Securities And Exchange Commission v. Mercury Interactive LLC et al
Filing
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ORDER DENYING DEFENDANTS' MOTION FOR RELIEF FROM NON-DISPOSITIVE PRETRIAL ORDER OF MAGISTRATE JUDGE re 256 MOTION From Non-dispositive Pretrial Order of Magistrate Judge re 249 Order on Motion for Sanctions Defendant's Motion for Relief From Non-Dispositive Pretrial Order of Magistrate Judge filed by Susan Skaer (whalc2, COURT STAFF) (Filed on 9/25/2012)
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IN THE UNITED STATES DISTRICT COURT
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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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Plaintiff,
For the Northern District of California
United States District Court
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No. C 07-02822 WHA
SECURITIES AND EXCHANGE
COMMISSION,
ORDER DENYING
DEFENDANTS’ MOTION FOR
RELIEF FROM NONDISPOSITIVE PRETRIAL ORDER
OF MAGISTRATE JUDGE
v.
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MERCURY INTERACTIVE LLC, et al.,
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Defendants.
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INTRODUCTION
Defendants Amnon Landan, Douglas Smith, and Susan Skaer seek relief from the
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magistrate judge’s order denying sanctions for alleged spoliation of evidence. For the reasons
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stated below, defendants’ motion for relief is DENIED.
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STATEMENT
The instant motion arises from an investigation and ensuing lawsuit that was initiated by
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the Securities and Exchange Commission in 2004. In November 2004, the Commission began an
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informal investigation into Mercury Interactive LLC for potential violations of securities laws.
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Mercury retained Davis Polk & Wardwell LLP as its counsel for the investigation. In August
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2005, the Commission ordered a formal investigation into Mercury and subpoenaed documents
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from Mercury. As a result of the investigation, the Commission filed a complaint against
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Mercury and individual defendants Landon, Smith, Skaer, and Sharlene Abrams in May 2007. A
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final settlement agreement was entered as to Mercury in July 2007. The settlement agreement
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required Mercury to retain all documents and to produce them to the Commission if necessary.
The civil action was reassigned to the undersigned judge in September 2011.
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Now before the Court is a motion by defendants Landan, Smith, and Skaer for sanctions
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for the Commission’s alleged spoliation of evidence, which was referred to Magistrate Judge
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Jacqueline Corley. Defendants claim that the Commission deleted documents produced to the
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Commission by Mercury (through Davis Polk), which are now permanently lost. Defendants’
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first motion requested the sanction of dismissal. Following a hearing, the magistrate judge
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allowed additional discovery and supplemental briefing. In the second round of briefing,
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defendants also requested alternative remedies short of dismissal, including an adverse inference
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jury instruction.
data were produced by Mercury (through Davis Polk) to the Commission from 2005 to 2007. In a
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For the Northern District of California
Pursuant to the Commission’s initial investigation of Mercury, large amounts of electronic
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United States District Court
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series of mishaps and misunderstandings, the Commission deleted the documents that Davis Polk
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had produced to it prior to April 2006 to remedy the law firm’s erroneous production of
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privileged material. The Commission was then unable to re-produce those documents to the
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individual defendants in later litigation. Apparently, for reasons that are not entirely clear, neither
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Mercury nor Davis Polk retained a complete copy of the earlier productions. Although
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defendants originally claimed that the Commission’s deletion of documents resulted in the loss of
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roughly five million pages of electronic data, all but 270,000 pages have now been located from
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Davis Polk and Hewlett-Packard (now Mercury’s parent company) and produced to movants.
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The details are below.
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1.
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Davis Polk’s first production to the Commission in 2005 included roughly five million
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pages of electronic documents, originally provided in “native” format only. The Commission
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requested that Davis Polk provide the production in “TIFF” format (“Tagged Image File
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Format”), which Davis Polk did over a period of several months. Davis Polk then discovered that
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the documents provided in the 2005 production (and again in the subsequent TIFF format
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productions) included privileged and non-relevant documents. In a letter dated February 7, 2006,
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Davis Polk proposed a procedure whereby Davis Polk would review the documents and identify
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privileged or non-responsive documents to the Commission, at which point the Commission
Davis Polk’s Production of Privileged or Non-responsive Materials.
