A Penny Saved is a Penny Earned:

Navigating Your Company through Spoliation Claims and Strategies

to Maximize RecoveringAttorneys’ Fees

presented by:

Chris Hanslik, Craig Dillard & Matt VeechBoyarMiller

ACC Houston Chapter May 2013

Five Big Issues in Spoliation Battles

When did duty to preserve arise?

Did the accused party breach the duty?

Did the accused party act with a “culpable mental state”?

Did the spoliation prejudice the other party?

What level of sanction is warranted?

When Does Duty to Preserve Arise?

Possible answers:― When litigation reasonably anticipated?― When you receive a demand letter or preservation letter from

adversary?― When suit is filed?

Courts in agreement on “reasonably anticipated.”― E.g. Zubulake IV, Rimkus, Apple v. Samsung

Compare to work product protection.

Apple v. Samsung Ruling on Duty to Preserve

Court rejected Samsung’s argument that duty arose when Apple filed suit.― Samsung had duty to preserve when Apple communicated

specific positions that Samsung was infringing.― Samsung’s own litigation hold used against it.― Apple’s failure to issue hold did not absolve Samsung.

Reasonably anticipate litigation – fact issue.

Litigation Reasonably Anticipated

What do you need to do? Send litigation hold to document custodians?

Send preservation letter to the other guy?

Send response to preservation letter?

Engage outside counsel?

Sit down with opposing counsel?

Consider conference requirements imposed by rules or judge?

What Should Litigation Hold include?

Zubulake IV Who?

― “Key players” likely to have relevant information.

What? ― Relevant documents.

How?― One way: retain all backup tapes for relevant personnel,

catalog later-created documents, make mirror-image of computer system.

Scope of Litigation Hold

Zubulake IV Suspend document retention/destruction system to

preserve relevant documents.

Include all accessible backup media (data in readily usable format).

Include inaccessible backup media for key players if information not otherwise available.

What to Include in Litigation Hold?

What devices? BYOD policy?― Laptop computers? Thumb drives? Disks?― Voice mail?― Tablets?― Smart phones?― Home computers?

What documents? ― Personal email accounts? Instant messages?― Social media?

How do you determine “key players”?

Is the Litigation Hold Enough?

Zubulake V says counsel must oversee compliance:― Periodically re-issue litigation hold.― Interview employees.― Communicate directly with key players.― Familiar with client’s “data retention architecture”.― Speak with IT personnel.― Secure backup media.

Samsung breached duty to preserve by failing to monitor compliance with litigation hold.

Samsung’s August 2010 Litigation Hold

Court found Samsung’s hold inadequate.― Litigation hold sent to small group of employees.― Did not suspend auto-delete feature of email system.― No record of preserving backup media.― No follow up with employees for seven months.

“Culpable Mental State”?

What state of mind is sufficient to support an adverse inference instruction?― Fifth Circuit: requires “bad faith”. (Rimkus)― Second Circuit: negligence sufficient (Residential Funding).― Apple v. Samsung: “conscious disregard”.

Proposed amendment to Federal Rule 37(e).― Overrule Residential Funding.― Adverse inference would require: (A) willful or bad faith

spoliation or (B) irreparable deprivation.

Prejudice?

Who has burden to prove prejudice?

Proof of prejudice required if spoliation willful or in bad faith?― Residential Funding and Zubulake V: in 2d Cir. willful spoliation

creates presumption of relevance and prejudice.― Texas and Fifth Circuit: not clear?

How do you prove prejudice?― The “we’ll never know” argument.― Extrinsic evidence.

• Catch-22?

Remedies for Spoliation

The available remedies for spoliation range from minor sanctions such as paying the cost of re-deposing witnesses to case-dispositive “death penalty” sanctions such as dismissal or a default judgment.  Included in these available remedies is the option for the Court to exclude evidence or to give an “adverse inference” instruction to the jury. 

The spoliation instruction to the jury can vary in harshness depending on the degree of spoliation:― A “mild” adverse inference instruction may merely inform the jury that a party

failed to comply with its duty to preserve relevant evidence, and the jury can decide what conclusion to draw.

― A “intermediate” adverse inference instruction can tell the jury that it can, but is not required to, presume that the spoliated evidence would have been unfavorable to the spoliating party. 

― A “harsh” adverse inference instruction can tell the jury that certain facts are deemed proven as a result of the spoliation.

Strategies to MaximizeRecovering Attorneys’ Fees

Recovery of Attorneys’ Fees

In Texas, the general rule is that in the absence of legislation providing otherwise, litigants must pay their own attorneys’ fees – a.k.a. the “American Rule.” MBM Fin. Corp. v. Woodlands Oper. Co., 292 S.W.3d 660 (Tex. 2009)

Texas has some 155 different statutory provisions that allow for the recovery of attorneys’ fees.

