Federal Circuit Court raises standard for dismissal because of spoliation of evidence
In companion decisions of Micron v. Rambus and Hynix v. Rambus, the Court of Appeals for the Federal Circuit clarified a party’s duty to preserve documents and other evidence when litigation is “pending or reasonably foreseeable.” The two cases involved infringement suits brought by Rambus against manufacturers who used a competitor’s chip technology. Before either case was filed in the district court, Rambus instituted a new document retention policy that led to its employees discarding potentially discoverable documents and erasing e-mail backup tapes for data. Some of this destruction took place on what the company called “shred days” where hundreds of boxes of documents were shredded. Furthermore, Rambus destroyed over 1,250 e-mail back up tapes that were older than three months.
In deciding whether Rambus had spoliated evidence, the court examined whether the litigation (eventually brought by Rambus) was “reasonably foreseeable.” Reasonably foreseeable litigation creates a duty to preserve evidence and failure to do so is sanctionable conduct. Indeed, the court called this standard “a flexible fact-specific standard that allows a district court to exercise the discretion necessary to confront the myriad factual situations inherent in the spoliation inquiry.” On the other hand, the court also noted that the standard is objective in that the court must consider “whether a reasonable party in the same factual circumstances would have reasonably foreseen litigation.”
The court rejected Rambus’ contention that litigation must be “imminent, probable, or without significant contingencies” to be “reasonably foreseeable.” Indeed, in both the Micron and Hynix cases before the circuit court, the litigation should have been reasonably foreseen much earlier than alleged by Rambus for a variety of reasons. In a harsh rebuke of Rambus’ actions and legal arguments, the court specifically held that it would not “sully the flexible reasonably foreseeable standard with the restrictive gloss proposed by Rambus.”
In finding that Rambus spoliated evidence, the court turned to the appropriate sanction for its conduct. In Micron, the circuit court considered whether the district court’s dismissal was appropriate under the circumstances. In articulating an apparent new standard regarding a dismissal sanction, the court 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.”
To make a determination of bad faith, the district court must find that the spoliating party “intended to impair the ability of the potential defendant to defend itself.” Upon a finding of bad faith, prejudice is measured by that the spoliation “materially affects the substantial rights of the adverse party.” In a further departure from earlier district court decisions, the court continued that, even if there is both “bad-faith spoliation and prejudice,” dismissal may not be warranted. Assuming there is bad faith and prejudice, the court must further consider “whether there is a lesser sanction” that will deter future spoliation, protect the opposing party’s interests, and remedy the prejudice. The Micron court remanded the case to the district court to consider bad faith and prejudice and whether dismissal remains warranted given the circuit court’s instruction on appeal.
The Micron and Hynix cases are the latest in a line of similar cases that offer instruction on how courts will handle the spoliation of evidence. In the e-discovery age in which we now live, spoliation is getting the increasing attention of litigants and the court. For companies frequently involved in litigation (or its possibility), the decisions can be seen as a relief from the fear of dismissal for the inadvertent spoliation of evidence where there is bad faith and prejudice (and no appropriate “lesser sanction”). Inadvertent spoliation, however, can still lead to harsh penalties. Careful management of litigation, litigation holds, and document retention policies can be an important factor in avoiding a finding of bad faith.