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Grim Consequences for Spoliation of Evidence

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On September 9, 2010, Judge Paul W. Grimm of the U.S. District Court for the District of Maryland decided a crucial motion in the four year long case of Victor Stanley, Inc. v. Creative Pipe, Inc.1 Judge Grimm was appointed Chief Magistrate Judge of the U.S. District Court for the District of Maryland in May of 2006, and was appointed by the Chief Justice of the United States as a member of the Advisory Committee for the Federal Rules of Civil Procedure in September of 2009.2 In the case before him, Judge Grimm responded to Plaintiff’s Motion For Terminating And Other Sanctions Arising Out Of Defendants’ Intentional Destruction Of Evidence And Other Litigation Misconduct by holding that:

  • (1) pursuant to Fed. R. Civ. P. 37(b)(2)(A)(vi), a default judgment will be imposed as to Count I (copyright infringement);
  • (2) pursuant to Fed. R. Civ. P. 37(b)(2)(C), the Plaintiff Victor Stanley, Inc. (“VSI”) will be awarded attorney’s fees and costs associated with Defendants’ spoliation of Electronically Stored Information (“ESI”);
  • (3) pursuant to Fed. R. Civ. P. 37(b)(2)(A)(vii), the pervasive and willful violation of multiple court orders to preserve and produce ESI by the President of Creative Pipe, Inc. (“CPI”), Mark T. Pappas, be treated as civil contempt of court; and
  • (4) Pappas be imprisoned for a period not to exceed two years, unless and until he pays Plaintiff the aforementioned attorney’s fees and costs.3

Background

The parties in the case – VSI and CPI – are competing businesses that manufacture a broad line of high quality furnishings for public and commercial sites, such as receptacles, benches, tables, and chairs.4 VSI alleges in its Complaint that someone at CPI downloaded VSI design drawings and specifications from VSI’s website using the pseudonym “Fred Bass.”5 To be allowed to download the drawings, website users must agree to VSI’s limited licensing agreement, which prohibits the use of those drawings in competition with VSI.6 VSI further alleges that Pappas sent drawings downloaded from VSI’s website out of the country to be copied as CPI drawings so that Pappas could then submit them as part of its bid documents for the type of work which CPI competed against VSI.7 Under Count I of the complaint, VSI alleges copyright infringement, and under other counts, VSI primarily alleges patent infringement and unfair competition.8

Pappas’s Spoliation of ESI

Judge Grimm listed eight specific failures by Pappas to either preserve or produce evidence:

  • (1) a failure to implement a litigation hold;
  • (2) deletions of ESI after VSI filed its lawsuit;
  • (3) a failure to preserve an external hard drive after VSI demanded preservation of ESI;
  • (4) a failure to preserve files and emails;
  • (5) deletion of ESI after the Court issued its first preservation order;
  • (6) the use of computer programs to permanently delete files after the Court admonished both parties of their duty to preserve evidence and issued its second preservation order;
  • (7) a failure to preserve ESI on CPI’s computer server; and
  • (8) the continued use of computer programs to permanently delete ESI after the Court issued numerous production orders.9

VSI’s experts determined that at least two of Pappas’s larger deletions of ESI from his work computer occurred on the eve of scheduled discovery. Someone deleted 9,234 files off Pappas’s password protected work computer. After scheduling an imaging of Pappas’s work computer, he deleted almost 4,000 files and someone ran Microsoft Window’s Disk Defragmenter program immediately afterword. Disk Defragmenter transfers pieces of files around the computer’s hard drive, overwriting deleted files and making most of the deleted files unrecoverable.10 Further forensic analysis discovered that many of the deleted files had file names indicating VSI-like site furnishings. The contents of those files likely would have had probative value.11 The expert also determined that emails were sent from Pappas’s email account using Pappas’s password-protected work computer (not via remote access) just prior to and just after the deletions of ESI. Furthermore, many of the deletions took place after the Court issued preservation orders and reminded both parties of their affirmative duty to preserve evidence.12 Ultimately, experts were unable to recover any of the deleted files from Pappas’s work computer.13

VSI’s expert also concluded that an external hard drive must have been connected to Pappas’s work computer after VSI filed their lawsuit. Pappas claimed he had returned the external hard drive to “Bob from Office Max” because he was “frustrated” by its automatic backup features that “would flash messages and interrupt [his] work.”14 Pappas was unable to produce a receipt or any other proof that the external hard drive was returned.

