Case: Phillip M. Adams & Assoc., LLC v. Windbond Elecs. Corp., No. 1:05-CV-674 (TS), 2010 WL 3767318 (D. Utah Sept. 16, 2010).
Topic: Industry-Wide Litigation and the Duty to Preserve
Phillip M. Adams & Associates ("Adams"), the plaintiff in a multi-party patent-infringement action involving floppy-disk controllers (known as FDCs), sought spoliation sanctions against MSI, one of the defendants. Adams had earlier persuaded the court that a duty to preserve existed throughout the entire computer- and component-manufacturing industry as early as in 1999, when the industry-wide litigation regarding the technology began. Adams argued that MSI was subject to the industry-wide duty to preserve and that MSI's questionable data-archiving practices and its destruction of potentially relevant data during a change of e-mail servers in 2003 constituted a sanction-worthy failure to preserve. MSI maintained that it had no duty to preserve because it was "not in the FDC business" in 2003. The court rejected MSI's arguments and held that MSI's preservation duties had been triggered when the industry-wide litigation became well-publicized in late 1999 and, therefore, MSI should have known that litigation was "imminent." MSI had been testing FDCs before 2003 and its customers, in 2000, had also provided MSI with letters of notice regarding the litigation. Under these circumstances, the court decided that MSI should have preserved FDC data from the time it first received notice of the litigation and that its failure to do so constituted spoliation. Using a five-factor test, the court concluded that sanctions were appropriate but, to avoid undue prejudice, refused to instruct the jury that MSI had acted wrongfully. Instead, the court imposed a jury-instruction sanction, allowing the jury to make an adverse inference from MSI's failure to preserve.
- A company can be under a duty to preserve even if it is not a party to any litigation. Companies can be found to be "on notice" of potential litigation for preservation purposes based on a showing of well-known, well-publicized litigation in the same industry.
- This duty to preserve arising from industry-wide litigation can extend back to the beginning of the litigation in the industry-when the first lawsuits in the industry were publicized and known.
- When industry-wide litigation creates a duty to preserve, breaching that duty can result in an adverse-inference instruction of varying severity, depending on the underlying facts of spoliation.
Exaggerations can lead to trouble. Here, MSI also argued that it had no duty to preserve because it "lacked experience in patent litigation." When the court learned that MSI had, in fact, participated in many other lawsuits-including one involving allegations of patent infringement before its data destruction in 2003-MSI was left with egg on its face and the court had even more reason for the spoliation sanction.
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