Landmark Sanctions Order Affirmed – Negative Inference Instruction Given to Jury

The landmark sanctions order in Phillip M. Adams & Associates v. Dell, 621 F.Supp.2d 1173 (D. Utah 2009) has been adopted by U.S. District Judge Ted Stewart.  Finally made available to the public last week after a nine-month delay (, Judge Stewart’s order ( PACER, sign-up req’d) fully embraced the magistrate’s holding that organizations have an obligation to preserve relevant evidence after the duty to preserve attaches.  The court thus imposed a negative inference jury instruction against defendants Asustek Computer and Asus Computer Intl. for their evidence spoliation.  It should come as no surprise that the jury then returned a verdict against those defendants.

With the Adams sanction order finally in the books, it is worth reviewing why that decision was so noteworthy.

1.  Companies Have Duties to Third Parties

The Adams decision affirmed the long standing rule that organizations must preserve data for third parties.  While there was considerable angst among legal commentators about this aspect of Adams’s holding, it was not a ground-breaking rule.  Various decisions had held as much in the context of paper records.  See, e.g., Kozlowski v. Sears, Roebuck & Co., 73 F.R.D. 73, 76 (D. Mass. 1976).  Moreover, dozens of statutes and regulations require organizations to preserve data for legal and regulatory purposes.  It should therefore be axiomatic that a company’s “information management practices . . . may be unreasonable, given responsibilities to third parties.”  Adams v. Dell, 621 F.Supp.2d at 1191.

2.  Information Governance Procedures Must Be Designed to Address Duties to Third Parties

Given their duties to third parties, organizations must implement effective information governance procedures.  Such procedures include retention policies that reasonably ensure the preservation of information that is significant or that otherwise must be kept for business, legal and regulatory purposes.  Without those procedures, companies unwittingly leave the duty to manage, archive and discard data to their rank and file employees.  And for the reasons articulated in Adams, such a decision is typically disastrous.  Id. at 1192-94.

3.  Litigation Response Must Include an Effective Legal Hold

The Adams case also made clear that parties must implement an effective legal hold to preserve information that is or will be subject to litigation.  And while some legal commentators criticized this portion of the Adams’s holding as unduly burdensome, the circumstances of the Adams case certainly warranted imposing a timely hold.  Judge Stewart explained that sanctions were being imposed for "the inexplicable failure of a party to retain an asset which is both a valuable business asset and central to imminent litigation.”  See PACER, sign-up req’d.

The bottom line from Adams is that organizations should implement effective information governance procedures to properly address litigation demands.  This includes reasonable data retention policies and an effective litigation response effort.  By following these simple practices, a company can avoid the sanctions headaches that plagued the Adams defendants.