Case Law

Seller’s Remorse: Court Imposes Sanctions for Failure to Preserve ESI in Sale of Business

California

ILWU-PMA Welfare Plan Bd. of Trs. v. Connecticut Gen. Life. Ins. Co., 2017 WL 345988 (N.D. Cal. Jan. 24, 2017) In this action for breach of duties under ERISA, the plaintiff moved the court for sanctions against the defendant, alleging spoliation of evidence. This action stems in part from a tolling agreement the parties signed in 2011 due to previous litigation. In 2012, the defendant’s parent company sold one of its three subsidiaries to a third party. Included in the transferred assets were email accounts and other electronically stored information (ESI) belonging to the defendant. Importantly, the purchase agreement obligated the buyer to “provide [the seller] reasonable access to business information of both parties as reasonably required for, among other things, litigation purposes.” The agreement also stipulated that each party would preserve the defendant’s information, and that for the first six years, neither party would destroy any of the subsidiary’s information without first providing the other party an opportunity to first obtain a copy. In February 2016, as part of the present dispute, the plaintiff requested production of ESI that included a portion of the records included in the sale. Despite the terms of the purchase agreement, the third party was unable to produce any of the defendant’s records dated prior to 2009. The defendant argued that sanctions were not warranted, as it could not have reasonably foreseen this action before that time. Further, the defendant argued that even if it could have foreseen litigation, the purchase agreement established that the defendant took reasonable steps to preserve. Turning to Rule 37(e), the court found that the defendant was put on notice of potential litigation in 2011 because of the terms of the tolling agreement and because the issues of the present suit related to the 2011 litigation. Additionally, the terms of the purchase agreement expressly stated that the defendant would have access to the transferred records “for litigation purposes.” The court was also troubled that the subsidiary sold by the parent company had possession of records of a completely separate subsidiary, and that the company did not bother to make copies of the records before transfer. The court held that even though the discovery process was still ongoing, “at least some prejudice” occurred, and that sanctions against the defendant were appropriate. The court ordered discovery reopened, that the defendant pay the reasonable costs for discovery, and that the defendant pay plaintiff’s costs for bringing this motion.

Keywords: Spoliation, electronically stored information, duty to preserve, sanctions