July 23, 2014

The Penalties for Spoliation of Evidence

Posted in Commercial Litigation, Corporate Litigation, Employment Law by Gene Killian |

Needless to say, spoliation of evidence is serious business.  That eminent research publication WikiPedia accurately states:  “Spoliation is the intentional or negligent withholding, hiding, altering, or destroying of evidence relevant to a legal proceeding. Spoliation has two possible consequences: in jurisdictions where the (intentional) act is criminal by statute, it may result in fines and incarceration for the parties who engaged in the spoliation; in jurisdictions where relevant case law precedent has been established, proceedings possibly altered by spoliation may be interpreted under a spoliation inference.”  “Spoliation inference” means a jury instruction that one of the parties has destroyed relevant, unfavorable evidence. Not good.

I’m assuming that most people are ethical and would not engage in the intentional destruction of evidence, exposing themselves to criminal liability.  Maybe that’s a dangerous assumption, given that, as I write this, a technology company called LBDS Holding Co. LLC has just admitted in Texas federal court that it submitted inauthentic documents in a trade secrets suit that yielded a $25 million verdict for the company, roughly two months after the manufactured evidence was (necessarily) disclosed by its former counsel.  (Not a spoliation case, but still a dishonest failure to play by the rules.)  Along these lines, many years ago, when I was a young associate, a less-than-reputable client gave me a copy of a document that he said exonerated him in a commercial suit, but that had not surfaced in the previous year of litigation.  The paper was yellowing.  He pointed to the yellowish tinge and said, “I thought that was a nice touch.”  (The case was resolved without reference to the questionable document.)

The more common scenario, though, is that no one in a company institutes a proper litigation hold on evidence potentially relevant to a lawsuit, and the evidence unfortunately goes missing.  And that’s what recently happened to sneaker retailer Foot Locker in Osberg v. Foot Locker, Docket No. 07-cv-1358 (KBF) (S.D.N.Y. Jul. 14, 2014). 

Foot Locker’s problems stemmed from an ERISA lawsuit brought by a former employee, who contended that Foot Locker had converted its “defined benefit” pension plan to a “cash balance” plan through, among other things, false and misleading plan descriptions. Other employees had previously filed suit on the same topic. Despite the pending lawsuits, Foot Locker did not issue a litigation hold on relevant documents for two to three years. During this period, relevant documents were destroyed. Electronic documents were not retained, for example, and 141 boxes of documents relating to the pension plan were discarded.  The destroyed documents related to the creation of Foot Locker’s new retirement plan, and therefore to the question of whether Foot Locker had breached its fiduciary duties under ERISA by concealing key facts from plan participants.

Plaintiff moved for sanctions.  In considering the application, the Court noted that “the state of mind of a party that destroys evidence is a major factor in determining…the appropriate sanction.” With respect to Foot Locker, the Court determined that “a fair reading of the available evidence indicates that defendant’s failure to timely issue a litigation hold memorandum was…inadvertent.” Two in-house lawyers, for example, each stated that they knew a litigation hold was required, but that each thought the other had taken responsibility for preparing and distributing the necessary memorandum.

The Court held that, in a case such as this one in which simple negligence was involved, an adverse jury instruction was the proper remedy. Specifically, the Court ruled: “The Court shall instruct the jury at trial –using wording to be determined at a later date – that it can infer from the fact that defendants lost certain evidence that the evidence, if available, would have been favorable to plaintiff.”

With all the bad press that corporate America has gotten in the past few years, many jurors simply do not trust businesspeople. A judge’s instruction indicating that a company has destroyed evidence favorable to the plaintiff can, of course, be devastating. Don’t let it happen in your company. When claims come in, confirm and reconfirm with all employees, in writing, that a proper litigation hold has been established.

-        Gene Killian