The Court then ordered CPI and Pappas to produce all relevant, non-privileged ESI to VSI’s counsel. However, someone at CPI used a computer program called Easy Cleaner to delete large amounts of data from its computers and another program called CCleaner “to clear up file content in specific areas, and. . . to go through the registry. . . and clear out. . . dead registry entries” from their server months after the Court had issued its preservation orders.15

Defendants Response to VSI’s Motion for Sanctions

In response to VSI’s motion for sanctions, the Defendants admitted that fifteen CPI products were based on VSI designs. Defendants also were willing to accept as a sanction a consent judgment on liability for copyright infringement and a consent injunction on VSI’s copyright claim.16

The Court’s Authority to Sanction

The court has inherent power to “control the judicial process and litigation, a power that is necessary to redress conduct which abuses the judicial process.”17 The Court’s inherent authority arises “when a party deceives a court or abuses the process at a level that is utterly inconsistent with the orderly administration of justice or undermines the integrity of the process.”18 This power is organic without need of a statute or rule for its definition.19 Pursuant to the court’s inherent authority, it may impose fines or prison sentences on parties held in contempt.20 The court may even grant a default judgment or dismiss the case.21 However, the court’s inherent authority may only be exercised to sanction “bad-faith conduct,” and “must be exercised with restraint and discretion.”22

Under Fed. R. Civ. P. 37(b)(2), the court also has the authority to sanction a party for failure to comply with a court order “to provide or permit discovery.”23 The duty to preserve evidence is a common law duty that falls within the definition of permitting discovery.24 Therefore, a judge’s order to preserve evidence is also an order to permit discovery, and the court has authority to issue sanctions pursuant to Rule 37(b)(2) for violations of the court’s preservation orders even when the order does not actually order the production of evidence.25

Fashioning an Effective Sanction

Judge Grimm states:

What frustrates courts is the inability to fashion an effective sanction to address the drain on their resources caused by having to wade through voluminous filings, hold lengthy hearings, and then spend dozens, if not hundreds, of hours painstakingly setting forth the underlying facts before turning to a legal analysis that is multi-factored and involved. Adverse inference instructions do not compensate for the expenditure of court resources to resolve a spoliation dispute, nor do awards of attorney’s fees and costs to the prevailing party in the dispute. Further, dispositive sanctions, the appellate courts tell us, are only appropriate where lesser sanctions will not suffice.26

In the Fourth Circuit, courts may impose sanctions for spoliation anytime the spoliator is found to be at fault whether it was done with bad faith, willfulness, gross negligence, or ordinary negligence.27 The degree of fault impacts the severity of the sanctions.28 The court must consider – holistically – the extent of prejudice, if any, along with the degree of culpability.29

The sanctions that a federal court may impose for spoliation include:

  • (1) assessing attorney’s fees and costs;
  • (2) giving the jury an adverse inference instruction;
  • (3) precluding evidence;
  • (4) dismissing the case or granting default judgment; or
  • (5) treating as contempt of court the failure to obey a court order to provide or permit discovery of ESI evidence pursuant to Fed. R. Civ. P. 37(b)(2)(A)(vii).30

The court has broad discretion in choosing a sanction, but the appropriate sanctions should:

  • (1) deter parties from engaging in spoliation;
  • (2) place the risk of an erroneous judgment on the party who wrongfully created the risk; and
  • (3) restore the prejudiced party to the same position he would have been in the absence of wrongful destruction of evidence by the opposing party.31

The duty to preserve evidence is a duty owed to the court. Therefore, it is also appropriate for a court to consider whether the sanctions it imposes will “prevent abuses of the judicial system” and “promote the efficient administration of justice.”32 The court must impose the least harsh sanctions that provide an adequate remedy while also striking the appropriate balance between those that are normative and those that are compensatory.”33

In the Fourth Circuit, courts may dismiss a case or order a default judgment when the court is “able to conclude either (1) that the spoliator’s conduct was so egregious as to amount to a forfeiture of his claim, or (2) that the effect of the spoliator’s conduct was so prejudicial that it substantially denied the defendant the ability to defend the claim.”34 To impose an adverse jury instruction the court “must only find that the spoliator acted willfully in the destruction of evidence;” a showing of negligence or even gross negligence is insufficient yet the conduct need not rise to the level of bad faith.35 Less severe sanctions include the costs, attorney’s fees, and fines that compensate the prejudiced party but also punish the offending party. When assessing fees or fines, the court’s inquiry focuses more on the conduct of the offending party than on the actual relevance of the ESI. 36

Treating Spoliation as Contempt of Court

The contempt sanctions under Fed. R. Civ. P. 37(b)(2)(A)(vii) may be civil or criminal. A drawback of issuing criminal contempt sanctions is that they require additional proceedings with enhanced due process procedures.

When the nature of the relief and the purpose for which the contempt sanction is imposed is remedial and intended to coerce the contemnor into compliance with court orders or to compensate the complainant for losses sustained, the contempt is civil; if, on the other hand, the relief seeks to vindicate the authority of the court by punishing the contemnor and deterring future litigants’ misconduct, the contempt is criminal. . . .37

For example, if the court imposes a prison sentence for a definite period of time, the sanction is punitive and therefore criminal contempt; however, if the sanction merely requires the defendant to remain in jail until he performs an affirmative act, the sanction is remedial and therefore civil contempt.38 To hold a party in civil contempt, the court must find that four elements have been established by clear and convincing evidence:

  • (1) the existence of a valid decree of which the alleged contemnor had actual or constructive knowledge;
  • (2) that the decree was in the movant’s “favor;”
  • (3) that the alleged contemnor by its conduct violated the terms of the decree, and had knowledge (at least constructive knowledge) of such violation; and
  • (4) that [the] movant suffered harm as a result.39

Judge Grimm’s Sanctions

Judge Grimm stated:

