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NACCO v. Lilly: Spoliation Sanctions in Tennessee Case Shows Ongoing Challenge of Preservation

By Brad Harris

We just learned of another preservation case involving sanctions but what makes this one stand out is that the litigation started in 2011 – after Pension Committee, Rimkus, Victor Stanley II, and the other opinions showing the courts’ focus on preservation issues. This case out of the Western District of Tennessee, which is the first preservation sanction we’ve seen from this district, shows how the need for improved preservation practices is permeating the judicial landscape.

In NACCO Materials Handling Group, Inc. v. Lilly Co. (No. 11-2415 AV, 2011 WL 5986649, W.D. Tenn. Nov. 16, 2011), the plaintiff brought a motion to prevent further spoliation of evidence due to inadequate preservation efforts being demonstrated by the defendant. The original lawsuit alleged unauthorized and improper access to the plaintiff’s secure dealer website. After initial 30(b)(6) depositions and e-discovery, there was evidence of data spoliation, and the plaintiff sought sanctions for both the failure to adequately prepare the 30(b)(6) witness and failure to take reasonable steps to preserve potentially relevant information.

In determining if sanctions were warranted, the court looked at a number of factors:

In order to determine if sanctions against Lilly are appropriate, the court must first determine (1) when Lilly’s duty to preserve evidence arose; (2) the scope of Lilly’s duty to preserve evidence; (3) whether Lilly’s litigation hold and search and collection efforts were sufficient; and (4) if not, whether sanctions should be imposed on Lilly… [p. 6]

The court found that Lilly’s duty to preserve arose no later than when they were served with the lawsuit in December of 2011. The court next looked at scope, concluding that “given the allegations concerning computer access, which Lilly did not deny, Lilly’s duty to preserve potentially relevant ESI was very broad” [p. 7]. The court then considered the defendant’s preservation actions, identifying a number of shortcomings:

Upon being served with the lawsuit on February 25, 2011, Lilly took no immediate action whatsoever to preserve any data, electronic or paper. In addition, upon receiving the preservation letter, approximately twelve days later, Lilly failed to issue a written company-wide litigation hold. Instead, Clark simply circulated the litigation hold letter to seven Lilly employees out of Lilly’s 160 employees without any additional instruction. The failure to issue a written litigation hold is “likely to result in the destruction of relevant evidence.” [p. 7]

The court went on to cite additional shortcomings, including not notifying all the “key players” who had access the secure dealer website, and that no actions were taken to prevent deletion of emails or backup data. The court concluded:

In summary, after the duty to preserve was triggered, Lilly failed to timely issue an effective written litigation hold, to take appropriate steps to preserve any existing electronic records, to suspend or alter automatic delete features and routine overwriting features, and to timely and effectively collect ESI. Therefore, the court finds that Lilly breached its duty to preserve relevant evidence. [p.8]

The court then considered the level of culpability (in this case, finding negligence) and prejudice suffered (uncertain, but highly likely given the facts of the case). The end result: the court imposed preservation actions, additional discovery and monetary sanctions.

It bears repeating. Lilly is required to bear these costs because its preservation and collection efforts were woefully inadequate. Parties must take their duty to preserve ESI seriously. In order to avoid sanctions, such as these, parties must cooperate and voluntarily preserve, search for, and collect ESI. [p.11]

We’re hearing such conclusions from the courts being repeated often, and they do indeed serve as fair warning that litigants must take their duty to preserve seriously and respond appropriately, especially now that these issues are under a white-hot spotlight.