4th Circuit vacates $10M award based on ‘spoliation’

An Alexandria federal district court abused its discretion by imposing a too-broad preservation duty on a travel agency suing on an oral contract, prompting a federal appeals court to vacate the lower court’s award of $10 million for lost profits.

A magistrate judge in the case had told the parties that once litigation began, the defendants “had a duty to stop its document retention policies” and to “preserve all documents because you don’t know what may or may not be relevant.”

Not so, said the 4^th U.S. Circuit Court of Appeals in Blue Sky Travel and Tours LLC v. Al Tayyar  (VLW 015-2-061).

A “party is not required to preserve all its documents but rather only documents that the party knew or should have known were, or could be, relevant to the parties’ dispute,” wrote Judge Barbara Milano Keenan in the panel’s March 31 unpublished opinion. The court vacated the lost profits award that resulted from the court’s sanction for spoliation: Because the defendant could not produce documents that would allow the plaintiff to establish lost profits, its lost profits would be presumed.

On another legal point, the panel split 2-1 over interpretation of Virginia’s statute of frauds, with the majority agreeing the plaintiff could enforce an oral agreement. A dissenting judge rejected the view that any hypothetical that would allow the contract to be performed within one year was good enough to eliminate the defense against an unwritten agreement.

Profit-sharing promise

The case involved a breach of contract dispute between two travel agencies and their respective principals. The parties disagreed over enforcement of an oral contract governing a profit split in their joint undertaking to buy and sell airline tickets funded by Saudi Arabia for Saudi students’ travel outside the country.

Blue Sky sued Al Tayyar Group, or ATG, for breach of the oral agreement and demanded nearly $2 million for ATG’s alleged failure to reimburse Blue Sky for tickets and service fees. Blue Sky also claimed ATG refused to pay profits it earned after reselling tickets to the Saudi Ministry of Higher Education. Blue Sky alleged that ATG’s principal had promised that around December 2012, ATG would calculate its profits from reselling airline tickets to the Saudi Ministry and pay Blue Sky 50 percent of those profits.

Blue Sky’s complaint stuck to its relationship with ATG, but when discovery got underway, Blue Sky asked ATG to produce invoices showing prices paid by the Ministry for tickets purchased by all 28 additional vendors used by ATG.

ATG balked and Blue Sky moved to compel production. ATG produced 5,000 pages of computer spreadsheets with pricing information on ticket resales, but told the court it had not retained original invoices for the other vendors, after the invoices had been paid by the Ministry.

U.S. Magistrate Judge Ivan D. Davis admonished ATG’s lawyers, telling them that “when this litigation started, the defendants were required by law to preserve. Any document retention policy you had had to be stopped.” He said ATG had “completely failed to fulfill” its “obligation to preserve documents subsequent to initiation of this litigation.”

Davis held the jury would be given an adverse instruction permitting it to presume that ATG made $20 million in profits in reselling to the Saudi Ministry tickets originally purchased by Blue Sky. U.S. District Judge Anthony Trenga upheld the spoliation sanction.

The trial was bifurcated and the court, not the jury, construed the adverse jury instruction sanction to create a presumption applied at the damages hearing, with the court awarding Blue Sky $10 million for lost profits.

Save everything?

The appeals court vacated the lost-profits award, holding that the magistrate judge abused his discretion in applying such a broad document preservation standard. The sanction “created severe prejudice, because the evidentiary presumption effectively relieved Blue Sky of its burden to prove its damages claim for lost profits,” Keenan wrote.

In upholding enforcement of the oral agreement, Keenan, a former justice of the Supreme Court of Virginia, said courts considering a statute of frauds defense “do not examine the actual course of contract performance, but rather undertake a theoretical approach to determine whether the contract is capable of being fully performed by either party within one year.” Under that approach, the contract was enforceable because a single ticket order within one year would have allowed Blue Sky to perform under the agreement.

The court affirmed enforcement of the agreement and the nearly $2 million damage award, but vacated the profit-based damages award and remanded for further proceedings.

Judge Dennis W. Shedd agreed with the spoliation decision but said the district court and the panel majority “misread Virginia law,” which does not allow “any contingency to be ‘conjured up’ to remove a contract from the statute.”

There “is simply no way that either party could fully perform its obligations” under the contract within one year, Shedd said.