When Can a Business Shred its Documents? The Federal Court in Maryland Sanctions Two Companies for Pre-Litigation Spoliation of Evidence

When two consulting firms believed that documents containing confidential  information were improperly within a high-level consultant’s possession, they authorized the destruction of the documents and terminated the consultant.  The consultant sued the companies in Maryland Federal Court for terminating him without cause in breach of the parties’ contract.  He also moved for sanctions against the companies, arguing that the companies had wrongfully destroyed evidence when litigation was reasonably foreseeable.  The Court agreed to sanction the companies for spoliation of evidence.  Despite the fact that the documents were destroyed long before a lawsuit was ever filed, the Court held that the companies acted in a grossly negligent manner when they authorized the documents to be shredded.  As a sanction, the Court prohibited the companies from presenting critical arguments at trial.

The case is Jorgensen v. United Communications Group Limited Partnership, et al.  The consultant filed suit against the companies for breaching the parties’ Consulting Agreement, which was for a set term of five years.  The Agreement provided for termination without cause upon 30 days’ notice or “for cause,” and entitled the consultant to certain compensation upon termination.  Defendants contend that the consultant was terminated “for cause” when Defendants learned that he possessed, used, or planned to use confidential information that contained lists of potential customers, called lead sheets.  The Defendants had previously sold these lead sheets to another company, Accuro Healthcare Solutions (“Accuro”); therefore, neither Defendants nor the consultant possessed any rights to the information contained in the lead sheets.

After selling the lead sheets, the Defendants came to believe that the consultant and his brother were planning to wrongfully use the lead sheets.  The consultant’s brother asked Defendants’ representative what he should with the lead sheets, and suggested their destruction.  The representative for Defendants authorized the destruction of the lead sheets, stating that the documents could be “potentially tremendously damaging” for Defendants.  Afterwards, the consultant was terminated and commenced litigation against Defendants.

The consultant filed a Motion in Limine, requesting that the Court sanction Defendants for spoliation of evidence.  The consultant argued that all of the elements of spoliation existed because: (1) evidence was destroyed even though litigation was reasonably foreseeable, (2) Defendants had a culpable state of mind, and (3) the evidence that was destroyed was relevant.

The duty to preserve material evidence arises not only during litigation, but also extends back to the period in which a party should have reasonably foreseen litigation.  Defendants argued that they could not have reasonably foreseen litigation with the consultant at the time they destroyed the lead sheets, and claim that the only entity with which they could have foreseen litigation was Accuro.  The Court, unpersuaded by this argument, found that the Defendants’ stated distinction was far too narrow.  Judge Williams also determined that a reasonable person should have anticipated that Accuro would sue the Defendants and the consultant for possessing or using the lead sheets, and should have further anticipated that the Defendants would cross-claim against the consultant.  Therefore, in the Court’s view, the Defendants’ had a duty to preserve the lead sheets because they should have reasonably foreseen that litigation would commence.

The Court also found that the second element of spoliation existed because the Defendants exhibited a culpable state of mind when they destroyed the lead sheets.  The Court held that such destruction by Defendants was grossly negligent because Defendants knew the lead sheets could potentially subject Defendants to litigation.  The Fourth Circuit, unlike other courts, requires a less stringent showing of culpability before imposing sanctions.  Finally, the Court held the lead sheets were relevant.  For purposes of sanctions, relevance means evidence which would have naturally been introduced at trial.  The Defendants’ destruction of the lead sheets compromised the consultant’s ability to defend against arguments that he was terminated for cause.

Based on this, the Court issued a severe sanction against Defendants, and ordered that Defendants were prohibited from arguing that the lead sheets contained confidential information.  This sanction is likely to significantly impede Defendants’ case.