The Fourth Circuit upholds severe sanctions against a party who fails to preserve evidence in litigation.
A recent decision of the U.S. Court of Appeals for the Fourth Circuit emphasizes the importance of preserving electronically stored information and complying with discovery requests in litigation. In QueTel Corporation v. Abbas, the plaintiff fought to hold the defendants responsible for evading their evidence preservation obligations. The Fourth Circuit showed its willingness to uphold harsh sanctions for failing to preserve evidence.
Background on ‘Spoliation’ of Evidence
A party’s duty to preserve evidence often begins even before litigation, whenever the party knew or should have reasonably known that the information may be relevant to anticipated litigation. Upon anticipating litigation, parties must institute a “litigation hold,” suspending routine document retention and destruction policies and ensuring that its individual employees, IT department, and data storage vendors preserve all potentially relevant documents.
The failure to preserve potentially relevant evidence for an ongoing or reasonably foreseeable litigation is known as spoliation. Courts can sanction parties for spoliation, and generally impose sanctions when:
- The party having control over the evidence had an obligation to preserve it when it was destroyed or altered; and
- The party destroying the evidence was at least somewhat at fault; and
- The evidence that was destroyed or altered was relevant to the claims or defenses of the opposing party.
District courts have broad discretion in granting a motion for sanctions for spoliation of evidence. Typically, negligent destruction of evidence is enough to warrant sanctions for spoliation, but courts within the Fourth Circuit are split on this issue. Some require a higher level of culpability, such as gross negligence or willfulness.
Sanctions for spoliation may include the following:
- Imposition of monetary sanctions, sometimes including payment of the opposing party’s expenses and attorney fees;
- Limitations on the amount of damages recoverable based on lost evidence;
- Instructions to the jury to draw an adverse inference against the party responsible for losing the evidence;
- Striking pleadings in whole or in part;
- Precluding a party from introducing other evidence;
- Preventing the culpable party from proceeding with certain claims or defenses; or
- Dismissing the case or awarding default judgment against the spoliator.
In deciding which sanctions to impose, courts analyze the culpability of the party accused of spoliation and the degree of prejudice the spoliation caused the opposing party when deciding which sanctions to apply. More egregious culpability or stronger prejudice will result in harsher sanctions. Spoliation arising out of ordinary negligence or that causes little prejudice will generally result in lighter sanctions. Ultimately, courts use these sanctions to deter spoliation of evidence and preserve the integrity of the judicial process.
‘QueTel Corporation v. Abbas’
QueTel Corporation v. Abbas arose out of a copyright dispute, where the plaintiff alleged that the defendants misappropriated its intellectual property when developing a competing software product. The plaintiff believed Abbas, the plaintiff’s former employee, misappropriated their copyrighted source code and used it to develop a nearly identical, competing product under his own company.
The plaintiff sent a cease and desist letter to the defendants—Abbas, Mansour (his co-founder and spouse), and Finalcover, LLC (the business co-owned by Abbas and Mansour)—stating the defendants’ responsibility to preserve all potentially relevant evidence including documents, electronic devices, computer files, and emails.
On three separate occasions after receiving plaintiff’s preservation letter, the defendants failed to preserve or intentionally destroyed relevant evidence. Four months after receiving the letter, Abbas purchased a new computer and disposed of the computer he had used to create his product by wiping its data and disposing of it in a commercial trash can. Later, the plaintiff filed a motion to compel documents including previous versions of the defendants’ source code, forensic images of all computers used to create the software, and their source code control system (a software program that tracks changes in code over the course of a software development project that is commonly used by developers).
The defendants lied, stating they had not used a source code control system to develop the software, and failed to disclose that the computer had been destroyed. However, during development of the software, Abbas had accidentally sent a screenshot of his work to a QueTel employee, proving his use of a source code control system and displaying code that looked “substantially the same” as the plaintiff’s code. The defendants only admitted the destruction of the computer at a later deposition. Forensic imaging of remaining devices and further depositions revealed that the defendants deleted “thousands” of likely relevant files just days before the forensic imaging took place.
The parties could not replace or restore the information lost through additional discovery. The loss of the evidence compromised the plaintiff’s ability to prove essential elements of its claims.
The district court found that the defendants destroyed material evidence intentionally and in bad faith. In doing so, the defendant eliminated the most probative evidence and “effectively deprived the Plaintiff of its ability to pursue its claims of copyright infringement and misappropriation of trade secrets.” The district court ultimately entered a default judgment against the defendants as a sanction for their spoliation of evidence.
The Fourth Circuit upheld the decision to impose a default judgment as a sanction. The Fourth Circuit based its decision in large part on the district court’s finding that the defendants destroyed the evidence in bad faith and that “no less drastic sanction would adequately address the prejudice suffered by QueTel or adequately deter the type of spoliation that occurred in this case.”
QueTel confirms the Fourth Circuit’s unequivocal disapproval of bad faith during discovery, and underscores the court’s keen interest in deterring similar behavior in the future.
In this case, the district court found that the defendants destroyed evidence with the intent of depriving the plaintiff of relevant evidence in the litigation. Such bad faith likely doomed the defendants. But courts may impose severe sanctions even for accidental or negligent destruction of relevant evidence if it is irreplaceable and its loss is prejudicial to the opposing party. Where ordinary negligence has caused the spoliation, courts in the Fourth Circuit have generally resorted to monetary sanctions, including costs and attorney fees, or limited the amount of damages recoverable by the spoliator. Even where the responsible party still has the opportunity to prevail in the litigation, these sanctions can still be extremely costly.
Businesses must take reasonable steps to preserve relevant evidence once they are on notice of a potential claim. This may involve the preservation of a broad range of potentially relevant documents. Businesses also must ensure that all individuals who may have custody of relevant documents are aware of their preservation responsibilities. And IT and data professionals must take reasonable steps to preserve the company’s electronically stored information.
Special thanks to contributing author, Dani Dobosz.
This article was first published on LAW.COM on August 5, 2020, and is republished here with permission. ©2020 ALM Media Properties, LLC. All rights reserved.