Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. Jan. 26, 2024) (Laster, V.C.)

In this opinion, the Court of Chancery imposed sanctions on defendants for failing to take reasonable steps to preserve text messages.

In May 2017, Sanofi S.A. (“Sanofi”) expressed interest in buying Bioverativ, Inc. (the “Company”).  The board declined the offer.  Days later, a hedge fund controlled by one of the directors, Alexander Denner, Sarissa Capital (“Sarissa”) purchased more than a million shares of Company stock.  In October 2017, Sanofi expressed interest in purchasing the Company again, and Denner invited Sanofi to bid.  Denner then served as lead negotiator to broker a deal between the Company and Sanofi.  The Company announced the transaction in January 2018.

Shortly after the transaction was announced in February 2018, the Company circulated a litigation hold, which Denner received.  The hold specifically mentioned preserving text messages.  In September 2019, the SEC served subpoenas on Denner and Sarissa, and Sarissa circulated a litigation hold.  The general counsel for Sarissa stated that he went through Denner’s phone for text messages at this time and found no texts responsive to the subpoena.  Outside counsel for Sarissa agreed to “table any collection of mobile data/text messages” as a result.  Sarissa’s litigation hold also went to the fund’s general counsel and head trader.  No steps were taken to preserve texts for Denner, the fund’s general counsel, or the fund’s head trader.  In September 2020, Sarissa’s general counsel dropped his phone in a pool and had it repaired as a result.  The general counsel said he believed he lost all texts from before the repair as a result, although the Court noted that texts were lost after the date of the repair as well.  Furthermore, Denner lost all texts from before October 2021 for unknown reasons, which he stated might be due to upgrading his iPhone model.  The Court believed “[t]hat would be bizarre, because Apple facilitates upgrades by transferring data to the new iPhone from the cloud.”  In December 2020, the plaintiff filed this case in the Court of Chancery.  In connection with the litigation, defense counsel did not take steps to preserve text messages until after the plaintiff raised texts as an issue and other parties produced responsive texts with Denner.  Nor did defense counsel conduct formal custodian interviews. 

The Court adopted the framework federal courts have established under Rule 37(e) to analyze the question of spoliation.  First, the Court noted that there was a duty to preserve the texts at least as soon as the Company issued the first litigation hold in February 2018.  Second, the Court noted that relevant texts were lost and could not be obtained from another source.  Third, the Court determined that the texts were lost due to failure to take reasonable steps to preserve the data.  In particular, the Court observed that the parties did not disable auto-delete functions on relevant phones after receiving the litigation hold.  Sarissa’s head trader left his phone settings to automatically delete texts after thirty days.  The Court also noted that Denner and Sarissa did not image or backup phones for relevant custodians after the first litigation related to this case began in 2018.  Further, the Court noted that counsel relied on a “manual self-collection by an inferably interested party” when Sarissa’s general counsel searched Denner’s phone to determine whether Denner had relevant texts, instead of conducting custodian interviews and searching all appropriate sources of data.  The Court observed that if the parties had imaged or backed up the relevant phones after receiving the litigation holds relevant to this case, or in response to the litigation being filed, relevant texts would not be lost.  Finally, the Court concluded that defense counsel failed to provide timely and candid information on texts to the plaintiff during discovery.  As a result, the Court ordered sanctions in the form of rebuttable presumptions against defendants at trial, a higher burden of proof for the defendants, and fees and expenses incurred by the plaintiff in connection with this issue assessed against defendants.

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