Beard Research, Inc. v. Kates, No. 1316-VCP (Del. Ch., May 29, 2009), read opinion here.

This is One of Three Chancery Court Decisions  Decided in May 2009 that Address Electronic Discovery Issues

This Chancery Court decision by Vice Chancellor Parsons is one of three Chancery Court cases decided in May that address important aspects of electronic discovery and describe the penalties for not upholding the duty to preserve electronically stored information (ESI). See also  Triton Construction Co. v. E. Shore Electric Services, Inc., summarized here on this blog; and Omnicare v. Mariner Health Care Management Co., another Chancery Court decision issued in May 2009 that addressed when ESI will be deemed not “readily accessible” such that costs of production will be shifted, summarized here. This decision in this Beard Research case is a magnum opus of sorts on the important issue of ESI especially to the extent Vice Chancellor Parsons provides the clearest statement of the law on this topic that I recall in a Chancery Court opinion, and to the extent that it provides a cautionary tale for those attorneys and clients who do not have their “ESI house in order.”


This decision procedurally came before the court on the Motion for Sanctions of plaintiff for alleged spoliation of evidence. In particular, the plaintiffs argued that the laptop of an ex-employee was irretrievably altered after a duty to preserve relevant information from that laptop had arisen. By way of remedy, the plaintiffs urged the court to grant a default judgment in their favor for tortious interference with business relations and misappropriation of trade secrets. Alternatively, the plaintiffs requested an adverse inference that the destroyed evidence contained information that would favor their claims, in addition to the imposition of attorneys’ fees and costs.

The court declined to enter a default judgment but granted a request to draw an adverse inference based on the missing evidence, but the court did order that the ex-employee and his new employers reimburse the plaintiffs for the reasonable attorneys’ fees and expenses incurred in prosecuting the motion for sanctions.


The parties in this case were companies that provided outsourcing services, such as chemists, for the chemical industry. A variety of claims were made against several former employees and their subsequent employers. One of the former employees was named Dr. Michael Kates. Kates left the employment of the plaintiffs and went to work for a competitor but continued to use a laptop which he had used while working for the plaintiffs, which contained proprietary information he obtained while working for plaintiffs.

In June, 2005 plaintiffs served their discovery requests and they specifically requested documents kept in electronic form, including e-mail communications. Nonetheless, in October 2005, Kates deleted key files from his laptop and “emptied” the computer’s trash in the recycle bin. In both December of 2005 and August 2006 he reformatted the hard drive and reinstalled system software, with the understanding that reformatting the hard drive or installing a new operating system would delete the old data.

Plaintiffs filed a Motion to Compel in May of 2006 and another in December of 2006. Based on the second Motion to Compel, the court directed the IT expert for defendants to meet with plaintiffs to discuss a method and means of searching the computers and databases in June 2007.

In October 2007, defendants’ counsel notified counsel for plaintiffs that the defendants had “nothing on their personal computers” and further advising them that access to any computer would require a court order.

Motion to Compel Inspection of Laptop

In July 2008, plaintiffs filed a Motion to Compel requesting that the laptop of Kates be turned over to them so that it could be searched by the IT expert of plaintiffs. The day before the hearing on that third Motion to Compel, Kates “defragmented the hard drive and computer” before being ordered by the court to produce the laptop, and after being told by his lawyer that he would likely be required to produce his laptop.

The IT expert for plaintiffs conducted a forensic investigation which concluded that key data was deleted and sent to the recycle bin the day before the hearing on the Motion to Compel, and that more than 11,000 files were deleted previously on the laptop.

In October 2008 the Motion for Sanctions for spoliation of evidence was filed by plaintiffs.

Plaintiffs’ Arguments

Plaintiffs argued that the destruction of the laptop of Kates constituted spoliation of discoverable material in the face of a duty to preserve potentially relevant evidence. The defendants made several feeble replies to these arguments, including that the deletions were performed in order to keep the laptop operational, and that the reason the information was deleted on the eve of the hearing on the Motion to Compel was to avoid revealing embarrassing personal information.

Legal Rulings

The court cited substantial authority for the following statement of Delaware law: “A party in litigation or who has reason to anticipate litigation had an affirmative duty to preserve evidence that might be relevant to the issues in a lawsuit.” See footnotes 62 through 64. (citing, e.g., the Sedona Guidelines.) The court observed that whether a person has reason to anticipate litigation depends on the facts and circumstances that may lead to a conclusion that litigation is imminent or should be expected, but a court may sanction a party who “breaches this duty by destroying relevant evidence or by failing to prevent the destruction of such evidence.”

The court described in great detail three specific actions where Kates disregarded his duty to preserve data: (1) The deletion of files from the original hard drive of the laptop in November of 2005; (2) The installation of a new hard drive in December of 2007; and (3) Tampering with the laptop and deletion of files in July 2008.

