The Duty to Preserve Has Limits That Can Be Tricky To Define
Blue Sky Travel & Tours, LLC v. Al Tayyar, No. 13-2500, 2014 WL 1451636 (4th Cir. Mar. 31, 2015).
In this contractual dispute between two travel agencies, the appellate court remanded the case because it found the district court abused its discretion by applying an incorrect standard for spoliation.
Blue Sky signed a contract agreeing to help Al Tayyar Group (ATG) obtain tickets to resell to the Saudi Arabian Ministry of Higher Education. The terms provided that ATG would share 50 percent of the profits from Ministry sales with Blue Sky. Ultimately, the relationship between the parties deteriorated, and Blue Sky filed this lawsuit.
During discovery, Blue Sky asked ATG to produce invoices from other ticket vendors. After ATG declined, the court compelled their production. Instead of complying, ATG provided 5,000 pages of spreadsheets with vendor pricing data. Blue Sky filed another motion seeking sanctions. After a hearing, the court sided with Blue Sky, refused to allow ATG to argue that it earned only a 5 percent profit, and warned it would impose additional sanctions if ATG still refused to comply. In response, ATG filed a motion to reconsider and explained it no longer had the invoices.
Blue Sky then filed a motion for default judgment. During the hearing, the magistrate judge admonished ATG’s lawyers: “[W]hen this litigation started, the defendants were required by law to preserve. Any document retention policy you had had to be stopped.” The judge also dismissed ATG’s argument that it was unaware invoices from other vendors might be relevant to the litigation. Rather, the judge asserted that once ATG was knew of pending or actual litigation, it should have preserved everything “because you don’t know what may or may not be relevant.” Accordingly, the judge imposed an adverse inference that ATG earned profits of $20 million from reselling tickets. ATG filed exceptions to the sanctions order, but the district court upheld the adverse inference as “necessary to address effectively the prejudice to the plaintiffs caused by defendant’s failures.”
Before trial, the parties had agreed to bifurcate a portion of the trial into a jury trial on liability and a hearing before the judge on lost profits. The jury found ATG liable and awarded Blue Sky nearly $2 million in damages. Subsequently, the district judge ruled that Blue Sky was entitled to $10 million in lost profits, half of the $20 million presumed under the adverse inference.
ATG appealed, claiming the district court abused its discretion. Specifically, ATG claimed the magistrate judge and district court used the wrong legal standard in assessing its obligation to preserve documents. The appellate court agreed.
The Fourth Circuit found the magistrate judge exceeded his power by requiring ATG to retain everything once litigation began, “effectively reliev[ing] Blue Sky of its burden to prove its damages claim for lost profits.” Instead, the judge should have limited ATG’s preservation duty to the documents it knew or should have known might be relevant to the case.
In addition, the Fourth Circuit found the district court failed to apply the three-part spoliation test: (1) whether ATG had a duty to preserve evidence, (2) whether ATG engaged in willful conduct that resulted in the loss or destruction of the evidence, and (3) whether ATG knew or should have known the evidence might be relevant.
Thus, it remanded the case to the district court to resolve the final two prongs “essential to the spoliation analysis”: (1) when “ATG knew or should have known that invoices relating to other vendors could be relevant” and (2) “when ATG destroyed the invoices from the other vendors.” Once it answered these questions, the court could assess whether ATG engaged in spoliation, whether any sanctions were appropriate, and whether a new trial on lost profits damages would be necessary.
As this case demonstrates, there are limits to the duty to preserve. Of course, those limits can be difficult to define, but that uncertainty does not mean parties must preserve all evidence in case it becomes relevant.
Although it can be challenging to assess what might be relevant at the beginning of a case, the best approach is to consider everything that might be foreseeably relevant to every claim. Assess the potential landscape of relevant data and custodians. Then meet with the custodians and your IT partners to determine where the data is stored. Using this information, you will be able to construct a defensible strategy for imposing a litigation hold.