First American Title Insurance et al v. Northwest Title Insurance Agency et al
Filing
272
MEMORANDUM DECISION granting in part and denying in part 155 Motion for Spoilation Sanctions. Signed by Magistrate Judge Paul M. Warner on 8/31/16 (alt)
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
FIRST AMERICAN TITLE INSURANCE
COMPANY AND FIRST AMERCAN
TITLE COMPANY, LLC,
MEMORANDUM DECISION
Case No. 2:15-cv-00229
Plaintiffs,
v.
District Judge David Nuffer
NORTHWEST TITLE INSURANCE
AGENCY, LLC; MICHAEL SMITH;
JEFF WILLIAMS; AND KRISTI
CARRELL
Magistrate Judge Paul M. Warner
Defendants.
District Judge David Nuffer referred this case to Magistrate Judge Paul M. Warner
pursuant to 28 U.S.C. § 636(b)(1)(A). Before the court is a motion for spoliation sanctions1 by
First American Title Insurance Company and First American Title Company (collectively
“FATCO”) against Northwest Title Insurance Agency, Mike Smith, Jeff Williams, and Kristi
Carrell (collectively “Defendants”). The court carefully reviewed the papers submitted by the
parties. Pursuant to civil rule 7-1(f) of the United States District Court for the District of Utah
Rules of Practice, the court elects to determine the motion on the basis of the written memoranda
and finds that oral argument would not be helpful and is unnecessary. See DUCivR 7-1(f).
BACKGROUND
Defendants Mike Smith and Jeff Williams were previously employed at FATCO. In and
around January 2015, the two men began working together to establish a competing company,
1
Docket no. 155.
1
Northwest Title Insurance Agency (“Northwest”). When communicating by email regarding
setting up Northwest, they used their wives’ emails, rather than their FATCO email accounts.
Their efforts occurred primarily outside of their normal work hours at FATCO.
The men resigned their FATCO positions on March 9 and 10, 2015, and began working at
the newly-formed Northwest. Smith deleted certain personal files from his FATCO computer
before leaving FATCO. Smith returned a FATCO-issued iPad to FATCO within a few days of his
departure. Mr. Smith deleted personal files and applications from the iPad prior to its return.
FATCO alleges that Smith factory-reset the iPad before returning it.
Within days of the men’s departures, other co-workers left FATCO to work for
Northwest.
Individuals leaving FATCO were instructed not to bring FATCO documents;
nevertheless, some documents were taken. Some of these documents were subsequently lost or
destroyed.
On March 17, 2015, FATCO sent preservation demand letters to certain Northwest
employees.2 Smith complied with the preservation demand and instructed other recipients of the
preservation demand “that they should follow the instructions in the [l]etter and to not delete or
destroy anything that could constitute evidence in any proceeding against them.”3 On April 7,
2015, FATCO served the underlying complaint on Defendants. Shortly thereafter, Smith met
with Northwest branch managers and instructed them to preserve documents related to the
lawsuit, and to relay that instruction to all employees in the branch.4 FATCO served its first set
of discovery requests on June 19, 2015.
2
Docket no. 155-4.
Docket no. 169-13.
4
Id.
3
2
FATCO brought the current motion under rule 37 of the Federal Rules of Civil Procedure
seeking sanctions against Defendants for alleged spoliation of evidence. The facts relating to
specific issues raised by FATCO’s motion are discussed below in conjunction with the court’s
analysis of the respective categories.
LEGAL STANDARD
Rule 37(e) of the Federal Rules of Civil Procedure provides the framework for analyzing
spoliation of electronically stored information (“ESI”). Rule 37 provides:
If electronically stored information that should have been preserved in the
anticipation or conduct of litigation is lost because a party failed to take
reasonable steps to preserve it, and it cannot be restored or replaced through
additional discovery, the court:
(1)
upon finding prejudice to another party from loss of the information, may
order measures no greater than necessary to cure the prejudice; or
(2)
only upon finding that the party acted with the intent to deprive another
party of the information’s use in the litigation may:
(A) presume that the lost information was unfavorable to the party;
(B) instruct the jury that it may or must presume the information was
unfavorable to the party; or
(C) dismiss the action or enter a default judgment.
Fed. R. Civ. P. 37 (emphasis added).
