United States: For Now, Residential Funding And "Inherent Authority" Doctrine For Spoliation Sanctions Live On

As noted in the Advisory Committee's commentary to the recently amended Federal Rule of Civil Procedure 37(e), two goals of the amendments were: (1) to create uniformity among the Federal courts in imposing sanctions for the spoliation of electronically stored information, and (2) to prevent the imposition of harsh sanctions – such as an adverse inference instruction — for the merely negligent, or even grossly negligent, spoliation of ESI.

More specifically, the Committee's comment to amended Rule 37(e) points out that Federal circuit courts had established "significantly different standards for imposing sanctions or curative measures on parties who fail to preserve electronically stored information." Thus, the new rule "forecloses reliance on inherent authority or state law to determine when certain measures should be used" to address spoliation, although the commentary further points out that "the new rule applies only to electronically stored information."

The comments to Rule 37(e)(2) further clarify that the new rule "is designed to provide a uniform standard in federal court for use of these serious measures when addressing failure to preserve electronically stored information. It rejects cases such as Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99 (2d Cir. 2002), that authorize the giving of adverse inference instructions on a finding of negligence or gross negligence."

Since the amended Rules took effect on December 1, there have been a number of instances where Federal courts have continued to exert their "inherent authority" to sanction parties for the spoliation of evidence and/or apply the Residential Funding negligence or gross negligence standard. Perhaps not surprisingly, most of the cases clinging to the old standards are from the Second Circuit, where Residential Funding originated.

It appears that there are three primary reasons why courts have applied pre-amendment standards in favor of Rule 37(e).

1. Timing for the application of the new rules is "unjust" or "impractical"

First, some courts have declined to apply the new standards where it would be unjust to do so given the effective date of the new Rules. Noting that the amendments govern in all new proceedings filed after December 1, 2015, as well as all proceedings then pending "insofar as just and practical," a handful of courts have somewhat liberally determined that it would not be "just and practical" to apply the new Rule 37. For example, in McIntosh v. USA, 2016 WL 1274585 (S.D.N.Y. March 31, 2016), the court held that "it would fall short of justice and practicability" to apply the new Rule 37(e) to the Plaintiff's motion for sanctions, since "it makes sense to apply the old rules to motions briefed before the new rules came into effect." Similarly, in Thomas v. Butkiewicus, 2016 WL 1718368 (D.Conn. April 29, 2016), the court found that it was unjust to apply new Rule 37(e), which took effect 2½ years before the plaintiff's claim was filed, and long before the facts arose regarding the spoliation of the missing video at issue.

Presumably, these types of situations might eventually disappear, as the new Rule 37(e) becomes more uniformly applied to sanctions motions in all pending and newly filed cases.

2. Spoliation of evidence other than Electronically Stored Information.

As mentioned above, the Advisory Committee's comments to Rule 37(e) provide that "the new rule applies only to electronically stored information." Some courts have therefore continued to apply Residential Funding and its progeny in cases dealing with the spoliation of non-ESI evidence.

For example, in Coale v. Metro-North Railroad Co., 2016 WEL 1441790 (D.Conn. April 11, 2016), the defendant allegedly spoliated evidence by cleaning up and failing to preserve or identify the oily substance upon which the plaintiff slipped and fell. In finding that the defendant had a duty to preserve the substance, the court declined to apply Rule 37(e), which is "expressly cabined only to ESI and therefore does not disturb the present application of the Residential Funding rule." Similarly, in In re: Bridge Construction Services of Florida, Inc., 2016 WL 2755877 (S.D.N.Y. May 12, 2016), the court awarded an adverse inference under Residential Funding, where the spoliation related to loss of physical evidence in the form of a notebook or log book. In Best Payphones, Inc. v. City of New York, 2016 WL 792396 (E.D.N.Y. 2.26.16), the court actually applied both the Rule 37(e) framework for addressing the spoliation of emails, and the Residential Funding "gross negligence" standard for addressing the spoliation of tangible evidence in the form of bank statements and daily activity reports.

3. Loss of information not governed by Rule 37(e).

A third kind of exception to the Rule 37(e) framework was also suggested in CAT3, LLC v. Black Lineage, Inc., 2016 WL 154116 (S.D.N.Y. January 12, 2016). There, the court was faced with a motion for sanctions where the plaintiff migrated its emails to a new system, which caused the domain name on all of its emails to change. The plaintiff argued that notwithstanding the altered domain suffix on all of its emails, it had nevertheless produced its emails in the case, meaning that there was never really any "loss of information" or spoliation under Rule 37(e). Magistrate Judge James C. Francis disagreed and held that the ESI had not been restored or replaced because the different versions of the emails casted doubt on the authenticity of the evidence.

However, Judge Francis went on to note that even if Rule 37(e) was construed not to apply to the facts of that case, the court could nevertheless remedy the spoliation by exercising its "inherent authority" to remedy an abuse of the judicial process. Ultimately, the court found the plaintiff's conduct to have been intentional and it awarded sanctions under Rule 37(e) in the form of an order precluding evidence or argument on a key point in the trademark case. Although it was therefore unnecessary for the court to award sanctions under its "inherent authority," Judge Francis noted that relief under that standard would have also been warranted.

This type of "exception" to the application of Rule 37(e) seems the most questionable and susceptible to improper extension, given the Advisory Committee's comment that the new Rule "forecloses reliance on inherent authority or state law to determine when certain measures should be used" to address spoliation, and the Committee's express rejection of Residential Funding. Based on the Committee's commentary, one can fairly conclude that Rule 37(e) was meant to be the sole source of authority for seeking relief for the spoliation or loss of ESI, and was not meant to merely provide an alternative to seeking relief under the court's "inherent authority" to sanction discovery misconduct.

As sanctions decisions under Rule 37(e) continue to roll in, t will certainly be interesting to continue looking out for references to the CAT3 opinion and the "inherent authority" doctrine.

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