Companies have a duty to preserve evidence that may be relevant to a pending or reasonably foreseeable litigation. Complying with this duty requires the institution of “litigation holds” and the suspension of routine document retention/destruction policies. Failure to do so can result in expensive and time-consuming sanctions. However, it can be difficult to determine when litigation is reasonably foreseeable.
Duty to Preserve
Corporations rely on litigation holds to satisfy the duty to preserve information that may be relevant to a pending or reasonably foreseeable litigation.1 A properly crafted litigation hold identifies custodians and data stewards of relevant information and outlines procedures to preserve such information.2 To be effective, the litigation hold must be implemented as soon as the duty to preserve is triggered. It's not always clear what triggers a litigation hold.
The courts have consistently held that the duty to preserve information is not triggered by the “mere existence of a potential claim or the distant possibility of litigation”.3 Instead, courts apply an objective standard, “asking not whether the party in fact reasonably foresaw litigation, but whether a reasonable party in the same factual circumstances would have reasonably foreseen litigation”.4
In the arena of litigation holds, one thing is crystal clear – the filing of a complaint and the subsequent service of the summons triggers a defendant's obligations.5 However, the duty can “also extend to that period before the litigation, when a party reasonably should... anticipate litigation”.6
Duty to Preserve Can Extend to Non-Parties
Generally, the duty to preserve information does not apply to entities that are not a party to the litigation,7 except in situations where there is a “special relationship or special circumstance” involving the non-party or when the non-party enters into an agreement to preserve information sought to be obtained.8 While no clear criterion or criteria has emerged for what constitutes a “special relationship” or “special circumstance”, courts consider whether the non-party has a significant interest in the case.9
As any litigator knows, a violation of the duty to preserve, even by a non-party, can result in negative consequences for the aligned party. Specifically, the court can impose spoliation sanctions ranging from excluding the related evidence to giving the jury adverse inference instructions.10
In imposing sanctions, the court considers the non-party's relationship with the aligned party and a balance of hardships between the litigating parties. Specifically, the analysis focuses on the following factors:
• Culpability of the aligned party in the breach (eg,
complicity or knowledge of the nonparty's breach).
• Ability of the aligned party to control the non-party.
• Steps taken by the aligned party to attempt to preserve the evidence destroyed by the non-party.
• The extent that any negative judgment will be borne by the non-party (eg, whether the non-party indemnifies the aligned party).
• The degree of involvement between the non-party and aligned party; and
• The importance of the evidence to the opposing party.
Evidence Held by Related Corporate Entities
The duty to preserve can also extend to documents and electronically stored information (ESI) held by a non-party corporate affiliate of the party from whom discovery is sought (ie, a sister corporation, parent, or subsidiary). Under Fed R Civ P 34, a party must produce documents in its possession, custody or control upon request.11 This could include materials and information possessed by a corporate affiliate which is not a named party in the action.12 In such instances, the court examines the corporate party's “control” over the requested information.
“Control” is construed broadly as the “legal right, authority, or practical ability to obtain the information sought upon demand”.13 In making this determination, courts consider the following factors:
• Commonality of ownership of the corporate entities.
• Exchange or intermingling of directors, officers or employees of the corporations.
• Exchange of documents between the companies in the ordinary course of business.
• Any benefit or involvement by the non-party corporation in the transaction at issue.
• Involvement of the non-party corporation in the litigation.
• The corporate party's marketing and/or servicing of the non-party company's products; and
• The financial relationship between the companies.14
Analysing the above factors, courts have found that documents possessed by a non-party subsidiary corporation were within the control of the parent corporation, a party to the litigation. In situations where a parent corporation is sued, and its subsidiary is in possession of relevant information, a litigation hold could be needed, and the best rule of thumb may be to issue a litigation hold to the relevant subsidiary.
Courts have also held that documents held by a non-party parent entity were within the subsidiary's control. For example, in Ferber v Sharp Electronics Corp, the court held that the defendant, who allegedly infringed the plaintiff's patent, had constructive control of information possessed by its Japanese parent corporation, a non-party to the action.15 In this case, the court determined that the subsidiary has some control over the documents sought. However, this outcome is uncommon, since a subsidiary would generally have no power over its parent company.16 So, in situations where a subsidiary is sued, and its parent is in possession of relevant information, a litigation hold is generally not needed (although there are exceptions).
As to subsidiaries of the same parent , some courts have found that “sister companies” in a corporation have control over documents held by the non-party sister corporation.17 In situations like this, the requirement of a litigation hold will likely depend on the degree of interrelationship between the sister corporations and the relevance of the information held by the non-party sister entity, but in general, a litigation hold is also generally not needed.
Giving the fact-specific nature of the triggering event for a litigation hold, (which would result in the duty to preserve information, using a litigation hold), and given the uncertainty about what entities are subject to a litigation hold, parties should carefully consider the decision on instituting litigation holds as soon as litigation is reasonably foreseeable (or soon after litigation has been instituted). Indeed, for added safety, defendant corporations could even consider obtaining a short opinion of outside counsel on the issue, to serve as added insurance, if challenged.