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would presumably pick through the production and selectively remove each document (Dkt. No.
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213-1 at 42-43). Davis Polk also requested the Commission delete the native file production, as it
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would be entirely replaced with the same documents in TIFF format (ibid.). On April 7, 2006,
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Davis Polk identified to the Commission a long list of Bates numbers reflecting documents it
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claimed were privileged.
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Davis Polk repeatedly followed up to request that the Commission delete or return the
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documents identified in its April 2006 clawback list. The Commission responded that the
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Commission was reviewing the past productions to ensure that all prior native format productions
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had been replaced, and informed Davis Polk that the process was complicated by technical
difficulties with some of the productions. Davis Polk responded in October 2006 suggesting that
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For the Northern District of California
United States District Court
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the Commission “return the ‘native format’ files and inadvertently produced .tiffs to us now
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subject to a commitment by us to resolve any issues the Staff may subsequently discover[.] We
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are obviously willing to get the Staff whatever non-privileged materials it needs if issues do, in
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fact, arise” (Dkt No. 244-1 at 2).
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2.
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Davis Polk continued to provide document productions on a rolling basis through
The Commission’s Deletion of Documents Produced to it Prior to April 2006.
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February 2007, some of which were found to have technical problems. Discussions between
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Davis Polk and the Commission or its staff regarding the documents to be clawed back were also
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rolled into communications regarding these other technical problems. In particular, Carrie Holt,
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the Commission’s IT litigation support specialist, was primarily responsible for communicating
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with Davis Polk regarding their document productions. She understood that Davis Polk wanted
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the Commission to delete all the material produced prior to April 2006 and that Davis Polk would
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provide corrected productions without the clawback documents (Holt Decl. ¶¶ 3-4, Dkt. No. 219).
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In March 2007, the Commission deleted from the Commission’s electronic databases all
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documents produced to it by Davis Polk prior to April 7, 2006. The Commission deleted these
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documents with the understanding “that Mercury and/or Davis Polk would preserve any and all
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responsive materials” (Jest Decl. ¶ 10, Dkt. No. 220).
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3.
Defendants’ Claim of Missing Documents.
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On September 7, 2007, the Commission served its Rule 26(a) disclosures to individual
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defendants Landan, Smith, and Skaer. The initial disclosures listed specific Bates number ranges
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that would be provided to defendants, including a substantial number of documents received from
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Mercury. Discovery progressed. Defendants claimed that over five million pages of non-
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privileged, responsive documents that Davis Polk had produced to the Commission were missing
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from the Commission’s production to defendants. This was a vast overstatement. Defendants
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have identified the documents by gaps in Bates numbering, as the documents are labeled with
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Bates numbers that use prefixes specific to each custodian. Defendants have thus been able to
isolate the number of missing pages for each custodian on the Commission’s original list of
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potential trial witnesses. As described above, defendants were able to obtain all but
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approximately 270,000 pages, either from Davis Polk or Hewlett-Packard. Defendants claim that
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these 270,000 pages are permanently missing. As the magistrate judge noted, “they have not,
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however, identified any specific missing range of documents” other than by Bates number. For
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example, they have not shown that there are gaps in a custodian’s emails from certain time
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periods, or that documents of a particular type are missing.
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ANALYSIS
“A non-dispositive order entered by a magistrate must be deferred to unless it is ‘clearly
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erroneous or contrary to law.’” Grimes v. City & County of San Francisco, 951 F.2d 236, 241
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(9th Cir. 1991) (citations omitted). Findings of fact in the magistrate judge’s order are reviewed
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for “clear error.” Ibid. A district court reviewing the magistrate judge’s order “may not simply
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substitute its judgment for that of the deciding court.” United States v. BNS, Inc., 858 F.2d 456,
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464 (9th Cir.1988). Under the “contrary to law” standard, a court reviews issues of law de novo.
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Osband v. Woodford, 290 F.3d 1036, 1041 (9th Cir.2002).
DISMISSAL SANCTION.
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1.
