Sanction Granted for Spoliation when Defendant Relied on Third Party to Preserve ESI

On February 24, 2017, the US District Court for the Northern District of California imposed sanction on a party failing to preserve electronically stored information (ESI) transferred in the sale of business.

In this action for breach of duties under ERISA, the Court granted Plaintiffs’ motion for sanctions for spoliation of evidence. An insurance company owned three separate subsidiaries, two of which (Human Resources Solutions, Inc., HRS, and SHPS Health Management Solutions, Inc., HMS) were sold. As part of the sale, the buyer (ADP, Inc.) acquired HRS’s servers that contained electronically stored information, including the emails of its employees.

At the time of the sale, Carewise (former HRS) had a policy to retain electronically stored information for eight years. The sale agreement provided both parties with reasonable access to business information required for, among other things, litigation purposes. The sale agreement further provided that both parties would retain “each others’ business information and, until the sixth anniversary of the agreement, not destroy any such information without first notifying the other party and giving it a reasonable opportunity to take possession, at its own expense, of the information to be destroyed”.

However, after Plaintiffs commenced this action and requested production of documents, Carewise informed Plaintiffs “that it had sold part of its business to ADP and ‘may not’ have access to servers containing relevant electronically stored information”.

ADP later informed Carewise that – “[D]espite the terms of the [sale agreement], ADP does not have [the requested] electronic records”.

Plaintiffs moved for spoliation sanctions under either Federal Rule of Civil Procedure 37(e) or the Court’s inherent power (Dkt. No. 85 at 9). Rule 37(e) states that potential litigants have a duty to preserve relevant information when litigation is “reasonably foreseeable”.

Carewise contended it owed no duty to preserve this ESI because the lawsuit was filed several years after the sale to ADP.

However, according to the Court, the litigation was “reasonably foreseeable” when both Plaintiffs and Carewise entered into a certain tolling agreement that became relevant to the dispute.

Next, Carewise contended that “even if it had a duty to preserve evidence at the time of the sale to ADP, it satisfied that duty by including provisions in the sale agreement for access to and retention of business information.”

The Court disagreed holding that the clause in the sale agreement were unable to effectuate “prompt access to, and complete retrieval of, electronically stored information from ADP as needed for litigation purposes.” Moreover, by failing to retain copy of the transferred ESI, Carewise failed to do everything it could reasonably have been expected to do to in light of future litigations.

In light of the above, the Court declined to find that “it is per se unreasonable for a party with a duty to preserve to fail to make any copies of [electronically stored information] before selling the systems and servers on which such [information] is housed and to depend solely on a third party to retain and preserve such [information]” (see Dkt. No. 85 at 7-8)”.

The District Court deemed it premature to determine the full extent to which Plaintiffs were actually prejudiced and partially reopened discovery to the limited extent necessary to determine which relevant information had been lost, and to locate or recover such information to the maximum extent possible.


ILWU-PMA Welfare Plan Bd. of Trs. v. Conn. Gen. Life Ins. Co., 2017 U.S. Dist. LEXIS 10529, 2017 WL 345988 (N.D. Cal. Jan. 24, 2017) is available (with subscription) at

For more information on how to preserve ESI, conatact Francesca Giannoni-Crystal

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