The Tenth Circuit has applied the same Rule 37 analysis to non-ESI spoliation issues, and
emphasized that the litigation must be “imminent” for the duty to preserve to arise:
Spoliation sanctions are proper when “(1) a party has a duty to preserve evidence
because it knew, or should have known, that litigation was imminent, and (2) the
adverse party was prejudiced by the destruction of the evidence.” Burlington N. &
Santa Fe Ry. Co. v. Grant, 505 F.3d 1013, 1032 (10th Cir. 2007). But if the
aggrieved party seeks an adverse inference to remedy the spoliation, it must also
prove bad faith. “Mere negligence in losing or destroying records is not enough
because it does not support an inference of consciousness of a weak case.”
3
Aramburu, 112 F.3d at 1407. Without a showing of bad faith, a district court may
only impose lesser sanctions.
Turner v. Pub. Serv. Co. of Colorado, 563 F.3d 1136, 1149 (10th Cir. 2009) (emphasis added).
ANALYSIS
FATCO brought the current motion under rule 37 of the Federal Rules of Civil Procedure
seeking sanctions against Defendants for alleged spoliation of evidence. The alleged spoliation
issues can be divided into five general categories, which are divided here by headings.
A. Timing of Duty to Preserve and Failure Issue a Written Litigation Hold Notice
FATCO claims that Defendants failed to preserve evidence because they issued a verbal
litigation hold notice, rather than a written one, and that Defendants’ duty to preserve arose as
soon as Defendants set up Northwest.5 FATCO contend that an oral litigation hold is inadequate
and potentially “[constitutes] gross negligence” because the failure to issue a written hold is
“likely to result in destruction of relevant information.”6
Issuance of only an oral litigation hold is problematic, and depending on circumstances,
may fail to fulfill a party’s discovery obligations. However, FATCO fails to cite any authority for
the proposition that an oral litigation hold is per se violative of a party’s duty to preserve. The
case repeatedly quoted by Plaintiffs, Philips Elecs. N. Am. Corp. v. BC Tech., involved the
failure to issue a litigation hold until more than 17 months after litigation commenced and
deliberate, systematic spoliation and overwriting of nearly 18,000 files by officers and
executives. 773 F. Supp. 2d 1149, 1196 (D. Utah 2011) (finding bad faith where, hours after the
court ordered defendant to stop deleting files and to turn over certain documents, “executives and
employees began deleting a massive number of files from their computers”). However, the
5
Docket no. 155 at 7 and 10.
6
Id. at 8.
4
Philips case did not involve or address the sufficiency of an oral litigation hold. Further, the
Philips opinion relied on a Southern District of New York decision that was subsequently
abrogated by the Second Circuit. See Pension Comm. of Univ. of Montreal Pension Plan v. Banc
of Am. Sec., 685 F. Supp. 2d 456, 481 (S.D.N.Y. 2010) abrogated by Chin v. Port Auth. of New
York & New Jersey, 685 F.3d 135 (2d Cir. 2012). In rejecting the lower court’s position, the
Second Circuit noted that failing to issue any litigation hold was merely “one factor” in
considering discovery sanctions. Chin, 685 F.3d at 162 (“We reject the notion that a failure to
institute a ‘litigation hold’ constitutes gross negligence per se.”). Other than generalities and
conclusory statements, FATCO fails to allege prejudice from issuance of an oral hold, as opposed
to a written hold.
FATCO also argues that Defendants’ duty to preserve started on January 26, 2015, when
Northwest was incorporated.7 This is clearly overreaching by FATCO. Rule 37 provides that the
duty to preserve arises when there is “anticipation . . . of litigation.” Fed. R. Civ. P. 37. The
Tenth Circuit has interpreted this to mean when a party “knew, or should have known, that
litigation was imminent.” Burlington N. & Santa Fe Ry. Co., 505 F.3d at 1032. Taking steps to
start Northwest, even if Defendants knew starting the competing company would be contentious
and actively opposed, is insufficient to establish imminent litigation. FATCO’s position is
sweeping in scope and would effectively render a company’s every action the basis for a
litigation hold.
Defendants contend that the duty arose “no earlier than April 7, 2015, when this lawsuit
was served.”8 Although service of a complaint may trigger the duty to preserve under some
7
Docket no. 155 at 10.
8
Docket no. 169 at 28.
5
circumstances, the date of service of the complaint here is too late.
Defendants knew or
reasonably should have known that litigation was imminent shortly after receipt of the
preservation demand on March 18, 2015. The court recognizes that as a practical matter a few
additional days should be allowed to permit recipients to review the matter, seek the advice of
counsel, and determine appropriate next steps.
Defendants’ argument that delivering a
preservation demand to Northwest’s executives and company founders only notified the
individual recipients, not Northwest, is disingenuous.