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Sanctions may be imposed for spoliation, which is “the destruction or significant
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alteration of evidence . . . in pending or future litigation.” Kearney v. Foley & Lardner, LLP, 582
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F.3d 896, 900 (9th Cir. 2009). Dismissal is a permissible sanction when “a party has engaged
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deliberately in deceptive practices that undermine the integrity of judicial proceedings because
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courts have inherent power to dismiss an action when a party has willfully deceived the court and
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engaged in conduct utterly inconsistent with the orderly administration of justice.” Leon v. IDX
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Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006).
to impose a sanction of dismissal. Defendants assert that the standard set by our court of appeals
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is that “dismissal requires only ‘fault,’ i.e. gross negligence,” but cite no decision on point from
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the court of appeals. On the record in this case, the magistrate judge found that dismissal was not
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warranted, particularly because the Commission believed that Davis Polk would or already had
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reproduced the documents to the Commission, and that Davis Polk and Mercury had copies of
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For the Northern District of California
Defendants argue that the magistrate judge committed legal error by requiring “bad faith”
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United States District Court
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everything the Commission had deleted. Under the proper standard of the United States Court of
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Appeals for the Ninth Circuit governing the sanction of dismissal for loss of evidence, the
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conduct of the Commission staff was not so egregious as to warrant dismissal. See Leon, 464
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F.3d at 958.
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2.
ADVERSE INFERENCE SANCTION.
A.
The Commission’s Level of Culpability.
The magistrate judge’s finding that the Commission did not act in bad faith was not clear
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error. Davis Polk believed that it had requested that the Commission delete the specific
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privileged or non-responsive documents Davis Polk identified to them. Misunderstanding the
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request, the Commission deleted all the documents Davis Polk had produced to it prior to April
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2006. The magistrate judge found that Davis Polk never corrected the Commission or its staff’s
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misunderstanding regarding how to handle Davis Polk’s clawback requests. The Commission’s
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confusion was “not unreasonable,” given that the document productions Davis Polk provided to
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the Commission were “complicated and problematic, a process that involved production, claw-
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back, and reproduction of some 13 million pages of documents, with many of the reproductions
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and further production riddled with errors” (Order at 12). Also important, the Commission had
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every reason to believe that there were other copies of the production. Mercury had a clear
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obligation to retain discovery materials. Davis Polk, as counsel for Mercury, should also have
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retained a copy of everything it had produced, and indeed did assure the Commission that it
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would provide the Commission with any documents that may have been lost through the jumbled
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production and clawback process.
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The magistrate judge appears to have found the Commission acted reasonably in deleting
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the pre-April 2006 production set of documents. After deleting the files, however, the
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Commission did not ensure that the later productions from Davis Polk provided a complete set of
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documents. “While the record is replete with emails demonstrating some efforts by the SEC to
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confirm that Davis Polk had reproduced what the SEC believe it was supposed to receive, the
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bottom line is that the SEC did not know what was in its investigative files” (Id. at 13).
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B.
Determination that adverse inference sanction not warranted.
Noting that our court of appeals has not established a clear test for determining when an
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adverse inference instruction to the jury may be an appropriate sanction, the magistrate judge
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applied the test set forth in Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 220 (S.D.N.Y. 2003).
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The test is widely used and requires that the party seeking an adverse inference instruction based
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on the spoliation of evidence must establish: “(1) that the party having control over the evidence
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had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed
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with a ‘culpable state of mind’[;] and (3) that the destroyed evidence was ‘relevant’ to the party’s
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claim or defense such that a reasonable trier of fact could find that it would support that claim or
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defense.” Ibid. Where the “culpable state of mind” is bad faith, “that fact alone is sufficient to
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demonstrate relevance. By contrast, when the destruction is negligent, relevance must be proven
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by the party seeking the sanctions.” Ibid. Defendants do not argue that the application of the
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Second Circuit’s test constituted legal error. Defendants contend, however, that the magistrate
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judge erred by interpreting “culpable state of mind” to require a showing of bad faith.
