GE HARRIS RAILWAY ELECTRONICS, L.L.C., and Ge–Harris Railway Electronics Services, L.L.C., Plaintiffs, v. WESTINGHOUSE AIR BRAKE COMPANY, Defendant Civil Action No. 99–070–GMS United States District Court, D. Delaware March 29, 2004 Sleet, Gregory M., United States District Judge MEMORANDUM I. INTRODUCTION *1 This memorandum addresses the pending motion for sanctions.[1] The issue before the court is whether to impose sanctions, and if so, what those sanctions should be where the defendant's employee admittedly destroyed evidence relating to anticipated litigation between the parties. The court has discretion to impose sanctions for the spoliation of relevant evidence. Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991); FED. R. CIV. P. 37. The sanction should reflect the severity of the misconduct. In re Wechsler, 121 F.Supp.2d 404, 427 (D.Del.2000). The plaintiff GE Transportation Services Global Signaling, L.L.C.[2] (hereinafter “GETS”) asks the court to impose sanctions against the defendant Wabtec, Inc.,[3] (hereinafter “Wabtec”) because a Wabtec employee destroyed incriminating documents that detailed his arguably prohibited participation in a business transaction with Queensland Rail (hereinafter “QR”).[4] Specifically, GETS wants the court to enter a default judgment against Wabtec in a contempt action in which GETS accused Wabtec of violating the terms of the consent order entered pursuant to the settlement of a prior litigation. Although a sanction is appropriate under the circumstances, the entry of a default judgment is too severe. The court will exercise its discretion in adopting an adverse inference against Wabtec. In this memo, the court does not decide whether the defendant Wabtec was in contempt of the consent order, only that it grants the motion for sanctions in the form of an adverse inference. II. BACKGROUND The present motion arises out of a complaint filed on February 12, 1999, in which GETS alleged claims of patent infringement and trade secret misappropriation against Wabtec. (D.I.1). Wabtec employees Robert Kull (Kull) and Richard Klemanski (Klemanski) were implicated in the trade secret misappropriation claim. (D.I. 226, page 3).[5] The parties settled the litigation and a consent order was entered on or about December 1, 2000. The consent order limited Wabtec's license to deal in RF (radio-based) distributed power systems outside of South and North America. See Plaintiff's Opening Brief (PL Op. Br.), Exh. C, ¶¶ 1–2. Paragraph Four of the order (hereinafter “Paragraph Four”) also specifically forbade Kull and Klemanski from any involvement in Wabtec's “manufacture, development, use, marketing, sale or offer to sell” of radio-based distributed power products. It stated: 4. Until September 14, 2003, WABCO [now Wabtec] employees Robert Kull and Richard Klemanski shall not be involved, directly or indirectly, in any capacity in the manufacture, development, use, marketing, sale or offer to sell any radio-based distributed power product manufactured, developed, used, sold, or offered for sale by WABCO. (Pl. Op. Br., Exh. C, Amended Permanent Consent Order, ¶ 4). In March of 2002 Queensland Rail (hereinafter “QR”) invited both GETS and Wabtec to submit bids for a contract to upgrade QR's locomotive electronics for its CAW fleet of locomotives. (D.I.259, ¶ 62). Wabtec won the bid. (D.I.259, ¶ 77). Around May 2002, GETS suspected that Wabtec's proposal violated the terms of the consent order and began to investigate. (D.I. 259, ¶¶ 99 to 102). On or about September 20, 2002, GETS moved for an order to show cause as to why Wabtec should not be held in contempt of Paragraph Two of the consent order for these alleged violations.[6] (D.I.172). The court ordered discovery of the matter on December 20, 2002, and in response to Wabtec's first interrogatory, GETS stated its intent to seek relief for alleged violations of Paragraph Four uncovered during the discovery period.[7] *2 Further inquiry revealed that Robert Kull was the Director of Integrated Systems at Wabtec Railway Electronics at the time of the QR tender, and was directly involved in the transaction. (D.I.259, ¶¶ 85–87). He also knew of the prohibition applicable to him in the consent order under Paragraph Four. (D.I.259, ¶ 88). He interpreted the prohibition “as only applying to what he calls stand-alone distributed power systems.” (D.I.259, ¶ 89). Kull never sought the advice of legal counsel to determine whether his interpretation was defensible. (D.I.259, ¶ 90). Moreover, Kull destroyed all of his documents implicating his involvement with the QR project when he anticipated that GETS would raise objections regarding the compliance of Wabtec's proposal with the consent order. (D.I.259, ¶¶ 103–08). Despite Kull's minimum retention[8] policy by which he rationalized the destruction of his personal QR record, Wabtec was able to produce e-mails from the computer files of other employees that duplicated many of the destroyed documents.