Recovery of Attorneys’ Fees in Commercial Disputes

The provisions that generally arise in commercial disputes:

CPRC 38.001 – Breach of Contract actions

Contractual provisions for prevailing party

CPRC 37.009 – Texas Uniform Declaratory Judgment Act

CPRC 134.005 – Texas Theft Liability Act

TRCP 91a – Texas’ new Motion to Dismiss rule

Attorneys’ Fees ― CPRC 38.001

Recovery of fees is permissible i.e. “may”.TEX. CIV. PRAC. & REM. CODE § 38.001

The standard under section 38.001:― The party must prevail on a claim for which fees are

recoverable and the party must recover a judgment for damages or injunctive relief.

Nominal damages are not sufficient to support an award of attorneys’ fees. ITT Commercial Fin. Corp. v. Riehn, 796 S.W. 2d 248 (Tex. App. – Dallas 1990, no writ); MBM Fin, 292 S.W. 3d at 666 (“[T]his court has never said whether nominal damages are enough.”)

A prevailing party is whatever the contract defines a prevailing party to be.

If the contract does not define “prevailing party,” the court will give the term its ordinary meaning. Epps v. Fowler 351 S.W. 3d 832 (Tex 2011)

The prevailing party may be defined in the contract in a way such that a party defending the action may recover its fees if successful in the defense.

Attorneys’ fees – Prevailing Party Provision

The court may award costs and reasonable and necessary attorney's fees as are equitable and just. TEX. CIV. PRAC. & REM. CODE §37.009

The equitable and just standard means that the award of fees is within the trial court’s discretion and a party is not entitled to recover fees.

Importantly, an award of attorneys’ fees as are equitable and just may mean that the party defending the declaratory judgment action recovers its fees.

Mirror image rule.

Texas Uniform Declaratory Judgments Act

Section 15.52 – Preemption of Other Law

The criteria for enforceability of a covenant not to compete provided by Section 15.50 of this code and the procedures and remedies in an action to enforce a covenant not to compete provided by Section 15.51 of this code are exclusive and preempt any other criteria for enforceability of a covenant not to compete or procedures and remedies in an action to enforce a covenant not to compete under common law or otherwise.

Texas Covenants Not to Compete Act

No Fees for Employer Enforcing a 15.50 Covenant

An employer enforcing a 15.50 covenant will not be entitled to an award of attorneys’ fees.

Glattly v. Air Starter Components, Inc., 332 S.W.3d 620 (Tex. App.—Houston [1st Dist.] 2010, pet. denied) In Glattly, the Houston First Court of Appeals upheld the trial court’s

decision refusing to award attorneys’ fees even where the employment agreement at issue contained a prevailing party provision. The First Court of Appeals made three important conclusions regarding Section 15.52:

― It does not contain a provision that allows employers to recover attorneys’ fees;

― It expressly states the remedies in the Act are the exclusive remedies; and

― It expressly states that it preempts any other remedies in an action to enforce a covenant not to compete.

However, an employee defending against enforcement of a 15.50 covenant may be entitled to an award of attorneys’ fees if successful in such defense in two ways:

Under the statue if the employee shows that the employer knew at the time of execution of the agreement that the covenant did not contain restrictions that were reasonable and the employer sought to enforce the covenant to a greater extent than was necessary to protect the goodwill or other business interest of the employer; or

Pursuant to a declaratory judgment action seeking a declaration that the covenant is not enforceable.

Employee Defending Enforcement May Be Entitled to Fees

Texas Theft Liability Act

Each person who prevails in a suit under this chapter shall be awarded court costs and reasonable and necessary attorney's fees. TEX. CIV. PRAC. & REM. CODE 134.005(B)

The award of fees is mandatory.Brown v. Kleerekoper WL 816393 (Tex. App. – Houston [1st Dist.] 2013, no pet. history)

Grounds for the Motion to Dismiss― The cause of action has no basis in law or fact.

TEX. R. CIV. P. 91A

A motion to dismiss must be heard within 60 days after the pleading containing the cause of action is served.

Attorneys’ Fees― The court must award the prevailing party on the motion all

costs and reasonable and necessary attorney fees incurred with respect to the challenged cause of action in the trial court. The court must consider evidence regarding costs and fees in determining the award.

Dismissal of Baseless Causes of Action

Questions?

BoyarMiller713.850.7766

chanslik@boyarmiller.com cdillard@boyarmiller.com │ mveech@boyarmiller.com