Sanctions ordered against business for unintentional failure to protect evidence in anticipation of litigation

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Summary

Following a broadening trend, the U.S. District Court for the Southern District of California recently held that a party is subject to sanctions – including an adverse inference instruction at trial – for negligently failing to institute a litigation hold to preserve evidence two years before suit was filed. Zest IP Holdings, LLC v. Implant Direct MFG, LLC, 2013 WL 6159177 (S.D. Ca., Nov. 25, 2013).

Magistrate Judge William Gallo held that the defendant in this patent case was notified of the plaintiff’s intent to file an infringement action as early as 2008 but failed to issue a litigation hold to its personnel until the lawsuit was actually filed in March 2010. Plaintiff later obtained emails from third parties that the defendant failed to preserve even though it said it produced everything available.

Quoting recent Fourth Circuit precedent, the court reiterated that the “obligation to preserve evidence arises when the party reasonably should know the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation.” Moreover, sanctions may be imposed “against a spoliating party that merely had ‘simple notice’ of ‘potential relevance to the litigation.’” The court also rejected the idea that the company’s standard electronic data preservation policies are enough. Despite the fact that the Defendant’s failure was found “merely negligent,” the court imposed the sanction of an adverse inference instruction permitting the jury to infer the information would have been adverse to the defendant.

This decision illustrates the importance for businesses to implement:

  1. effective internal procedures for recognizing and communicating knowledge of potential or anticipated litigation to counsel as soon as possible; and
  2. the immediate issuance and monitoring of appropriate litigation holds to preserve information and protect the company’s record in the event of a motion for sanctions.