*1 For the reasons discussed more fully below, the Court recommends that Defendant's Motion for Sanctions [76] be granted. The Court further recommends a curative jury instruction be given at trial and Plaintiff Ayers should pay Defendant's attorneys’ fees related to bringing the motion for sanctions. Within 14 days after being served with a copy of the recommended disposition, a party may serve and file specific written objections to the proposed findings and recommendations. A party may respond to another party's objections within 14 days after being served with a copy. Unless the district judge orders otherwise, the objecting party must promptly arrange for transcribing the record, or whatever portions of it the parties agree to or the magistrate judge considers sufficient. The 6/20/22 status report date remains set.

This case arises from a contract dispute surrounding the end of Plaintiff Thomas E. Ayers II's (“Ayers”) employment with Defendant Heritage-Crystal Clean, LLC (“HCC”). Prior to 2018, Ayers was the President of Plaintiff Products Plus, Inc. (“PPI”) and Manager of Plaintiff AO Holding Company-Kansas City, LLC (“AO Holding”) (Dkt. 49 at ¶ 14.) On May 2, 2018, HCC purchased the assets of PPI; on that date, PPI, AO Holding, and HCC entered into an Asset Purchase Agreement that included a provision that Ayers would remain employed by HCC for three years to assist with the transition of PPI's business to HCC and called for Ayers to receive certain performance-based bonuses. (Id. at ¶¶ 6-7.) Ayers's tenure with HCC was fraught, and ultimately led to the instant lawsuit. Ayers alleges “HCC improperly interfered with Ayers's ability to perform his job duties, engaged in efforts to avoid making full payment to PPI and Ayers pursuant to the terms of the parties’ agreement, and refused to provide information supporting their claims that PPI and Ayers were not entitled to full payment [of his bonuses].” (Id. at ¶ 8.) He further claims “HCC unilaterally changed Ayers’ job duties from those agreed upon in the Employment Agreement and ultimately terminated Ayers's employment, on pretextual grounds as part of its overall scheme to avoid payments owed to Plaintiffs.” (Id. at ¶ 9.)

HCC countersued, alleging that Ayers had violated his employment agreement with HCC by: 1) refusing assignments and being insubordinate; 2) failing to perform his job duties, such as communicating with his supervisors or attending calls and meetings; 3) acquiring and establishing another company, Executive Data Controls (“EDC”), instead of devoting his time and energy to HCC, as required by his employment agreement; and 4) hiring a former PPI and HCC employee as the Chief Financial Officer of EDC. (Dkt. 53, Countercl. at ¶¶ 30-43.) HCC informed Ayers in August 2019 that he had “engaged in repeated and chronic breach of his Employment Agreement,” then put him on a performance improvement plan, and eventually terminated Ayers's employment with HCC on December 13, 2019. (Id. at ¶¶ 46-51.)

*2 HCC also claimed Ayers failed to return materials to HCC in violation of HCC's employee handbook, including his company-issued laptop and iPhone. (Id. at ¶¶ 54-55.) Ayers filed his original complaint on August 28, 2020. (Dkt. 1.) On November 2, 2020 – three days before returning his devices to HCC – Ayers reset his HCC-issued iPhone back to its factory settings and deleted 244 files from his HCC laptop. (Dkt. 76 at 5-6.) As a result of resetting his smartphone, the parties can no longer retrieve from that phone the content of any text messages sent or received, the call history and contact list, voice mails, or any photographs and recordings. (Dkt. 76 at 7.) Of the 244 documents Ayers deleted from the HCC laptop, the majority are unlikely to be recovered, according to HCC's forensic examiner. (Dkt. 86 at 14.) Without recovering the documents, it is difficult to tell what Ayers deleted. Some of the documents have titles that suggest relevance such as “PPI.HCC Customer Letter.pdf,” “PPI AR Report 9.24.18.xlsx,” “Corporate Filings GA, SC, NE.pdf,” and “Purchaser's Statement.pdf.” (Dkt. 76 at 6 n.2.) Others are indecipherable strings of characters and some do not have an obvious suggestion of relevance. (Dkt. 86, Ex. 4.)

I. Federal Rule of Civil Procedure 37(e)

Federal Rule of Civil Procedure 37(e) provides the following:

“Rule 37(e) provides the sole source to address the loss of relevant ESI that was required to be preserved but was not because reasonable steps were not taken, resulting in prejudice to the opposing party.” DR Distributors, LLC v. 21 Century Smoking, Inc., 2021 WL 185082, at *75 (N.D. Ill. Jan. 19, 2021) (citing Snider v. Danfoss, LLC, 2017 WL 2973464, at *3-4 (N.D. Ill. July 12, 2017)). Federal Rule of Civil Procedure 37(e) requires the following to find a violation: that the lost information (1) must be electronically stored information (“ESI”), (2) existing during anticipated or actual litigation, (3) which “should have been preserved” because it is relevant; (4) was “lost because [ ] a party failed to take [ ] reasonable steps to preserve it” and (5) cannot be restored or replaced through additional discovery. Moreover, “[i]f any of these five prerequisites are not met, the court's analysis stops, and sanctions cannot be imposed under Rule 37(e).” Snider, 2017 WL 2973464 at 4. Below is a flow chart for Rule 37(e) analysis:

DR Distributors, 2021 WL 185082, at *75 (citing Hon. Iain D. Johnston & Thomas Y. Allman, What Are the Consequences for Failing to Preserve ESI: My Friend Wants to Know, Circuit Rider 57-58 (2019)). All parties agree that the information is ESI, Ayers had a duty to preserve the ESI, Ayers failed to take reasonable steps to preserve the ESI, and that the ESI was lost and is unable to be restored.[1] As such, the Court will address the remaining questions from the flow chart in order.

II. The ESI Is Relevant

The Court agrees that Ayers's argument that the destroyed ESI was not relevant “borders on the absurd,” and rejects it. (Dkt. 87 at 9.) The Court recognizes that it is difficult to firmly establish the relevance of ESI that has been deleted, but in this instance it is clear the ESI was relevant. This is an employment case where key issues include whether Ayers gave his full attention to his HCC work while employed there and whether he was spending time establishing EDC when he should have been focusing on his work at HCC. Documents and communications showing what Ayers was doing on his HCC iPhone during his employment at HCC would plainly fall within the broad definition of relevance. Ayers's HCC-issued work iPhone and laptop would provide a trove of potentially relevant information. Moreover, the names of some of the files deleted from the laptop are highly suggestive of relevant information. The vast majority of Ayers's brief on this issue is devoted to arguing that other documents exist that can recreate the information lost when Ayers factory reset his iPhone and deleted 244 files from his laptop. (Dkt. 86 at 7-10.) Such arguments are better directed to whether HCC suffered prejudice and do not bear on whether the deleted ESI was relevant – i.e., it would make a fact more or less probable than it would be without the evidence. The Court finds that HCC has sufficiently demonstrated relevance for the purpose of Rule 37(e).

III. Ayers Did Not Intentionally Delete the ESI to Deprive HCC of its Use

*3 The Court does not believe that HCC has sufficiently proved that Ayers deleted the ESI with the intent to deprive HCC of its use.[2] “To prevail under Rule 37(e)(2) or the court's inherent authority, [movant] must show by a preponderance of the evidence that [destroying party] engaged in spoliation with the requisite intent.” Williams v. Am. Coll. of Educ., Inc., 2019 WL 4412801, at *11 (N.D. Ill. Sept. 16, 2019).

Ayers claims he reset his phone to factory settings to remove any personal items and because “PPI employees were commonly instructed to factory reset their company-issued phones at the end of their employment” and he believed “that such action was common business practice regarding the return of a company-issued phoned.” (Dkt. 86-1 at ¶¶ 15-16.) According to Ayers, the 244 files he deleted from his HCC laptop had previously been migrated from a tablet he had been using for personal and business reasons, and he “deleted 244 documents from [his] HCC-issued laptop under the belief that those documents were unrelated to this litigation and primarily consisted of the documents migrated from [his tablet] to [his] HCC-issued laptop.” (Id. at ¶¶ 3-6.) Ayers further states he has reviewed the names of the 244 deleted documents and maintains his “belief that the deleted documents were personal or related to non-HCC business matters.” (Id. 86-1 at ¶ 8.)

HCC argues that the facts show Ayers deleted the ESI with the intent to deprive HCC of its use at trial. First, HCC notes that Ayers only chose to wipe his HCC-issued phone and left his personal phone untouched. Next, HCC points out that the names of some of the files deleted from the HCC laptop suggest they are relevant. Third, HCC argues the data deleted from Ayers's phone was likely damaging because “[m]any of the texts Ayers did produce reveal that he was not performing pursuant to his obligations under the Employment Agreement, and it would defy common sense to believe that Plaintiff deleted the entire contents of his smartphone and a significant number of files on his laptop if the data he deleted was helpful to his claims.” (Dkt. 76 at 14-15.) Finally, HCC highlights what it sees as Ayers's shifting explanations; the declaration Ayers appended to his response brief posits that Ayers believed it was standard operating procedure to wipe the phone, whereas he testified at his deposition that he deleted the ESI because it was personal in nature. (Id. 76 at 15.)

On the record currently before it, the Court finds it is more likely Ayers was innocent in deleting the ESI, and that he did not intentionally delete the relevant ESI to deprive HCC of its use. While Ayers is a sophisticated businessman, he is a novice at litigation; indeed, this is the first lawsuit he has ever been a party to personally, and PPI's previous lawsuits ended before discovery. (Dkt. 86-1 at ¶ 18.) He did not consult his attorneys before deleting the ESI. (Id. at ¶ 17.) The Court notes that many firms and businesses require employees to reset devices before returning them. While he should have known better and his attorneys should have been more proactive in communicating his discovery obligations to him, the Court does not believe a preponderance of the evidence shows Ayers deleted the ESI with any nefarious purpose in mind based on the filings currently before the Court.

