Securities And Exchange Commission v. Mercury Interactive LLC et al, No. 3:2007cv02822 - Document 259 (N.D. Cal. 2012)
Court Description: ORDER DENYING DEFENDANTS' MOTION FOR RELIEF FROM NON-DISPOSITIVE PRETRIAL ORDER OF MAGISTRATE JUDGE re 256 MOTION From Non-dispositive Pretrial Order of Magistrate Judge re 249 Order on Motion for Sanctions Defendant's Motion for Relief From Non-Dispositive Pretrial Order of Magistrate Judge filed by Susan Skaer (whalc2, COURT STAFF) (Filed on 9/25/2012)
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Securities And Exchange Commission v. Mercury Interactive LLC et al Doc. 259 1 2 3 4 IN THE UNITED STATES DISTRICT COURT 5 FOR THE NORTHERN DISTRICT OF CALIFORNIA 6 7 8 9 SECURITIES AND EXCHANGE COMMISSION, Plaintiff, For the Northern District of California United States District Court 10 11 No. C 07-02822 WHA ORDER DENYING DEFENDANTS’ MOTION FOR RELIEF FROM NONDISPOSITIVE PRETRIAL ORDER OF MAGISTRATE JUDGE v. 12 MERCURY INTERACTIVE LLC, et al., 13 Defendants. / 14 15 16 INTRODUCTION Defendants Amnon Landan, Douglas Smith, and Susan Skaer seek relief from the 17 magistrate judge’s order denying sanctions for alleged spoliation of evidence. For the reasons 18 stated below, defendants’ motion for relief is DENIED. 19 20 STATEMENT The instant motion arises from an investigation and ensuing lawsuit that was initiated by 21 the Securities and Exchange Commission in 2004. In November 2004, the Commission began an 22 informal investigation into Mercury Interactive LLC for potential violations of securities laws. 23 Mercury retained Davis Polk & Wardwell LLP as its counsel for the investigation. In August 24 2005, the Commission ordered a formal investigation into Mercury and subpoenaed documents 25 from Mercury. As a result of the investigation, the Commission filed a complaint against 26 Mercury and individual defendants Landon, Smith, Skaer, and Sharlene Abrams in May 2007. A 27 final settlement agreement was entered as to Mercury in July 2007. The settlement agreement 28 required Mercury to retain all documents and to produce them to the Commission if necessary. The civil action was reassigned to the undersigned judge in September 2011. Dockets.Justia.com 1 Now before the Court is a motion by defendants Landan, Smith, and Skaer for sanctions 2 for the Commission’s alleged spoliation of evidence, which was referred to Magistrate Judge 3 Jacqueline Corley. Defendants claim that the Commission deleted documents produced to the 4 Commission by Mercury (through Davis Polk), which are now permanently lost. Defendants’ 5 first motion requested the sanction of dismissal. Following a hearing, the magistrate judge 6 allowed additional discovery and supplemental briefing. In the second round of briefing, 7 defendants also requested alternative remedies short of dismissal, including an adverse inference 8 jury instruction. data were produced by Mercury (through Davis Polk) to the Commission from 2005 to 2007. In a 11 For the Northern District of California Pursuant to the Commission’s initial investigation of Mercury, large amounts of electronic 10 United States District Court 9 series of mishaps and misunderstandings, the Commission deleted the documents that Davis Polk 12 had produced to it prior to April 2006 to remedy the law firm’s erroneous production of 13 privileged material. The Commission was then unable to re-produce those documents to the 14 individual defendants in later litigation. Apparently, for reasons that are not entirely clear, neither 15 Mercury nor Davis Polk retained a complete copy of the earlier productions. Although 16 defendants originally claimed that the Commission’s deletion of documents resulted in the loss of 17 roughly five million pages of electronic data, all but 270,000 pages have now been located from 18 Davis Polk and Hewlett-Packard (now Mercury’s parent company) and produced to movants. 19 The details are below. 20 1. Davis Polk’s Production of Privileged or Non-responsive Materials. 21 Davis Polk’s first production to the Commission in 2005 included roughly five million 22 pages of electronic documents, originally provided in “native” format only. The Commission 23 requested that Davis Polk provide the production in “TIFF” format (“Tagged Image File 24 Format”), which Davis Polk did over a period of several months. Davis Polk then discovered that 25 the documents provided in the 2005 production (and again in the subsequent TIFF format 26 productions) included privileged and non-relevant documents. In a letter dated February 7, 2006, 27 Davis Polk proposed a procedure whereby Davis Polk would review the documents and identify 28 privileged or non-responsive documents to the Commission, at which point the Commission 2 1 would presumably pick through the production and selectively remove each document (Dkt. No. 2 213-1 at 42-43). Davis Polk also requested the Commission delete the native file production, as it 3 would be entirely replaced with the same documents in TIFF format (ibid.). On April 7, 2006, 4 Davis Polk identified to the Commission a long list of Bates numbers reflecting documents it 5 claimed were privileged. 