PHKS Technology Alert: Wayward Trends in Internet Unfair Competition Litigation

To the Unwary Goes the Spoliation Claim

Are you in danger of having to defend an allegation of spoliation? Do you even know that there is such a danger? Spoliation is the destruction, loss, or significant alteration of evidence, whether a document, software, or tangible piece of property or equipment. The law of spoliation is rapidly evolving, rendering persons and entities liable to others for their intentional or, in certain circumstances, negligent conduct. Although parties to a litigation have faced these claims for years, even non-parties are now confronted with this problem.

Introduction
Assume that a company employee suffers an injury during the course of his employment while utilizing a power drill. The company, consistent with past practice and its concern to maintain a safe work environment, conducts an investigation of the accident, determines that the drill is faulty, and discards it. In some states, although the company cannot be liable to the employee for his physical injuries because of the worker's compensation bar, the employee may sue the company for damages on the ground of spoliation of evidence: the loss of the power drill allegedly renders him unable to prosecute a tort action against the drill manufacturer.

Traditionally, spoliation of evidence by a party was sanctionable as a discovery abuse. Destruction of evidence by a plaintiff could lead to dismissal of the complaint; destruction by a defendant led to defenses being stricken and sanctions for failure to provide discovery. Now, however, spoliation is recognized as an independent tort claim, even as against persons or entities who are not parties in the litigation.

The Tort Claim
The independent tort of intentional spoliation of evidence holds that claims may be brought against persons or entities who tamper with evidence in a willful manner that is intended to hamper plaintiff's ability to prove her claim. Some states have gone further, finding that negligence is sufficient to impose liability for the spoliation of evidence. A survey of the law in California, New Jersey and New York illustrates the various concerns.

California gave birth to the cause of action for intentional spoliation of evidence.¹ In Smith v. Superior Court² and County of Solano v. Delancy³, California courts defined spoliation of evidence as requiring (1) pending or probable litigation involving the plaintiff; (2) knowledge on the part of the defendant that litigation exists or is probable; (3) willful, or possibly negligent, destruction of evidence by the defendant designed to disrupt the plaintiff's case; (4) disruption of the plaintiff's case; and (5) damages proximately caused by the defendant's acts. Despite the reference to "negligent" conduct, not until Lewis v. J.C. Penney, Inc.⁴ did California recognize a claim for negligent spoliation, which is limited to situations where there has been a specific agreement to preserve evidence, a voluntary undertaking to preserve, or the alleged spoliator is bound to preserve, either by statute or regulation.⁵

More recently, California has retreated from its rapidly expanding recognition of spoliation claims. In Cedars-Sinai Medical Center v. Superior Court of Los Angeles⁶, the Supreme Court of California refused to recognize an independent tort for negligent spoliation directed against a party to the underlying action, holding that the available non-tort remedies against a spoliating party were sufficient. The Court expressed its concern about the indirect costs that would be associated with the recognition of the independent tort, which would require entities to take "extraordinary measures to preserve for an indefinite period of time documents and things of no apparent value solely to avoid the possibility of spoliation liability if years later those items turn out to have some potential relevance in future litigation."⁷ Though not addressing whether an independent tort for spoliation should be recognized in cases of "third party" spoliation, the court disapproved of Willard v. Caterpillar and Smith v. Superior Court to the extent that they were inconsistent and suggested that these theories be revisited. Thus, California appears to be limiting the scope of spoliation claims.