[9] In fact, Wabtec claims it produced 395 e-mails relating to Kull's involvement.[10] GETS moved for sanctions against Wabtec on May 2, 2003, for Kull's spoliation of evidence relating to Paragraph Four violations. (D.I.259, ¶ 23). The court now addresses that motion. III. DISCUSSION A party has a duty to preserve evidence that it “ ‘knows or reasonably should know is relevant to the action.’ “ Baliotis v. McNeil, 870 F.Supp. 1285, 1290 (M.D.Pa.1994) (quoting Fire Insurance Exchange v. Zentih Radio Corp., 747 P.2d 911, 914 (Nev.1987)). Where a party neglects that duty, or actively obstructs it, a district court has the authority to impose sanctions. In re Wechsler, 121 F.Supp.2d 404, 427 (D.Del.2000) (citing Baliotis, 870 F.Supp. at 1289 (“the inherent power of district courts to utilize sanctions in order to ‘manage their own affairs so as to achieve the orderly and expeditious disposition of cases' ”) (quoting Chambers v. NASCO, 501 U.S. 32, 43 (1991))). That authority includes the discretion to determine the severity of the sanction imposed. Id. (“In its discretion, the court may impose a wide range of sanctions for the spoliation of evidence depending upon the severity of the circumstances”). The range of applicable sanctions, “[f]rom least to most severe” include: (1) “an instruction at trial which permits the fact-finder (here, the court) to draw an adverse inference from the destruction of evidence, (a “spoliation inference” permits the court, or the jury as it may be, to infer “that the destroyed evidence would have been unfavorable to the position of the offending party.” Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76, 78 (3d Cir.1994)); (2) shifting the burden of proof to Wabtec and requiring it to show that Kull's involvement in the QR project did not violate the consent order; or (3) entering judgment in favor of GETS in the contempt action, (“[a] sanction that has the ‘drastic’ result of judgment being entered against the party who has lost or destroyed evidence must be regarded as a ‘last resort,’ to be imposed only ‘if no alternative remedy by way of a lesser, but equally efficient, sanction is available.’ “ Baliotis, 870 F.Supp. at 1289). Id. *3 In determining which sanction is appropriate, the court must consider: (1) the degree of fault of the party who altered or destroyed the evidence; (2) the degree of prejudice suffered by the opposing party; and (3) whether there is a lesser sanction that will avoid substantial unfairness to the opposing party and, where the offending party is seriously at fault, will serve to deter such conduct in the future. Schmid, 13 F.3d at 79 (citing for example Dillon v. Nissan Motor Co., Ltd., 986 F.2d 263 (8th Cir.1993). Appropriate sanctions are determined on a case-by-case basis “keyed to the degree of fault on the part of the party accused of [spoliation] and the degree of prejudice to the opponent.” Id. at 81. See id . (striking the testimony of the plaintiff's expert witness in its entirety was too severe where the evidence was not altered with the intent to interfere with the opponent's investigation, and, given that the plaintiff's theory was defective design, the specific injury-causing product was not crucial to the opponent's case, therefore, the prejudice was minimal); Liafail, Inc. v. Learning 2000, Inc., Nos. C.A. 01–599–GMS, C.A. 01–678–GMS, 2002 WL 31954396 (D.Del. Dec. 23, 2002) (adverse inference jury instruction would be imposed if the plaintiff failed to produce documents pursuant to discovery order) (stating at *4, “jury would be permitted to infer that [the plaintiff's] bad faith alone is sufficient circumstantial evidence from which a reasonable fact finder could conclude that the missing evidence was unfavorable to that party”); Mosel Vitelic Corp. v. Micron Tech., Inc., 162 F.Supp.2d 307, 314 (D.Del.2000) (an adverse inference jury instruction as well as the possible award of attorneys' fees were warranted where the spoliating party's attorney discarded or destroyed all prior drafts of an opinion letter, but potential for prejudice was minimal in that “the only real loss Micron might suffer is the potential to obtain treble damages”); In re Wechsler, 121 F.Supp.2d 404 (dispositive sanction warranted where the spoliating party destroyed the evidence to prevent inspection by opponent and the destruction substantially prejudiced the opponent such that it could not establish its claims). A measure of the appropriateness of a sanction is whether it “restore [s] ‘the prejudiced party to the same position he would have been in absent the wrongful destruction of evidence by the opposing party.’ “ West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir.1999) (quoting Kronisch v. United States, 150 F.3d 112, 126 (2d Cir.1998)). A party's bad faith intent speaks to that party's degree of fault and must be factored into a court's choice of sanction. Baliotis, 870 F.Supp. at 1291 (“The motive for the destruction of evidence is, of course relevant to determining what sanctions, if any, should be imposed. Schmid makes clear that it is ‘the degree of fault’ that is at issue. Evidence warranting a finding of bad faith may support the drastic sanction of preclusion of evidence that could result in the entry of judgment against the spoliating party.” Id. (citation omitted)). See also In re Wechsler, 121 F.Supp.2d at 415 (“when determining the degree of fault and personal responsibility attributable to the party that destroyed the evidence, the court must consider whether that party intended to impair the ability of the other side to effectively litigate its case”); c.f. Mosel, 162 F.Supp.2d at 314, 316 (degree of culpability is lower where the accused party was unaware that his attorney committed the alleged acts of spoliation). *4 The degree of prejudice suffered by the non-offending party is substantial if that party is unable to pursue or establish its claims without the evidence. In re Wechsler, 121 F.Supp.2d at 429. The prejudice is reduced if the party had an adequate opportunity to inspect the evidence before it was destroyed. Id. at 416 (“when considering the degree of prejudice suffered by the party that did not destroy the evidence, the court should take into account whether that party had a meaningful opportunity to examine the evidence in question before it was destroyed”). Based on the stipulated undisputed facts alone (D.I.259), the court concludes that Kull's conduct warrants sanctions against Wabtec. The pertinent undisputed facts are: 85. At the time of the QR tender Robert Kull was the Director of Integrated Systems at Wabtec Railway Electronics (“WRE”). 86. As Director of Integrated Systems, Kull was involved in system solutions which can include wireline distributed power and where there is also an RF component he was involved from the viewpoint of how the systems interface. 87. Kull was directly involved in the development of Wabtec's response to QR's tender. 88. Shortly after the consent order was executed, Kull was made aware of the prohibitions applicable to him under paragraph 4 of the Consent Order.... 103. At the time that GETS served its first document request, Kull had no documents to produce because he had destroyed his documents relating to the QR project. 104. Among other things, Kull deleted his computer QR project file when he became aware that GETS might have concerns about Wabtec's bid which occurred prior to the contract award. 105. Kull did not consult with anyone when he destroyed documents. (D.I.259). Kull's destruction was clearly motivated by an intent to eliminate evidence that could potentially incriminate Wabtec in a contempt claim. See D.I. 226, Exh. A, p. 72. As such, the degree of fault in this case weighs heavily in favor of imposing a serious sanction. The egregiousness of Kull's actions, however, is tempered by the minimal prejudice GETS likely suffered from the absence of the documents. Given that there is an extensive record of the e-mails sent to and from Kull collected from those with whom he communicated about the QR project, some of the most damning evidence probably still exists. GETS contends that the full extent of his involvement in the QR project will never be known because the emails are only some among many documents destroyed by Kull. This may be so, however, the stipulated facts and Kull's deposition testimony together with the restored emails provide considerable support for GETS's claims. Thus, the court does not face the worst case scenario that would have resulted from the destruction of all Kull/QR related evidence.[11] In light of the above, the court must determine the minimal sanction that “will avoid substantial unfairness to the opposing party and ... will serve to deter such conduct in the future.” Schmid, 13 F.3d at 79. As previously noted, “[g]enerally, the court should impose the most severe sanction of dismissal or default only as a last resort, reserving it for those extreme or drastic cases where a party has acted callously or in bad faith and, as a result, has severely prejudiced the other side.” In re Wechsler, 121 F.Supp.2d at 427 (emphasis added). Thus, the court must now seek to deliver a sanction that will put the parties in the positions they would have been had the evidence been preserved, West, 167 F.3d at 779 (quoting Kronisch v. United States, 150 F.3d 112, 126 (2d Cir.1998)), and, in light of the willfulness of the conduct, adequately punish Wabtec and deter such behavior in the future. *5 In order to adequately address Kull's impertinent involvement in questionably prohibited activities and his deliberate attempt to conceal that involvement, the court will adopt an adverse inference against Wabtec. Even if Wabtec was unaware of Kull's destruction, Wabtec failed to screen him from debatably impermissible pursuits. Wabtec concedes “that it is responsible for the wrongful conduct of its employees and that some sanction may be warranted.” (D.I. 240, page 8).