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September 18th, 2024
In the case of Domus BWW Funding, LLC v. Arch Insurance Company, No. 2:23-cv-00094-JDW (E.D. Pa. 2024), the U.S. District Court for the Eastern District of Pennsylvania sanctioned defense counsel for violating the Federal Rules of Civil Procedure governing discovery.
This matter involved an insurance coverage dispute. Arch denied Domus’ request to provide coverage for defense costs in an underlying civil dispute. Pursuant to Domus’ “litigation hold” request, Arch’s claims adjuster, Lynne Miller, and policy underwriter Greg McGowan notified Arch and its counsel that they had responsive documents, both in hard copy and electronically stored. The claim proceeded to litigation.
The Parties agreed on the production of discovery documents, including electronically stored information (“ESI”). Arch delegated to an in-house paralegal the process of using search terms to collect a review set of ESI. Arch’s counsel knew that Arch’s paralegal was not diligently implementing the ESI search but nonetheless did not press the paralegal or notify Domus of the delay. Consequently, Domus scheduled the deposition of Ms. Miller, thinking that they had all the relevant documents. Also, in the meantime, Arch conducted a corporate data migration, during which an incorrect tag was placed on Mr. McGowan’s emails, resulting in the destruction of Mr. McGowan’s emails.
After Ms. Miller’s deposition, Domus to follow up with Arch about Arch’s document production. For the first time Arch told Domus that Arch had not yet made a production of ESI materials because the search was not run in the timeframe to which the Parties agreed. When Arch produced approximately 300 documents, it agreed to make Ms. Miller available for an additional deposition and permitted Domus to supplement the expert reports. Rather than seeking Court intervention, Domus took Arch up on that proposal to cure the harm it had suffered.
Furthermore, Ms. Miller testified that she informed Arch that she had transferred some hard-copy files to an on-site filing cabinet. Arch searched Ms. Miller’s cubicle and surrounding filing cabinets for any hard copy files but did not find any documents. During a discovery hearing, Arch represented to counsel and the Court that Ms. Miller was mistaken in her belief that hard copy documents existed. The Court directed Arch to get a declaration to set forth in more detail the information about Ms. Miller’s files. In response, Arch submitted a declaration explaining that it found eight file folders, consisting of 399 pages, including drafts of coverage letters and Ms. Miller’s notes, located in file cabinets in the hallway behind Ms. Miller’s former cubicle. Arch claimed that it had no reason to search those files until the Court ordered the declarations.
When a party fails to supplement its disclosure pursuant to Fed. R. Civ. P. 26(e)(1)(A) and does so without showing that the failure was substantially justified or is harmless, a judge may impose a range of sanctions on the party or its counsel. Fed. R. Civ. P. 37(c)(1); see Fed. R. Civ. P. 37(b)(2)(A)(i)-(vi). “Substantial justification” means “justification to a degree that could satisfy a reasonable person that parties could differ as to whether the party was required to comply with the disclosure request.” Grider v. Keystone Health Plan Central, Inc., 580 F.3d 119, 140 n.23 (3d Cir. 2009).
When a party spoliates tangible evidence, judges may use the court’s inherent powers to sanction the spoliator. Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76, 78 (3d Cir. 1994). Spoliation of tangible evidence has occurred when “the evidence was in the party’s control; the evidence is relevant to the claims or defenses in the case; there has been actual suppression or withholding of evidence; and the duty to preserve the evidence was reasonably foreseeable to the party.” Bull v. United Parcel Serv., Inc., 665 F.3d 68, 73 (3d Cir. 2012). ESI spoliation occurs when ESI “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 replaced through additional discovery.” Fed. R. Civ. P. 37(e). To impose sanctions pursuant to this rule, a judge must find that (A) the spoliating party had a duty to preserve information when the loss occurred; (B) the lost ESI was within the scope of that duty to preserve; (C) the spoliating party’s failure to take reasonable steps to preserve the information led to its loss; and (D) the information is truly lost, i.e., it cannot be otherwise recovered. See Fed. R. Civ. P. 37(e) advisory committee’s note to 2015 amendment.
The Federal Rules contemplate two remedies for ESI spoliation. When the loss of information prejudices a party, a judge may order “measures no greater than necessary to cure the prejudice.” Fed R. Civ. P. 37(e)(1). Appropriate sanctions include “forbidding the party that failed to preserve information from putting on certain evidence, permitting the parties to present 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.” Fed. R. Civ. P. 37(e) advisory committee’s note to 2015 amendment. When a party destroys electronically stored information “with the intent to deprive another party of the information’s use in the litigation,” a judge may presume the information was unfavorable to the infracting party, instruct the jury that it may or must presume the information was unfavorable, or dismiss the action. Fed. R. Civ. P. 37(e)(2). Because bad faith is rarely evident on its face and judges cannot directly observe a party’s motivation for spoliating, judges may consider circumstantial evidence to determine intent. See, e.g., Bistrian v. Levi, 448 F.Supp.3d 454, 475 (E.D. Pa. 2020) (Rufe, J.). Judges in this district have considered (1) the timing of the destruction, (2) the method of destruction, (3) whether the destruction was selective or indiscriminate, and (4) the spoliating party’s policies for retention and destruction. See id.
While the Court was highly critical of Arch and its attorney for their discovery violations, because Domus did not seek court intervention, the Federal Rules, in the Court’s opinion, did not support the imposition of monetary sanctions. See Fed. R. Civ. P. 37(a)(5)(A) (Federal Rules prohibit monetary sanctions when “circumstances make an award of expenses unjust.”) However, the Court reopened discovery with costs to be paid by Arch.
Because the Court concluded that Arch did not destroy Mr. McGowan’s emails with the intent to deprive Domus of the information’s use in litigation, it concluded that it could not impose any of the sanctions available under Rule 37(e)(2). However, because the Court found that the destruction prejudiced Domus, it imposed sanctions pursuant to Rule 37(e)(1) and permitted Domus to introduce evidence of Arch’s failure to preserve Mr. McGowan’s emails but ensuring that the sanction did not run afoul of the adverse inference available only under Rule 37(e)(2).
The case of Domus BWW Funding, LLC v. Arch Insurance Company, No. 2:23-cv-00094-JDW (E.D. Pa. 2024) can be accessed here.
