Destruction of Electronic Evidence, Discovery Misconduct Lead to $1 Million Fine, Default Judgment

In a February 23, 2011 opinion and order, Judge Sharon Johnson Coleman granted the motion of Trading Technologies International, Inc. (“Defendant”) for default judgment and monetary sanctions, based on misconduct by Rosenthal Collins Group, LLC (”Plaintiff”) and its counsel with respect to the preservation and production of electronic evidence. Rosenthal Collins Group, LLC v. Trading Technologies International, Inc., No. 05-C-4088, 2011 WL 722467 (N.D. Ill. Fed. 23, 2011) (hereinafter, “Trading Techs.”).

Finding that “both [Plaintiff] and its counsel acted willfully in bad faith by engaging in conduct that resulted in deception of both the opposing party and the Court, the destruction of relevant evidence, the waste of judicial resources, and the undermining of the judicial process,” the Court imposed a sanction on Plaintiff of $1,000,000 and default judgment against Plaintiff. In addition, “[f]or their part in presenting misleading, false information, materially altered evidence, and willful non-compliance with the Court’s orders,” Plaintiff’s counsel was ordered to pay the costs and attorneys fees related to litigating the motion.

In finding that Plaintiff and its counsel had committed misconduct which warranted the sanction of dismissal, the Court noted the following:

1. Evidence tampering; Lack of candor. Plaintiff’s consultant admitted to altering and overwriting source code to make it appear that it had been last modified much earlier, which was of critical importance to the claims in the case. Plaintiff and its counsel had denied Defendant’s allegations that the dates had been altered, characterizing those allegations as “libelous,” “audacious,” and an “Oliver Stone-esque” conspiracy theory. The Court held:
   
   [Plaintiff] and its counsel had an affirmative duty to make sure that the metadata was accurate in light of their reliance on the source code. . . . Instead of inquiring further into the matter, [Plaintiff] opted to stay the course and continue to deny any wrongdoing.
   
2. “Wiping” electronic media. Media which purportedly contained original source code had been “wiped” (erased and rendered unrecoverable) by Plaintiff’s consultant before being produced to Defendant. Additional media purported to contain original source code was “wiped” only hours before it was inspected by Defendant’s counsel.
   
3. Spoliation of evidence previously ordered to be produced. Forensic analysis indicated that “virtually every piece of media ordered produced by the Court in May 2007 and July 2008 was wiped, altered, or destroyed after those orders were entered.”
   
4. Gross negligence or recklessness. While Plaintiff claimed that it had no knowledge of the misconduct of its consultant and argued that it should not be held responsible for his actions, the Court determined that Plaintiff was not immune from sanctions, stating:
   
   The imposition of sanctions, however, does not require actual knowledge, but gross negligence or recklessness, i.e., [Plaintiff] knew or should have known. . . . Even if this Court were to accept that [Plaintiff] had no actual knowledge of the evidence destruction and modification that occurred, [Plaintiff’s] conduct still warrants the imposition of a default judgment.
   
5. Failure to preserve relevant evidence; Failure to comply with Court orders on discovery. The failure of Plaintiff to follow the orders of the Court and preserve electronic evidence allowed for spoliation to occur. As the Court reasoned:
   
   [Plaintiff] and its counsel had a duty to preserve the evidence, which they could have done by taking physical possession of, or obtaining forensic images, of the evidence. It appears that [Plaintiff] took no steps after the first order to collect the evidence to ensure its preservation. . . . Parties to a lawsuit have a duty to preserve admissible evidence as well as evidence that is discoverable because it is “reasonably calculated to lead to the discovery of admissible evidence.” (citations omitted).
   
6. Failure to take reasonable measures to ensure preservation of evidence. Plaintiff claimed that it told its consultant to preserve everything related to the software. However, the Court reasoned that:
   
   [I]t is evident to this Court, and should have been equally apparent to counsel for [Plaintiff], who actually interacted with [Plaintiff’s consultant], that [Plaintiff’s consultant’s] understanding of what “preserve” means was dramatically different from what is intended by that word for litigation purposes. Moreover, simply telling [Plaintiff’s consultant] to preserve everything related to the [software], does not strike this Court as a reasonable means of ensuring preservation of evidence material to this lawsuit, especially after the Court had specifically ordered certain pieces of equipment to be produced.
   
7. Responsibility for agent’s actions. Plaintiff’s consultant was “under [Plaintiff’s] control and was its paid agent,” such that Plaintiff was bound by his behavior and actions.
   
8. Failure to take reasonable measures to ensure completeness and accuracy of disclosures. Sanctions were required for the failure of Plaintiff to act reasonably in making disclosures in discovery. As the Court stated:
   
   “Under Rule 26(g), a court must impose sanctions against the party, its counsel, or both, when the party fails to meet its disclosure obligations under Rule 26. The completeness and accuracy of these disclosures must be certified by an attorney of record. This certification requirement includes an obligation to conduct a reasonable inquiry into the disclosures. (citations omitted).

A motion for reconsideration and clarification of the sanctions order was filed by Plaintiff. The Court denied the motion, stating: “This Court’s order entering default judgment and sanctions was tailored to the misconduct at issue. [Plaintiff] attempts to minimize the implications of its misconduct, treating the matter as a simple issue of discovery compliance. This Court reminds [Plaintiff] that the conduct at issue was far more insidious, constituting an attempt to commit a fraud on the Court by fabricating evidence of prior art and engaging in systematic spoliation of evidence.” Memorandum Opinion and Order, June 1, 2011, Doc. No. 489 at p. 2. As the Court reiterated, “The sanctions imposed were proportionate to the wrong, which this Court found to be willful and egregious.” Id. at p. 4.

The Trading Techs. case provides various lessons for parties and counsel engaged in litigation, especially when electronic discovery is involved. The key take-aways from the case are:

1. Candor with the Court and other parties must be maintained at all times.
2. Reasonable efforts to ensure the completeness and accuracy of information disclosed in discovery is required under Fed. R. Civ. P. 26.
3. It is important to preserve electronic evidence properly, ensuring that such evidence is not altered or destroyed. “Litigation holds” should be put in place as soon as possible to ensure that such practices as routine electronic file purges or scheduled hard copy shredding do not destroy relevant evidence. Ensure that a party and its agents, including consultants, are aware of the duty to preserve all relevant evidence. Actual knowledge of discovery misconduct is not necessary for sanctions to be imposed on a party or its counsel, as gross negligence or recklessness (i.e., knew or should have known) can be enough.
4. Do not erase, alter or destroy even questionably relevant evidence.
5. Never falsify documents. While this, of course, goes without saying, it must be underscored in an age of electronic discovery. As seen in Trading Techs., an electronic trail may remain as a result of any alteration to an electronic file, and this trail may be readily apparent or can be uncovered through forensics.
6. Make all reasonable efforts to timely comply with discovery requests, including making arrangements for discovery of electronic files and media.
7. Comply with Court orders regarding discovery, both in terms of scope and timing. As the Court indicated in Trading Techs., the failure of the Plaintiff to adhere to Court orders on discovery allowed spoliation of evidence to incur and, eventually, sanctions to be imposed.