Federal Circuit Overturns Adverse Inference Sanction for Spoliation in Adams. v. Dell

[Correction — This article has been corrected to show that the ruling was from the Federal Circuit, not the Tenth Circuit as originally reported. – Ed.]

The patent infringement and trademark case of Phillip M. Adams & Assoc. v. Dell Computer Corp. has been an ongoing saga with actions dating back to the 1990s. In recent years the case had been on hiatus, but that ended on March 18, 2013 when the Federal Circuit announced its ruling on four claims that had been challenged from the earlier District Court opinion.

Of particular interest here is that the three-judge panel overturned an adverse inference sanction for spoliation that the District Court had imposed on ASUSTeK Computer Corp. (ASUS), a co-defendant in the case who had brought the appeal. Does this set a precedent  that signals a shift in the threshold for issuing an adverse inference?

The Back Story

This is a long, complex and messy case with many fact-specific issues, so the focus here will be on the spoliation sanction. It all began with a small innovation that detected and resolved defects in floppy drive controllers that could cause data errors in the most ubiquitous data storage technology of that era. It was discovered that computer manufacturers were selling defective products and a class action suit was filed. The first target was Toshiba which ultimately settled for $2.1 billion in 1999.

With the threat of a flood of class actions, computer manufacturers needed the plaintiff’s technology. ASUS developed software to detect and correct the defects in response to the Toshiba class action. Unfortunately, the plaintiff claimed this was in violation of a patent held by the plaintiff and inventor Phillip Adams who filed suit in May 2005 alleging infringement.

When asked to produce key documents, ASUS’s response was meager. While producing a copy of the software program, it failed to deliver the source code which was considered critical to determining if ASUS copied Adams’ work or not. ASUS claimed the source code was lost due to “information management practices.”

Conflicting Opinions

The pre-trial first opinion (Adams v. Dell, 621 F.Supp.2d 1173, 1194 (D.Utah Mar 30 2009)) by U.S. Magistrate Judge David Nuffer determined that there was no determination of bad faith but that “ASUS’ lack of a retention policy and irresponsible data retention practices are responsible for the loss of significant data”(*15). He reserved any determination of sanctions on additional evidence to determine prejudice. In a July 10, 2009 opinion, the magistrate found no evidence of willful spoliation and “[i]n fact, the evidence… shows just the opposite.” Absent of bad faith, the order for sanctions was denied.

Subsequently, the district judge in (Phillip M. Adams & Assocs. V. Sony Elecs. Inc., No. 05-64, D. Utah Sept 26, 2011) reversed the magistrate’s opinion and “ordered an adverse inference sanction against ASUS for spoliation of evidence.” (p.6) The sanction was an adverse inference as it was deemed “an adequate penalty under the circumstances.” (p.6)

Appeals Court Overrides the Override

In the appeal, the Federal Circuit weighed in on ASUS’s assertion that the district court erred in imposing the adverse inference sanction on grounds of “abuse of discretion.” Following the July 2009 ruling, the plaintiff objected to the order which denied a sanction.

According the FRCP, the only rationale for reconsidering a magistrate’s pretrial order is if it was “clearly erroneous or contrary to law.” Despite this, the district court found no clear error in Magistrate Judge Nuffer’s ruling but still “determining a sanction was warranted and imposed a broad adverse inference sanction against ASUS.”

In footnote 7, the Appeals Court notes that the “district court’s decision could be interpreted as making an independent finding of bad faith,” in which it cites the September 2010 district court as ruling that “ASUS failed to preserve certain evidence with ‘pinpoint accuracy.’ If this was the case, the district court abused its discretion by failing to properly defer to the magistrate’s actual findings.”

The Federal Circuit reversed the ruling. It deemed the district court’s ruling to be in error because in that Circuit an adverse inference sanction “must be predicated on the bad faith of the party destroying the records.” (p.9 citingAramburu v. Boeing) By reversing the adverse inference sanction, the panel would “consider whether there is adequate evidence to support the jury verdicts against ASUS absent such adverse inferences.” (p.9)

The Ruling’s Impact on Preservation

It may be too early to tell, but on first blush the decision is not likely to have an overarching impact. In the end, the standards for preservation remain the same: bad faith is a prerequisite for adverse inference sanctions. (As shown in the Spoliation Sanctions by Circuit chart) That is what the magistrate judge correctly ruled in his July 2009 opinion.

The crux of the Federal Circuit’s ruling pertains to the reasoning that the district court chose to overrule the magistrate’s opinion and give an adverse inference sanction. The court agreed there was not bad faith and the district court made an independent finding and therefore “committed legal error” (p.9), and a “district court by definition abuses its discretion when it makes an error of law.” (p.9)

In the end, the opinion focuses less on “what,” “when” and “how” spoliation occurred, but how the courts handled it. The Federal Circuit’s ruling offers little assistance in clarifying issues around timing of trigger events nor bright lines on preservation and legal holds. Organizations still need to have sound preservation practices in place otherwise based on the current legal standards they could find themselves in sanctionable territory.

Further Reading: