When Producing 2 Million Documents Just Isn’t Enough
March 15, 2011Preserve all potential evidence for a lawsuit. This is discovery 101, isn’t it? Apparently not. The CEO of Oracle Corporation deleted email files and audiotapes, and this blunder could have cost him and his company a substantial lawsuit.
Oracle is the second largest software producer in the world, and Larry Ellison is Oracle’s Chief Executive Officer. In 2001, Oracle missed its forecasted earnings and its stock price dropped. Several analysts blamed it on the burst of the dot-com bubble. Not surprisingly, purchasers of Oracle common-stock were not satisfied with chalking their losses up to the economy.
This background sets the stage for In re Oracle Corp. Sec. Litig., where purchasers sued Oracle and several of its officers (including Ellison) asserting violations of federal securities laws. Specifically, the purchasers claimed that the drop in Oracle’s stock price was the result of an elaborate scheme by the company and its officers to defraud the public.
By November 2004, it was clear that the purchasers’ lawsuit survived Oracle’s motions to dismiss, thereby triggering the start of a long and difficult (not to mention, expensive) discovery process. Discovery finally wrapped up in 2008 and the end product was voluminous, to say the least. Over 134 days of depositions had been conducted, and over 2 million documents were produced.
Despite this wealth of discovery, missing emails and audiotapes from Ellison―which probably would have comprised a very thin slice of the pie―took center stage. In September 2008, the Court found that Ellison wilfully failed to preserve the potential evidence and, as expected, the Court made sure that Oracle would not be able to benefit from this failure.
As a sanction, the Court ruled that the purchasers were entitled to a limited adverse inference instruction that the missing evidence demonstrated Ellison’s knowledge of any material facts that the purchasers could otherwise prove. In order to prove their case, the purchasers were required to demonstrate both fraud and knowledge of that fraud. So long as the purchasers could set forth enough facts to support the fraud element, the adverse inference instruction would take care of the knowledge element (inferring that Ellison must have known of the fraud). Therefore, this was a heavy sanction against Oracle and could have proven fatal for them in this lawsuit.
Lucky for Oracle, the Court found that the record didn’t have enough facts to establish the requisite fraud. Since the purchasers failed to respond to any of Oracle’s challenges to evidence, the Court declined to consider the challenged evidence in rendering its decision. Thus, the adverse inference instruction turned out to be inconsequential. In the end, the Court summarily dismissed the purchasers’ lawsuit against Oracle, and the Ninth Circuit affirmed.
You could say that Oracle lucked out with the purchasers’ (or more accurately, their attorneys’) failure to respond to Oracle’s evidentiary challenges. Or you may think that the record simply didn’t support the purchasers’ lawsuit. Whatever your position, we can all agree on one thing: Oracle has probably tightened up its policies with respect to evidence preservation after the close call in In re Oracle Corp. Sec. Litig. Be sure to preserve all potential evidence for a lawsuit―the cost of doing so is worth the benefit of avoiding an adverse inference instruction.
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Tagged as: Legal Hold/Preservation, Sanctions, Spoliation.
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Nicely written piece. Oracle was doing alright with the adverse inference. Or at least they thought they were. But it’s really not much of a victory if the case just gets dismissed in the end. Preserving all evidence is clearly what this company should have done!
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