Company’s Inadequate Preservation and Collection Efforts Require Company to Shoulder Costs of Forensic Analysis of Computers and Mirror-Imaging of Hard Drives

Company’s Inadequate Preservation and Collection Efforts Require Company to Shoulder Costs of Forensic Analysis of Computers and Mirror-Imaging of Hard Drives

In Nacco Materials Handling Group, Inc. v. Lilly Co., the court considered whether Lilly Company’s litigation hold and search collection efforts were sufficient, and if not, whether sanctions should be imposed on Lilly, including requiring the company to pay for the costs of forensic examination and mirror imaging of its own computers.

This case arose from allegations by Yale, a truck manufacturer, that several of Lilly’s employees, one of Yale’s distributors, had improperly used an expired user name and password to access its secure website. Yale alleged that in using the user name and password, Lilly gained access to its trade secret information, among other things.

After Lilly received the complaint from Yale, Lilly’s attorney sent a letter to Lilly’s President, Joe Clark, to advise him that there was a prospect that e-discovery issues could be an important issue in the lawsuit. The attorney advised Clark that essentially all electronic data is potentially discoverable, including emails sent or received by any employee, other “active” information stored on servers, and information stored on backup tapes or other media capable of restoration.

Clark testified at his deposition that Lilly did nothing to preserve electronic evidence of access to Yale’s secure site when it was served with Yale’s complaint in February 2011, and after it received a “document hold” letter from Yale one month later, other than to forward the litigation hold letter from its attorney to seven other employees. Yale argued that this constituted spoliation of evidence by which it was prejudiced, and moved pursuant to Rule 37 of the Federal Rules of Civil Procedure to prevent further spoliation of evidence.

Judge Diane K. Vescovo held that Lilly’s duty to preserve evidence was triggered when it received the complaint from Yale on February 25, 2011. Additionally, Lilly was aware of its duty to preserve evidence when it received the litigation hold letter from its attorney and the preservation letter from Yale.

The judge noted that upon receiving the complaint, Lilly took no immediate action whatsoever to preserve any data, electronic or paper. Neither did it issue a company-wide litigation hold upon receiving the preservation letter, approximately twelve days later. Rather, Clark simply circulated the litigation hold letter to nine employees out of a total of 160, and gave no further instructions. Lilly took no other affirmative steps to preserve electronic data. It did not direct employees to alter delete functions in its email program, to preserve Internet logs, or to disable overwriting on its computers and servers. Additionally, it failed to collect potentially relevant documents and ESI from key players.

In summary, after Lilly’s duty to preserve was triggered, Lilly failed to timely issue an effective written litigation hold to key employees, to take appropriate steps to preserve any existing electronic records, to suspend or alter automatic delete features and routine overwriting features, and to timely and effectively collect ESI. The court therefore found that Lilly breached its duty to preserve relevant evidence.

Finding that Lilly’s conduct was, at minimum, negligent in discharging its discovery obligations, the court entered sanctions against the company. The court found that it was impossible to know the extent of prejudice suffered by Yale until it was known whether evidence was lost or destroyed. Because Lilly admitted that its employees had accessed Yale’s secure dealer website, it was likely that evidence had been lost by Lilly’s failure to copy data on its server or preserve back-up tapes. These potentially missing logs and tapes may have been the only source of that information. Severe sanctions were not warranted because Yale had not presented sufficient evidence of prejudice, but lesser sanctions were appropriate because Lilly had acted negligently.

The court ordered Lilly to bear the cost of a forensic analysis of the data contained on seventeen of its mirror imaged hard drives. Additionally, it ordered Lilly to bear the cost of mirror imaging the hard drives of all the remaining Lilly computers, finding that it was likely

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that these computers might contain relevant information or evidence of deletion. Finally, the court found that Yale was entitled to an award of reasonable costs, including its attorney fees, with bringing this motion.

The court admonished that parties must take their duty to preserve ESI seriously, and that to avoid sanctions like these, “parties must cooperate and voluntarily preserve, search for, and collect ESI.


Kathy Trawinski is a Seton Hall University School of Law student (Class of 2012) who focuses her studies in the area of commercial litigation. She is an Associate Editor of the Law Review and a member of the Moot Court Board. She will begin as a first year associate at Day Pitney LLP in the fall of 2012. Prior to law school, she was a 2009 graduate of the University of Virginia, where she earned a BA in English.


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