1 Micron Tech Inc v Rambus Inc, 645 F.3d 1311, 1321-22 (Fed Cir 2011); see also Hynix Semiconductor Inc v Rambus Inc, 645 F.3d 1336 (Fed Cir 2011); Zubulake v UBS Warburg LLC, 220 FRD 212, 216-18 (SDNY 2003). (“Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold' to ensure preservation of relevant documents”); Kronish v United States, 150 F.3d 112, 126 (2d Cir 1998) (the obligation to preserve evidence arises when the party has notice that evidence is relevant to litigation).
2 See The Sedona Conference, The Sedona Principles, Third Edition: Best practices, recommendations & principles for addressing electronic production, 19 SEDONA CONF J 1, 103–04 (2018).
3 Micron Tech, Inc, 645 F.3d 1311, 1320.
4 Id. (“When litigation is ‘reasonably foreseeable' is a flexible fact-specific standard that allows a district court to exercise the discretion necessary to confront the myriad factual situations inherent in the spoliation inquiry.”); see also Storey v Effingham Cnty, 2017 WL 2623775, at *3 (SD Ga 16 June 2017).
5 See, eg, Jenkins v Woody, 2017 WL 362475, at *14 (ED Va 21 Jan 2017) (stating that a defendant's duty to preserve evidence is triggered, at the latest, on service of the complaint)).
6 Silvestri v Gen Motors Corp, 271 F.3d 583, 591 (4th Cir 2001).
7 See Andra Grp, LP v JDA Software Grp, Inc, 2015 WL 12731762, at *15 (ND Tex 9 Dec 2015) (“[t] here is no general duty in the common law for an independent non-party to preserve evidence”).
8 See Id. (Addressing the obligation of non-parties to preserve evidence and noting that, “[a]bsent some special relationship or duty rising by reason of an agreement, contract, statute, or other special circumstance, the general rule is that there is no duty to preserve possible evidence for another party to aid that other party in some future legal action against a third party” (internal quotation marks omitted) ).
9 Pettit v Smith, 45 F Supp 3d 1099, 1106 (D Ariz 2014) (finding that the Arizona State Prison Complex (ADC), a non-party to the litigation, had a duty to preserve evidence once it knew that litigation was reasonably likely, since the ADC was not a disinterested third party).
10 See, eg, Dykes v BNSF Ry Co, 2019 WL 1128521, at *7 (WD Wash 12 Mar 2019).
11 Fed R Civ P 34.
12 See, eg, In re NTL, Inc Sec Litig, 244 FRD 179 (SD NY 2007) (court sanctioned a party for spoliation, even when the documents were in custody of a nonparty. After the litigation commenced, the defendant entity [NTL] was divided into two entities due to reorganisation – NTL Inc, a non-party to the case, and the defendant, NTL Europe. NTL Europe argued that it did not have control over documents relevant to plaintiffs' document requests, because they were in the possession of non-party NTL Inc, but the court disagreed); see also Selectica, Inc v Novatus, Inc, 2015 US Dist LEXIS 30460, * 9 (MD Fla 2015).
13 See Cacace v Meyer Mktg (Macau Commer.
Offshore) Co, 2011 US Dist LEXIS 50753, *10 (SDNY 2011); see also
Victor Stanley, Inc v
Creative Pipe, Inc, 269 FRD 497, 523 (D Md 2010); Guillory v Skelly, 2014 US Dist LEXIS 128178, 20-21 (WDNY 2014) (holding subsidiary had control over evidence held by parent).
14 Meridian Labs, Inc v OncoGenerix USA, Inc, 333 FRD 131, 135-36 (ND Ill 2019); In re Subpoena to Huawei Techs Co, Ltd, 720 F.Supp.2d 969, 977 (ND Ill. 2010) (citing cases); Wachovia Sec, LLC v Loop Corp, 2008 WL 2625907, at *2 (ND Ill 27 June 2008); Super Film of Am, Inc v UCB Films, Inc, 219 FRD 649, 655 (D Kan 2004); Uniden Am Corp v Ericsson Inc, 181 FRD 302, 306 (MDNC 1998); see also Afros SPA v Krauss-Maffei Corp, 113 FRD 127, 129 (D Del 1986); Cormack v United States, 117 Fed Cl 392, 403 (Fed Cl 2014); Steele Software Sys, Corp v DataQuick Info Sys, Inc, 237 FRD 561, 564 (D Md 2006) (holding that the specific form of the corporate relative involved does not matter when analysing control under Rule 34).
15 40 Fed R Serv 2d (LCP) 950 (SDNY 1984).
16 See eg, In re Uranium Antitrust litig, 480 F Supp 1138, 1153 (ND Ill 1979) (defining the test as whether the subsidiary “has, or once had, control over [the parent's] directors, officers and employees who managed the uranium-related activities of [the subsidiary] alone or of both corporations”).
17 Compare Perfect Form Mfg LLC v United States,142 Fed Cl 778, 788-789 (Fed Cl 2019) (finding control over evidence possessed by sister corporation) with Klesch & Co v Liberty Media Corp, 217 FRD
Originally published Finnegan, May 2020
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