanction such conduct. Cat3 {TA \s “Cat3”}, 2016 U.S. Dist. LEXIS 3618, at *22. These comments are significant given that much of the impetus behind strengthening under the new Rule the prerequisites to imposition of serious spoliation sanctions – like an adverse inference – included the understanding that the court’s ability to sanction such conduct if it fell outside the four corners of Rule 37 would be restricted or eliminated; i.e., the inherent authority basis would not be available. In fact, the Advisory Committee Notes for amended Rule 37(e), indicate the new rule “forecloses reliance on inherent authority or state law to determine whether certain [curative or punitive] measures should be used,” to address acts of negligent or intentional spoliation. Judge Francis took a narrow view, opining that the comment merely means that the court cannot now rely on inherent authority to impose sanctions expressly disallowed by the new rule, e.g., serious sanction like an adverse inference for merely negligent spoliation of evidence, but does not mean that the court is generally divested of the ability to sanction parties for conduct that “threatens the integrity of judicial proceedings,” even if evidence is not ultimately lost or spoliated within the meaning of Rule 37(e).

In sum, Cat3 is highly significant in that it clarifies that the court’s inherent sanctioning authority is available in spoliation situations that may not strictly satisfy the stringent standards of Amended Rule 37(e). It will surely be the subject of further commentary and judicial opinions.

Scott J. Etish is a Director in the Gibbons Business & Commercial Litigation Department and a member of the Gibbons E-Discovery Task Force.
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