6 Davis Polk repeatedly followed up to request that the Commission delete or return the 7 documents identified in its April 2006 clawback list. The Commission responded that the 8 Commission was reviewing the past productions to ensure that all prior native format productions 9 had been replaced, and informed Davis Polk that the process was complicated by technical difficulties with some of the productions. Davis Polk responded in October 2006 suggesting that 11 For the Northern District of California United States District Court 10 the Commission “return the ‘native format’ files and inadvertently produced .tiffs to us now 12 subject to a commitment by us to resolve any issues the Staff may subsequently discover[.] We 13 are obviously willing to get the Staff whatever non-privileged materials it needs if issues do, in 14 fact, arise” (Dkt No. 244-1 at 2). 15 2. 16 Davis Polk continued to provide document productions on a rolling basis through The Commission’s Deletion of Documents Produced to it Prior to April 2006. 17 February 2007, some of which were found to have technical problems. Discussions between 18 Davis Polk and the Commission or its staff regarding the documents to be clawed back were also 19 rolled into communications regarding these other technical problems. In particular, Carrie Holt, 20 the Commission’s IT litigation support specialist, was primarily responsible for communicating 21 with Davis Polk regarding their document productions. She understood that Davis Polk wanted 22 the Commission to delete all the material produced prior to April 2006 and that Davis Polk would 23 provide corrected productions without the clawback documents (Holt Decl. ¶¶ 3-4, Dkt. No. 219). 24 In March 2007, the Commission deleted from the Commission’s electronic databases all 25 documents produced to it by Davis Polk prior to April 7, 2006. The Commission deleted these 26 documents with the understanding “that Mercury and/or Davis Polk would preserve any and all 27 responsive materials” (Jest Decl. ¶ 10, Dkt. No. 220). 28 3 1 3. Defendants’ Claim of Missing Documents. 2 On September 7, 2007, the Commission served its Rule 26(a) disclosures to individual 3 defendants Landan, Smith, and Skaer. The initial disclosures listed specific Bates number ranges 4 that would be provided to defendants, including a substantial number of documents received from 5 Mercury. Discovery progressed. Defendants claimed that over five million pages of non- 6 privileged, responsive documents that Davis Polk had produced to the Commission were missing 7 from the Commission’s production to defendants. This was a vast overstatement. Defendants 8 have identified the documents by gaps in Bates numbering, as the documents are labeled with 9 Bates numbers that use prefixes specific to each custodian. Defendants have thus been able to isolate the number of missing pages for each custodian on the Commission’s original list of 11 For the Northern District of California United States District Court 10 potential trial witnesses. As described above, defendants were able to obtain all but 12 approximately 270,000 pages, either from Davis Polk or Hewlett-Packard. Defendants claim that 13 these 270,000 pages are permanently missing. As the magistrate judge noted, “they have not, 14 however, identified any specific missing range of documents” other than by Bates number. For 15 example, they have not shown that there are gaps in a custodian’s emails from certain time 16 periods, or that documents of a particular type are missing. ANALYSIS 17 18 “A non-dispositive order entered by a magistrate must be deferred to unless it is ‘clearly 19 erroneous or contrary to law.’” Grimes v. City & County of San Francisco, 951 F.2d 236, 241 20 (9th Cir. 1991) (citations omitted). Findings of fact in the magistrate judge’s order are reviewed 21 for “clear error.” Ibid. A district court reviewing the magistrate judge’s order “may not simply 22 substitute its judgment for that of the deciding court.” United States v. BNS, Inc., 858 F.2d 456, 23 464 (9th Cir.1988). Under the “contrary to law” standard, a court reviews issues of law de novo. 24 Osband v. Woodford, 290 F.3d 1036, 1041 (9th Cir.2002). 25 1. DISMISSAL SANCTION. 26 Sanctions may be imposed for spoliation, which is “the destruction or significant 27 alteration of evidence . . . in pending or future litigation.” Kearney v. Foley & Lardner, LLP, 582 28 F.3d 896, 900 (9th Cir. 2009). Dismissal is a permissible sanction when “a party has engaged 4 1 deliberately in deceptive practices that undermine the integrity of judicial proceedings because 2 courts have inherent power to dismiss an action when a party has willfully deceived the court and 3 engaged in conduct utterly inconsistent with the orderly administration of justice.” Leon v. IDX 4 Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006). to impose a sanction of dismissal. Defendants assert that the standard set by our court of appeals 7 is that “dismissal