Case Law: Victor Stanley, Inc. v. Creative Pipe, Inc. Update

Court Orders Defendant to Pay Attorneys' Fees or Serve Two Years Imprisonment for "Egregious" Discovery Misconduct

Victor Stanley, Inc. v. Creative Pipe,Inc., 2010 WL 3703696 (D. Md. Sept. 9, 2010). In this intellectual property litigation, the plaintiff sought terminating and other sanctions arising out of the defendants' intentional spoliation of evidence and other litigation misconduct. The plaintiff identified eight discrete preservation failures, including the president of the defendant company's use of wiping software, failure to implement a litigation hold and failure to preserve an external hard drive, files and e-mails following the plaintiff's demands and multiple court orders. Calling this a case of the "gang that couldn't spoliate straight," Judge Grimm remarked that through four years of discovery, the defendant president had actual knowledge of his duty to preserve, yet delayed and misrepresented the completeness of the ESI production and deleted, destroyed and otherwise failed to preserve evidence. The Judge stated that these failures "collectively constitute the single most egregious example of spoliation [that he has] encountered in any case . . . in nearly fourteen years on the bench." Following a thorough discussion of preservation standards and spoliation laws among the Circuits, including in Pension Committee and Rimkus Consulting Group, Judge Grimm issued a default judgment for the copyright claim only and held that the defendant president pervasively and willfully violated court orders in civil contempt of court, ordering him to be imprisoned for up to two years, or until he paid the attorneys' fees and costs - estimated to be a "significant amount."

Commentary

This opinion by Chief Magistrate Judge Paul W. Grimm, one of the leading judicial voices on the topic of electronic discovery, has garnered significant discussion throughout the industry over the past several months. Upon appeal by the defendants, the District Court adopted Judge Grimm’s order and recommendations, except for the imprisonment sanction. The District Court determined that ordering imprisonment for the “future possible failure to comply” with the payment obligation was not appropriate, although noted that incarceration could be a possibility if the defendant President fails to comply with the payment order. The total amount of sanctions issued by the District Court: $337,796.37.

Although the District Court declined to adopt Judge Grimm’s recommendation regarding imprisonment, the possibility of that sanction should not go unnoticed by practitioners and corporations alike. This case does represent an extreme form of bad faith misconduct on the part of the defendants; however, bad faith is often not required for the imposition of sanctions. Despite the fact that the 2006 amendments took effect four years ago, many are still struggling to comply with electronic discovery obligations. Education in this area is an important investment to make and parties should continue to strive for conducting their discovery in a transparent manner, documenting all steps taken and why. By taking these steps and cooperating with opposing counsel (however idealistic that may seem), counsel may be able to avoid sanctions – or at least soften the blow of the court’s gavel – when an ediscovery mishap occurs.