FATCO fails to establish what ESI, if any, may have been lost due to an oral hold, as
opposed to a written hold. Likewise, the court finds that Defendants’ duty to preserve arose no
earlier than March 18, 2015.
B. Deletion of Emails from Shared Personal Accounts
Plaintiff contends that deletion of emails from Smith’s and William’s personal accounts
that they shared with their respective wives was spoliation.
In setting up Northwest, Smith and Williams used family emails accounts, rather than
their FATCO email accounts.
Defendants subsequently determined that emails from these
personal accounts had been deleted at some point in time. It appears that the emails were deleted
by the men’s wives as part of routine account maintenance practices. Smith testified that his
wife, Ruth Smith, deleted e-mails on the account. Ruth Smith stated that it was “our family email,” that she deleted emails because she had “over 10,000 e-mails on [the] account,” and that
she deleted “them randomly to get rid of them.”9 Ruth Smith also testified that she could not
remember when she deleted emails, but that it was “a long time ago.”10 It appears that FATCO
9
Docket no. 169-24.
10
See docket no. 187 at 7.
6
never deposed Williams’ wife, but Williams declared that “I can only surmise that my wife
cleaned out her email box, and did so some time ago.”11 FATCO claims that the loss of these
emails constitutes spoliation. At least some of the deleted emails from these accounts were
recovered from third parties.
Analyzed through the framework of Rule 37, it is clear that some potentially relevant ESI
was lost. However, there are no specific dates to establish when the emails were deleted, other
than statements that indicate it could likely have been before the time that the duty to preserve
arose. Similarly, FATCO fails to establish that the emails, or a significant portion of them,
“cannot be restored or replaced through additional discovery,” or explain the actual prejudice to
FATCO. Fed. R. Civ. P. 37(e). Rule 37’s plain language does not support the argument that
every loss of ESI is per se prejudicial for purposes of spoliation sanctions. Rule 37(e)(1)’s
requirement of the court’s “finding prejudice to another party from loss of the information”
before impose sanctions would be meaningless otherwise.
On the facts before it, the court cannot determine that ESI was lost or destroyed after the
duty to preserve arose, that FATCO was prejudiced by the loss of these emails, or that a
significant portion of the lost ESI “cannot be restored or replaced through additional discovery.”
Fed. R. Civ. P. 37(e). In fact, some portion of the ESI has been recovered or replaced through
third parties. Accordingly, imposition of sanctions under Rule 37 would be improper.
C. Deletion of Documents from Smith’s FATCO Computer and iPad
Smith “deleted a number of files” from his work computer immediately prior to his
resignation” from FATCO on March 9, 2015.12 Smith deleted personal documents, but left other
11
Docket no. 169-22 at 3.
12
Docket no. 155-2 at 45.
7
ESI behind.13 Smith also returned a FATCO iPad to FATCO “two or three days” or “within a
week of when [he] left.”14 Smith asserts he only deleted personal photos and applications from
the iPad, “do[es] not know how to return an iPad to factory settings,” and does not believe he
reset the iPad.15 Smith noted that as a matter of practice he did not save documents on the iPad
and only used it to send or receive emails on FATCO’s system.16 FATCO also appears to have
technological controls that limited how the iPad could be used, including blocking access to nonFATCO email accounts. FATCO claims that the iPad was “wiped back to factory settings” upon
return to FATCO.17
It is not clear whether potentially relevant ESI was lost. There is no evidence that Smith
deleted items other than personal pictures, documents, or applications. No argument has been
made that Smith’s vacation pictures or a favorite fondue recipe are somehow relevant. Further,
any deletions occurred before receipt of the preservation demand on March 18, 2015, and thus
before the duty to preserve arose. Finally, FATCO has not established that the ESI “cannot be
restored or replaced through additional discovery.” Fed. R. Civ. P. 37(e). Smith’s computer and
iPad remained, and presumably remain, in the possession and control of FATCO. Other than a
conclusory statement about recovery of iPad data by a FATCO employee, FATCO fails to discuss
(1) any efforts to restore computer files or the iPad, or (2) any backups that might exist.
Accordingly, there is no basis for sanctions under Rule 37.
13
See docket no. 169-1.
14
Id. at 13.
15
Docket no. 169-13.
16
Id.
17
Docket no. 155 at 5.
