Landmark Federal Circuit Decisions on Spoliation of Documents and Appropriate Sanctions

May 16, 2011 Authors: David J. Kessler, Richard S. Zembek, David B. Schwartz


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In two landmark decisions, the Court of Appeals for the Federal Circuit held that a duty to preserve evidence attaches when litigation is “pending or reasonably foreseeable” under an objective standard, which does not carry a gloss requiring that litigation be imminent, probable, or without significant contingencies. The Court also broke new ground at the circuit court level by articulating that “clear and convincing” evidence is required before a dispositive dismissal sanction for spoliation can be imposed. There must be evidence of (1) bad faith by the party that failed to preserve, (2) prejudice to the other party, (3) an evaluation of the degree of each, and (4) a showing that no lesser sanction is sufficient. Given both the severity of potential sanctions and that two different district courts reached contrary conclusions as to whether spoliation even occurred, these decisions provide in-house counsel reason to continue to develop and monitor document retention policies.

In Micron v. Rambus (“Micron II”)[1] and its companion case, Hynix v. Rambus (“Hynix II”),[2] the Federal Circuit resolved two appeals from separate district courts on the same alleged pretrial conduct of the same defendant.[3] Both cases involved efforts by Rambus to enforce its patents. The lower courts found that in the early 1990s Rambus pursued a two-prong business strategy: (1) license chip makers that complied with its proprietary standards; and (2) demand license fees and be prepared to bring infringement suits against those manufacturers who adopted the competing standard. The courts further found that years after adopting this strategy and before either case was filed, Rambus instituted a new document retention policy that led to its employees discarding potentially discoverable documents and erasing email backup tapes for data more than three months old.

The Duty To Preserve Attached When Litigation Was Reasonably Foreseeable

The plaintiffs in each case alleged that Rambus intentionally destroyed relevant, discoverable documents and sought sanctions against it as a result of its actions. Sanctions can only be imposed for discarding evidence if the party had a duty to preserve it at the time of its loss. The duty attaches when litigation is “pending or reasonably foreseeable.”[4] The decisions of the district courts – which reached opposite results – turned on when the duty began.

In Micron v. Rambus (“Micron I”),[5] the District Court for the District of Delaware found that the Micron litigation was reasonably foreseeable in December 1998, so Rambus’ duty began at that point and its continued disposal of potentially discoverable documents after that time was spoliation. In Hynix v. Rambus (“Hynix I”),[6] the District Court for the Northern District of California had concluded that the Hynix litigation did not become reasonably foreseeable until late 1999 because a number of contingencies had to occur before Rambus would begin the litigation. No spoliation occurred because the duty did not attach until after Rambus had completed implementation of its new document retention policy.

Notably, in neither case did the district court affirmatively hold that a number of earlier activities related to patent licensing triggered a duty to preserve, including (1) the development of a licensing program, (2) management’s instructions to develop a strategy for licensing and litigation, and (3) the retention of counsel to perform licensing and patent prosecution work as well as to begin preparing for litigation.

In Micron II, the Federal Circuit reiterated that spoliation is “the destruction or material alteration of evidence or . . . the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.”[7] The court emphasized that “pending or reasonably foreseeable” was an objective and flexible standard without any additional gloss that would require litigation to be “imminent, or probable without significant contingencies.”[8] The presence of contingencies was not enough to eliminate a litigation’s reasonable foreseeability if the resolution of those contingencies was itself reasonably foreseeable.[9]

In applying its articulated standard to Micron I, the court affirmed the Delaware District Court’s finding of spoliation. As to Hynix I, the Federal Circuit found clear error by the Northern District of California court in applying too narrow a standard of reasonableness, vacated the judgment and findings on spoliation, and remanded the issue to the lower court to apply the standard it established in Micron II.

Clear and Convincing Evidence Required for Dismissal

Having affirmed that there was spoliation in Micron I, the Court turned to whether dismissal, the sanction issued by the Delaware District Court, was appropriate. Recent district court opinions have split on the level of culpability required by the spoliating party for the imposition of sanctions. In Pension Committee v. Banc of America Securities in the Southern District of New York, Judge Shira Scheindlin articulated a framework in which different sanctions could be imposed depending in part on the culpability of the spoliating party, be it negligence, gross negligence, or willfulness.[10] In Rimkus Consulting Group v. Cammarata in the Southern District of Texas, Judge Lee Rosenthal held that bad faith is required for the granting of any sanction against a spoliating party.[11] But both courts had similar views on granting dismissal as a sanction for spoliation: it is to be limited to situations where a party “intentionally destroyed evidence”[12] and only then when such behavior “resulted in irreparable prejudice and no lesser sanction would suffice.”[13]

