Finding the defendant, Implant Direct Mfg., LLC, had a culpable state of mind in failing to preserve documents relevant to the claims against it, the federal District Court for the Southern District of California has granted Zest IP Holdings, LLC’s request for an adverse jury instruction against the defendant.  Zest IP Holdings, LLC v. Implant Direct Mfg., LLC, 2013 U.S. Dist. LEXIS 169014 (S.D. Cal., Nov. 25, 2013). 

In August 2008, Zest’s counsel sent a letter to Implant advising that it considered Implant’s planned products to be an infringement on Zest’s existing products.  On October 22, 2008, Zest’s counsel sent a cease and desist letter to Implant regarding Implant’s plan to commercialize Zest’s products and threatening to file an action for patent infringement if Implant continued with its plans.     

In March 2010, Zest filed a complaint against Implant alleging Implant’s sale of certain products infringed on Zest’s patents.  Implant did not make any effort to preserve documents or put a litigation hold in effect prior to being served with the complaint, although its obligation to do so arose upon receiving Zest’s counsel’s cease and desist letter in 2008.  Implant’s Director of Design Engineering testified at her deposition that she intentionally deleted e-mails from her e-mail accounts because she received too many e-mails and was not instructed to preserve them.  Similarly, during his deposition, Implant’s President and CEO testified that he had six different e-mail accounts but did not preserve any e-mails. 

In its review of third-party files, Zest identified e-mail communications between third-party dentists and Implant’s President relevant to whether the President induced the third-party dentists to infringe on Zest’s patents.  Implant, however, argued that the e-mails pre-dated Implant’s obligation to preserve evidence.

Zest also claimed Implant failed to preserve: (1) documents related to Implant’s regulatory files and submissions to the Food and Drug Administration (“FDA”); (2) material used by Implant’s sales force to promote Implant’s products; and (3) customers’ complaints.  The court found Zest failed to demonstrate these categories of documents were destroyed.

However, the court granted Zest’s requests for sanctions because Implant failed to issue a litigation hold and monitor its employees’ document preservation efforts after receiving notice of Zest’s intended litigation.  Relying on the three-part test for determining whether to grant an adverse inference spoliation instruction inZubalake v. UBS Warburg, LLC, 220 F.R.D. 212, 216 (S.D. NY 2003), the court held Zest submitted sufficient evidence for it to determine that documents relevant to Zest’s claims were destroyed due to Implant’s misconduct -Implant’s inaction.  The court held that this prejudiced Zest and caused it to have to proceed to trial without complete evidence.

In addition to granting an adverse inference instruction, the court held Zest was entitled to monetary sanctions.  It found Implant’s negligence resulted in unnecessary costs and delay. Accordingly, the court awarded Zest reasonable attorneys’ fees and costs for: (1) time spent in bringing Implant’s misconduct to the court’s attention; (2) filing the motion for sanctions; and (3) efforts in obtaining destroyed documents from third parties.  The court declined to enter a default judgment because Implant’s conduct was not bad faith – but grossly negligent. 

The duty to preserve arises as soon as litigation is reasonably anticipated.  As the court highlighted, “the Federal Rules of Civil Procedure do not require perfection or guarantee that every possible document will be found and/or produced.”  However, when a party fails to preserve potential evidence, it may face sanctions, including default judgment, an adverse inference jury instruction and attorneys’ fees, for its culpability.