In May 2017, Sanofi, S.A. expressed interest in purchasing Bioverativ, Inc. (the Company) at a share price representing a 64% premium to the trading price. The Company’s board declined Sanofi’s offer. In the days following the Company’s refusal, Sarissa, a hedge fund controlled by Company director Alexander J. Denner, purchased over a million shares of the Company. Sanofi continued to approach Denner, and eventually, in November 2017, the Company’s board began negotiating with Sanofi. The transaction was announced in January 2018.
The defendants received three litigation holds in connection with the transaction: (1) a February 2018 hold from the Company after shareholders filed a derivative suit in response to the transaction’s announcement; (2) a March 2018 hold from Sanofi; and (3) a September 2019 hold from Sarissa after Denner and Sarissa received SEC subpoenas. Each of the three holds specifically instructed recipients to preserve potentially relevant text messages.
The plaintiff sued in December 2020, but the defendants did not take any steps to preserve or collect relevant documents or communications until November 2021, after their motion to stay discovery was denied and after the plaintiff questioned the lack of text messages produced by the defendants, given that other parties had produced text messages with Denner. The defendants responded that there were no responsive texts on phones belonging to any of Denner, Sarissa’s general counsel, or Sarissa’s head trader because Denner lost all of his text messages in October 2021, when he upgraded to a new iPhone; the general counsel lost all of his text messages after his phone was repaired after falling into a pool; and the head trader’s phone was set to delete messages every 30 days. The plaintiff moved for sanctions against the defendants for spoliation of evidence.
Court of Chancery Rule 37(e) largely tracks Federal Rule of Civil Procedure 37(e), except, as relevant here, requires the court to find that “the party acted recklessly or with the intent to deprive another party of the information’s use in the litigation.” The Court applied Court of Chancery Rule 37(e)’s four-step framework to find that the defendants spoliated the text messages and impose sanctions.
First, the Court concluded that the defendants had a duty to preserve their text messages at least as early as February 2018, when the first litigation hold was circulated, but noted that the defendants’ duty arguably arose much earlier, perhaps as early as Sanofi’s initial May 2017 outreach to Denner.
Second, the Court concluded that the text messages were “lost” because they were irretrievable from any source. The plaintiff could not collect the texts directly from the defendants, and the plaintiff’s attempts to retrieve the texts from third parties were unsuccessful.
Third, the Court concluded that the text messages were lost due to the defendant’s failure to take reasonable steps to preserve the text messages, such as by imaging phones or backing up data. The Court also expressed skepticism regarding Denner’s and DiPaolo’s explanations for the loss of their texts, reasoning that features, such as Apple’s iCloud, should have preserved the text messages.
Finally, the Court found that the plaintiff was prejudiced by these losses because the plaintiff could not use the evidence to prove its affirmative case or to cross-examine defense witnesses.
The sanctions imposed included: (1) rebuttable presumptions against the defendants; (2) the imposition of a higher burden of proof on the defendants (clear and convincing evidence, as opposed to the standard preponderance of the evidence); and (3) an monetary award of the fees and expenses plaintiff incurred in connection with this issue. The Court explained that the rebuttable presumptions were appropriate sanctions under Rule 37(e)(2) because the defendants acted at least recklessly with regard to their discovery obligations.
This case highlights the importance of preserving electronic records, including text messages, that may be relevant to litigation, particularly in the merger context where litigation often follows transactions involving publicly traded companies. The court also explained that counsel must test the accuracy of a client’s response to document requests to ensure that all appropriate sources of data have been searched and that responsive information has been collected and preserved.
Authored by Allison M. Wuertz, Jordan Teti, Sean MacDonald, and Molly Balan.