In Micron II, the Court addressed only the sanction of dismissal and on that point set out an even more restrictive standard than either Pension Committee or Rimkus. The Court described dismissal as a “harsh sanction” and held that “such sanctions should not be imposed unless there is clear and convincing evidence of both bad faith spoliation and prejudice to the opposing party.”[14] But the court went further in holding that “bad faith and prejudice, without more, do not justify the imposition of dispositive sanctions.”[15] Instead, the Court established that a district court must evaluate the degree of both fault and prejudice as well as “whether there is a lesser sanction” that will “vindicate the trifold aims of: (1) deterring future spoliation of evidence; (2) protecting the [opposing party’s] interests; and (3) remedying the prejudice [the opposing party] suffer[ed] as a result of the identified actions.”[16]

The Court identified the appropriate bad faith analysis as whether a party “intended to impair the ability of the potential defendant to defend itself.”[17] The proper prejudice evaluation then depends on the bad faith conclusion. The burden is typically on the moving party to “come forward with plausible, concrete suggestions as to what the destroyed evidence might have been.”[18] But if “the spoliator acted in bad faith, the spoliator bears the heavy burden to show a lack of prejudice to the opposing party.”[19] This prejudice analysis is in contrast to that in Pension Committee, where the court found that a judge can shift the burden to a spoliating party who acted with only gross negligence.[20] Rimkus of course never reaches the issue of prejudice unless the party acted in bad faith. Because in Micron I the district court did not sufficiently explain its bad faith determination or make its decision on prejudice within the burden shifting framework, the Court remanded the case to the district court on the issues of bad faith, prejudice, and remedy.

Guidance for In-House Counsel

For plaintiffs, the Court’s decision makes abundantly clear that the duty to preserve will normally attach before a case is filed. For Intellectual Property attorneys in particular, the Court’s focus on the implementation of a litigation strategy and not merely generic licensing efforts reveals a possible early bookend to when the duty to preserve arises. One bright line test is that a litigation hold should be in place as soon as counsel begin to mark documents as being protected by the work product doctrine.

For corporations and large entities for whom litigation is frequent and/or always possible, the Court’s decision provides relief from the fear of dismissal from inadvertent spoliation. But both Micron II and Hynix II serve as a reminder for the development and implementation of a reasonably conservative document and data retention policy. Though the most severe sanctions will only be imposed in the rarest of cases, inadvertent spoliation can still lead to less severe sanctions including additional discovery, cost shifting, fines, special jury instruction, and preclusion[21] and will certainly add to litigation costs. Well designed, well implemented, and well executed policies governing document retention and litigation holds are a must for any corporate entity operating today. The need for such a policy is particularly acute in the context of patent licensing programs because of the possibility of declaratory judgment actions and need to pursue litigation if licensing efforts reach an impasse.

[1] Micron Tech., Inc. v. Rambus Inc., No. 2009-1263 (Fed. Cir. May 13, 2011).

[2] Hynix Semiconductor, Inc. v. Rambus Inc., No. 2009-1299, -1347 (Fed. Cir. May 13, 2011).

[3] The Federal Circuit holds exclusive jurisdiction over appeals of district court final judgments in cases that "arise under" the patent laws. 28 USC § 1295(a)(1). For procedural matters, such as those presented in the decisions, regional circuit law is applicable. Accordingly, Micron II applies Third Circuit law, and Hynix II applies Ninth Circuit law.

[4] Micron II at 12 (internal quotation marks and citation omitted).

[5] Micron Tech., Inc. v. Rambus Inc., 255 F.R.D. 135 (D. Del. 2009).

[6] Hynix Semiconductor, Inc. v. Rambus, Inc., 591 F. Supp. 2d 1038 (N.D. Cal. 2006).

[7] Micron II at 12 (internal quotation marks and citation omitted).

[8] Id. at 12-14.

[9] Hynix II at 13-15.

[10] Pension Committee of the Univ. of Montreal Pension Plan v. Banc of America Securities, LLC, 685 F. Supp. 2d 456, 470 (S.D.N.Y. 2010).

[11] Rimkus Consulting Group, Inc., v. Cammarata, 688 F. Supp. 2d 598, 642 (S.D. Tex. 2010).

[12] Pension Committee at 469-70.

[13] Rimkus at 644 (internal quotation marks and citation omitted).

[14] Micron II at 29.

[15] Id. at 30.

[16] Id. at 30-31 (internal quotation marks and citation omitted).

[17] Id. at 27 (internal quotation marks and citation omitted).

[18] Id. at 28.

[19] Id.

[20] Pension Committee at 467-68.

[21] Id. at 469.