*4 None of HCC's arguments persuade the Court otherwise. It makes sense that Ayers would wipe his work phone, but not his personal phone; he was never going to use the HCC-issued phone again, whereas he uses his personal devices on a daily basis. Anyone with a phone knows how inconvenient it would be to reset it back to its original factory settings. Had Ayers been intent on hiding evidence from HCC, he would have also deleted items from his personal phone, but he did not do so. Moreover, by HCC's own admission, the evidence retrieved from Ayers's personal phone “reveal[ed] that he was not performing pursuant to his obligations under the Employment Agreement.” (Dkt. 76 at 14.) The Court believes this cuts against a finding of bad faith; if Ayers were attempting to destroy unfavorable evidence, he would not have kept so much allegedly incriminating evidence on his personal phone. As for the names of the 244 deleted files, they certainly suggest some relevant information was lost, but a review of the titles shows many of the documents were potentially irrelevant or are at least inconclusive. The Court finds Ayers likely looked at the file names and truly believed they were not relevant to the case. Of course, that was not his decision to make, and it was wrong of him to delete those files, but that does not mean he erased them with the intention of depriving HCC of pertinent files. Finally, the Court does not believe Ayers's two explanations for his actions are irreconcilably conflicting. In fact, the Court believes the explanations make sense in tandem. It is entirely possible Ayers believed it was common practice to reset company-owned devices for the purpose of removing personal items from those devices before returning them to the company, and – knowing he had personal items on his HCC-issued devices – took steps to remove personal data from his phone and laptop. Although there are facts that suggest Ayers may have acted with intent, the Court finds that the preponderance of the evidence at this point in the case shows he did not act in bad faith.

IV. Ayers's Deletion of ESI Prejudiced HCC

The Court finds that HCC was prejudiced by Ayers's deletion of the ESI. The Court believes it is self-evident that HCC is prejudiced by losing access to the ESI. The substance of all the text messages sent by Ayers from his HCC-issued phone are lost. This creates a fairly sizeable gap in the record from which HCC can prove its counterclaims, and that loss alone is prejudicial. Much of Ayers's argument against prejudice amounts to demonstrating that there are other ways HCC can get at the information lost – e.g., checking phone bills and similar records. The Court rejects these arguments. First, forcing HCC to reverse engineer the information that Ayers had a duty to preserve and produce prejudices HCC by forcing it to devote time and resources it should not have to expend on a labor-intensive activity caused by Ayers's discovery violation. More substantively, the information that would be included on the HCC-issued phone cannot be adequately gleaned from the other sources Ayers recommends. The Court agrees with HCC that “the texts provide a real-time record of Ayers’ (sic) activities both with respect to HCC and EDC, as well as documentation of Ayers’ (sic) present-sense impressions that are difficult to capture by way of deposition testimony or other types of evidence,” and that “HCC has been prejudiced by not being able to discover evidence which would refute the assertions made by Ayers that he was working 40-50 hours per week throughout his employment with HCC.” (Dkt. 86 at 13.) The Court finds that HCC was prejudiced by Ayers's deletion of the ESI and that a sanction is appropriate.

V. Sanction

Pursuant to Rule 37(e)(1), having found prejudice (but no intent to deprive HCC of the ESI), the Court “may order measures no greater than necessary to cure the prejudice.” First, the Court recommends that Ayers pay HCC's attorneys’ fees for preparing, drafting, and filing the instant motion. Within seven days of this report and recommendation being entered, HCC should provide Ayers's counsel with an accounting of the fees; if Ayers has any objections, the parties must meet and confer before Ayers files any objections to the fees with the Court. The Court also believes a jury instruction informing the jury of Ayers's behavior is warranted in this case and will cure the prejudice to HCC. All parties agree Ayers intentionally deleted ESI that he had a duty to preserve and that he failed to take reasonable steps to preserve that ESI. The Court recommends the following curative jury instruction:

*5 The Court believes this jury instruction adequately strikes a balance between HCC's need to inform the jury of Ayers's failure to preserve relevant ESI, but stops short of an adverse inference instruction, which the Court believes would be unduly prejudicial to Ayers on the facts before the Court at this time. However, the Court does not believe the fact-finding role on this issue should be completely taken from the jury. Perhaps with a more fulsome record and after hearing live testimony, the jury will find that Ayers did destroy the ESI intentionally to deprive HCC of the ESI, in which case the jury may presume the evidence would have been unfavorable to Ayers. As such, the Court has taken some of the language from Seventh Circuit Pattern Civil Jury Instruction 1.20 on Spoliation to allow the jury to make the final decision on whether Ayers intentionally destroyed the ESI in bad faith. The Court believes this is an adequate sanction that is not greater than necessary to cure the prejudice suffered by HCC.

For the reasons discussed, the Court recommends that Defendant's Motion for Sanctions [76] be granted. The 6/20/22 status report date remains set.