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Adverse Inference Instruction Ordered for ESI Spoliation Outside the Scope of FRCP 37(e)

Posted on May 19th, 2017

Scope of FRCP 37(e)In United States ex. rel. Scutellaro v. Capitol Supply, Inc., Case No. 10-1094 (District of Columbia, Apr. 19, 2017), the relator, Louis Scutellaro, sued Defendant under the qui tam provision of the False Claims Act (FCA). The suit alleged that Defendant falsely certified that its products sold to federal agencies were manufactured in compliance with the Trade Agreements Act (TAA) and the Buy American Act (BAA), laws that require that products sold to federal agencies come only from designated countries.

Over seven years, Plaintiff served Defendant with subpoenas, with which Defendant never fully complied. Eventually, the court entered a conditional contempt order against Defendant, at which time Defendant admitted that it had not retained information about country of origin prior to July 2009, and the only information it had after that was incomplete. Discovery was stayed for mediation, but mediation was unsuccessful. Plaintiff then filed a Motion for Adverse Inference, and all parties filed Motions for Summary Judgment.

Plaintiff’s Motion for Adverse Inference was based upon Defendant’s failure to preserve “case-dispositive” country of origin evidence for the products it sold on a website, contrary to regulations. Plaintiff alleged that Defendant “flouted its clear obligation to preserve” the country of origin data by overwriting it after “only a fleeting preservation period.” Plaintiff sought an adverse inference that, for all products for which the country of origin is unknown due to the failure to preserve, such country of origin be considered non-designated. That amounted to over 250,000 transactions representing sales of over $223 million.

Defendant argued that, although it had overwritten or otherwise failed to preserve the data for products sold prior to July 2009, the court’s power to impose sanctions for spoliation of ESI stems from FRCP 37(e), and not from the court’s inherent powers. Rule 37(e) requires a greater showing than Plaintiff had made, Defendant argued.

The court disagreed. FRCP 37(e) applies, the court held, to ESI that should have been preserved in the anticipation or conduct of litigation. Here, Plaintiff was not arguing that Defendant failed to preserve evidence in anticipation of litigation; Plaintiff was arguing that Defendant failed to preserve data in violation of Defendant’s regulatory and contractual obligations. Therefore, the court held that the actions were outside the scope of FRCP 37(e), but sanctions could be issued under the court’s inherent power. Defendant overwrote the data as part of its practice and not accidentally or unknowingly. The court ruled that an adverse inference instruction was appropriate but that the form of the instruction would be addressed during pretrial motions in limine.

ILS – Plaintiff Electronic Discovery Experts

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