CASE ALERT: Nursing Home Pension Fund v. Oracle Corporation, 2008 U.S. Dist. LEXIS 66740 (N.D. Cal., Sept. 2, 2008)

In recent years, courts have wrestled with the issue of sanctions in the e-discovery context, including when sanctions are warranted, the appropriate type and severity of sanctions, and issuance of sanctions in unusual circumstances, such as when some of the electronically stored information which is the subject of the dispute is in the physical custody of a third-party. Recently, the United States District Court for the Northern District of California addressed all of these issues in one case.

Nursing Home Pension Fund v. Oracle Corporation, 2008 U.S. Dist. LEXIS 66740 (N.D. Cal., Sept. 2, 2008), involved a class action brought by persons who acquired publicly traded securities of defendant Oracle Corp. (“Oracle”) between December 14, 2000 and March 1, 2001. The lawsuit arose out of alleged false statements made by various Oracle employees regarding the financial condition of the company. During discovery, the plaintiffs sought sanctions against Oracle, including default judgment and an adverse inference jury instruction, based on alleged spoliation of various categories of electronically stored information. Specifically, the plaintiffs claimed the following:

1. After the Plaintiffs served Oracle with notice of the lawsuit on March 9, 2001, Oracle only sent preservation notices to about 30 out of more than 40,000 employees. The plaintiffs alleged that Oracle improperly limited its preservation efforts to those employees who made or communicated allegedly false statements. Thus, preservation notices were not sent to many employees at the levels of Vice President, Regional Sales Manager, and others who might have possessed relevant information.
2. The preservation process itself was inadequate such that one individual employee defendant, Oracle CEO, Lawrence Ellison, received the preservation notice but did not preserve hundreds of his own e-mails, many of which the plaintiffs discovered in e-mail files of other Oracle employees disclosed by the defendants.
3. Defendants failed to preserve documents created by a non-party author consisting of the author’s audio files and transcripts of approximately 135 hours of interviews with Ellison in preparation for a book.

Preliminarily, District Court Judge Susan Illston analyzed the issue of appropriate severity of sanctions taking into consideration the defendants’ degree of fault in failing to preserve evidence, the degree of prejudice suffered by the plaintiffs, and whether there is a lesser sanction that will avoid substantial unfairness to the opposing party. Judge Illston determined that the most severe category of sanctions, default judgment/dismissal, was not warranted since the plaintiffs could not demonstrate that they were prejudiced by defendants’ failures, a necessary showing for this type of sanctions. As a mitigating factor, the Court noted that the plaintiffs had in fact been provided with a large volume of documents.

The Court then applied the long-established three part test to determine whether adverse inference sanctions were warranted, finding that the plaintiffs must demonstrate: (1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that evidence was destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.

With respect to the claim that Oracle failed to communicate preservation instructions to a sufficient number of employees, the Court denied sanctions finding that the plaintiffs did not demonstrate willfulness and that the plaintiffs did not identify any particular documents not preserved as a result of Oracle’s efforts.

Regarding the destruction of Ellison’s e-mails, the Court granted adverse inference sanctions. Although many of Ellison’s e-mails were contained within other employees’ e-mail files produced to the plaintiffs, it was impossible to know whether additional undisclosed e-mails were also deleted. The Court found that the duty to preserve e-mails existed since many of the e-mails were deleted after notice of the lawsuit, and that destruction of Ellison’s e-mails was willful. The Court determined that several of Ellison’s e-mails recovered from other employees’ files were potentially relevant and supported sanctions, and pointed out the inherent unfairness in presuming irrelevance since the relevance of destroyed documents cannot clearly be ascertained.

The Court also found an adverse inference sanction appropriate with regard to potentially relevant interview materials in possession of the non-party author. Although the plaintiffs had requested production of interview materials in October 2006, the author destroyed the interview materials in late 2006 or early 2007 by disposing of his laptop on which the materials were stored. The Court determined that even though the defendants were not in possession of the interview materials, defendant Ellison had a contractual right to obtain the materials from the author and thus had the ability to preserve the materials or instruct that they be preserved. For this reason, Judge Illston found it to be of no consequence that the defendants were not in physical possession of the materials or that the materials were destroyed by a third party, and not by the defendants.

Beyond demonstrating the continuing willingness of federal judges to issue sanctions for spoliation of electronic evidence, the Oracle case makes clear that a party will not be excused for a failure to make an effort to preserve documents which, although not in its actual custody or possession, can be said to be in its control. The test applied by the court turns on the party’s legal right to obtain the material.

Other recent cases highlight this point. In Infinite Energy, Inc. v. Thai Heng Chang, 2008 WL 4098329 (N.D. Fla., Aug. 29, 2008), the defendant initially failed to identify a personal Yahoo! e-mail account in response to a demand for relevant e-mails, ostensibly because he knew the e-mails, although relevant, had been deleted and were irretrievable. The plaintiff, however, obtained and disclosed a letter from defendant’s counsel to Yahoo! in connection with a subpoena served for e-mails from that account in an unrelated action. The letter contained no reference to any inability on the part of Yahoo! to retrieve the deleted e-mails. The Court found defendant’s representation that he did not originally identify the Yahoo! account because he knew it would be impossible to retrieve the e-mails, to be not only false, but sanctionable. Noting that Yahoo! might have a process for retrieving deleted e-mails, the Court ordered the defendant to make all possible efforts to obtain the e-mails from Yahoo! or face sanctions if defendant’s failure to identify the Yahoo! account at an earlier date resulted in the irretrievability of the e-mails.

Similarly, in Flagg v. City of Detroit, 2008 WL 3895470 (E.D. Mich., Aug. 22, 2008) the plaintiff sought text messages sent between 34 named defendants over a five year period. Plaintiff issued subpoenas to the non-party text messaging service, SkyTel. The defendants moved to quash the subpoenas and refused to authorize SkyTel’s release of the e-mails. Citing precedent from several other Circuits, the Court found that documents are deemed to be within the control of a party if it has a legal right to obtain the documents on demand. The Court further held that the defendants were under an affirmative duty to seek information reasonably available to them. Noting the dearth of case law addressing the power of a court to compel a party’s consent to the disclosure of materials pursuant to a third-party subpoena, and given its holding, the Court recommended that parties seeking internet service provider (“ISP”)-stored materials routinely serve a Rule 34 demand for same on their adversary, thereby signaling that party’s control over the information and providing the court with a basis under the discovery rules to enforce the demand.

All of these recent cases signal to litigants that early and continuing assessments of discoverable documents and data, and resulting preservation efforts, should always take into account information that may not be in their physical custody, but which they have a legal right to obtain.

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¹ Because the claims at issue arose under the Private Securities Litigation Reform Act (“PSLRA”) which provides that sanctions are only available for “willful” failure to preserve relevant evidence, the Court applied the willfulness standard rather than a mere culpability standard in its analysis of adverse inference sanctions.