Episode 85 of Case of the Week brings you a new case and decision. The matter is Drips Holdings, LLC v. Teledrip LLC, 2022 WL 4545233 (N.D. Ohio 2022), and the decision is from September 29, 2022 by United States District Judge John R. Adams. We’ll discuss how intentional deletion of Slack data and a party’s failure to change its retention on Slack resulted in spoliation and the entry of adverse inference instruction against the spoliating party.
Keep reading or watch the video to understand the eDiscovery issues.
Good morning. Welcome to Episode 85 of our Case of the Week series published in partnership with ACEDS. My name is Kelly Twigger. I am the CEO and founder of eDiscovery Assistant, as well as the Principal at ESI Attorneys, and I’m very happy to be here with you today. Thank you so much for joining me on this latest episode.
We’re going to jump into this week’s decision from Drips Holdings, LLC v. TeleDrip, LLC. In this decision, District Court Judge, John Adams, upheld the trial court’s report and recommendations sanctioning defendants for spoliation of Slack data, but rejected the magistrate’s recommendation of a permissible adverse inference instruction and instead ordered a mandatory adverse inference instruction against the defendants.
A key case today involving Slack data; Slack is a source of ESI that is an instant messaging platform that we’ve discussed several times on our Case of the Week series. It’s now a very common platform in many organizations that are leveraging it and is recognized as a key source of ESI for discovery.
If you’re not familiar with Slack, I’m going to encourage you to join me next Monday on a webinar that I’m doing in partnership with ACEDS and Onna to talk about how Slack works, how courts are viewing Slack data and requiring the production of data from Slack, as well as what you need to do to create a proactive plan for Slack data for your clients.
As always, we tag the appropriate eDiscovery issues on each decision in our eDiscovery Assistant database. This week’s issues include Slack, legal hold, adverse inference, sanctions, scope of preservation, spoliation, and failure to preserve. This decision from the Drips case is dated from September 29th, 2022, so not quite three weeks ago. As I mentioned, it’s from the District Judge, John Adams.
What are the facts that we’re talking about in this case? The underlying case here is a trademark infringement claim based on the phrase “conversational SMS”. We are before the District Court here on objections to the Magistrate Judge’s Report and Recommendation granting the plaintiff’s motion for sanctions. The district court is undertaking the review of that Magistrate’s report pursuant to 28 U.S.C. Section 636(b)(1)(C).
Now, on the motion for sanctions, the plaintiffs sought a mandatory adverse inference instruction. The Magistrate Judge did a thorough review of the facts in a separate decision from the one that we’re covering today and recommended that sanctions be levied under Rule 37(e), but recommended a permissive adverse inference instruction. Both parties objected to the magistrate’s report, obviously on different grounds. Let’s talk a little bit about what the facts were before the trial court that resulted in the motion for sanctions.
It’s a quick summary of date-specific information. As we’ve talked about multiple times on Case of the Week, the timeline of your case is always what is going to be key. Here are some key facts from that timeline:
- From 2017 to the present date, TeleDrip, which is one of the defendants, has used Slack as a typical mode of communication for both internal communications as well as external communications with customers.
- On October 25th, 2019, one of the defendants downloaded a portion of TeleDrip’s Slack data which did not include Slack channels containing internal communications.
- Three days later, on October 28th, 2019, that same defendant changed the retention setting of TeleDrip’s Slack from unlimited, meaning it was retaining all messages used on the platform, to seven days and deleted the previously exported Slack data. In essence, by making those changes on October 28th, 2019, every message in Slack at TeleDrip was deleted on that date and the retention was set only to keep messages for seven days going forward.
- A month later on November 26, 2019, Drips brought the instant action against TeleDrip. The following day, TeleDrip received a litigation hold letter from Drips along with service of the complaint.
- TeleDrip did not change the seven-day retention policy for its Slack communications until almost a year later in September of 2020.
Those are the facts we’re operating with.
Now, what is the Court’s analysis of the Magistrate’s Report and Recommendation? Well, the Court starts with Rule 37(e), which is the basis for sanctions, according to the Magistrate Judge. That section, of course, as we’ve discussed on multiple times on Case of the Week, provides for sanctions for spoliation for a failure to preserve, meaning that a party failed to keep data in the first instance.
The defendants objected to the trial court’s finding that their duty to preserve arose in August of 2019, and that they knowingly spoliated Slack data with the intent to deprive the plaintiffs from discovering it. The District Court here agreed with the Magistrate Judge’s analysis, based on the facts in that timeline that I just articulated to you, and noted that the defendant knew about the alleged trademark dispute as early as August 22nd, 2019, when a screenshot of a Slack message showed that a defendant employee of Drips knew about the potential trademark dispute.