8
D. Smith’s Northwest Emails Between February 28 and March 10
Smith began using a Northwest email account for business purposes around February 28,
2015.18 During discovery, Smith produced emails from his Northwest account, but could not
locate emails dated prior to March 10, 2015. Smith does not recall deleting the emails, but says
that if he did, it would have been before he received the preservation demand.19 FATCO was
able to recover some emails through third party subpoenas.
The volume of potential ESI here appears very limited—approximately 11 days of emails
from a time period when Smith was still working at FATCO during the regular workday. There
is no evidence of deletion of the emails, other than Smith’s statements that he does not recall
deleting the emails, but that he would not have done so after receipt of the preservation
demand.20 FATCO acknowledges that at least some of the emails have been recovered from third
party discovery. It is also unclear how FATCO would be prejudiced from the unavailability of
this part a limited set of emails.
Given the circumstances, sanctions are not warranted under Rule 37.
E. FATCO Documents Destroyed by Non-Party Employees
FATCO highlights three separate former FATCO employees that FATCO alleges spoliated
evidence.21 These individuals are not defendants in this action and do not appear to be principals
at or owners of Northwest.
1. Angie Flint
Angie Flint (“Flint”) had two thumb drives with FATCO documents.22 On March 9,
18
Docket no. 155-2 at 42.
19
Docket no. 169-13 at 6.
20
Id.
21
Docket no. 155 at 6 and 7.
9
2015, her penultimate day at FATCO, she copied personal photos from her FATCO computer
onto a drive. That same day she took the drive home and deleted two FATCO documents that
she found there.23 Flint does not know what happened to that thumb drive.
The second thumb drive contained marketing materials that Flint used in her dealings
with customers.24 Mark Webber, a FATCO executive, testified that the marketing materials were
not confidential and were distributed to customers.25 Flint threw away the second thumb drive at
a time she could not specify and denied using the materials on the drive at or for Northwest.26
The documents on the first thumb drive were deleted prior to the preservation demand,
and hence before any duty to preserve arose. The timing of the deletion of the documents on the
second drive is unknown. However, given that the documents were described with sufficient
detail for a FATCO executive to opine on their confidentiality and that FATCO has the original
documents, FATCO fails to establish that (1) documents were actually “lost,” or (2) the
documents “cannot be restored or replaced through additional discovery.” Fed. R. Civ. P. 37.
Further, it is unclear how loss of these files would be prejudicial to FATCO.
Accordingly, the requirements under Rule 37 for imposing sanctions are not met for Flint.
2. Elizabeth Cole
Elizabeth Cole (“Cole”) took numerous hard copy documents and a thumb drive
containing FATCO documents when she left the company on March 10, 2015.27 Cole testified
22
See docket no. 155 at 6.
23
Docket no. 169-5.
24
Id.
25
Docket no. 169-25.
26
Docket no. 169-5.
27
Docket no. 169-9.
10
that she had no reason to use a thumb drive in the ordinary course of her work at FATCO.28 The
hard copy documents appear to have been client and lender documents.29
Some of the
documents were returned to FATCO, while others were recorded if the transaction closed at
Northwest.30 Cole did not know what happened to each copy of the documents, and could not
locate them. Cole believes that remaining copies “got shredded,” but she did not know and could
not remember.31 The thumb drive contained affidavit forms.32 Cole asserts that she never used
these files and that she cannot find the thumb drive.33 Cole did not know when the documents
and files were destroyed or lost.
Files on the thumb drive are ESI, while the hard copies are not. However, the court
analyzes spoliation of non-ESI documents under the same rubric of Rule 37. See Turner, 563
F.3d at 1149.
Based on the evidence before the court, it appears likely that the thumb drive and
documents were lost or destroyed after receipt of the preservation demand.
Cole joined
Northwest shortly before receipt of the preservation demand. She close transactions or attempted
to close transactions at Northwest based on or relating to the documents, which presumably did
not occur within just days of her departure from FATCO. Defendants had an obligation to
preserve the documents as of approximately March 18, but failed to take reasonable steps to do
so. Cole could not recall all of the files and documents with specificity, and there is no
28
Id. at 14.
29
Docket no. 169-9.
30
Id.
31
Id.
32
Id.
33
Id.
11
mechanism to enable FATCO to recover or restore the documents through further discovery.
Based on the types of documents spoliated and their potential relevance to the issues of the case,
the court finds that FATCO is prejudiced by not having access to the documents and the thumb
drive. Cole admitted that some or all of the spoliated materials were used by or on behalf of
Defendants in the course of closing or attempting to close transactions. These documents go
directly to the claims and issues of the case, in particular the causes of action for breach of
contract, tortious interference with contract, misappropriation of trade secrets, and unfair
competition.34
FATCO has not provided any evidence suggesting that Defendants “acted with the intent
to deprive another party of the information’s use in the litigation” under Rule 37(e)(2).