[12] Although a significant amount of evidence was recovered, the extent of Kull's destruction remains unknown. The calculated destruction of documents in anticipation of potential litigation must be construed as ill-intended. Such conduct weighs in favor of imposing severe punishment. Kull and Wabtec have, however, been forthright in acknowledging their wrongdoing, and have attempted to reconstruct the missing information. The evidence that they have produced has mitigated the prejudice GETS has suffered in proving its contempt claims. To achieve a deterrent objective without overcompensating for the prejudice suffered by GETS, the court declines to enter a default judgment against Wabtec in the contempt action. Instead, the court will draw an adverse inference in favor of GETS where ambiguities exist as a result of the spoliation. IV. CONCLUSION In conclusion, the court will construe any factual ambiguities created by the spoliation in favor of GETS. For example, such factual ambiguities may include the extent to which Kull's role violated Paragraph Four. As well, destroyed evidence may have documented what technology Wabtec contemplated in its proposal to QR that may have violated Paragraph Two.[13] At present, the court is prepared to find that Wabtec is guilty of spoliating evidence and that the appropriate sanction is an adverse inference. The court is not, however, prepared to identify what inferences it will adopt. Footnotes [1] The court is aware that the parties await a post-hearing decision on whether the defendant is in contempt of the consent order. An opinion on that issue is forthcoming. [2] Formerly GE–Harris Railway Electronics, L.L.C, and GE–Harris Electronics Services, L.L.C. [3] Formerly Westinghouse Air Brake Company. [4] The parties dispute whether the conduct was actually prohibited. [5] D.I. 226, Plaintiff GETS's Memorandum in Support of its Motion for Sanctions for Defendant Wabtec's Spoliation of Evidence. [6] Paragraph Two of the Amended Permanent Consent Order stated: Except as provided in the patent licenses granted to [Wabtec] in the November 3, 2000 Settlement and License Agreement, upon entry of this Consent Order, [Wabtec], without any admission of liability or misappropriation of trade secrets or breach of contract, shall not (and shall not case, assist or encourage others to start or continue) manufacture, develop, repair/maintain, use, sell or offer to sell worldwide the radio-based (i.e., non-wired) distributed power product known as PowerLink, or known now or hereafter by any other name associated with the same or similar product; provided that [Wabtec] may, to the extent necessary to avoid a breach of an existing contract, deliver and repair/maintain any PowerLink units sold as of this date to MRS (4 units), Queensland Rail (2 units), and FreightCorp. (7 units.) Nothing in this paragraph affects, or shall be construed to affect any rights or liabilities [Wabtec] may have with respect to warranty obligations relating to the PowerLink sales referred to in this paragraph. Except as provided in the aforesaid patent licenses, these prohibitions shall remain in effect until March 14, 2004. D.I. 259, Stipulation of Undisputed Facts, ¶ 14. [7] GETS alleges that it was only after Wabtec produced several documents including e-mails either to or from Kull indicating his involvement in the QR transaction that it realized that Wabtec had specifically violated Paragraph Four of the consent order and began to investigate Kull's and Klemanski's involvement in the QR proposal. [8] See D.I. 226, Plaintiff GETS's Memorandum in Support of its Motion for Sanctions for Defendant Wabtec's Spoliation of Evidence, Exhibit A, p. 107. [9] The court can infer that they are duplicates of destroyed e-mails because the 395 e-mails consist of communications to or from Kull. [10] See D.I. 240, Defendant's Memorandum in Opposition to Plaintiff's Motion for Sanctions for Defendant's Alleged Spoliation of Evidence. [11] The stipulated facts state that “Kull was involved in system solutions which can include wireline distributed power and where there is also an RF [radio-based] component he was involved from the viewpoint of how the systems interface.” (D.I.259, ¶ 86). Given the restrictive language in Paragraph Four of the consent order, a good argument exists that this stipulation alone admits a violation. Kull's statements in his deposition also indicate that his work, at least indirectly, involved dealings in radio-based distributed power. See Deposition of Robert Kull pp. 7–8, 10–11, 15, 32, 40, 57, 84–132. [12] See D.I. 240, Defendant's Memorandum in Opposition to Plaintiff's Motion for Sanctions for Defendant's Alleged Spoliation of Evidence, page 8. [13] These factual ambiguities are examples of potential ambiguities the court may encounter when making factual findings. They are not to be construed as conclusive findings, and are not binding on the court for the purpose of future rulings.