Taken individually, each [act of spoliation] demonstrates intentional misconduct done with the purpose of concealing or destroying evidence. Collectively, they constitute the single most egregious example of spoliation that I have encountered in any case that I have handled or in any case described in the legion of spoliation cases I have read in nearly fourteen years on the bench.40

Pappas cannot avoid sanctions by blaming his prior counsel or Information Technology employees. Counsel and IT employees are Pappas’s agents, and spoliation done by them is attributed to Pappas under agency law.41 Judge Grimm found that Pappas and his agents acted willfully and in bad faith.42 Defendants’ bad faith conduct allowed the Court to presume both relevance and prejudice from the spoliation of ESI.43

Judge Grim held that default judgment of Count I (copyright infringement) in favor of VSI is clearly appropriate since Defendants admit spoliation, relevance, and prejudice, and consented to default judgment.44 Defendants also agreed to a permanent injunction prohibiting them from further infringing on VSI’s copyright.45 Judge Grim held pursuant to Fed. R. Civ. P. 37(b)(2)(C) that Plaintiff is entitled to a reasonable attorney’s fees and costs because Defendants failed to comply with a court order to provide or permit discovery. The fees and costs awarded include all the costs related to uncovering Defendants’ discovery abuses; preparing, filing, and arguing Plaintiff’s ESI motions; and retaining ESI experts.46 Lastly, Judge Grimm stated:

[Pursuant to Fed. R. Civ. P. 37(b)(2)(A)(vii),] I order that Pappas’s acts of spoliation be treated as [civil – not criminal – ] contempt of this court, and that as a sanction, he be imprisoned for a period not to exceed two years, unless and until he pays to Plaintiff the attorney’s fees and costs that will be awarded after the Plaintiff has submitted an itemized accounting of the attorney’s fees and costs associated not only with filing this motion, but also with respect to all efforts expended throughout this case to demonstrate the nature and effect of Pappas’s spoliation. These costs and fees likely will amount to a significant figure, and that will properly vindicate this Court’s ability to enforce its discovery orders. . . .47 This result is absolutely essential as a civil contempt sanction because without it, I am convinced that Pappas will do all that he can to avoid paying any money judgment or award of attorney’s fees that is in the form of a civil judgment alone. Without the threat of jail time, Pappas’s future conduct would be predicted by his past, and the Plaintiff will receive a paper judgment that does not enable it to recover its considerable out-of-pocket losses caused by Pappas’s spoliation.48


1 Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497 (D. Md. 2010).

2 Chief Magistrate Judge Paul W. Grimm, http://www.mdd.uscourts.gov/publications/JudgesBio/grimm.htm

3 Victor Stanley, Inc., 269 F.R.D at 500.

4 Id. at 502.

5 Id.

6 Id. at 507.

7 Id.

8 Id. at 502.

9 Id. at 501.

10 Id. at 504.

11 Id. at 509.

12 Id. at 510.

13 Id. at 512.

14 Id. at 507.

15 Id. at 513-14.

16 Id. at 514.

17 Id. at 517 (quoting United Med. Supply Co. v. United States, 77 Fed. Cl. 257, 263-64 (2007) (internal quotation omitted)).

18 Id. at 517 (quoting United States v. Shaffer Equip. Co., 11 F.3d 450, 462 (4th Cir. 1993)).

19 Id. at 517 (citing Shaffer Equip. Co., 11 F.3d at 462).

20 Id. at 518 (citing United States v. Hudson, 11 U.S. (7 Cranch) 32, 34 (1812)).

21 Id. at 518 (citing Roadway Exp., Inc. v. Piper, 447 U.S. 752, 765 (1980)).

22 Id. at 518 (quoting Chambers v. NASCO, 501 U.S. 32, 50 (1991) and Schaffer Equip. Co., 11 F.3d at 461-62).

23 Id. at 519.

24 Id.

25 Id. at 519-20.

26 Id. at 527 (citing Silvestri v. Gen. Motors Corp., 271 F.3d 583, 590 (4th Cir. 2001)).

27 Id. at 529.

28 Id. at 529 (citing Silvestri, 271 F.3d at 590).

29 Id. at 533.

30 Id.

31 Id. at 534 (citing Silvestri, 271 F.3d at 590).

32 Id. at 534.

33 Id.

34 Id.

35 Id. at 536.

36 Id. at 536-47.

37 Id. at 537 (quoting Hicks v. Feiock, 485 U.S. 624, 631-32 (1988)).

38 Id. at 537.

39 Id. at 538 (quoting Ashcroft v. Conoco, Inc., 218 F.3d 288, 301 (4th Cir. 2000)).

40 Id. at 515.

41 Id. at 516 (citing, inter alia, Rouse v. Lee, 339 F.3d 238, 249 (4th Cir. 2003) (“Former counsel’s errors are attributable to [plaintiff] not because he participated in, ratified, or condoned their decisions, but because they were his agents, and their actions were attributable to him under standard principles of agency.”)).

42 Id. at 531.

43 Id. at 533.

44 Id. at 538.

45 Id. at 539.

46 Id.

47 Id. at 540-41.

48 Id. at 48553.

49 Id. at 541.

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