New Jersey courts first recognized the tort of fraudulent concealment of evidence (analogous to the intentional spoliation tort) in Viviano v. CBS, Inc⁸, but refused to recognize the tort of negligent spoliation. This conclusion has been repeatedly recognized by the Appellate Division, most recently in Proske v. Saint Barnabas Medical Center⁹, where the Court confirmed that "New Jersey appellate courts have not recognized the tort of negligent spoliation of evidence."¹⁰

Despite this history of consistent Appellate Division decisions refusing to recognize a tort for negligent spoliation, in 1997 the trial court in Callahan v. Stanley Works¹¹ applied the principles of a negligent spoliation cause of action. Shortly thereafter, one appellate panel also applied the principles of negligent spoliation.¹² These decisions required a plaintiff to show that a duty to preserve the evidence exists through agreement, contract, statute or other special circumstance. A defendant "owes a duty of care to preserve evidence if a reasonable person in the defendant's position should have foreseen that the evidence was material to a potential civil action."¹³ However, "the scope of the duty to preserve evidence is not boundless. A 'potential spoliator need only do what is reasonable under the circumstances.'"¹⁴

New York still follows the majority view and does not recognize spoliation as an independent tort action, but spoliators are subject to sanction for their intentional or negligent acts.¹⁵ The various sanctions available for spoliation have been expanded to include preclusion of expert testimony, exclusion of the tangible evidence, dismissal of claims, and adverse inferences.¹⁶

According to Kirkland v. N.Y.C. Housing Authority,¹⁷ the sanction of dismissing a claim no longer requires that the party's loss or destruction of evidence be intentional, willful, or in bad faith. Rather, claims against parties can be dismissed when "crucial evidence" was only negligently destroyed, misplaced, or altered. In Kirkland, the New York Appellate Division noted that several other state and federal courts "have found dismissal warranted when discovery orders were not violated, and even when the evidence was destroyed prior to the action being filed . . . notwithstanding that the destruction was not malicious . . . or in bad faith."¹⁸ Yet two other decisions, Berwecky v. Montgomery Ward Inc. and Vaughen v. City of New York, seem to conflict with Kirkland, holding that a party seeking the sanction of preclusion of evidence or witnesses must set forth conclusive evidence that the spoliated evidence was willfully or intentionally destroyed with a purpose to frustrate the other party.

The law of spoliation in New York evidences a trend toward preventing all spoliation by imposing harsher sanctions for its occurrence, regardless of whether the spoliation was intentional. A party prejudiced by the negligent spoliation of key evidence that his adversary had the opportunity to inspect would likely be successful in seeking dismissal of claims in New York.

Consequences
What is clear from this summary of the law of three states is that nothing is certain regarding the law of spoliation. Hence, in order to avoid the imposition of sanctions for spoliation, a company would be wise to follow a conservative approach to the preservation of documents, tangible equipment, and other information once the company becomes aware of the reasonable likelihood of a legal claim. For example, as soon as the nature of the claim has become known, a point person for the company should be assigned to gather and preserve all documents, computer-stored information, and tangible items that relate to that claim. Immediately following an accident, affirmative steps should be taken to inspect the machinery involved, and locate and retain purchase or lease documents and repair and maintenance records. Records or reports of investigations conducted must be preserved. Where the dispute involves evidence that is necessary to the company's continuing operations, quick action must be taken. For example, where computer software development is involved, care must be taken to preserve versions of the software as of the time the dispute arose, and to document subsequent changes in order to minimize the effect of the passage of time on the state of the relevant evidence.

Once notice of a legal claim has been received, the duty of the person or company in possession of relevant evidence is heightened. The relevant machinery or documents must not be altered, discarded or destroyed. All employees, especially new employees, must be educated about the company's policies, so that an employee does not unknowingly discard the evidence after the company has diligently preserved it for litigation purposes. Attorneys for the parties involved in the underlying claim should be advised of the need for immediate inspection of the equipment or documents if they are voluminous or overly burdensome to preserve. Although compliance with formal record retention policies may be an adequate defense to a negligent spoliation claim, once notice of an impending action is received, personnel records, investigative reports, relevant E-mail, purchase and sale records and maintenance records must be preserved, regardless of the company's document retention policy.

The implementation of and adherence to a comprehensive plan for the identification of evidence and its preservation is crucial to the avoidance of spoliation allegations. Companies must examine their current policies and procedures to take into account this potential claim and, if necessary, revise their guidelines to comport with this fast changing area of the law.