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First, as stated above, the magistrate judge did not commit clear error in determining there
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was no bad faith on the part of the Commission. Second, the magistrate judge did not make an
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explicit finding regarding whether the Commission was negligent, but instead assumed for the
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sake of argument that the Commission had been negligent. Even so assuming, however, the
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magistrate judge found that defendants failed to meet their burden of showing relevance. The
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magistrate judge emphasized that all the record shows is that a comparison of spreadsheets
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suggests that documents with certain Bates numbers are missing. These spreadsheets are
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themselves not necessarily to be taken at face value, as they are based on an “error-riddled
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document production.” Defendants provided no evidence regarding what time frame the missing
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documents covered. The magistrate judge further found that defendants failed to identify any
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particular gaps based on their review of the other documents they had received from the
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Commission or other parties (Order at 18). Where the challenged conduct is at most negligent,
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rather than “bad faith,” it is the party seeking sanctions who bears the burden of showing
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relevance. In this case, defendants presented arguments as to why the particular custodians may
have relevant documents in general. They did not, however, make any showing regarding the
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time frame, type of document, or other information sufficient to demonstrate the relevance of the
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missing documents. Based on the lack of information tied to the missing documents, coupled
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with the fact that the documents were identified as missing only by their presence or absence on
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questionably reliable production spreadsheets, the magistrate judge found that defendants had not
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met their burden of showing the missing documents were relevant. This finding was not clearly
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erroneous.
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Defendants contend that relevance should be presumed where the spoliating party acted in
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bad faith or in a “grossly negligent manner.” As discussed above, however, the magistrate judge
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clearly did not find “bad faith” or “gross negligence” on the part of the Commission. Applying
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the test from Zubulake, the magistrate judge did not commit clear error in requiring defendants to
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demonstrate relevance where the spoliating party’s conduct was at most negligent.
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C.
The magistrate judge’s findings of fact.
Defendants argue that the magistrate judge erred on a number of facts that would establish
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the Commission was at least negligent. Defendants do not, however, contend that the alleged
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factual errors are sufficient to establish bad faith on the part of the Commission. Even were the
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Commission negligent, the result remains given the failure of proof as to relevance.
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For example, defendants claim that the magistrate judge erred in finding that the
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Commission conducted a diligent review of the document production prior to deleting the pre7
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April 2006 documents in March 2007. The magistrate judge’s order, however, referred to the
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Commission’s review of the document production prior to returning physical and tangible
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materials to Davis Polk, not the deletion of documents from the Commission’s database.
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Presumably these physical materials contained yet another copy of the pre-April 2006
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productions. The fact that the Commission deleted documents prior to conducting this review
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does not establish bad faith, where the Commission believed that Davis Polk still retained copies
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of all documents produced. Similarly, defendants argue that the magistrate judge erred in finding
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that the Commission had returned materials to Davis Polk where “there was no corroborative
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evidence” from the Commission or Davis Polk. The order cited to evidence in the record to
support this finding, including a declaration of Joseph Jest, who was senior counsel at the
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Commission and involved in the investigation, a declaration of Carrie Holt, Commission’s IT
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litigation support specialist, and the statements made by counsel at the hearing, which defendants
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did not contest (Jest Decl. ¶9, Dkt. No. 220; Holt Decl. ¶ 10, Dkt. No. 219; Hearing Tr. at 5-6,
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Dkt. No. 227). The magistrate judge did not commit clear error in crediting this evidence.
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With regard to defendants’ contention that the magistrate judge erred by crediting Ms.
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Holt’s declaration with statements not in the declaration and crediting Ms. Holt with memories
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she did not have, those issues were adequately addressed in the order (Order at 4 and fn. 6).
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Similarly, the magistrate judge adequately considered the Commission’s internal manual setting
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forth procedures for handling documents in determinating the Commission’s level of culpability.
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The magistrate judge did not commit clear error in findings of fact, and defendants have failed to
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show that any alleged errors would require a different outcome.
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Defendants argue that they are innocent and should not bear the burden of the lost
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documents. If it becomes relevant at trial, the Court may possibly allow defendants to inform the
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jury that the Commission managed to delete some 270,000 pages that Mercury had produced to
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the Commission. If, in fact, the documents are relevant in some way, the defendants will receive
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some benefit from this.
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CONCLUSION
For the foregoing reasons, defendants’ motion for relief from the magistrate judge’s order
is DENIED.
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IT IS SO ORDERED.
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Dated: September 25, 2012.
WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE
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For the Northern District of California
United States District Court
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