Archive for April 2017

U.S. Supreme Court Considers “Inherent Authority to Sanction a Litigant for Bad-faith Conduct� by Ordering Payment of Opponent’s “Legal Fees,� Reverses and Remands

Goodyear Tire & Rubber Co. v. Haeger, 581 U.S. ___ (2017)

In this rare opinion from our Supreme Court addressing discovery, the court considered “a federal court’s inherent authority to sanction a litigant for bad-faith conduct by ordering it to pay the other side’s legal fees.� The court held that “such an order is limited to the fees the innocent party incurred solely because of the misconduct—or put another way, to the fees that party would not have incurred but for the bad faith.� Because neither the trial court nor the appellate court applied the correct legal standard, the judgment of the Court of Appeals (9th Cir.) was reversed and the case remanded for further proceedings.

Plaintiffs sued Defendant after their motorhome swerved off the road and flipped. Plaintiffs alleged the accident was caused by the failure of their Goodyear tire.  In the course of discovery, Plaintiffs repeatedly sought disclosure of Defendant’s internal test results related to at-issue tire, but “responses were both slow in coming and unrevealing in content.�  Ultimately, the case settled.

Several months later Plaintiffs’ counsel read in the newspaper about test results disclosed in a separate litigation involving the same model tire—which he had never seen. The test indicated that the at-issue tire model “got unusually hot� at certain speeds, which had been Plaintiffs’ theory all along.  Defendant conceded withholding the information.

Plaintiffs sought sanctions for discovery fraud, specifically payment of their attorney’s fees and cost “expended in the litigation.� The District Court, reasoning that no statute or rule “enabled it to reach all the offending behavior� granted Plaintiffs’ motion pursuant to its inherent authority.  Moreover, despite acknowledging the usual need to limit such an award to expenses caused by the offending behavior, the court justified its authority to award a greater amount based on the egregious behavior of Defendant and its determination that disclosure of the test results would “more likely than not� have allowed settlement much earlier. Ultimately, the court awarded $2.7 million to account for Plaintiffs’ legal costs “since the moment, early in the litigation, when Goodyear made its first dishonest discovery response.�  Notably, in the event the Circuit Court required a causal connection, the court also made a “contingent award� of $2 million, reducing the award to exclude $700,000 based on costs associated with developing claims against other defendants and proving Plaintiffs’ medical damages.  On appeal, the Ninth Circuit affirmed the full $2.7 million award.  This created a split of authority for the Supreme Court to resolve.

Summarizing broadly, the Supreme Court confirmed that federal courts possess inherent authority to impose sanctions “for conduct which abuses the judicial process� and that one such sanction is the “assessment of attorney’s fees.� However, the court made clear that such an award “may go no further than to redress the wronged party ‘for the losses sustained’; it may not impose an additional amount as punishment . . . .�  “That means, pretty much by definition, that the court can shift only those attorney’s fees incurred because of the misconduct at issue.�  The court further explained that “[t]hat kind of causal connection . . . is appropriately framed as a but-for test . . . .�  Thus, a complaining party may recover “‘only the portion of his fees that he would not have paid but for’ the misconduct.�

In the present case, the court reasoned, neither of the lower courts used the “correct legal standard.� The District Court, for example, “specifically disclaimed the ‘usual[ ]’ need to find a ‘causal link’� between the misconduct and the fees awarded in light of the seriousness of the misconduct and possible effect (delay) on settlement.  The Circuit Court, for its part, also “mistook what findings were needed to support [the] award� when it concluded that the trial court could grant all fees incurred “during the time� of Defendant’s bad behavior—a “temporal limitation, not a causal one . . . .�

Ultimately, the court reversed the judgment of the Circuit Court and remanded the case for further proceedings.

A copy of the court’s full opinion is available here.

Court Concludes Rule 37(e) Does Not Apply to “situations where, as here, a party intentionally deleted the recording”

Hsueh v. N.Y. State Dep’t of Fin. Servs., No. 15 Civ. 3401 (PAC), 2017 WL 1194706 (S.D.N.Y. Mar. 31, 2017)

In this case arising from claims of sexual harassment at work, the court found that an adverse inference was the appropriate remedy for Plaintiff’s deletion of a recorded conversation with an HR representative. In the course of its analysis, the court agreed with Defendants that “Rule 37(e) applies only to situations where ‘a party failed to take reasonable steps to preserve’ ESI; not to situations where, as here, a party intentionally deleted the recording” and thus relied upon inherent authority to impose sanctions.

