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E-discovery: Lessons learned from Scentsy, Inc. v. B.R. Chase LLC

Insufficient document retention and litigation hold policies spell trouble for plaintiffs

In some of our recent articles, we have noted the fundamental importance of having data and document retention policies in place and consistently applying those policies. Doing so reduces the overall volume of data or electronic documents that need to be preserved, collected, processed, analyzed and reviewed for potential production when litigation arises. A recent case out of the U.S. District Court for the District of Idaho—Scentsy, Inc. v. B.R. Chase LLC—gives in-house counsel some guidelines for whether their company’s data or document retention policies are acceptable, and if not, what the courts might order.

In Scentsy, a defendant accused the plaintiff of spoliating and failing to produce key documents because of an insufficient litigation hold. Instead of issuing a written litigation hold to any of its custodians, the plaintiff’s general counsel spoke to the custodians that had information regarding the subject of the lawsuit. The plaintiff issued this oral litigation hold around the time it filed the complaint in May 2011. The defendant argued that the plaintiff had first anticipated the litigation in May 2010. Meanwhile, the plaintiff admitted that it anticipated the litigation no later than March 2011, roughly two months prior to the oral litigation hold.

The plaintiff’s document retention policy was curious in that it provided for the routine deletion of emails but not other documents that are more than six months old.

Other facts complicated the plaintiff’s odd document retention policy and the oral litigation hold. Specifically, the hard drive used by the plaintiff’s lead designer for the products at issue in the case crashed in early 2010. The plaintiff sent the drive to a forensic computer specialist in an attempt to recover any data on it, but those efforts were unsuccessful. As a result, the plaintiff contended that even if it contemplated the litigation in May 2010, any relevant documents not produced were destroyed either under its general retention policy or when its lead designer’s computer hard drive failed.

The court was not troubled by the failure of the lead designer’s hard drive in early 2010. It reasoned that even if the plaintiff anticipated the litigation in May 2010, as asserted by the defendant, the hard drive had crashed before that. The defendant provided no evidence to the contrary.

The court was, however, troubled by the plaintiff’s document retention policy and the oral litigation hold issued by its general counsel:

“The Court has serious concerns with [plaintiff’s] retention policy and litigation hold process. Generally not deleting documents, and orally requesting certain employees to preserve relevant documents concurrently with filing a lawsuit, is completely inadequate.”

The court even described this conduct as “very risky” and bordering on “recklessness.”

The court focused specifically on the fact that the plaintiff’s vice president of IT testified that all non-email documents saved to an employee’s personal computer hard drive or the plaintiff’s server are preserved indefinitely. Besides this testimony, the plaintiff’s GC suggested that there was no document retention policy for files other than emails and that those files were “’stored in accordance with the creator’s intent.’”

The court quickly combined this lack of a document retention policy for files other than emails with the admitted two-month gap between the plaintiff’s anticipation of litigation and the issuance of the oral litigation hold. It described this two-month gap as a “window where these [non-email] documents could have been destroyed by a user after [plaintiff] anticipated litigation.” And if you accepted the defendant’s argument as to when the plaintiff anticipated the litigation, the window grew to 12 months.

Here comes the scary part. The court agreed that regardless of which window you chose the likelihood that any non-email documents were destroyed was “slight.” The defendant had no affirmative evidence that any documents had been destroyed during the window. But in the court’s reasoning, “There is no way to know, and that uncertainty was caused by [plaintiff’s] inadequate retention policy coupled with its late and imprecise litigation hold.”

The court then moved to craft the remedy for the plaintiff’s inadequate policies. It agreed that conducting a lengthy forensic examination of the plaintiff’s computer system, costing millions of dollars, was an undue burden and cost. But the court stated that the plaintiff “should not be completely let off the hook simply because the cost is high.” Using its “inherent power to make evidentiary rulings in response to the destruction of relevant evidence if spoliation occurs before the litigation is filed,” the court allowed the defendant to depose the “appropriate individuals” at the plaintiff’s company who were involved in the design of the products at issue to determine whether any of them destroyed relevant documents.

Many in-house counsel at this point would react something like this: “Those witnesses would have been deposed anyway, and they will be prepared to testify that, while they stored documents on their personal computer hard drives, they did not destroy any such documents.” It would be hard to argue with that response. But the court went further. The plaintiff had to pay for the deposition costs, including the defendant’s attorneys’ fees for taking the depositions. It also noted that if those depositions revealed that spoliation occurred it would consider issuing an adverse inference instruction at trial or dismissing some or all of the plaintiff’s claims. The court summed up its ruling in stating that “if there is evidence that spoliation occurred, future consequences will be harsh.”

What is remarkable about the ruling in Scentsy is that the court awarded the sanction through the plaintiff paying the defendant’s attorneys’ fees for the depositions despite the fact that there was no evidence that spoliation had actually occurred. We have seen numerous cases in which courts have threatened sanctions given the possibility of spoliation but have not yet seen a case in which a sanction has been issued prior to that finding. The court in Scentsy premised its ruling entirely upon that admitted “uncertainty,” but when it tied that uncertainty of spoliation to the plaintiff’s inadequate document retention policy and oral litigation hold practice, it did not hesitate to issue the sanction.

It will be interesting to see if other courts adopt the stance of Scentsy. Regardless, this opinion is a reminder of the importance of having adequate data and document retention policies, consistently applying those policies and issuing written litigation holds when litigation is first anticipated. 

Contributing Author

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Todd Ohlms

Todd J. Ohlms is a Partner at Freeborn & Peters and co-leads the Litigation Practice Group.  His practice involves advising and representing clients with respect...

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Contributing Author

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Joseph Fogel

Joseph L. Fogel is a Partner at Freeborn & Peters and co-leads the Litigation Practice Group. His areas of focus include multiple areas of business...

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