Accordingly, FATCO is not entitled to evidence preclusion, an adverse inference, or monetary
sanctions under Rule 37(e)(2). Rather, under Rule 37(e)(1), the court “may order measures no
greater than necessary to cure the prejudice.” Fed. R. Civ. P. 37(e)(1).
While the full range of curative measures available to a court under Rule 37(e)(1) is
unclear, the Advisory Committee’s commentary on Rule 37(e)(1) notes that the court has broad
discretion in crafting an appropriate remedy.
Once a finding of prejudice is made, the court is authorized to employ measures
“no greater than necessary to cure the prejudice.” The range of such measures is
quite broad if they are necessary for this purpose. There is no all-purpose
hierarchy of the severity of various measures; the severity of given measures must
be calibrated in terms of their effect on the particular case. But authority to order
measures no greater than necessary to cure prejudice does not require the court to
adopt measures to cure every possible prejudicial effect. Much is entrusted to the
court’s discretion.
In an appropriate case, it may be that serious measures are necessary to cure
prejudice found by the court, such as forbidding the party that failed to preserve
information from putting on certain evidence, permitting the parties to present
34
Docket no. 2.
12
evidence and argument to the jury regarding the loss of information, or giving the
jury instructions to assist in its evaluation of such evidence or argument, other
than instructions to which subdivision (e)(2) applies. Care must be taken,
however, to ensure that curative measures under subdivision (e)(1) do not have
the effect of measures that are permitted under subdivision (e)(2) only on a
finding of intent to deprive another party of the lost information’s use in the
litigation. An example of an inappropriate (e)(1) measure might be an order
striking pleadings related to, or precluding a party from offering any evidence in
support of, the central or only claim or defense in the case. On the other hand, it
may be appropriate to exclude a specific item of evidence to offset prejudice
caused by failure to preserve other evidence that might contradict the excluded
item of evidence.
Fed. R. Civ. P. 37 advisory committee’s note to 2015 amendment.
Here, the court orders that the parties will be permitted to present evidence and argument
to the jury regarding the spoliation of the Cole ESI and documents. However, the jury will not
be instructed regarding any presumption or inference regarding those materials.
To avoid
impinging on the trial judge’s purview in presiding over and conducting the trial, this court
leaves to the trial judge to determine the appropriate mechanism for permitting the presentation
of the evidence and argument at trial on this issue.
3. Jeremy Bawden
Jeremy Bawden (“Bawden”) took a printout of a customer list when he left FATCO for
Northwest on March 23, 2015.35 Bawden stated that he “shredded” the list “a day or two, maybe
three” after starting at Northwest.36 According to Bawden, Doug Smith told him not to bring any
documents from FATCO, and Bawden shredded the list without ever using it at Northwest.37 The
35
Docket no. 169-8.
36
Docket no. 169-8 at 6.
37
Docket no. 169-8.
13
customer list was a printout of an Excel document, which Bawden left on his FATCO
computer.38
Bawden left FATCO on March 23, 2015, after the preservation demand was sent.
Bawden left the original electronic version of the list on his FATCO computer, and there is no
indication that the printout had any substantive notations or modifications. Thus, FATCO fails to
establish that (1) documents were actually “lost,” or (2) the documents “cannot be restored or
replaced through additional discovery.” Fed. R. Civ. P. 37. Again, it unclear how loss would be
prejudicial to FATCO.
Accordingly, the requirements under Rule 37 for imposition of sanctions are not met for
the Bawden materials. See also Turner, 563 F.3d at 1149.
CONCLUSION
Accordingly, for the foregoing reasons, FATCO’s motion for spoliation sanctions is
GRANTED IN PART AND DENIED IN PART. As discussed above, the spoliation motion is
GRANTED as to the Cole materials. The parties will be permitted to present evidence and
argument to the jury regarding the spoliated Cole ESI and documents, pursuant to the direction
of the trial judge. FATCO’s motion is DENIED as to all other claims of spoliation. Defendants
request for sanctions against FATCO under 28 U.S.C. § 1927 is DENIED.
IT IS SO ORDERED
DATED this 31st day of August, 2016
BY THE COURT:
PAUL M. WARNER
United States Magistrate Judge
38
Id.
14
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