Thursday, September 04, 2008

2008-09-04 Nursing Home Pension Fund v Oracle - Spoliation Decision

In this decision Judge Ilston found that Oracle had spoliated evidence, imposed sanctions, and took spoliation into account in deciding a summary judgment motion.

Judge Ilston first states the basis for the imposition of sanctions, noting the Court has the power to sanction, either under its inherent powers or in consequence of a failure "to obey an order to provide or permit discovery" pursuant to through Fed. R. Civ. P. Rule 37:

"The Court has inherent powers to [sic] arising out of “‘the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.’” UnigardCase 3:01-cv-00988-SI Document 1478 Filed 09/02/2008 Sec. Ins. Co. v. Lakewood Eng’g & Mfg. Corp., 982 F.2d 363, 368 (9th Cir. 1992) (quoting Chambersv. NASCO, Inc., 501 U.S. 32, 43, 111 S. Ct. 2123, 2132 (1991)); see also Toste v. Lewis Controls, Inc.,1996 WL 101189, *2 (N.D. Cal. Feb. 27, 1996). In this regard, “[a] federal trial court has the inherent discretionary power to make appropriate evidentiary rulings in response to the destruction or spoliationof relevant evidence.” Glover v. BIC Corp., 6 F.3d 1318, 1329 (9th Cir. 1993). Federal courts also have authority to sanction a party “who fails to obey an order to provide or permit discovery” under FederalRule of Civil Procedure 37(b)(2)(A). Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006)(internal quotation marks omitted).

Moreover, as other (but not all) courts have ruled, a showing of bad faith is not required:

I. Standard for Imposing Spoliation/Discovery Abuse Sanctions

The Court need not find bad faith by the offending party before issuing sanctions for destruction of evidence; willfulness or fault can suffice. Id.; Unigard, 982 F.2dat 368 n.2 (citing Halaco Eng’g Co. v. Costle, 843 F.2d 376, 380 (9th Cir. 1988)). Sanctions may beappropriate when a party knew or should have known that the destroyed evidence was potentiallyrelevant to litigation. Glover, 6 F.3d at 1329 (“Surely a finding of bad faith will suffice, but so will simple notice of potential relevance to the litigation.”) (internal quotation marks omitted)."

Judge Ilston then reinforces the notion that negligence (simple notice, and ordinary negligence, at that) may be sufficient trigger for a Court to use its inherent powers to sanction.

"The Court has inherent powers to arising out of “‘the control necessarily vested in courts to
manage their own affairs so as to achieve the orderly and expeditious disposition of cases.’” UnigardUnigard, 982 F.2d at 368 n.2 (citing Halaco Eng’g Co. v. Costle, 843 F.2d 376, 380 (9th Cir. 1988)). Sanctions may be appropriate when a party knew or should have known that the destroyed evidence was potentiallyrelevant to litigation. Glover, 6 F.3d at 1329 (“Surely a finding of bad faith will suffice, but so willsimple notice of potential relevance to the litigation.”) (internal quotation marks omitted)."

II. Type of Sanction

Judge Ilston then describes the types of sanctions available for destruction of evidence:

"Courts have developed three types of sanctions for destruction of evidence. First, a court can instruct the jury that it may infer that evidence made unavailable by a party was unfavorable to that party. See, e.g., id.; Akiona v. United States, 938 F.2d 158, 161 (9th Cir. 1991); Cedars-Sinai Med. Ctr.v. Superior Court of Los Angeles, 18 Cal. 4th 1, 11-12 (1998); Trevino v. Ortega, 969 S.W.2d 950, 960(Tex. 1998). Second, a court can exclude witness testimony based on the spoliated evidence. See, e.g.,Unigard, 982 F.2d at 368-69; BTO Logging Inc. v. Deere & Co., 174 F.R.D. 690, 692-93 (D. Or. 1997).The third and harshest of sanctions is to dismiss the claim of the party responsible for the spoliation.See, e.g., Allstate Ins. Co. v. Sunbeam Corp., 53 F.3d 804, 806-07 (7th Cir. 1995); see also Chambers,501 U.S. at 45 (noting that “outright dismissal . . . is a particularly severe sanction, yet is within thecourt’s discretion”); Cedars-Sinai Med. Ctr., 18 Cal. 4th at 12."

The triad of adverse inferences, exclusions of testimony based on spoliated evidence, and dismissal of a spoliating party's claims, which is considered an "ultimate" sanction.