The defendants made absolutely no attempt to explain why that was not sufficient to be able to put them on notice. Therefore, the Court said, “we agree that the duty to preserve arose as of August of 2019, not as of when you received the complaint in January.”
The key here is that the defendants tried to raise an argument with the District Court that it did not raise with the Magistrate Judge. That argument was that the trademark at issue was ultimately placed on the supplemental registrar, rather than the principal registrar, and was not a protectable trademark. The Court said, essentially, “You didn’t raise that argument with the Magistrate. I know you spent a lot of time on it here, but we’re not going to entertain it for the first time on objection to the report and recommendations to the magistrate.” That’s a key takeaway here.
Having determined the analysis of the Magistrate Judge on the date of the duty to preserve arose, the Court then addressed the intent requirement of Rule 37. This is where District Court starts to disagree with the Magistrate Judge. The defendants argued here that they were not on notice of the anticipated litigation until after the case was filed, which was a couple of months after they changed the retention on Slack, and so obviously, therefore, they were not on notice until after that Slack retention was changed.
They also stated that they “changed its data retention settings with a good faith belief that it minimized potential liability for the theft or disclosure of its customers confidential information under the California consumer privacy act of 2018 and the International Standard of Operation compliance.” Those we refer to as the CCPA and ISO compliance.
The defendants argued that a jury should decide its intentions instead of the Court and really argued for that permissive adverse inference instruction to stand if the motion for sanctions was to be granted. The Court looked at both of those objections from the defendants and said no — this is not an element of a cause of action for the jury to decide, but rather, we’re before the court on a motion for sanctions under Rule 37(e)(2), and that section allows the Court to make a finding that a party acted with the intent to deprive, as well as to order a mandatory adverse inference instruction.
The Court then also looked at the timing of the deletion of the data, the change in the retention policy by the defendants, and whether or not the defendants’ explanation regarding the CCPA and ISO was credible. Essentially, the Court said no. It found that the defendants were on notice as of August of 2019, and that there was absolutely no dispute that the defendants changed the retention settings in Slack from indefinite to a seven-day retention period and deleted all of its Slack data up to that point as of October 28th, 2019.
There’s no dispute that Slack was the defendant’s primary mode of communication, or the fact that all the spoliated data, which would have contained evidence of the alleged trademark infringement, was now gone and unable to be recovered. The Court also noted, and this was key, that the defendants did not change their Slack retention settings for 10 months after receiving the litigation hold.
We noted the date of the litigation hold, and I noted for you in that timeline that they didn’t change it back until September 2020, which was 10 months after receiving that litigation hold notice. Big failure, from a legal perspective, of counsel getting involved, whether in-house counsel or outside counsel, and advocating for what preservation needed to be for this case.
The defendants argued that they did not know how to comply with the CCPA and ISO standards considering the legal hold, and that they failed to consult counsel on how to do that properly. They argued that once plaintiff requested the messages in discovery, that they changed the retention settings back to what they were in October 2019 to retain all of the messages.
The Court said, “we’re not buying that.” The Court dismissed the defendant’s arguments about failure to consult with counsel and commented that is perhaps a malpractice issue, but nevertheless not a defense on a motion for sanctions. The Court also dismissed the defendants’ argument that their spoliation was based on a misunderstanding of their obligations under the CCPA and ISO, and noted that the Magistrate’s Report and Recommendation thoroughly reviewed both of those policies and found no basis for the defendants to rely on them for destroying their Slack data.
Now, here’s where we get the difference between what the District Court viewed and what the Magistrate found. While the Magistrate deemed the defendant’s arguments regarding the CCPA and ISO as “plausible”, the District Court was less willing to give the defendants any benefit of the doubt without excuse. The Court said, “Simply put, this explanation is not credible when coupled with the timing of the destruction and the continued refusal to change the retention settings to indefinite despite the litigation.”
In overruling the defendants’ objections, the District Court stated that the report and recommendation aptly states that, “The defendant’s refusal to abide by the litigation hold letter or seek clarification from their attorney strongly suggests that the earlier change in policy was not an innocent change of policy to comply with ISO or CCPA requirements.” Based on all of that, the Court essentially rejects the defendants’ objections to the Magistrate’s Report and Recommendation.
The Court then turned to the plaintiff’s objections. Those objections argued that the Magistrate’s recommendation of a permissive adverse inference instruction instead of a mandatory one was incorrectly based on the Court’s finding that defendant’s argument was “plausible”. The District Court, as we already mentioned in that earlier quote, found that the defendant’s excuse for changing the retention policy and deleting a Slack data was not credible. Based on the Magistrate’s recommendation that the District Court find that the defendants knowingly spoliated Slack data with the intent to deprive Drips from discovering its content, that was sufficient to allow for a mandatory adverse inference instruction.
