9th Circuit: No Dismissal Under Rule 37 When Accountant's IT Fails to Preserve Emails

Yesterday, the Ninth Circuit issued a per curiam decision, Winecup Gamble v. Gordon Ranch LLP, No. 20-16411, 2021 U.S. App. LEXIS 18062 (9th Cir. June 17, 2021), reversing and vacating a judgment of the United States District Court for the District of Nevada which granted the Defendant's motion for sanctions under Fed. R. Civ. P 37(e). This rule provides for sanctions when a party fails to take reasonable steps to preserve ESI in the anticipation or conduct of litigation. The Court concluded that the district court should not have dismissed the Plaintiff's case since the Plaintiff was not aware that relevant emails were lost until discovery in the action began.

The Ninth Circuit found no intent to deprive the Defendant of relevant ESI where the Plaintiff's accountant had data, "managed by the IT department at his independent accounting firm. At [the accountant's] deposition, he explained that although he alerted his IT department of the preservation order in 2017, the instruction was not followed (for unknown reasons), and the documents therefore could not be recovered. ", Id. at *2. The Court also noted the Defendant's failure to demonstrate the importance of the lost email data. The Plaintiff was able to attest to the fact that other sources provided the accountant's relevant email data.

N.D. Cal. Resolves Dispute Between Facebook and Plaintiff on 502(d) Order

Last week, in Klein v. Facebook, Inc., No. 20-cv-08570-LHK (VKD), 2021 U.S. Dist. LEXIS 105516 (N.D. Cal. June 3, 2021) Magistrate Judge Virginia DeMarchi issued an order resolving a dispute between the parties on a Rule 502(d) order, specifically with regards to whether or not a clawback order should only cover documents and data produced inadvertently, or cover all privileged material that is disclosed. The Court noted that Fed. R. Evid. 502(d) does not expressly restrict itself to inadvertent productions, and the commentary to Rule 502(d) states that, "[T]he court order may provide for return of documents without waiver irrespective of the care taken by the disclosing party[.]" Id. at *14. Magistrate DeMarchi concluded that, "The parties may have different views regarding what distinguishes an 'inadvertent' disclosure from an 'intentional' disclosure, but the principal purpose of the proposed order, as the Court understands it, is to provide a mechanism for protecting legitimate claims of privilege without requiring an exhaustive pre- or post-production review of documents disclosed in discovery, and a mechanism for challenging post-production claims of privilege in a way that does not unfairly prejudice a receiving party who may have relied on the purportedly privileged material without knowing or suspecting the producing party's privilege claim." Id. at *15.

In addition to making clear that the order governs all disputes on the production of protected documents, the Court found it necessary to add language to the 502(d) order that made it clear that it covered both documents and accompanying metadata.

The parties also disagreed over how documents and data subject to a clawback request should be treated. Facebook's position was that the materials should be destroyed by the opposing party pending resolution of any disagreement over a clawback request, and Klein argued that the materials could be sequestered and used for such resolution. The Court noted that both parties' proposals were contrary to Fed. R. Civ. P. 26(b), which prohibits the use of privileged documents in resolving a dispute, but does provide for sequestration as an alternative to the destruction of clawed back materials. Judge DeMarchi ordered that clawed back materials be returned or destroyed, but also ruled that notes or other work product concerning the content of the materials could be sequestered. The privileged materials are to be submitted to the Court for in camera review at the request of any party. A party responding to clawback requests made within a single 7 day period for more than 100 documents will receive 7 more days to dispute the requests.

The Court also addressed the possibility of deposition testimony concerning documents objected to as improperly produced privileged material at the deposition itself. The document in question will have to be redacted at the deposition, and any testimony about the challenged provisions taken after the dispute of a clawback request has been resolved. If they are not raised during the deposition, objections to testimony about privileged materials must take place within 10 days of the receipt of the rough draft of a transcript.

Michigan Court of Appeals: No Spoliation For IT Department's Destruction of Defendant's Laptop

This Thursday, the Court of Appeals of Michigan issued a decision, Gen-Wealth, Inc. v. Freckman, No. 353584, 2021 Mich. App. LEXIS 3003 (Mich. Ct. App. May 13, 2021), that both affirmed the trial court's order dismissing Gen-Wealth, Inc.'s claims, and its order on a dispute over the spoliation of evidence.

The drive on a laptop used by Freckman, an employee of the Co-Defendant Korhorn Financial, failed but Korhorn's IT department was able to copy the user created files and metadata to a new drive. The original drive was destroyed by the IT staff. On appeal, Gen-Wealth asserted that the trial court should have granted judgment in its favor as a sanction for the spoliation, or at least, in the interest of justice, not awarded offer-of-judgment sanctions as a sanction for the spoliation. [In MIchigan, a party who rejects an offer by the opposing party to enter judgment, and does not obtain a more favorable judgment, may have to pay sanctions.]

The Court found that the trial court's ruling was not clearly erroneous because the Defendants did not act with the intent to cause evidence to be destroyed. "To be sure, Korhorn Financial and Freckman had a duty to take reasonable steps to preserve evidence that they knew or should have known was relevant. . . As such, had they known that reporting the defective hard drive would result in the loss of the physical drive, which in turn might have caused the loss of evidence, they might be said to have breached their duty by failing to take reasonable steps to ensure that the information-technology persons addressing Freckman's concerns about the drive preserved the hardware." Id. at *12 (internal citations omitted). The Court noted that Gen-Wealth's own expert could only state that it was possible some files were not transferred from the original laptop, and it was proven that relevant files had been transferred to the new laptop. "Although there was evidence that the original hard drive theoretically could have contained artifacts in the form of data generated by the operating system that were not copied to the interim hard drive or the hard drive submitted for expert review, there was no evidence that the artifacts were relevant and material evidence." Id. at *13-14.

The Court considered that Gen-Wealth was able to examine Freckman's work computer at its own office, and this personal computer. The use of thumb drives with the work computer did not show what was copied to the thumb drives or who used them. "Therefore, even if there were artifacts that were lost from the laptop that Freckman had originally been provided by Korhorn Financial, the artifacts would not have established that Freckman himself copied confidential files, continued to possess confidential files, or that he transferred or disclosed them to a third party. Accordingly, the trial court did not clearly err when it determined that any data lost by the destruction of the hard drive was not material or relevant to the issues involved." Id. at *14-15.

The Court also rejected the Defendants' cross-appeal which asserted that its award of costs should not have been reduced by the cost to Gen-Wealth of litigating the spoliation issue. The Defendants were aware of their need to preserve electronic data, and the Court faulted them for not preventing the IT department from destroying the original laptop. "Had Freckman and Korhorn Financial informed the information-technology personnel of the need to preserve the hardware associated with Freckman's electronic devices, they might have spared the parties and court the time and expense associated with litigating the spoliation issue. In other words, the failure to take simple and reasonable steps to protect evidence undermined the very goal of the offer-of-judgment rule by encouraging further contentious litigation." Id. at *21.