Federal Trade Commission v. Vyera Pharmaceuticals, LLC

Background

The Federal Trade Commission, the State of New York, the State of California, the State of Ohio, the Commonwealth of Pennsylvania, the State of Illinois, the State of North Carolina, and the Commonwealth of Virginia sued Vyera Pharmaceuticals, LLC, Phoenixus AG, Martin Shkreli, and Kevin Mulleady in an antitrust action. The plaintiffs alleged that Vyera entered anti-competitive agreements, including an exclusive supply agreement with RL Fine Chem concerning the drug Daraprim.

The plaintiffs sought sanctions under Federal Rule of Civil Procedure 37(e), which addresses the failure to preserve electronically stored information. They argued that Shkreli had failed to preserve relevant messages from two devices: a company-issued iPhone and a phone he used while incarcerated. Shkreli received document-preservation notices in 2015. The company-issued phone was later reset, which erased communications stored on the device. Vyera represented that messages from company-issued phones were automatically backed up to iCloud.

The plaintiffs also presented evidence that Shkreli used the prison phone to communicate with Vyera executive Akeel Mithani about business development while Shkreli was incarcerated. Shkreli invoked his constitutional privilege against self-incrimination when asked during his deposition whether he had a cell phone in prison. Vyera told the plaintiffs that it did not possess, and likely could not access, WhatsApp messages exchanged between Mithani and Shkreli.

The Court’s Analysis

Rule 37(e) permits sanctions when electronically stored information that should have been preserved for litigation is lost because a party failed to take reasonable preservation steps, and the information cannot be restored or replaced through additional discovery. More severe sanctions under Rule 37(e)(2), such as an adverse inference or a default judgment, require a finding that the party acted with the intent to deprive another party of the information’s use in the litigation. Rule 37(e)(1) permits measures no greater than necessary to cure prejudice caused by the loss.

The plaintiffs requested presumptions that Shkreli remained involved in Vyera and Phoenixus’s business, communicated with Vyera executives about company business while in prison, and participated in conduct intended to restrain generic competition. Alternatively, they asked the court to bar Shkreli from presenting arguments or evidence contrary to those presumptions.

The court found that the plaintiffs had not shown that Vyera failed to preserve messages from the company-issued phone. Shkreli testified that he almost never used that phone for business, and Vyera represented that employee messages were backed up to iCloud. The court therefore required Vyera’s counsel to confirm that an appropriate search had been conducted and that any relevant messages had been produced.

The court reached a different conclusion about the prison phone. It found that Shkreli used the phone to discuss highly relevant company business and knew that the communications should have been preserved but would not be preserved. The court determined that this conduct was intentional destruction or failure to preserve evidence and that the plaintiffs were prejudiced because they lacked access to the messages.

Ruling

The court exercised its discretion not to impose the broader sanctions requested by the plaintiffs. It adopted Shkreli’s proposed sanction: Shkreli was precluded from introducing any argument or evidence contrary to the presumption that he communicated with Mulleady and Mithani about company business while in prison.

The court also ordered Vyera, by June 4, 2021, at noon, to submit a letter stating whether it had searched its iCloud backup for messages sent to and from the company-issued phone and whether it had produced any relevant messages. The opinion addressed discovery sanctions and preservation of electronically stored information; it did not resolve the underlying antitrust allegations.