The Supreme Court’s recent affirmance of penalties imposed by the Delaware Court of Chancery for litigation misconduct is a useful tool for litigators of all stripes to brandish as an incentive for both their clients and opposing parties to comply with the rules of the road in connection with obligations to preserve evidence during discovery–and to tell the truth. (Yes, some need reminders.)
In Shawe v. Elting, Del. Supr., No. 487, 2016 (Feb. 13, 2017), Delaware’s high court upheld a civil penalty of more than $7 million in legal fees and costs, imposed after a hearing which found that one of the parties in a hotly contested stockholder dispute, engaged in the following bad faith conduct: (1) intentionally attempting to destroy information on a laptop after the court had entered an order requiring the production of that laptop for forensic discovery and after litigation hold notices were sent; (2) at a minimum recklessly failing to safeguard evidence on a cell phone which was regularly used to exchange text messages among relevant witnesses; and (3) by repeatedly lying in responses to interrogatories and in a deposition to conceal the details about deletion of information from a laptop.
The Chancery Court’s 100-plus page decision on the merits was highlighted on these pages. Chancery’s decision imposing penalties was highlighted in this space also. The Supreme Court’s affirmance opinion on the merits was issued on the same day as the decision upholding penalties that is highlighted in this post. The affirmance on the merits features a vigorous dissent that provides a thought-provoking contrasting analysis on the merits. Several key takeaways from the Supreme Court’s decision upholding the penalty are featured in the following bullet points:
- An important point made in upholding the penalty was that there was no requirement that a person succeed in his efforts to thwart the ability of an imposing party to prosecute the merits of the case in order for the court to have the power to impose penalties for discovery abuse or other litigation misconduct.
- Even if the deleted emails were ultimately recovered, the attempt to delete emails or other data in violation of discovery obligations is a sufficient basis to impose penalties. The recovery of deleted emails does not negate the illicit intent and does not cleanse the bad faith.
- Moreover, a party need not prove that deleted data was relevant in order for the court to impose penalties for its deletion.
- A party in litigation has an affirmative duty to preserve potentially relevant evidence and a court may impose penalties on a party who fails to prevent destruction of that evidence.
- Although a party is not obligated to preserve every email or shred of evidence, it must “preserve what it knows, or reasonably should know, is relevant to the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the subject of a pending discovery request.”
- In order to impose sanctions, such as the shifting of legal fees, a court “need only find that a party had a duty to preserve evidence and breached that duty.”
- The court described as “incredible” the testimony of the co-CEO that his niece dropped his iPhone in a “cup of Diet Coke,” and then without having a professional try to preserve the data, discarded it after his assistant, who had no expertise in forensic discovery, was unable to retrieve the data after allowing the phone to dry.
- The court found that the penalty of over $7 million in attorneys’ fees and costs was a civil penalty, and because it was not regarded as a criminal sanction for perjury, the court rejected the arguments regarding due process.
Notably, this seemingly high dollar amount as a penalty for legal fees incurred in connection with failure to comply with discovery obligations, including the deletion of electronically stored data, is not unprecedented in Delaware. See Genger v. TR Investors, LLC, 26 A.3d 180 (Del. 2011), which was highlighted on these pages.
Supplement: My latest ethics column for The Bencher, a publication of the American Inns of Court, focused on this decision. Also, an article on Oct. 23, 2018 in The Delaware Law Weekly, about the post-settlement statements of Mr. Shawe regarding this litigation in general, after he bought out his partner and moved the company to Nevada, quotes yours truly extensively about how the several decisions on the merits in this case fit into the jurisprudence of Section 226–which was used by the court to force a sale to end the deadlock.