Blockchain Innovation, LLC v. Franklin Resources, Inc.

Background

Defendants moved for sanctions under Federal Rule of Civil Procedure 37(e), arguing that Plaintiff Blockchain Innovation, LLC (“Blockchain”) failed to preserve electronically stored information, specifically text messages on services such as iMessage and WhatsApp. Defendants sought an adverse-inference instruction, which would allow the jury to draw a negative conclusion from the alleged loss of evidence. They argued that Austin Trombley, Aaron Travis, and Alina Trombley failed to take reasonable steps to preserve messages beginning in August 2020, when the parties agreed the preservation duty began.

What the Court Found

The court found no evidence that Alina Trombley failed to preserve relevant messages. Blockchain had produced her messages dating back to June 2020, and its privilege log included her messages dating back to August 2020. The parties agreed that Travis’s messages were preserved beginning in August 2021 and that Austin Trombley’s messages were preserved beginning in December 2021. Messages exchanged between Travis and Austin Trombley from August 2020 through July 2021 therefore were lost under Rule 37(e), because both custodians failed to preserve them and the messages could not be restored or replaced from another source.

The court found, however, that messages involving other people had not been shown to be lost. The record indicated that Alina Trombley was included in relevant messages and had preserved her messages, and Atul Patil had WhatsApp threads containing messages involving the three individuals. The defendants also did not provide evidence showing that the individuals had communicated by text with Onsa shareholders, advisers, prospective investors, or customers during the relevant period, or showing what steps they had taken to obtain messages from those people.

Attribution to Blockchain

Rule 37(e) permits a court to act when electronically stored information that should have been preserved for anticipated or ongoing litigation is lost because a party failed to take reasonable preservation steps, and the information cannot be restored or replaced through additional discovery. The court emphasized that the relevant “party” was Blockchain, which did not exist until July 7, 2021.

Blockchain was suing as a successor in interest to Onsa and had acquired Onsa’s assets and claims under an August 2021 asset purchase agreement. The court explained that a predecessor’s failure to preserve evidence could potentially be attributed to a successor. But the defendants’ asserted preservation duty began in August 2020, after Travis and the Trombleys had left Onsa in June 2020. The defendants did not argue that Onsa had a duty or ability to preserve those individuals’ messages after they left.

The court rejected the defendants’ efforts to attribute the pre-formation failures to Blockchain. Blockchain was not asserting legal claims assigned by Travis or Austin Trombley, and the company did not exist or control evidence before July 7, 2021. The court also rejected an alter-ego theory because the defendants offered no evidence that Blockchain was not distinct from its founders and cited no supporting case. Austin Trombley’s indirect shareholder status alone did not establish that Blockchain controlled him, although his role as a corporate witness and expert suggested some degree of control after Blockchain’s formation.

The court assumed that Blockchain had an immediate duty to preserve Travis’s messages once the company was formed, because Travis was its chief executive officer from the beginning. It also assumed that Blockchain had an obligation to preserve Austin Trombley’s messages from that date. As a result, the court treated Blockchain as responsible for the failure to preserve messages between Travis and Austin Trombley essentially during July 2021, but not for the earlier period.

Ruling

The defendants did not argue that the approximately one month of preservation failure attributable to Blockchain caused prejudice. Their prejudice arguments concerned the broader period beginning in August 2020 and included messages that other custodians had preserved. The court therefore held that the defendants failed to show prejudice from the loss of the information, as required by Rule 37(e)(1). The court further stated that, even if prejudice had been shown, an adverse-inference instruction would be greater than necessary to cure it.

Judge Thomas S. Hixson denied Defendants’ motion for sanctions.