Court acknowledges the Fifth Amendment’s Due Process Clause may limit the sanctions that can be imposed for destroying electronic documents

April 23rd, 2009 | By Steve Puiszis

Preferred Care Partners Holding Corp. v. Humana, Inc., 2009 WL 982460 (S.D. Fla. April 9, 2009)

It is every trial lawyer’s worst nightmare. You are one month away from trial, drafting motions in limine, and preparing jury instructions when your client calls to advise that they just found over 10,000 pages of potentially responsive electronic documents and emails in folders that were never searched. And to make matters worse, you learn that those electronic documents may support the claim you are defending that your client improperly used proprietary information which was obtained from your opponent pursuant to a confidentiality agreement. What do you do? Do you immediately contact opposing counsel about the additional records? Do you notify the court and seek its guidance as to how best to approach the problem that has now arisen? Or, as occurred in Preferred Care Partners, do you simply destroy the electronic documents while preserving paper copies without first notifying opposing counsel or the court?

It should come as no surprise that in Preferred Care Partners, the court entered sanctions for the “clearly egregious manner in which the defendant carried out its discovery obligations.” The fact that the electronic documents in question should have been destroyed long before the suit was filed pursuant to the terms of the confidentiality agreement under which they were obtained did not change the analysis. The defendant’s “print and purge” strategy was clearly inappropriate. However, the court ultimately concluded that the defendant’s discovery “shortcomings were neither intentional nor done in bad faith, but rather resulted from the grossly negligent oversights of counsel.”

What makes Preferred Care Partners notable is the district court’s acknowledgment that in light of Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 707 (1982), the Fifth Amendment’s Due Process Clause may limit the sanctions imposed for the loss of ESI. The court in Preferred Care Partners recognized that the Due Process Clause requires that discovery sanctions must not only be just, but also specifically related to the particular claim or defense affected by the misconduct. Therefore, due process requires a nexus between the lost or destroyed ESI, and either the plaintiff’s claim or the defendant’s defense.

In a prior post we noted that various courts had concluded that a party seeking sanctions for spoliation should not be held “to too strict a standard of proof regarding the likely contents of the destroyed [or unavailable] evidence.” However, as Preferred Care Partners recognized, the Due Process Clause requires a link between the lost or destroyed information and the plaintiff’s claim or a party’s defense, which may temper the nature or extent of any sanctions imposed in appropriate circumstances.

Humana had been engaged in negotiations to acquire Preferred Care Partners (“PCP”), and was provided with certain sensitive, proprietary information about PCP pursuant to a confidentiality agreement. Under the terms of that confidentiality agreement, if the acquisition failed to occur for any reason, Humana was to destroy all copies of the proprietary information about PCP. After the negotiations broke down, PCP sued Humana claiming that Humana breached the confidentiality agreement by failing to destroy that proprietary information. PCP alleged that Humana was using the information to unfairly compete against it.

Approximately one month prior to trial, Humana found over 10,000 pages of proprietary documents on their computers which should have been destroyed under the terms of its confidentiality agreement. Humana’s employees originally created files in which all PCP emails and attachments were placed. Those files were deleted after the negotiations fizzled. However, Humana didn’t realize that copies of those emails and electronic documents remained in folders located elsewhere on their computers.

Humana issued a “print and purge” directive asking their employees to search for any emails or proprietary information concerning PCP, and send a printed copy of any information that was found to its counsel. The employees were also instructed to delete any electronic documents or emails about PCP that remained on their computers. Humana explained this step was taken “in a good faith effort to mitigate its technical breach of the confidentiality agreement by removing the confidential data from the hands of individual employees disbursed throughout the company, while at the same time complying with its obligation to preserve documents relevant to the litigation by printing documents prior to deletion.” However, Humana did not contact the plaintiff or advise the court about the ESI it had discovered before purging that information. In response to PCP’s argument that Humana destroyed relevant evidence supporting PCP’s claims, Humana represented to the court that it did not destroy anything that could not be reconstructed from its backup systems.

Discussion of Sanctions and the Due Process Clause

The court noted that the decision by Humana’s counsel to print and purge documents “without consulting opposing counsel or advising the Court was an exercise in bad judgment and constituted a breach of Humana’s discovery obligation to preserve evidence relevant to ongoing litigation.” However, the court noted that the sanctions a court may award under Rule 37 should be “reasonable” in light of the circumstances presented. It observed that a court must consider whether a less drastic, but equally effective remedy could be fashioned. The court also explained that the violation of a discovery order caused by simple negligence or which was due to confusion, a misunderstanding, or the inability to comply with a court’s order does not justify a Rule 37 default judgment or dismissal.

Concerning a court’s inherent authority to regulate its docket, and sanction parties for abusive discovery practices, it observed:

The broad discretion of the district court to manage its affairs is governed, of course, by the most fundamental safeguard of fairness: the Due Process Clause of the Fifth Amendment. To comply with the Due Process Clause, the court must impose sanctions that are both ‘just’ and ‘specifically related to the particular claim’ or defense affected by the misconduct. Thus, for example, if there is no nexus between the information destroyed were not produced and Plaintiff’s claim or Defendant’s defense, it would not be appropriate to enter a default.

Here, the court found that Humana mistakenly believed it was in compliance with the PCP confidentiality agreement because its employees thought they had deleted all of the proprietary information, and were unaware that copies remained in separate folders. The court concluded that the decision to print and purge that information was not accomplished in bad faith, but rather was the product of bad judgment.

Accordingly, the court concluded the appropriate sanction was to permit PCP to conduct additional discovery relating to the information that Humana had untimely produced. The court determined that a monetary sanction was appropriate, given Humana’s grossly negligent discovery conduct. That sanction included the payment of PCP’s costs and attorneys’ fees stemming from the supplemental discovery which the court allowed, as well as PCP’s costs and attorneys’ fees incurred in bringing the motion for sanctions. The court further ordered that PCP be permitted to conduct a forensic examination of Humana’s backup systems to verify that it maintained copies of all of the purged emails. Humana was also ordered to pay the cost of that forensic examination.

Lesson to be Learned

While Humana escaped the entry of a default or the issuance of an adverse inference instruction, the sanctions which the court imposed will ultimately prove to be quite costly. Had the print and purge directive not been given, the costs of the forensic examination of Humana’s systems could likely have been avoided. However, the problem that was dropped in counsel’s lap on the eve of trial could have been avoided if adequate steps had been taken to initially search Humana’s computers for the proprietary information. While in this economy no one wants to unnecessarily incur ediscovery costs, the failure to use a third party vendor in the instance, probably ended up costing Humana more in the long run. If an ediscovery vendor had been hired to at least search a random sample of Humana’s computers to ensure that all proprietary information was located and destroyed, these sanctions probably could have been avoided.

When any attorney is presented with a unique or difficult ediscovery issue that could potentially result in the imposition of sanctions against the client and/or counsel, the best thing to do from a law firm risk management perspective is to consult with another knowledgeable lawyer either in your firm or elsewhere. Don’t try to solve the problem yourself. And be sure not to overlook your State’s rules of professional conduct in any such discussion. Here in Illinois, for example, Rule 3.4(a) provides that a lawyer shall not “unlawfully alter destroy or conceal a document or other material having potential evidentiary value.”

Finally, where your opponent brings a sanction’s motion for the spoliation of ESI, take a look at Preferred Care Partners. Don’t overlook the fact that the Fifth Amendment’s Due Process Clause requires a link be established between your opponent’s claim and any ESI that was not properly preserved.

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