Delaware Courts have increased focus on the importance of preserving text and other messages and delineated the implications of failing to do so.
Elon Musk submitted an affidavit saying he only recalled having one communication on the messaging app Signal that was related to his planned purchase of Twitter. That representation turned out to be inaccurate, as at least one other Signal communication related to the disputed transaction was identified. The Court noted it was likely that other relevant Signal communications were deleted via Signal’s auto-deletion function and that if they were deleted while Musk was under a duty to preserve, then some remedy is appropriate.
Twitter settled before the Court addressed what sanction would be appropriate. Still, other cases have made clear that both monetary sanctions and adverse inferences (including default judgment) may be appropriate sanctions for the deletion of responsive text messages when under a duty to preserve.
Delaware has issued an opinion highlighting the importance of preserving messages and the litigation risks for failing to do so.
Sanofi approached Denner and another Bioverativ director, who expressed an interest in acquiring Bioverativ. Denner and the other director allegedly told Sanofi the time was not suitable for an acquisition. Days after Sanofi’s overture, Sarissa began purchasing Bioverativ stock. Based on these acquisitions, Sarissa allegedly stood to make significant profits if a transaction with Sanofi happened at least six months after the purchases. As such, the plaintiff alleges that Denner delayed a transaction with Sanofi so that Sarissa could reap these profits. A Bioverativ-Sanofi transaction was announced on January 21, 2018.
The SEC subpoenaed Denner and Sarissa seeking documents about trading in Bioverativ securities. The next day, Sarissa’s general counsel circulated a litigation hold to all staff, including Denner.
After circulating the hold, Sarissa’s general counsel spoke with outside counsel about the implementation of the hold, and they discussed text messaging. Sarissa’s general counsel represented that he did not text for business purposes and that he did not believe that Denner did either but that he would confirm. He later told outside counsel that he had reviewed Denner’s text messages and confirmed that there were no relevant texts. Based on those representations, the general counsel and outside counsel agreed to hold off on collecting text messages but asked that text messages be preserved.
The plaintiff filed a suit alleging that Denner and Sarissa engaged in insider trading in connection with the Sanofi-Bioverativ transaction. Almost a year after the litigation was initiated, Denner and Sarissa started to collect documents. Neither Denner nor any other Sarissa custodians had any texts despite the fact that other defendants produced text messages from Denner. Denner apparently lost all of his texts when he upgraded his phone, another custodian’s phone allegedly fell in a swimming pool, and a third custodian had his phone set to delete texts after thirty days. In addition, the text messages from the three phones were not backed up to the cloud or to other devices.
The Court held that Denner and Sarissa should have taken steps to preserve data sooner and, if they had, text data would not have been lost. The Court held that the plaintiff filed the case in December 2020. Defense counsel should have started taking steps to identify and preserve information by at least then. Undoubtedly, the duty to preserve arose much earlier —even before the first litigation hold was issued in February 2018—because litigation involving M&A transactions is sufficiently common that Denner and Sarissa should have reasonably anticipated litigation challenging the Bioverativ-Sanofi transaction.
The Court explained that part of preserving data includes identifying the reasonably likely sources of information and taking reasonable steps to collect and preserve it. The Court held that steps could have included imaging phones or backing up data. None of this was done, and Denner and Sarissa were unable to come forward with other locations where the texts might be found, like Denner’s phone carrier or third parties.
The Court found that Denner and Sarissa’s failure to preserve the text messages was reckless. To remedy the prejudice to the plaintiff, the Court issued sanctions, holding that the Court would presume at trial that the hedge fund traded on the basis of a non-public approach from Sanofi and that Sarissa’s trading caused the sale process to fall outside a range of reasonableness. The Court also held that it would require the defendants to meet a burden of proof that is increased such that, rather than rebutting the presumptions or proving issues by a preponderance of the evidence, the defendants will have to adduce clear and convincing evidence. The Court also awarded the plaintiff fees and expenses in pursuing the motion.
As outlined by the Court, the duty to preserve often arises well before litigation is initiated, when litigation is reasonably anticipated. Often, this duty coincides with the issuance of a litigation hold, but the duty can arise well before then. The Court noted the duty to preserve undoubtedly arose much earlier than the issuance of the first litigation hold because litigation involving M&A transactions is sufficiently common, so Denner and Sarissa should have reasonably anticipated litigation challenging the Bioverativ-Sanofi transaction well before that. The Court did not, however, specify when that might have been. The decision suggests that when negotiating an M&A transaction, a party to negotiations should carefully consider whether, under the circumstances, there is a duty to preserve.
While circulating a litigation hold is essential and often a first step, the Court may not view it as enough for purposes of preservation. The Court held that the organization must take steps to ensure that the recipients of the hold understand what it means and abide by it. This is particularly true for data that a company does not control, like personal email and text messages.
When a duty to preserve arises, a party must act reasonably to preserve the information that it knows or reasonably should know could be relevant to the litigation, including what an opposing party is likely to request. The standard is not perfection. It is reasonableness. This requires first taking reasonable steps to identify the information that should be collected and preserved.
There is not a rigid checklist or bright-line rule for preservation. The specific approach taken will likely depend on the circumstances of the given case. In any case, it is crucial to speak with custodians of potentially relevant data at the outset of litigation, if not sooner, to determine potential sources of data and methods of ensuring the data is preserved.
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