Delaware Chancery Court Awards Sanctions for Spoliation; Issues Significant Guidance on Electronic Discovery

June 19, 2009

In three opinions issued between May 18 and 29, 2009, the Delaware Chancery Court has provided guidance on several key electronic discovery issues–triggering of the duty to preserve electronically stored information (“ESI”) and the scope of that duty; spoliation of evidence and the factors used to determine sanctions; and cost-shifting in relation to inaccessible data.  See Triton Construction Co. v. Eastern Shore Electrical Services, 2009 Del. Ch. LEXIS 88 (May 18, 2009); Beard Research v. CB Research & Development, 2009 Del Ch. LEXIS 94 (May 29, 2009); and, Omnicare v. Mariner Health Care Management Co., 2009 Del. Ch. LEXIS 95 (May 29, 2009).  Prior to these opinions, the Chancery Court had issued only a handful of notable e-discovery opinions, the last one in 2007.  These new opinions provide significant guidance on many of the most pressing issues in current e-discovery case law.

Beard and Triton both involved allegations that a former employee misappropriated confidential information and provided it to a subsequent employer.  The Chancery Court sanctioned the defendants for spoliation of electronic evidence, and ordered them to pay the plaintiff’s attorneys fees and costs.  In addition, the Court granted adverse inferences, which had a significant impact on the outcome of each case.  In both cases, the former employees either intentionally or recklessly destroyed evidence that led to the sanctions.  Nevertheless, the Court also imposed sanctions on their co-defendant employers because the duty to preserve applied to both.

Triggering the duty to preserve.  The Chancery Court held in Beard and Triton that a party’s duty to preserve relevant information is triggered “upon the discovery of facts and circumstances that would lead to a conclusion that litigation is imminent or should otherwise be expected.”  In most circumstances, this means upon the filing of a complaint or, at the very least, when discovery requests are served.

The Court suggested that the duty to preserve can be triggered even before litigation commences.  The individual defendants had resigned from the plaintiff companies and went to work for a direct competitor within days.  Plaintiffs did not file complaints until months later.  In both cases, however, the Court suggested that the employees’ duty to preserve might have been triggered when they went to work for a competitor, taking confidential information with them.  Nevertheless, it was unnecessary for the Court to find that the duty arose at the earlier time, because the individual defendants destroyed data after the duty undeniably arose with the filing of the complaint or service of discovery requests.  In any event, litigants (and potential litigants) should take note of the Court’s consideration of earlier triggering points.

Scope of preservation.  In both Beard and Triton, the Chancery Court sanctioned the defendants, at least in part, for failure to preserve data stored on the home computers of the employees, where they stored the confidential information of their former employers.  This highlights an increasing trend in e-discovery cases where employers are being held responsible for failing to preserve data in the hands of their employees, even outside the office.

Spoliation and sanctions.  The Chancery Court also laid out in Beard and Triton the factors for evaluating spoliation claims and sanctions.  To find spoliation, courts must find that a party had a duty to preserve relevant evidence, and that it destroyed or failed to prevent the destruction of that evidence.

Once spoliation is determined, according to the Chancery Court, the appropriate sanction depends upon the following factors:

  1. the culpability or mental state of the party who destroyed the evidence;
  2. the degree of prejudice suffered by the complaining party; and
  3. the availability of lesser sanctions which would avoid any unfairness to the innocent party, while, at the same time, serving as a sufficient penalty to deter the conduct in the future.

The Chancery Court explained that the three most common sanctions, in order of severity, are default judgment, adverse inference, and the awarding of costs and fees.  Default judgment should be entered against a spoliator only upon a finding of willfulness or bad faith, and only as “a last resort.”  When culpability rises merely to the level of negligence, the lesser sanction of fees and costs is most usually appropriate.  Adverse inferences fall somewhere in between, and courts may impose them for “intentional or reckless” destruction of evidence to which the duty to preserve has attached.  Intentional destruction requires a finding that the spoliator acted “with purpose.”  Reckless spoliation occurs when the spoliator is consciously aware of a “substantial and unjustifiable risk” that his action or inaction will cause or allow destruction of the evidence.

The Chancery Court was careful in both Beard and Triton to state that in determining the prejudice to the opposing party that results from spoliation, the complaining party must show that the destroyed evidence actually existed and that it was relevant.  Missing data by itself, with no proof of what it contains, is insufficient to merit a sanction.  In these cases, however, other evidence showed that the data that was once on the employees’ personal computers was highly relevant to the matter, and also likely to be adverse to their (and their subsequent employers’) claims and defenses.

In keeping with a common trend in recent e-discovery decision, the Chancery Court in Beard sternly reprimanded the defendants’ outside counsel for failing to properly advise its clients to preserve electronic evidence.  Outside counsel “did nothing to notify Defendants and their employees of the need for care in preserving relevant ESI once the litigation had been instituted.”  Because of these and other failings, the Court declined to “let the [defendants] and their counsel off the hook….”

The Chancery Court also urged “early and, if necessary, frequent communications among counsel …to determine how discovery and ESI will be handled,” citing the now well-known Sedona Principles.  It warned that if parties fail to address ESI-related discovery matters through agreeing upon a discovery protocol, “the Court is not likely to be sympathetic when … one party later complains….”

Inaccessible sources of ESI and cost-shifting.  In Omnicare, the Chancery Court addressed other common issues in e-discovery, namely the extent of a party’s duty to search back-up tapes and cost shifting to the requesting party.

The Chancery Court emphasized that the amendments to the Federal Rules of Civil Procedure in December 2006 (most notably Rule 26) do not apply to the Chancery Court.  Although 22 other states have amended their rules to largely mirror the 2006 federal amendments, Delaware has not.  The Court stated, “simply because ESI is now contained on Backup Tapes instead of in active stores does not necessarily render it not reasonably accessible.”

The Court addressed cost shifting, favorably referencing the seven Zubulake factors, and stating that “there is wisdom in the Zubulake approach.”[1]  But it stopped short of adopting them outright.  The Court ordered a sampling of the tapes to be restored, an increasingly common approach to dealing with back-up tapes when it is not clear whether the information they contain is worth the cost of restoration and review.  By doing so, the parties can obtain a better understanding of the relative worth of the data, and a further determination can be made as to whether additional tapes should be restored, and who should bear the cost.

  [1]   Zubulake v. U.B.S. Warburg LLC 217 F.R.D. 309, 323 (S.D.N.Y. 2003).  The seven factors (in descending order of importance) are: 1) The extent to which the request is specifically tailored to discover relevant information; 2) The availability of such information from other sources; 3) The total cost of production, compared to the amount in controversy, 4) The total cost of production, compared to the resources available to each party; 5) The relative ability of each party to control costs and its incentive to do so; 6) The importance of the issues at stake in the litigation; and 7) The relative benefits to the parties of obtaining the information.

The Electronic Data Discovery Initiative (“EDDI”) is a task force at Gibson, Dunn & Crutcher LLP dedicated to issues of e-discovery and records management.  If you have any questions regarding this material, or how to address e-discovery in one of your matters, please contact any of the following:

Gareth T. Evans – Los Angeles (213-229-7734, [email protected])
Farrah Pepper – New York (212-351-2426, [email protected])

© 2009 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.