Before the Duty to Preserve Arises, Parties Must Anticipate Litigation in the United States, Not Abroad
Lunkenheimer Co. v. Tyco Flow Control Pac. Party Ltd., No. 1:11-cv-824, 2015 WL 631045 (S.D. Ohio Feb. 12, 2015).
In this case involving an intellectual property (IP) dispute, the court had to resolve a dispute over a 10-year span as to when an Australian company’s duty to preserve arose, among other issues, and concluded that the date when the complaint was filed was when the duty commenced.
Intervenor and counter-defendant Nilmini Klur argued that a defendant, Australian-based company PFCP, failed to preserve, collect, and produce evidence in the case and asked the court to sanction PFCP in several ways, including striking PFCP’s counterclaims.
One dispute involved when the duty to preserve evidence arose. Klur argued that PFCP had a duty to preserve within a month of acquiring the intellectual property, on October 1, 2002. On that day, a PFCP executive sent an e-mail indicating there was “conflicting evidence of ownership” over the IP. However, PFCP argued that its duty arose nearly 10 years later on August 3, 2012, when it filed its answer to the complaint in this case and consented to U.S. jurisdiction. If not then, the earliest it could have arisen was the date it was served with the lawsuit: December 8, 2011. Until that day, the plaintiffs accepted regular royalty payments for more than five years, did nothing about PFCP’s use of the IP, and never sent a dispute or termination notice.
Although the court asserted that PFCP is “not excused from an obligation to preserve evidence simply because it is a foreign company,” it found PFCP could not have reasonably anticipated U.S. litigation because the parties’ agreement provided that lawsuits had to be filed in Australia. Furthermore, PFCP had no sales or other business contacts in the United States. Therefore, the court ruled that PFCP’s duty to preserve arose on December 8, 2011, asserting that “[t]he power of a U.S. Court to require compliance with U.S. discovery obligations does not arise until and unless the Court has jurisdiction.”
Klur also argued that the company engaged in a “massive failure to preserve, search for, and produce evidence.” For example, the company never advised its employees to preserve evidence and were never shown any requests for documents. However, the company argued that it had retained all pertinent hard-copy and electronic documents as of September 21, 2007 in relation to acquiring the license. The company also asserted that its counsel repeatedly reminded custodians to retain all relevant documents. The court agreed that PFCP had taken adequate steps to preserve.
Klur also argued that PFCP was required to preserve and search for e-mails from 2009 and earlier. In 2009, PFCP had transitioned to a new e-mail client from Lotus Notes and no longer had the ability to access e-mails in the old format. In dismissing Klur’s assertion, the court again relied on the fact that the duty to preserve did not attach until 2011.
Finally, Klur argued that the company had not collected evidence for several former employees. The court ordered that to the extent any of the named custodians were employed as of 2011, PFCP had a duty to preserve their evidence and had to reach out to them to find any relevant evidence that it had not yet produced.
All in all, the court opted not to sanction PFCP because it had and was continuing to preserve all relevant evidence, as was the company’s practice with all acquisitions.
This opinion makes clear that foreign companies that do little or no business in the United States cannot disregard the duty to preserve. If they are subject to the jurisdiction of a U.S. court, they must follow U.S. discovery rules and retain evidence.
Here, the opinion stopped short of investigating what PFCP may have known before the litigation arose. The jurisdictional clause in the parties’ contract that required claims to be filed in Australia was clear evidence that litigation could not have been “reasonably anticipated” in the United States until the complaint was filed. However, in other cases, companies may have knowledge that a party intends to file a U.S. lawsuit well in advance of the date they receive service, regardless of the terms of any agreement. In such cases, foreign organizations should implement a litigation hold and document their rationale for anticipating litigation.