The court’s advice to counsel on e-discovery matters from the opinion deserves to be quoted verbatim:

In complex commercial litigation today, virtually all discovery involves electronic discovery to some extent. It also is well known that absent affirmative steps to preserve it, at least some electronically stored information (“ESI”) is likely to be lost during the course of litigation through routine business practices or otherwise. These realities counsel strongly in favor of early and, if necessary, frequent communications among counsel for opposing litigants to determine how discovery of ESI will be handled. To the extent counsel reach agreements recognizing and permitting routine destruction of certain types of files to continue during litigation, the Court has no reason to object. Conversely, if the parties do not focus on the handling of e-discovery in the early stages of a case, the Court is not likely to be sympathetic when, for example, one party later complains that stringent measures were not instituted voluntarily by her adversary to ensure that no potentially relevant information was lost. Rather, instead of holding a party to a stringent standard that might have been appropriate if established earlier in the case, the Court probably will apply an approach it deems reasonable, taking into account the insights provided by the case law and some of the guidelines and principles developed by various respected groups that have studied the challenges of electronic discovery.  66

66  See, e.g., Conference of Chief Justices, Guidelines for State Trial Courts Regarding Discovery of Electronically Stored Information (2006), available at ; The Sedona Principles: Best Practices, Recommendations & Principles for Addressing Electronic Document Production (2005), available at; Sedona Guidelines.

The court expressed its outrage that in July 2008 Kates brazenly ran a disk-cleanup program on the new hard drive on the eve of the hearing on the Motion to Compel. The court emphasized that it “cannot condone such flagrant disregard for the discovery rules in a party’s obligation to preserve potentially relevant evidence.”

What Sanctions are Appropriate for Failure to Preserve Evidence

Chancery Court Rule 37(a)(4), entitled “Expenses and Sanctions,” and Rule 37(b)(2), both provide a basis for penalties in this area. In addition, the court has the power to issue sanctions for discovery abuses under its inherent equitable powers, as well as the court’s inherent power to manage its own affairs. (See footnote 70.) In order to impose a default judgment, the spoliator must have acted “willfully or in bad faith and intended to prevent the other side from examining the evidence.” (See footnote 78). The court explained why the facts did not warrant such a severe remedy in this case.

Adverse Inference

The court explained the prerequisites based on recent Delaware Supreme Court precedent for the penalty of drawing an adverse inference against a spoliator of evidence. The standard for drawing an adverse inference is as follows:

An adverse inference instruction is appropriate where a
litigant intentionally or recklessly destroys evidence, when it
knows that the item in question is relevant to a legal dispute
or it was otherwise under a legal duty to preserve the item.
Before giving such an instruction, a trial judge must,
therefore, make a preliminary finding that the evidence shows
such intentional or reckless conduct. (citation from footnote 83 omitted).

Where Does an Adverse Inference in Chancery Court Get you?

After determining the different requirements for drawing an adverse inference had been satisfied, the court then analyzed in careful detail exactly what specific adverse inferences can be drawn based on the spoliation of specific evidence by Kates. Importantly, the court emphasized that an adverse inference is “not substantive proof” and not a substitute for the proof of a fact necessary to the party’s case. In addition, in order to obtain an adverse inference, a party must offer more than “mere speculation and conjecture that a particular document existed.” To that end, the court noted that by definition an e-mail has both a sender and a receiver. Even if the e-mails were destroyed by the sender, in this case the plaintiffs received discovery responses from the likely receiver of the e-mail and no incriminating e-mails from that party were received.

The court regarded as reckless the failure of Kates to fulfill his obligation to preserve potentially relevant evidence on the laptop and the adverse inference drawn was that there was relevant information on the laptop that would have shown confidential information of his former employer as part of a PowerPoint that Kates presented to a competitor.

Attorneys’ Fees and Costs

In order to impose monetary sanctions, the court “need only find that a party had a duty to preserve evidence and breached that duty. Essentially, this means that negligence alone may be sufficient to support the imposition of monetary sanctions.” See footnote 94. The court reserved some of its harshest language to justify the imposition of attorneys’ fees in this case. In particular, the court was troubled by the waste of time and resources suffered by the plaintiffs’ counsel and the court regarding a Motion to Compel the original hard drive. The court emphasized that it was only after the court read the opening brief on the motion did the defendants admit in their answering papers that the original hard drive had been replaced already.

The court added that: “The vexatiousness of Kates’ conduct was compounded further by his undisclosed deletion of numerous files from the new hard drive before the July 2008 hearing.” The court added that: “Kates’ intentional deletion of information in July 2008 was egregious and demonstrates a callous disregard for proper discovery in this court.” Therefore, the court awarded plaintiffs their attorneys’ fees and expenses, including expert fees, associated with the Motion for Sanctions and imposed those amounts jointly and severally against Kates and his new employers. The expenses included those associated with the inspection of the laptop.

Together with the Triton and Omnicare v. Mariner cases also decided in May 2009, the Chancery Court is providing helpful guidance to practitioners on cutting edge electronic discovery issues and “cautionary tales” to avoid ESI traps for the unwary.