III. Factors to Be Considered in Determining Type of Sanctions

Judge Ilston then discusses (and is guided by) the 3rd Circuit's approach in choosing a sanction, which involves an examination of the degree of fault of spoliating party, degree of prejudice to non-spoliating party, and the adequacy of a lesser sanction. The Court then discusses 9th Circuit approach to imposing the ultimate sanction of dismissal (or judgment), which in turn involves a consideration of (1) public interest in expeditious resolution; (2) Court's need to manage docket; (3) risk of prejudice to non-spoliating party; (4) public policy favoring disposition on the merits, and (5) availability of lesser sanctions:

"In determining whether and what type of sanctions to issue, the Third Circuit has explained that courts should consider three factors: 1) “the degree of fault of the party who altered or destroyed theevidence,” 2) “the degree of prejudice suffered by the opposing party,” and 3) “whether there is a lesser sanction that will avoid substantial unfairness to the opposing party.” Schmid v. Milwaukee, 13 F.3d76, 79 (3rd Cir. 1994); see also Toste, 1996 WL 101189 at * 2 (“[A] party’s motive or degree of fault in destroying evidence is relevant to what sanction, if any, is imposed.”). The Ninth Circuit has also explained that “[b]efore imposing the ‘harsh sanction’ of dismissal,” courts should consider “(1) the public’s interest in expeditious resolution of litigation; (2) the court’s need to manage its dockets; (3)the risk of prejudice to the party seeking sanctions; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions.” Leon, 464 F.3d at 958. However,district courts “need not make explicit findings regarding each of these factors.” Id."

Judge Ilston adopted the recommendation of the Special Master, agreeing that adverse inferences were warranted as to evidence "not produced or preserved" In particular, the Court found that Oracle's spoliation did not warrant terminating sanctions, finding that Oracle had provided substantial discovery, that public policy favored disposition on the merits, and that lesser sanctions were warranted.

This was a PLSRA case, and by statute the culpapble state of mind (culpability) standard threshhhold necessary for the imposition of an adverse inference was "willfulness:"

"In order for a court to impose an adverse inference sanction, plaintiffs must demonstrate “‘(1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that[evidence was] destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.’” Napster, 462 F. Supp. 2d at 1078 (quoting Hamilton v. Signature Flight SupportCorp., 2005 WL 3481423, *3 (N.D. Cal. Dec. 20, 2005)). Here, the parties agree that the culpable stateof mind is willfulness, because plaintiffs’ claims arise under the Private Securities Litigation ReformAct (“PSLRA”), which provides that a party may apply for an award of appropriate sanctions where itis “aggrieved by the willful failure of an opposing party to” preserve relevant evidence. 15 U.S.C. §78u-4(b)(3)(C)(ii)."

IV: When Showing of Prejudice Required for Dismissal Sanction.

Judge Ilston recognizes that the decisional authority has been somewhat unclear as to whether a showing of prejudice must be made in order to support a sanction of dismissal. The Court then follows a recent 9th Circuit decision (which in turn follows other jurisdictions) holding that while a finding of prejudice is required for a terminating sanction in a Fed. R. Civ. P. 37 hearing (failure to obey discovery order, etc.), a showing of prejudice is not required where a court is acting sua sponte, or in the use of its "inherent powers"

"The parties debate whether plaintiffs must demonstrate prejudice before the Court can impose lesser sanctions. The Ninth Circuit has recognized that it has sent conflicting signals regarding whether prejudice must be shown in order for the sanction of dismissal to be appropriate. Anheuser-Busch, Inc.v. Natural Beverage Distribs., 69 F.3d 337, 353 (9th Cir. 1995) (collecting cases). A court in this districtrecently clarified that the Ninth Circuit has required a showing of prejudice only when courts are actingunder Federal Rule of Civil Procedure 37, which applies when a party disobeys a court order regardingdiscovery. Napster, 462 F. Supp. 2d at 1075 n.4; cf. Halaco Eng’g Co. v. Costle, 843 F.2d 376, 382 (9thCir. 1988) (prejudice is an optional factor when courts are acting under their inherent authority); withHenry v. Gill Indus., Inc., 983 F.2d 943, 948 (9th Cir. 1993) (prejudice is a “key factor[]” when courtsare acting under the authority of Rule 37); Wanderer v. Johnston, 910 F.2d 652, 656 (9th Cir. 1990)(showing of prejudice is essential when courts are acting under the authority of Rule 37). When acting under its inherent authority, however, a district court need not consider prejudice to the party moving partyfor sanctions, Napster, 462 F. Supp. 2d at 1075 & n.4, and prejudice has not been required when a partymoves for lesser sanctions, id. at 1078. "

Judge Ilston does tip her hat to the difficulty of proving prejudice where the evidence that might have demonstrating that prejudice has been destroyed or otherwise been made unavailable:

"Here, the Court is considering lesser sanctions in the form ofan adverse inference, and even assuming prejudice is required, the Court notes that it would be quite difficult for plaintiffs to demonstrate how they were harmed by evidence to which they do not have access."

What remains to be seen is where there is a massive of amount of discovery provided (arguably showing some compliance with the rules, but where there also is established substantial document alteration.

