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TLS Management & Marketing Services, LLC v. Mardis Financial Services, Inc.

United States District Court, S.D. Mississippi, Northern Division

January 29, 2018




         A court does justice by finding truth. That search requires evidence. Intentionally destroying evidence, then, is more than a devious litigation strategy. It is a lethal attack on a court's purpose, and must be responded to in kind.[1]

         Federal Rule of Civil Procedure 37(e)(2) provides tools to do so.[2] Those tools address intentional destruction of “electronically stored information” - that is, data. People must preserve data they know (or should know) “may be relevant” to a lawsuit.[3] The Rule says that, if such data is lost in bad faith, a court can enter a default judgment against the wrongdoer.[4]

         TLS Management & Marketing Services says such wrongdoers include Todd Mardis and two businesses he runs, Capital Preservation Services and Mardis Financial Services. To agree, this Court must satisfy the five questions asked by the Rule.[5]

         1. Was There Data Defendants Should Have Preserved?[6]


         This lawsuit alleges that - as former TLS contractors - Defendants profited by using stolen data about TLS's tax business, products, and customers. To prove its claims (which are breach of contract, tortious business interference, unfair competition, violations of Mississippi trade secrets law, and violations of federal false advertising law), TLS needed data about Defendants' business strategies, clients, and products.[7] Defendants had to begin preserving that data the moment they were notified of TLS's claims in 2014.[8]

         Doing so meant protecting the containers where that data was “likely” stored.[9] These containers included electronic documents and the places those documents were stored, such as computers, hard drives, and user profiles. Destroying those containers means losing the data they store.[10] To preserve business data, then, Defendants could not destroy those containers.[11]

         2. Did Defendants Lose That Data By Not Preserving It?[12]


         Defendants destroyed numerous containers that likely contained business data:

• In early 2017, Todd Mardis deleted hundreds of business documents on his computer.[13]
• In late 2016, Capital Preservation Services financial advisor David Byrd had his corporate computer thrown away after it “crashed.”[14]
• In August 2016, CPS financial director Kim Mardis deleted the user profile on her corporate computer.[15]
• In September 2016, CPS tax planning director Donna Carter deleted the user profile on her corporate computer.[16] Later that year, Carter also deleted dozens of business documents from that same computer.[17]

         There is no doubt this destruction happened, and that Defendants caused it.[18] Todd Mardis, Kim Mardis, and Donna Carter all swore under oath that this destruction did not happen, and that they did not cause it.[19] They lied.

         3. Was The Destroyed Data Permanently Lost?[20]


         Destroyed data is permanently lost unless it “can be found elsewhere.”[21] Finding destroyed data can be simple, if a company systematically used back up tools.[22] To prove they did so, Defendants must show “clear and convincing evidence that all information” - not some or most information - was likely backed up.[23]

         Defendants say they had a routine of backing up information using two tools: Dropbox and Microsoft Outlook.[24] Dropbox, which backs up documents in select parts of a user profile, [25]was used on many of Defendants' computers.[26] The same is true of Microsoft Outlook, [27] which backs up all documents attached to emails received or sent on a computer.[28] But these facts only establish that Dropbox and Microsoft Outlook likely backed up some data. Defendants must show that all destroyed data was likely backed up.

         To do so, Defendants commissioned an expert report.[29] It is wholly inadequate, leaving nearly every important question unanswered. How often did Defendants back up their data? The report does not say. What data, if any, on David Byrd's computer was backed up before it was thrown away? The report does not say - nor could it, given that its author never examined Byrd's computer.[30] What data, if any, on Donna Carter or Kim Mardis's user profiles was backed up before they were erased? The report does not say.[31]

         The questions the report does answer do not help Defendants. How many of the hundreds of business documents deleted from Todd Mardis's computer were backed up? Just four, the report says.[32] The report's author says he “saw” duplicates of the other documents, [33] but only documented a “random sampling” because doing otherwise “would have taken forever, and it would have cost $50, 000.”[34] Defendants must live with the report they paid for.

         Just as futile is Defendants' other attempt to show the destroyed data is recoverable. Defendants recently submitted the deposition of a technician who recovered “thousands” of deleted files from Todd and Kim Mardis's computers.[35] But Defendants submitted no analysis proving those files are relevant to this case. Tellingly, they never asked for one.[36]

         Defendants might have backed up a fraction of the destroyed data. But there is no clear and convincing evidence they backed up most of that data, which must be assumed permanently lost.

         4. Was The Data Lost In Bad Faith?[37]


         Bad faith is determined by the when and how of data loss. Bad faith data loss happens when, shortly after receiving a request to protect lawsuit-relevant data, a person destroys many documents that likely contained such data.[38] Bad faith data loss does not happen when, “well in advance” of such a request, “routine procedures” destroy lawsuit-relevant data.[39]

         Here, the when of data loss began when TLS filed this lawsuit in late 2014. For the next two years, despite many reasonable requests from TLS, Defendants refused to open their books.[40] In July 2016, TLS asked this Court to force those books open, noting that Defendants had “not produced a single document in response to any request for production.”[41] As early as[42] the following weeks, Kim Mardis and Donna Carter deleted their user profiles.[43] In November 2016, this Court held a hearing on TLS's request.[44] As early as the next day, Todd Mardis began deleting hundreds of business documents from his computer.[45] In December 2016, this Court granted TLS's request, and scheduled the examination of Defendants' computers.[46] In the weeks before that examination, David Byrd's computer was thrown away.[47] In sum, the when of this case strongly suggests bad faith data loss.

         The how of data loss confirms that suggestion. Many documents deleted from the computers of Todd Mardis and Donna Carter had names like Marketing Agreement, Marketing and Tax Plan, Operating Agreement, and Engagement Agreement.[48] Deleting such files, erasing two user profiles, and throwing away a corporate computer - all in the midst of a business-related lawsuit - is convincing proof of bad faith.

         There's more. Defendants used a cleanup tool called CCleaner on their corporate computers.[49] Permanently erasing data using CCleaner in the middle of a lawsuit is grounds for severe sanctions.[50] CCleaner does not automatically erase data; to do so, a user must take a host of deliberate steps.[51] One step is clicking “OK” when asked, “This process will permanently delete files from your system. Are you sure you wish to proceed?”[52] CCleaner erases all traces of deleted files (called “metadata”[53]), leaving a unique pattern of symbols on a hard drive.[54]

         That pattern appears on Todd Mardis's hard drive, [55] and probably appears on Kim Mardis and Donna Carter's hard drives.[56] It is unclear when the patterns on Todd Mardis's hard drive were created, as he erased his software installation records.[57] What is clear is that Kim Mardis installed and ran CCleaner on February 19, 2016[58] - days after TLS asked Defendants to save all lawsuit-related data.[59] In the weeks before TLS was scheduled to examine Defendants' computers, Kim Mardis ran CCleaner seven times.[60]

         The evidence that Defendants acted in bad faith - unlike the evidence Defendants used to show that all the destroyed data had been backed up - is clear and convincing. Defendants permanently erased data using CCleaner in the face of an ongoing lawsuit. Combined with the other evidence of bad faith data destruction, this shows Defendants to be egregious wrongdoers.

         5. Is Default ...

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