requires only ‘fault,’ i.e. gross negligence,” but cite no decision on point from 8 the court of appeals. On the record in this case, the magistrate judge found that dismissal was not 9 warranted, particularly because the Commission believed that Davis Polk would or already had 10 reproduced the documents to the Commission, and that Davis Polk and Mercury had copies of 11 For the Northern District of California Defendants argue that the magistrate judge committed legal error by requiring “bad faith” 6 United States District Court 5 everything the Commission had deleted. Under the proper standard of the United States Court of 12 Appeals for the Ninth Circuit governing the sanction of dismissal for loss of evidence, the 13 conduct of the Commission staff was not so egregious as to warrant dismissal. See Leon, 464 14 F.3d at 958. 15 16 17 2. ADVERSE INFERENCE SANCTION. A. The Commission’s Level of Culpability. The magistrate judge’s finding that the Commission did not act in bad faith was not clear 18 error. Davis Polk believed that it had requested that the Commission delete the specific 19 privileged or non-responsive documents Davis Polk identified to them. Misunderstanding the 20 request, the Commission deleted all the documents Davis Polk had produced to it prior to April 21 2006. The magistrate judge found that Davis Polk never corrected the Commission or its staff’s 22 misunderstanding regarding how to handle Davis Polk’s clawback requests. The Commission’s 23 confusion was “not unreasonable,” given that the document productions Davis Polk provided to 24 the Commission were “complicated and problematic, a process that involved production, claw- 25 back, and reproduction of some 13 million pages of documents, with many of the reproductions 26 and further production riddled with errors” (Order at 12). Also important, the Commission had 27 every reason to believe that there were other copies of the production. Mercury had a clear 28 obligation to retain discovery materials. Davis Polk, as counsel for Mercury, should also have 5 1 retained a copy of everything it had produced, and indeed did assure the Commission that it 2 would provide the Commission with any documents that may have been lost through the jumbled 3 production and clawback process. 4 The magistrate judge appears to have found the Commission acted reasonably in deleting 5 the pre-April 2006 production set of documents. After deleting the files, however, the 6 Commission did not ensure that the later productions from Davis Polk provided a complete set of 7 documents. “While the record is replete with emails demonstrating some efforts by the SEC to 8 confirm that Davis Polk had reproduced what the SEC believe it was supposed to receive, the 9 bottom line is that the SEC did not know what was in its investigative files” (Id. at 13). 11 For the Northern District of California United States District Court 10 B. Determination that adverse inference sanction not warranted. Noting that our court of appeals has not established a clear test for determining when an 12 adverse inference instruction to the jury may be an appropriate sanction, the magistrate judge 13 applied the test set forth in Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 220 (S.D.N.Y. 2003). 14 The test is widely used and requires that the party seeking an adverse inference instruction based 15 on the spoliation of evidence must establish: “(1) that the party having control over the evidence 16 had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed 17 with a ‘culpable state of mind’[;] and (3) that the destroyed evidence was ‘relevant’ to the party’s 18 claim or defense such that a reasonable trier of fact could find that it would support that claim or 19 defense.” Ibid. Where the “culpable state of mind” is bad faith, “that fact alone is sufficient to 20 demonstrate relevance. By contrast, when the destruction is negligent, relevance must be proven 21 by the party seeking the sanctions.” Ibid. Defendants do not argue that the application of the 22 Second Circuit’s test constituted legal error. Defendants contend, however, that the magistrate 23 judge erred by interpreting “culpable state of mind” to require a showing of bad faith. 24 First, as stated above, the magistrate judge did not commit clear error in determining there 25 was no bad faith on the part of the Commission. Second, the magistrate judge did not make an 26 explicit finding regarding whether the Commission was negligent, but instead assumed for the 27 sake of argument that the Commission had been negligent. Even so assuming, however, the 28 magistrate judge found that defendants failed to meet their burden of showing relevance. The 6 1 magistrate judge emphasized that all the record shows is that a comparison of spreadsheets 2 suggests that documents with certain Bates numbers are missing. These spreadsheets are 3 themselves not necessarily to be taken at face value, as they are based on an “error-riddled 4 document production.” Defendants provided no evidence regarding what time frame the missing 5 