The Court notes that while the Magistrate said the mandatory adverse inference instruction was permissible, it was not required, and recommended the lesser sanction. The District Court rejected that argument and said, no, I don’t find their excuse credible, and I am going to impose the mandatory adverse inference instruction which is permitted under Rule 37(e).
That’s what we’ve got—a mandatory adverse inference instruction. Let’s talk a little bit about the difference between the permissive and adverse inference instructions as part of our takeaways. A mandatory adverse inference instruction requires a fact finder to presume that the evidence contained in spoliated information would have been favorable to the plaintiffs here. So it’s a forced presumption upon the fact finder with a mandatory adverse inference instruction.
A permissive adverse inference instruction, on the other hand, does not require, but allows the fact finders to presume, that the destroyed evidence would have been favorable to the plaintiffs here. In practical terms, any adverse instruction is bad as people’s natural reaction is to assume the worst. But a permissive adverse instruction does allow trial counsel to be able to try to work to convince the fact finder that the evidence either would not have been favorable to the other side or was not intentionally spoliated, and as such, their client should not be at fault.
Generally, the law favors permissive versus mandatory adverse inference instructions, and we’ve seen very recent results of a permissive adverse inference instruction in the DR Distributors case that we covered here on the Case of the Week.
Setting aside the difference between those instructions, let’s talk a little bit about Slack. Slack is a key source of ESI that you need to be aware of and communicate with your clients about, whether you are in-house counsel or outside counsel. And you need to be aware of its use in organizations and who has access to be able to change that retention.
Slack is generally a free service. There is a free plan that organizations can leverage as much as they want to, and retains all of the messages that organization creates. It does require you to upgrade to paid subscriptions to be able to see all of your messages. There’s a cutoff, I believe, at 10,000 messages currently, that you can view if you’re not on a paid plan. But the point is that there are free plans that are out there and many clients are leveraging them both for internal and external communications with clients and customers.
Now, default retention for Slack is to keep all messages in all of the channels, and a party has to take active steps to modify that retention. Here, we saw that the defendants took those active steps to delete not only existing data, but to change that data retention to seven days, as well as the failure to change the retention back once it believed it was on notice of the litigation. Those facts were sufficient to find intent under Rule 37(e)(2).
We’ve talked multiple times on Case of the Week about the difficulty in meeting that intent bar. These facts here are clearly showing that the defendant took active steps to delete and spoliate Slack data that was sufficient for a mandatory adverse inference instruction, which is one of the more severe sanctions that can be entered under Rule 37 before you get to dismissal.
Now, again, if you’re not familiar with Slack, Slack organizes data in channels and direct messages. If I’m using Slack and I have five different people that I’m communicating with, I can have individual direct messages to each one of those five people, or I can also have any mix of those five people in various channels and I could have as many channels as I want to have on Slack. In order to identify, preserve and collect and produce data from Slack, it can be a very significant undertaking to identify both the direct messages and the channels that need to be preserved during discovery.
Now, Slack is what I would call custodian-based because it’s dependent on who the people are that are in the channels or a part of the direct messages. But there is, of course, the ability also to search Slack using search terms. We’ve covered other cases regarding searching Slack with terms on the Case of the Week.
The best practice for Slack is going to be, generally, to retain all messages on Slack during a legal hold because it’s going to be difficult to deal with iterative discovery using Slack if you’ve set any retention requirements without understanding the full scope of custodians and the subject matter that needs to be produced from Slack data.
Now, we talked about this a little bit, but this ruling here from Judge Adams in the District Court is consistent with other rulings on Rule 37(e) requiring an active step being taken to spoliate data to allow for the crippling sanctions under Rule 37(e)(2).
The final takeaway for this case is that communication regarding issues that come up that may constitute anticipation of litigation is very key. In this particular case, there was a conversation at a trade show and an exchange about the materials for that trade show and what the text was to go on those materials. That was the evidence that defendants were on notice of the alleged infringement prior to the deletion of the Slack data.
There’s no information in this decision about when or whether that conversation was communicated to legal so that a determination could be made about whether the duty to preserve had arisen. That’s an issue that requires educating the folks in the field who are carrying out actions on behalf of the company that any inkling of a potential duty to preserve must be communicated in order to avoid a situation, just like the one we discussed today in this Drips decision.
That’s our Case of the Week for this week. Thanks so much for joining me. We’ll be back again next week with another decision from our eDiscovery Assistant database. I’ll also be at Relativity Fest next week, so if you’re going to be there, please seek me out and say hello; I’d love to know that you’re enjoying the Case of the Week series.
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