Automated Solutions Corp. v. Paragon Data Sys., Inc. – Circuit Court Affirms Denial of Spoliation Sanctions for Failure to Preserve ESI.

In this copyright case, the owner, Automated Solutions Corp. (“ASC”) brought suit against Paragon Data systems claiming that their developer used their copyrighted code to develop a software product. The circuit court addressed whether or not the district court abused its discretion in failing to grant plaintiff’s motion for spoliation sanctions for defendant’s failure to preserve electronic evidence when a computer hard drive, server and backup tapes were destroyed.

ASC entered into an agreement with Paragon Data Systems under which they jointly agreed to develop, market and license a software application for the Chicago Tribune. The software, called the Single Copy Distribution System (“SCDS”), would allow the Chicago Tribune to manage and track newspaper deliveries and subscriptions through the use of a handheld device. The two subsequently severed their business relationship and ASC sued Paragon in Ohio state court which found that ASC was the sole owner of SCDS. ASC subsequently filed suit alleging that Paragon infringed on its copyright and trademark in SCDS and after eight years of litigation, the court granted summary judgment to Paragon on all of ASC’s claims.

While the state court case was pending, Paragon continued its efforts to use SCDS as Paragon was under an obligation to provide the SCDS to the Tribune along with technical support. Brent Anderson was the former Paragon employee responsible for translating the SCDS code and utilized a Sun server in an attempt to make the server side of SCDS code work. Anderson could not get the software to work and Paragon terminated his employment. The Sun Server was discarded after the state court ruled that Paragon had no rights in the SCDS system.
Paragon subsequently began efforts to develop software for another newspaper and hired a programmer, Brian Atkin, to write the software they called “DRACI.” In an affidavit, Atkin stated that he wrote the software which did not use a server and was delivered in less than a month, “from scratch” and “primarily in his head.”

After acquiring a federal copyright registration on the SCDS code, ASC filed a second suit against Paragon in state court which was removed to federal court where ASC’s alleged copyright and trademark infringement based on Paragon’s alleged copying of the SCDS software to use in its DRACI software. Paragon was unable to produce documented evidence of its development of the DRACI code and the court ordered Paragon to submit to a forensic expert investigation of its computer systems. The expert found that its ability to obtain relevant evidence was impeded because Atkin’s former personal computer’s hard drive failed and files were not transferred to his current computer; Anderson’s personal computer was not maintained or archived after he left Paragon and Paragon used a faulty back up tape which did not record information. ASC then moved for sanctions arguing that Paragon had deliberately destroyed relevant evidence. Paragon moved for summary judgment arguing that ASC had not submitted evidence that Paragon had copied SCDS.

Addressing ASC’s motion for sanctions, the magistrate judge found that Paragon was at most negligent and had not acted with any degree of malicious behavior. The judge found the Sun server’s absence irrelevant as there was no evidence it was used in the development of DRACI. The judge also found Anderson’s hard drive to be irrelevant and rejected ASC’s assertion that the back-up tapes should have been subject to preservation as their sole purpose was disaster recovery. As Atkins was the “undisputed” author of DRACI, the magistrate judge recommended adverse inference sanctions only for the loss of Atkin’s hard drive to be considered at trial rather than at a the summary judgment stage. The magistrate judge also recommended granting partial summary judgment in favor of the defendant. After adopting magistrate’s recommendations in part, the plaintiff’s claims were dismissed and the sanctions were found to be moot. Paragon subsequently appealed raising a “host” of arguments that the district court abused its discretion by denying ASC’s motion for sanctions against Paragon.

Addressing the Sun Server, the appeals court found that while Paragon was under a duty to preserve the hard drive and Sun server, ASC did not cite any showing of evidence necessary for the district court to impose sanctions. The appeals court noted that the party seeking an adverse inference must “adduce sufficient evidence from which a reasonable trier of fact could infer that the destroyed [or unavailable] evidence would have been of the nature alleged by the party affected by its destruction.”

With respect to the backup tables, the appeals court concluded that the district court did not abuse its discretion in adoption the magistrates conclusion that that back-up tapes were not subject to Paragon’s duty to preserve. Applying Zubulake, the magistrate noted that “litigation hold does not apply to inaccessible backup tapes (e.g., those typically maintained solely for the purpose of disaster recovery), which may continue to be recycled on the schedule set forth in the company’s policy.” The appeals court found that none of ASC’s arguments addressed the fact that the tapes were re-written daily and only used for disaster recovery, further noting that there was not clear that any useful evidence was on the tapes even if they had been recovered.

Finally in addressing ASC assertions that the lower courts wrongfully found that Paragon’s failure to preserve evidentiary items was “at most” negligent, rather than willful or grossly negligent, the appeals court noted that the sixth circuit takes a case-by case approach rather than employimg“bright-line rules” and recognized that district courts are best positioned to adjudicate discovery disputes having the most contact with the parties, personalities and litigations. The appeals court found Paragon’s behavior to be negligent but was not willing to say that the district court abused its discretion in determining that it was not grossly negligent.

Automated Solutions Corp. v. Paragon Data Sys., Inc., —F.3d—, 2014 WL 2869286 (6th Cir. June 25, 2014)

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