Victor Stanley II – More Sanctions Including the Threat of Imprisonment for Spoliation of Electronically Stored Evidence

In a stinging opinion filed on September 9, 2010, the Hon. Paul W. Grimm -- a heavyweight in electronic discovery jurisprudence -- described the defendants’ actions in Victor Stanley, Inc. v. Creative Pipe, Inc., No. MJG-06-2662, 2010 WL 3530097 (D. Md. Sept. 9, 2010) as “the single most egregious example of spoliation that I have encountered in any case that I have handled or in any case described in the legion of spoliation cases I have read in nearly fourteen years on the bench.”

Due to the defendants’ repeated and willful attempts to destroy electronically stored information (ESI), Magistrate Judge Grimm ordered that the individual defendant’s acts of spoliation should be treated as contempt of court, and that as a sanction, the president of the defendant company should be imprisoned for a period not to exceed two years, unless and until he pays the plaintiff’s attorney’s fees and costs.  In addition, as a further sanction for spoliation of evidence, Magistrate Judge Grimm recommended that the district court enter a default judgment and permanent injunction regarding the plaintiff’s copyright infringement count.

Background: Victor Stanley I

On October 11, 2006, Victory Stanley, Inc., filed a complaint against Creative Pipe, Inc., Mark Pappas (President of defendant Creative Pipe), and others, alleging patent and copyright violations, as well as unfair competition.  Specifically, Victor Stanley claimed that someone from Creative Pipe downloaded design drawings and specifications from Victor Stanley’s website under the pseudonym “Fred Bass,” and subsequently used those drawings to compete against Victor Stanley.

The litigation between Victor Stanley and Creative Pipe was riddled with numerous discovery-related problems.  For example, in a much noted opinion from 2008, Magistrate Judge Grimm held that attorney-client privilege and work product protection had been waived for 165 documents that had been stored electronically and voluntarily produced pursuant to a document request. Victor Stanley, Inc. v. Creative Pipe, Inc., 250 F.R.D. 251 (D. Md. 2008).  Specifically, the court noted, among other things, that the defendants assumed the risk of inadvertent production when they abandoned a clawback agreement recommended by the court, and performed an unreasonable keyword search on text-searchable ESI.

Victor Stanley II

The parties’ discovery woes continued long after that 2008 opinion.  In the latest memorandum and ruling in this case, Magistrate Judge Grimm details defendant Pappas’ flagrant attempts to hide harmful ESI from production during discovery.  Specifically, defendant Pappas repeatedly deleted ESI on the eve of important discovery deadlines in an intentional attempt to destroy evidence.  Describing defendants as the “the gang that couldn’t spoliate straight,” the court noted that Pappas’s zeal for destroying and attempting to destroy evidence considerably exceeded his actual ability to destroy ESI without detection. 

The court cited eight specific preservation failures:

1. Failing to implement a litigation hold;
2. Deleting ESI soon after the plaintiff filed suit; 
3. Failing to preserve an external hard drive after the plaintiff demanded preservation of ESI;
4. Failing to preserve files and emails after the plaintiff demanded their preservation;
5. Deleting ESI after the court issued its first preservation order;
6. Continued deletion of ESI and use of programs to permanently remove files after the court admonished the parties of their duty to preserve evidence and issued its second preservation order;
7. Failing to preserve ESI when switching from an old server to a new one; and
8. Further using programs to permanently delete ESI after the court issued numerous production orders.

In analyzing an appropriate sanction for these preservation deficiencies, the court lamented “the lack of a national standard, or even a consensus among courts in different jurisdictions about what standards should govern preservation/spoliation issues.” Magistrate Judge Grimm noted that legal practitioners share a well-founded fear that they could face harsh sanctions despite their reasonable preservation and production efforts.  Not wanting to add to this “collective anxiety,” the court was careful to distinguish the defendants’ extraordinarily egregious acts from the typical spoliation case.

According to the court, an especially harsh sanction in the instant action was warranted for numerous reasons.  The court found that the defendants acted in bad faith, and that defendant Pappas repeatedly lied about his actions in affidavits, depositions, and in open court.  Additionally, the defendants’ willful, bad faith conduct deprived the plaintiff of relevant evidence, thus resulting in clear prejudice to the plaintiff.  Furthermore, the opinion noted that the duty to preserve evidence is a duty owed to the court, not to the party’s adversary – “a subtle, but consequential distinction.”  As such, Magistrate Judge Grimm explained that four years of discovery-related litigation in this case greatly interfered with the court’s administration of justice, and wasted precious time and resources.

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