The Court found:

1. No willfulness in failure to preserve backup tapes

2. Wilful failure to preserve Larry Ellison's email

The Court's finding merits some discussion. First, it appears that only 16 emails were produced from Ellison's own email account (i.e., sent directly from or received directly to), although more than 1,650 of Ellison's emails were referenced in the email threads of other Oracle employees:

"As to Ellison’s email files, the Court finds that sanctions are appropriate. It is undisputed thatdefendants produced only 15 emails sent or received by Ellison from Ellison’s own email files, anddefendants do not contend that all of Ellison’s emails were preserved in his files. Instead, defendantsnote that over 1,650 of Ellison’s emails were produced to plaintiffs from the files of other Oracleemployees. Defendants, relying on Wachtel v. Health Net, Inc., 2007 WL 1101436 (D.N.J. Apr. 10,2007), argue that plaintiffs are not entitled to receive multiple copies of Ellison’s emails. The Court disagrees. It could have been helpful to plaintiffs to demonstrate that certain emails were discoveredin Ellison’s files; otherwise, for instance, Ellison could argue that he never actually read or received anemail that was sent to him, and thus had no knowledge of its contents. Moreover, having establishedwith certainty that numerous emails were not produced from Ellison’s email files – because the emailswere produced from other files or accounts – it is impossible to know whether additional unproducedemails were also deleted or not turned over. This uncertainty about the existence of other emails isprecisely the reason all of Ellison’s emails should have been preserved and produced."

Notably, the last sentence's language, stating that "uncertainty about hte existence of other emails" may act as a preservation duty trigger in other cases.

V. Control and Spoliation

One required element in order to show spoliation is that a spoliating party had control over the evidence it had a duty to preserve. Here, "notes, transcripts and tape recordings" relating to the book "Softwar"(considered relevant evidence to the underlying proceedings) had been permitted to be destroyed:

"The Court also finds that an adverse inference is appropriate with regard to materials created inconnection with the drafting of the book Softwar. The materials in question, according to plaintiffs, are“at least 135 hours of tapes and transcripts of [] interviews with Ellison on topics such as Suite 11i,insider trading, forecasting, the economy, and Oracle’s billion dollar savings claim.” Plaintiff’sSupplemental Motion at 27. Plaintiffs first moved to compel production of these materials on October30, 2006, and on December 29, 2006, Special Master Infante granted plaintiffs’ motion to compelproduction of “any interview notes, transcripts or tape recordings relating to the book.” Winkler Decl.ex. 194 at 4. Many of these materials were never produced to plaintiffs, however, because it appearsthat sometime in late 2006 or January 2007, Symonds, the author of Softwar, destroyed the materialsin question by directing a computer repair shop to dispose of the laptop on which Symonds had storedthe recorded audio files of interviews with Ellison. Winkler Decl. ex. 214. It is undisputed thatdefendants were able to produce to plaintiffs roughly 200 pages of transcripts from interviews conductedin 2002, but were not able to produce any recordings or transcripts from interviews conducted in 2001"

The Court found that although defendant did not have physcial control over the laptop containing the transcripts and recordings, it did have a duty to attempt to preserve prior to their destruction:

"Even assuming defendants did have copies of the materials and were powerless to preventtheir destruction, the Court finds sanctions necessary because Ellison knew of the litigation at the timemost interviews were conducted, and failed to take any efforts to preserve the materials despite hisobligation to do so."

VI. Spoliation and Summary Judgment

Whether a finding of spoliation can help defeat a summary judgment motion has not received much judicial attention. There is some decisional authority from NY that indicates that a finding of spoliation may or may not defeat a motion for summary judgment, but it appears that the spoliated evidence must be shown to be fairly damaging. This does set up a very difficult requirement of proving a negative (show how spoliated evidence --- the content of which may never be known, might present a genuine issue of material fact). Judge Ilston appears to take the position that Oracles spoliation will provide support sufficient to defeat a summary judgement motion for at least some of the plaintiff's claims:

"To summarize, the Court holds that plaintiffs are entitled to adverse inference instructions with regard to Ellison’s emails and the Softwar-related materials, but not with regard to other evidence. The Court will take these adverse inferences into account when deciding the parties’ summary judgment motions. Specifically, the Court believes that it is appropriate to infer that the emails and Softwarmaterials would demonstrate Ellison’s knowledge of, among other things, problems with Suite 11i, the effects of the economy on Oracle’s business, and problems with defendants’ forecasting model, but theCourt notes that such inferences will not assist plaintiffs in demonstrating the existence of genuine issues of material fact for every element of their § 10(b) claims, such as the element of loss causation.To assist the Court with the resolution of these issues, the Court asks that both parties revise and re-filetheir motions for summary judgment to clearly specify the precise contours of the adverse inferencesthat should be drawn from the emails and Softwar materials, and to take these inferences into account with regard to the propriety of summary judgment."

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