Terminating Sanctions Reversed After Oral Litigation Hold Goes Awry

In Winecup Gamble, Inc. v. Gordon Ranch, LP, 2021 WL 2481861 (9^th Cir. Jun. 15, 2021) (unpublished), the Ninth Circuit reversed entry of terminating sanctions, vacated the judgment, and remanded for further proceedings.  Plaintiff had imposed an oral litigation hold that proved insufficient and a good deal of ESI went missing.  The case involved the sale of a ranch and whether $5 million in earnest money was refundable when flood damage occurred before closing.  One question was whether an amendment to the contract eliminated a refund clause.  Also at issue was whether, if the earnest money was not refundable, $5 million was an unenforceable penalty or a reasonable measure of damages.

The appellate court discussed the process for resolving a sanctions issue under Fed.R.Civ.P. 37(e).  First, a district court must make the threshold findings required by Rule 37(e).  Next, if they are present, it must determine the appropriate sanction.  As to the latter, the appellate court wrote that, if prejudice is found, Rule 37(e)(1) authorizes only measures no greater than necessary to cure it.  If the district court finds intent to deprive another party of evidence, it may presume (or instruct the jury to presume) that the missing information was unfavorable to the offender.

Turning to the facts on appeal, the Ninth Circuit wrote:

There is no evidence that Clay Worden, [plaintiff] Winecup’s accountant and chief negotiator, knew that his emails were lost until discovery commenced in 2019. Worden’s ESI was managed by the IT department at his independent accounting firm. At Worden’s deposition, he explained that although he alerted his IT department of the preservation order in 2017, the instruction was not followed (for unknown reasons), and the documents therefore could not be recovered. The record, in short, does not support the conclusion that Worden, let alone Winecup, “acted with the intent to deprive” [defendant] Gordon Ranch of any ESI. Fed. R. Civ. P. 37(e)(2). [Emphasis added].

The appellate court quoted the Advisory Committee note to Rule 37, stating that the “remedy should fit the wrong” and concluded that “the importance of the purportedly lost ESI is not entirely clear.”  Further, it wrote that Winecup “represents” that all of the “relevant ESI has been produced through other sources….”  Winecup also “represented” that accounting work papers were not “lost,” they were irrelevant and not responsive.  Several people testified that there would be few, if any, relevant text messages.

It is well established that the duty to preserve attaches to ESI that is within a potential litigant’s possession, custody, and control.  In some jurisdictions, “practical control” is sufficient.  See The “Practical Ability” Standard for “Control” in Maryland – E-Discovery LLC (ediscoveryllc.com)  Here, however, it appears that all of the information was in plaintiff’s control by any standard.

It is a bit difficult to square the Ninth Circuit’s unpublished decision with the lower court’s opinion which stated:

The Court finds that the [plaintiff’s] agents did intentionally spoliate ESI vital to the issues of this case, which resulted in prejudice that can only be cured through dispositive rulings in Defendant’s favor. Accordingly, the Court enters such a sanction and closes the case.

Winecup Gamble, Inc. v. Gordon Ranch, LP, 2020 WL 3840420, at *1 (D. Nev. July 8, 2020), rev’d in part, vacated in part, 850 F. App’x 573 (9th Cir. 2021).

Defendant Gordon Ranch, as appellee, argued that review was for “abuse of discretion” and:  “The Court may reverse ‘a district court’s decision to impose discovery sanctions under Rule 37 only if [the Court has] a definite and firm conviction that the [district] court committed a clear error of judgment in the conclusion it reached upon a weighing of the relevant factors.’” Brief of Defendant/appellee, 2021 WL 416281, *5.  It argued that: “Once the parties began discovery in the middle of 2019, Gordon Ranch learned that Winecup had done nothing to preserve ESI when litigation began in 2017. Winecup admitted that Winecup’s attorneys did not begin gathering discovery from witnesses until 2019, after [a prior] remand from this Court.”  Defendant stated that it received only 17 emails or text messages from plaintiff.

The district court followed the multi-step process of applying Fed.R.Civ.P. 37(e).  It wrote:

“First, the evidence shows that the ESI was deleted after a duty arose to preserve it. A reasonable party would have foreseen litigation on the horizon as soon as the parties began exchanging communications expressing their competing interpretations of the contract and the amendment. And such communications took place shortly after the flood on February 21, 2017….  Defendant has shown that the ESI was deleted after the duty arose to preserve the ESI. ”  That appears to be a supportable analysis of when the duty to preserve was triggered.  See  Triggering the Duty to Preserve ESI – E-Discovery LLC (ediscoveryllc.com)

“Second, Defendant has shown that Plaintiff failed to take reasonable steps to preserve the ESI after the duty arose to preserve it. Plaintiff admits that the sole action they took was to inform Mr. Worden to preserve relevant documents, who then relayed this message to his IT department at his accounting firm.  It argues that alone is sufficient grounds for showing that it performed reasonable steps to preserve the ESI—it is not.” [Cleaned up]. This appears to be a correct of applicable principles of law.  Imposing a litigation hold is insufficient.  It is only a first step in the process.  A legal hold must then be implemented, as the District Court pointed out.  See Plaintiff Sanctioned for Spoliation of Automobile Engines Due to Inadequate Implementation of Litigation Hold – E-Discovery LLC (ediscoveryllc.com)  Thus, it does not appear to be significant that “[a]t Worden’s deposition, he explained that although he alerted his IT department of the preservation order in 2017, the instruction was not followed (for unknown reasons), and the documents therefore could not be recovered,” as the appellate court wrote.  Since Zubulake, much more has been required.

The District Court continued:  “Third, some of the lost ESI is not attainable through additional discovery…. Plaintiff admitted that Mr. Worden was the principal negotiator in forming the deal resulting in some text messages between him and [the seller] Mr. Fireman.”  The District Court wrote that, for example, some text messages could not be produced by others.  “Additionally, Plaintiff has not produced any of Mr. Worden’s accounting work papers, which is relevant to Defendant’s case and covered by Defendant’s subpoena.”  This appears supportable.  In order to blunt sanctions, secondary evidence must fill the gap created by the loss of data.  See Satisfactory Secondary Evidence Prevents Sanction – E-Discovery LLC (ediscoveryllc.com)  Here, the trial court appears to have found as a fact that it did not.

“Fourth, Defendant has shown that Plaintiff acted with the intent to deprive Defendant of the information. While Plaintiff claims that it orally informed Mr. Worden to preserve ESI, this is woefully inadequate as discussed above, but evinces that Plaintiff and Mr. Worden knew they had a duty to preserve the ESI. However, Plaintiff did nothing more than orally inform their chief negotiator and accountant to preserve the ESI, and Mr. Worden allowed his computer to be upgraded without backing up his information and did not suspend his company’s aggressive deletion policy and backup settings to accommodate his duty to preserve evidence. These facts are sufficient for the Court to draw an inference that Mr. Worden acted intentionally.” [Cleaned up].  Neither court addressed the burden of proof.  See Burden of Proof: Sanctions for Intentional Deletion of Text Messages – E-Discovery LLC (ediscoveryllc.com)  Depending on the burden, the conclusion may be debatable.

The District Judge then imposed dispositive sanctions and ordered dismissal due to plaintiff’s spoliation.  The lower court’s decision appears defensible on many points.  Nevertheless, on appeal it was reversed, vacated, and remanded.