Bad Faith Spoliation Revisited

14 January 2013 IT-Lex Technology Law Publication

IT-Lex Technology Law

Some of you may have read about the spoliation issues unfolding over the past few years in the case of Micron Technology, Inc. v. Rambus, Inc., District of Delaware Case No. 00-792-SLR. On January 2, 2013, the Court issued the latest and perhaps most informative opinion to date. 2013 U.S. Dist. LEXIS 154.

If you have not been following these developments, the case arises from patent infringement claims involving inventions for improving the speed with which computer memory can function. On January 9, 2009, following a five-day bench trial, the District Court held that Rambus had unlawfully spoliated discoverable documents and that its patents were unenforceable against Micron as a result. On appeal, the Federal Circuit affirmed in part, vacated in part and remanded for further proceedings. The Federal Circuit agreed with the District Court that Rambus had engaged in unlawful spoliation, but asked the District Court to consider whether Rambus had acted in bad faith, whether the spoliation had resulted in prejudice to Micron, and whether the appropriate sanction was to declare Rambus’ patents unenforceable against Micron. On remand, the District Court provided a further detailed factual recitation, answered all three questions in the affirmative, and essentially confirmed its earlier ruling that Rambus’ patents were unenforceable against Micron as a result of Rambus’ spoliation.

The District Court’s opinion on remand is noteworthy for a number of reasons. Perhaps the most important aspect of the opinion concerns the Court’s conclusion that Rambus had acted in “bad faith.” The Court detailed evidence that Rambus had engaged in “shredding days,” which resulted in some 1000 boxes of materials being destroyed. Two of these “shredding days” took place after the duty to preserve attached in December 1998. Using these findings as the factual launching pad, the Court made four additional findings that were key to its ultimate conclusion that Rambus acted in bad faith.

First, the Court found that Rambus had developed and implemented a document retention policy as part of a specific litigation plan adopted for the technology at issue. 2013 U.S. Dist. LEXIS 154, *34. The Court detailed the steps Rambus had taken to develop the litigation plan, which included hiring an executive to develop a plan, meeting with outside litigation counsel to discuss litigation strategy, identifying potential targets, which included Micron, and presenting the plan to the Rambus Board. Id at 7-11. The litigation plan included a document retention policy that was designed to make Rambus “battle ready.” Id at 10. The Court found that the document retention policy was implemented to allow Rambus “to purge documents, including emails, from its files that might be discoverable in litigation.” Id at *37. The Court rejected Rambus’ argument that the purging of documents was not intended to prejudice Micron specifically. The Court explained, “the requisite bad faith need not be directed toward any specific litigant but only toward a potential litigant.” Id.

The second key finding was that Rambus had executed the document retention policy selectively. The Court noted that a Rambus executive had instructed engineers to “look for things to keep” and to expunge documents that might undermine Rambus’ legal position. Id at 37-38. Rambus retained only one of 1270 back-up tapes because it contained data that might be useful to Rambus’ legal position. Id at 38. While the litigation with Micron was pending, a Rambus executive sought to implement a new document retention policy that could be executed “more effectively.” Id. The Court inferred this to mean that “Rambus had failed to destroy all the unfavorable documents and/or retain all the favorable documents it had hoped under its existing policy.” Id at 39.

The third key finding was that Rambus had acknowledged the impropriety of its document retention policy. Id at 39. The Court was persuaded in part by the testimony of Rambus’ outside counsel, who testified that he would not advise a client to destroy documents knowing that a client reasonably anticipates litigation. Id at 40. From this, the Court inferred that Rambus had not been entirely forthcoming with outside litigation counsel about the likelihood of litigation. Perhaps the most damning piece of evidence in this regard were drafts of a memo in which a Rambus executive listed “1999 shredding party at Rambus” under the heading “Licensing/Litigation Readiness.” In the final version of the memo, this language was changed to read “a document retention compliance event” under the heading “Database Management.” Id at 40-41.

The fourth key finding was that Rambus had engaged in litigation misconduct. Id at 41. The Court found that Rambus’ witnesses had given false testimony regarding the presentation of the document retention policy to the Board and the number of shred days conducted by Rambus, among other things. Id. Rambus also tried to take the position that it did not contemplate litigation before adopting the document retention policy, even though there were contemporaneously prepared documents demonstrating the contrary. Id at 42. The Court also noted that the litigation with Micron “represents the exact sort of litigation that was meant to be frustrated by the document retention policy.” Id at 43.

After concluding that Rambus had acted in bad faith, the Court went on to explain the prejudice to Micron and the reasons why it was an appropriate sanction to hold the Rambus patents unenforceable against Micron. Perhaps the most important takeaway from these sections is that a party found to have engaged in bad faith spoliation, like Rambus, loses a certain amount of credibility and empathy when it comes to arguing for lack of prejudice and lesser sanctions. While the Court’s discussion of prejudice and appropriate sanctions certainly was thorough, the finding of bad faith was sprinkled throughout the discussion and to some degree constituted the beginning and end of the analysis.

Given the stakes, it seems reasonably likely that the Federal Circuit will be asked to review the District Court’s decision once again. Regardless of the outcome of any appeal, there are important lessons to be learned from this episode. Document retention policies need to be executed in a neutral and even-handed manner. Litigation readiness and the ability to implement timely and effective litigation holds certainly are valid considerations for a document retention policy. However, any document retention policy that is designed or implemented so as to gain an unfair advantage in litigation will be closely scrutinized.

Litigation may be reasonably foreseeable to a company, and the duty to preserve may attach, even before lawyers are engaged to investigate potential claims, particularly in instances where aggressive litigation is part of a company’s ongoing business strategy. Failing to involve litigation counsel early in the process creates additional risk that the company may not satisfy its preservation obligations. Keeping litigation counsel fully informed of what the company is contemplating from a potential litigation perspective can help save the company from itself.

Finally, even the best lawyering in the world cannot necessarily save a company from the consequences of its own nefarious intent. A finding of bad faith is the death knell when it comes to spoliation of evidence.

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