RealNetworks, Inc. v. DVD Copy Control Association: Preservation Triggers and Terminated Employees

On May 5, the U.S. District Court for the Northern District of California, in RealNetworks, Inc. v. DVD Copy Control Association, 2009 WL 1258970 (N.D. Cal. May 5, 2009), granted DVD Copy Control Association's (DVD CCA's) motion for sanctions for spoliation of evidence for RealNetworks' failure to preserve notebooks containing potentially relevant information that had belonged to an employee who had been terminated right before RealNetworks' action. This case is of interest because it discusses two key issues in discovery-when the obligation to preserve is triggered and how to preserve records created by employees who have separated from the company by the time the preservation obligation arises.

RealNetworks filed an action on September 30, 2008 seeking declaratory judgment that they had not breached a license agreement with DVD CCA. That same day in another jurisdiction, some of the DVD CCA defendants filed an action against RealNetworks alleging breach of the same licensing agreement. Later, DVD CCA filed a motion for sanctions against RealNetworks alleging spoliation of evidence.

The court first addressed the issue of when RealNetworks had a duty to preserve. DVD CCA asserted that the duty to preserve arose once RealNetworks knew litigation was inevitable, which DVD CCA believes occurred in early 2007. However, RealNetworks did not issue a preservation memorandum until October 6, 2008. To bolster its claim that the preservation obligation was triggered in early 2007, DVD CCA relied on some presentations by RealNetworks that contained slides referring to "risks" and "threats" and "legal action by Hollywood." Additionally, DVD CCA also relied on discussions between RealNetworks' employees regarding possible litigation about the product at issue. The court, however, stated that "a general apprehension of lawsuits does not create a duty to preserve all documentation related to the alleged software product sold and distributed by RealNetworks. . . .The cited statements do not rise to a probability that the instant litigation by or against Studio defendants [DVD CCA] would result" (emphasis added).

The court instead stated that the duty to preserve was triggered in early September 2008 when RealNetworks had notice that DVD CCA objected to RealNetworks' product release and expressed concern that the product violated the license agreement. Additionally, one of the DVD CCA defendants sent a letter to RealNetworks stating that it "intended to file a lawsuit against Real [networks] and seek injunctive relief." Based on these facts, the court concluded that the preservation obligation was triggered in early September 2008.

After addressing the trigger issue, the court then addressed the alleged spoliation by RealNetworks. DVD CCA deposed a former employee of RealNetworks who had been terminated just one week before RealNetworks' action. The employee testified that she turned over multiple notebooks to RealNetworks at the time of her termination and that these notebooks may have contained relevant information. The notebooks were never produced. RealNetworks "contends that [the employee] only handed over one notebook, which was placed in her locked office for three months and [that] they do not know what happened to [it]."

The court found no indication that the notebooks were willfully destroyed by RealNetworks, and stated that "they may have been inadvertently lost in the course of termination of an employee." However, the court did find that RealNetworks "failed to preserve the notebooks after [the employee's] termination, which was during the time they knew about litigation." The court further stated that even if it was only a single notebook that did not contain relevant information, as asserted by RealNetworks, it "should have been preserved for possible relevance." The court granted monetary sanctions and awarded attorneys' fees and related costs for pursuing the evidence of spoliation of the notebooks and for bringing that portion of the sanctions motion.

This case illustrates two key eDiscovery issues. First, it is important to know when a duty to preserve arises and to have policies and procedures already in place so that preservation measures can be implemented as quickly as possible. This case shows that mere speculation or general apprehension of litigation is not enough to trigger that duty, but once a potential claim is identified it behooves any organization to respond in a timely manner.

Equally important is the need to have a policy in place to ensure the proper preservation of potentially relevant data when an employee subject to a legal hold separates from a company. See also Cache La Poudre Feeds, LLC v. Land O'Lakes, Inc., 244 F.R.D. 614, 629-30 (D. Colo. 2007); Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212, 218 (S.D.N.Y. 2003); "Morgan Lewis eData Alert: Preserving Records of Former Employees" (January 21, 2009), available at http://www.morganlewis.com/documents/eData-internal_FormerEmployeesRecords_LF_21jan09.pdf.

If you have questions or require more information on the issues discussed in this eData LawFlash, please contact any of the Morgan Lewis attorneys below:

New York
Denise E. Backhouse

Philadelphia
Stephanie A. "Tess" Blair
Jacquelyn A. Caridad
Scott A. Milner