documents covered. The magistrate judge further found that defendants failed to identify any 6 particular gaps based on their review of the other documents they had received from the 7 Commission or other parties (Order at 18). Where the challenged conduct is at most negligent, 8 rather than “bad faith,” it is the party seeking sanctions who bears the burden of showing 9 relevance. In this case, defendants presented arguments as to why the particular custodians may have relevant documents in general. They did not, however, make any showing regarding the 11 For the Northern District of California United States District Court 10 time frame, type of document, or other information sufficient to demonstrate the relevance of the 12 missing documents. Based on the lack of information tied to the missing documents, coupled 13 with the fact that the documents were identified as missing only by their presence or absence on 14 questionably reliable production spreadsheets, the magistrate judge found that defendants had not 15 met their burden of showing the missing documents were relevant. This finding was not clearly 16 erroneous. 17 Defendants contend that relevance should be presumed where the spoliating party acted in 18 bad faith or in a “grossly negligent manner.” As discussed above, however, the magistrate judge 19 clearly did not find “bad faith” or “gross negligence” on the part of the Commission. Applying 20 the test from Zubulake, the magistrate judge did not commit clear error in requiring defendants to 21 demonstrate relevance where the spoliating party’s conduct was at most negligent. 22 23 C. The magistrate judge’s findings of fact. Defendants argue that the magistrate judge erred on a number of facts that would establish 24 the Commission was at least negligent. Defendants do not, however, contend that the alleged 25 factual errors are sufficient to establish bad faith on the part of the Commission. Even were the 26 Commission negligent, the result remains given the failure of proof as to relevance. 27 For example, defendants claim that the magistrate judge erred in finding that the 28 Commission conducted a diligent review of the document production prior to deleting the pre7 1 April 2006 documents in March 2007. The magistrate judge’s order, however, referred to the 2 Commission’s review of the document production prior to returning physical and tangible 3 materials to Davis Polk, not the deletion of documents from the Commission’s database. 4 Presumably these physical materials contained yet another copy of the pre-April 2006 5 productions. The fact that the Commission deleted documents prior to conducting this review 6 does not establish bad faith, where the Commission believed that Davis Polk still retained copies 7 of all documents produced. Similarly, defendants argue that the magistrate judge erred in finding 8 that the Commission had returned materials to Davis Polk where “there was no corroborative 9 evidence” from the Commission or Davis Polk. The order cited to evidence in the record to support this finding, including a declaration of Joseph Jest, who was senior counsel at the 11 For the Northern District of California United States District Court 10 Commission and involved in the investigation, a declaration of Carrie Holt, Commission’s IT 12 litigation support specialist, and the statements made by counsel at the hearing, which defendants 13 did not contest (Jest Decl. ¶9, Dkt. No. 220; Holt Decl. ¶ 10, Dkt. No. 219; Hearing Tr. at 5-6, 14 Dkt. No. 227). The magistrate judge did not commit clear error in crediting this evidence. 15 With regard to defendants’ contention that the magistrate judge erred by crediting Ms. 16 Holt’s declaration with statements not in the declaration and crediting Ms. Holt with memories 17 she did not have, those issues were adequately addressed in the order (Order at 4 and fn. 6). 18 Similarly, the magistrate judge adequately considered the Commission’s internal manual setting 19 forth procedures for handling documents in determinating the Commission’s level of culpability. 20 The magistrate judge did not commit clear error in findings of fact, and defendants have failed to 21 show that any alleged errors would require a different outcome. 22 * * * * * 23 Defendants argue that they are innocent and should not bear the burden of the lost 24 documents. If it becomes relevant at trial, the Court may possibly allow defendants to inform the 25 jury that the Commission managed to delete some 270,000 pages that Mercury had produced to 26 the Commission. If, in fact, the documents are relevant in some way, the defendants will receive 27 some benefit from this. 28 8 1 2 3 CONCLUSION For the foregoing reasons, defendants’ motion for relief from the magistrate judge’s order is DENIED. 4 5 IT IS SO ORDERED. 6 7 Dated: September 25, 2012. WILLIAM ALSUP UNITED STATES DISTRICT JUDGE 8 9 11 For the Northern District of California United States District Court 10 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9
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