2014: Winter Issue

Home – U.S. Judge Says Plaintiff's Litigation Hold Doesn't Pass Smell Test, Directs It to Pay for Spoliation Probe

U.S. Judge Says Plaintiff's Litigation Hold Doesn't Pass Smell Test, Directs It to Pay for Spoliation Probe

Will your litigation hold meet a judge's expectations? And if not, what are the potential consequences? Are you looking at sanctions or millions of dollars' worth of forensic discovery? To get a glimpse of at least one federal court's view on this, we look to the Oct. 2, 2012, decision in Scentsy v. B.R. Chase handed down by Hon. B. Lynn Winmill, Chief District Judge of the U.S. District of Idaho (No. 1:11-cv-00249-BLW, Oct. 2, 2012; 2012 U.S. Dist. LEXIS 143633) [enhanced version available to lexis.com subscribers].


We're talking "scented warmers" here. For the uninitiated, if you want your room to smell like a tropical oasis, a comfortable leather chair, or even a blueberry cheesecake, you can buy one of these devices, plug it in, and the warmed fragrance oils will transform your space into a corner cafe, a pool room, or a newborn baby. You can get one that looks like a snowman for winter, Frankenstein for Halloween, or proudly wave your college colors with the Scentsy "Campus Collection." Other holiday options include a menorah design for Hanukkah or Santa's bowl-full-of-jelly mid-section for Christmas.


While it may be lighthearted and whimsical, the manufacture of fragrances and flavors is big business, and the complex formulae are vigorously protected from competitors.


It is the scented warmer designs that are at issue in litigation between Scentsy Inc. and B.R. Chase, LLC-would-be maker of certain Harmony HomeBrands scented warmers. In this less-than-harmonious litigation, Scentsy sued Harmony over designs, alleging copyright and trade dress infringement.


Harmony charged Scentsy failed to produce and spoliated key documents as the result of an insufficient litigation hold put in place orally by Scentsy's in-house counsel. Harmony moved to compel Scentsy to conduct a highly expensive forensic examination of its computer systems-on its own dime-to retrieve any deleted discoverable data. Harmony also wanted the court to hit Scentsy with sanctions.


Key questions before the court included when Scentsy knew it was going to initiate litigation; when it implemented its hold; whether potentially relevant documents were destroyed; whether there was evidence of spoliation; and whether Scentsy's litigation hold was adequate to prevent spoliation, inadvertent or otherwise. The court noted that most courts have held that pre-suit destruction can constitute spoliation when litigation was "reasonably foreseeable" but not where it was "merely possible."


Instead of a written litigation hold, Scentsy's general counsel spoke to individuals who would have had information about Harmony Home Brands or the scented warmers implicated in the dispute. The Scentsy GC apparently directed that such documents not be deleted. The parties dispute when Scentsy anticipated litigation, whether it was about the time the complaint was filed or earlier. Also, it is Scentsy's document retention policy that emails, but not other documents, be deleted when they are six months old.


The designs in question were created between 2006 and 2009. Harmony maintains Scentsy contemplated litigation by May of 2010. And a key piece of evidence-a computer and hard drive used by a Scentsy designer-failed and/or was destroyed early in 2010. Its data was not recoverable. Scentsy sued in May 2011. Scentsy contends that even if it began contemplating litigation against Harmony in May 2010, any relevant documents not produced were long destroyed either under Scentsy's general retention policy or when its lead designer's computer hard drive failed.


"The Court has serious concerns with Scentsy's retention policy and litigation hold process. Generally not deleting documents, and orally requesting certain employees to preserve relevant documents concurrently with filing a lawsuit, is completely inadequate. It is very risky-to such an extent that it borders on recklessness. However, in this case there is very little chance that any of the documents at issue in the pending motion were destroyed because of the policy. The Court has been provided with no reason to question Scentsy's representation that the bulk of the documents were inadvertently destroyed when [ designer Stewart's] hard drive crashed, and that this occurred before Scentsy even knew about Harmony. Scentsy has provided the Court with testimony, given under oath, to that effect. Harmony has provided no evidence to the contrary. Moreover, all the warmers were designed and placed on the market no later than November 1, 2009. Thus, even if Scentsy contemplated suit in May 2010, as suggested by Harmony, the emails related to the design of the relevant warmers would have been already been deleted based on Scentsy's document retention policy-which deletes emails over six months old."


However, there is a chance that some documents-particularly those related to the three warmers designed by someone other than Stewart-were destroyed after Scentsy anticipated this litigation. Scentsy's Vice President of Information Technology said that all non-email documents saved to an employee's personal computer hard drive are preserved indefinitely, and the company GC said there really is no retention policy for such documents. He added that files other than email are stored based on the authors' intent. "We don't delete data off of user drives," the GC said.


After reviewing this and additional evidence, the court held that Scentsy's GC did not issue his oral litigation hold until "roughly concurrent with the filing of the Complaint" in May 2011. So, the court found that there was, under either party's argument, a window of time between when the suit may have been anticipated and the date it was filed. Either way, the court said, there is only a slight chance that destruction of relevant documents took place; no one can say for sure. "[T]here is no way to know," the court found, adding that this "uncertainty was caused by Scentsy's inadequate retention policy coupled with its late and imprecise litigation hold."


The forensic examination could cost Scentsy into the millions of dollars, which the court determined was an undue burden and cost. "However, Scentsy should not be completely let off the hook simply because the cost is high. "[T[he Court has inherent power to make evidentiary rulings in response to the destruction of relevant evidence if spoliation occurs before the litigation is filed. . . . If information is uncovered that spoliation occurred, the Court will consider giving an adverse inference instruction at trial or dismissing some or all of Scentsy's claims. Spoliation is a serious matter, and Scentsy's document retention and litigation hold policies are clearly unacceptable. The Court assumes that Scentsy will improve those policies in any future litigation. The failure to do so may result in this or some other court finding that Scentsy's failure to act, in the face of the warnings given in this decision, constitutes the kind of willfulness or recklessness which may result in serious repercussions."


While deciding not to impose sanctions on Scentsy, the court said it has "in essence" sanctioned Scentsy by requiring it to pay Harmony's costs of deposing Scentsy employees to determine whether spoliation took place, and by "giving Scentsy a shot across the bow that if there is evidence that spoliation occurred, future consequences will be harsh."

Key Takeaways

  • Evaluate your document retention policy.
  • Educate your employees about your document retention policy.
  • Put your litigation holds in writing.
  • Ensure that your litigation holds are being implemented.
  • Inventory your data. Know what it is, where it is, and who has it.
  • Know and be able to prove when you anticipated litigation.

 For more information about LexisNexis products and solutions, connect with us through our corporate site.