Summarizing broadly, Plaintiff was not initially forthcoming regarding whether she had recorded any relevant conversations but eventually admitted that she had recorded a conversation with an HR representative and later deleted it because it was not very clear and therefore not “worth keeping.” Defendants moved for spoliation sanctions. On the day Plaintiff’s response was due, Plaintiff’s counsel informed the court that Plaintiff had provided him with a recording of a conversation with the relevant HR representative and explained it was recovered with the help of her husband.  As a result, discovery was reopened and Plaintiff and her husband were deposed.  Thereafter, Defendants continued to pursue spoliation sanctions.

Taking up the motion the court rejected Defendants’ argument that the audio recording “might not be ESI,” but agreed that Rule 37(e) did not apply in the present instance:

The DFS also argues that Rule 37(e) applies only to situations where “a party failed to take reasonable steps to preserve” ESI; not to situations where, as here, a party intentionally deleted the recording. See DFS Br. at 8 n.2. This makes sense. The Committee Notes to the 2015 Amendment to Rule 37 explain that Rule 37(e) is meant to address “the serious problems resulting from the continued exponential growth in the volume of” ESI as well as “excessive effort and money” that litigants have had to expend to avoid potential sanctions for failure to preserve ESI. See also Cat3, LLC v. Black Lineage, Inc., 164 F. Supp. 3d 488, 495 (S.D.N.Y. 2016) (Rule 37(e) “was adopted to address concerns that parties were incurring burden and expense as a result of overpreserving data, which they did because they feared severe spoliation sanctions”). These considerations are not applicable here. It was not because Hsueh had improper systems in place to prevent the loss of the recording that the recording no longer existed on her computer; it was because she took specific action to delete it. The Court therefore concludes that Rule 37(e) does not apply.

The court further concluded that “[b]ecause Rule 37(e) does not apply, the Court may rely upon its inherent power.” The court then outlined the common law standard for the imposition of an adverse inference, which requires that the moving party “‘must establish (1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were 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.’” The court also considered and rejected Plaintiff’s argument that sanctions were inappropriate because the recording had been restored and produced, citing several facts in support of its conclusion that that the produced recording was incomplete (including the length of the recording, that it cut off in mid-sentence, and Plaintiff’s husband’s concession that he could not be sure the recording was complete).

Considering Plaintiff’s culpability, the court concluded that Plaintiff acted with the intent to deprive Defendants of the use of the recording, citing several problems with Plaintiff’s explanations surrounding the recording and its deletion.

Turning to its discussion of relief, the court noted that under both the court’s inherent authority and Rule 37(e), an adverse inference was appropriate. The court also determined that Defendants were entitled to attorneys’ fees and costs incurred in bringing the instant motion and in reopening discovery.

A full copy of the court’s opinion is available here.



Sedona Principles Revised, Public Comment Welcomed

The Sedona Conference has published revisions to its foundational Sedona Principles, The Sedona Principles, Third Edition: Best Practices, Recommendations & Principles for Addressing Electronic Document Production. As stated in the preface, the Third Edition was “necessitated by an even greater explosion in the volume and diversity of forms of electronically stored information, the constant evolution of technology applied to eDiscovery, and by further amendments to the Federal Rules of Civil Procedure” as well as by many years of experience in e-discovery.  Thus, “[t]he Third Edition has been thoroughly updated to take into account evolving views on electronic discovery over the past decade, based upon the collective experiences of the WG1 membership in facing the myriad of practical issues that are influencing the development of the law in this area, the numerous important court decisions across the country, and, of course, the 2015 amendments to the Federal Rules [of] Civil Procedure.”

Interested parties are invited to “join the dialogue and expand the consensus” around the revised principles and may provide comments to the drafting committee until June 30, 2017.

The Sedona Principles, Third Edition is available for download, here.