Defendant Sanctioned for Loss of ESI Transferred in the Sale of a Related Business
ILWU-PMA Welfare Plan Board of Trustees et. al. v. Connecticut General Life Insurance Company et. al., Case No. 15-02965 (N.D. Cali., Jan. 24, 2017) is an ERISA action brought by Plaintiffs against Defendants based upon an arrangement by which Defendants provided Plaintiffs with auditing and discount negotiation services for claims over $1,000.00 provided by out-of-network providers in exchange for a 23 percent commission on the value of the savings from the negotiated discounts. During the relationship, Defendants began paying providers’ fees without auditing in exchanged for discounts based upon billed charges, and without the audits, Plaintiffs paid more than usual, but Defendants continued to collect the commissions. Defendant Carewise was one of three subsidiary companies owned by a parent company, SHPS, who sold one of its subsidiaries to ADP in 2012. At the time of the sale, Carewise had a document retention policy that required it to retain ESI for eight years; thus, the servers sold to ADP should have contained ESI dating back to 2004. The sale agreement provided that the parties to the sale would retain each other’s business information for six years and not destroy it without notifying the other party first.
After Plaintiffs sued Defendants in 2015, Plaintiffs propounded document requests, including requests for certain ESI. Defendants responded that it may not have access to relevant ESI because of the sale to ADP. However, after Plaintiffs filed a Motion for Sanctions, ADP’s counsel appeared and notified the court that ADP had complied with the retention requirements of the sale agreement.
The court found that Defendants failed to take reasonable steps to preserve the data, resulting in a loss of ESI. The court took issue with Carewise’s storage of its ESI on another server and then the subsequent transfer of those servers to a third party buyer and rejected the argument that the sale agreement’s terms were sufficient to fulfill its obligation to preserve the data to avoid a loss of ESI. Defendants tried to argue that making copies of the ESI would have breached the sale agreement, but the court rejected that argument as well. Overall, the court found the record too limited to analyze further under FRCP 37, but concluded that prejudice had already occurred and thus ordered attorneys’ fees and costs to Plaintiffs. The court also suggested to Plaintiffs that they join ADP as a third-party defendant.