Zapproved Case Summary

Zapproved Case Summary

First Am. Title Ins. Co. v. Northwest Title Ins. Agency, No. 2:15-cv-00229 2016 U.S. Dist. LEXIS 118377 (D. Utah Aug. 31, 2016).

The court denied the majority of sanctions a party sought for spoliation of evidence where it could not demonstrate prejudice. The plaintiff, First American Title Insurance Company (FATCO), sued Northwest Title Insurance Agency and several individual Northwest employees, alleging breach of contract and unfair competition. Starting in January 2015, two of the defendants, Mike Smith and Jeff Williams, used family e-mail accounts to communicate about Northwest. On March 9 and 10, 2015, both men resigned from FATCO and started working at Northwest; other FATCO employees defected thereafter.

FATCO sent preservation demand letters on March 17, 2015 and served its complaint on Northwest on April 7, 2015. Smith met with Northwest’s employees and “instructed them to preserve documents related to the lawsuit” but did not issue a written legal hold. FATCO filed this motion under Federal Rule of Civil Procedure 37, seeking sanctions against Northwest for alleged spoliation of both electronically stored information (ESI) and physical documents.

Under the rule, “sanctions are proper when ‘(1) a party has a duty to preserve evidence because it knew, or should have known, that litigation was imminent, and (2) the adverse party was prejudiced’” by the loss of evidence. The court noted that courts apply the same Rule 37 analysis to both ESI and non-ESI spoliation.

The court decided that, while “[i]ssuance of only an oral litigation hold is problematic” and “may fail to fulfill a party’s discovery obligations,” it is not “per se violative of a party’s duty to preserve.” As to when that duty to preserve arose, FATCO argued that it started “when Northwest was incorporated” in January, while Northwest argued it began only when the lawsuit was served in April. The court rejected both dates, stating that FATCO was “clearly overreaching” since starting a company, even contentiously, “is insufficient to establish imminent litigation,” while Northwest clearly knew of the imminent litigation well before service of the complaint. The court held instead that the duty to preserve arose “shortly after [Northwest’s] receipt of the preservation demand on March 18, 2015.”

The court then turned to the deletion of e-mails from Smith’s and Williams’ personal family accounts. The court remarked that those e-mails “were deleted by the men’s wives as part of routine account maintenance practices” on unknown dates that likely predated the duty to preserve. Combined with the recovery of some of those e-mails and the lack of prejudice, the court declined sanctions, noting that “Rule 37’s plain language does not support the argument that every loss of ESI is per se prejudicial.” Similarly, the court found that no sanctions were warranted for Smith’s deletion of personal files from his FATCO computer and iPad, scoffing that FATCO could not argue “that Smith’s vacation pictures or a favorite fondue recipe are somehow relevant” and that the “deletions occurred before receipt of the preservation demand.” Further, the court noted that FATCO did not discuss “efforts to restore computer files or the iPad” or “any backups that might exist.”

The court, after rejecting several more of FATCO’s claims for a lack of prejudice, did impose sanctions for one employee’s spoliation. Elizabeth Cole admitted that before she resigned, she took a thumb drive and several hard-copy documents relating to FATCO’s clients and lenders and those documents were likely “lost or destroyed after receipt of the preservation demand.” Because Northwest “failed to take reasonable steps” to preserve that information and that information went “directly to the claims and issues of the case,” the court allowed the parties to “present evidence and argument to the jury regarding the spoliation,” though no jury instruction would be given.

First Am. Title Ins. Co. v. Northwest Title Ins. Agency, No. 2:15-cv-00229 2016 U.S. Dist. LEXIS 118377 (D. Utah Aug. 31, 2016).

Takeaways

Although the court permitted the parties here to get away with using an oral legal hold, the most defensible practice is always to issue a written preservation notice. Other courts may not take as charitable a view, particularly if the opposing party can demonstrate the loss of relevant documents and thus significant prejudice.