Court Sends a Signal to Defendants Over Use of Ephemeral Messaging After Duty to Preserve: eDiscovery Case Law

See what I did there!  😉  In Fed. Trade Comm’n v. Noland, No. CV-20-00047-PHX-DWL (D. Ariz. Aug. 30, 2021), Arizona District Judge Dominic W. Lanza, citing the individual defendants’ “deeply troubling” “systematic efforts to conceal and destroy evidence”, granted the FTC’s motion for spoliation sanctions over the defendants’ use of ephemeral messaging app Signal and encrypted email platform ProtonMail upon learning of the FTC’s investigation, awarding an adverse inference instruction for the defendants’ intent to deprive the FTC of that evidence.

Case Background

In May 2019, Defendant James Noland discovered, via the inadvertent disclosure of a bank subpoena, that the FTC was conducting an investigation of him and his business, Success By Health (“SBH”). Later that month, when the FTC learned its investigation was no longer covert, it specifically advised Noland and SBH to preserve relevant documents.  Instead, the day after learning about the FTC’s investigation, Noland instructed the other members of SBH’s leadership team to start using ephemeral messaging platform Signal and encrypted email platform ProtonMail. After doing so, those individual defendants stopped using their previous messaging platforms for work-related communications, apparently turned on Signal’s “auto-delete” function, and then proceeded to exchange “an untold number” of messages related to SBH’s business.

In January 2020, after completing its investigation, the FTC filed the action. At the same time, the FTC sought and obtained a temporary restraining order (“TRO”) that, among other things, appointed a receiver to assume control over SBH, required the Individual Defendants to produce their electronic communications, and required the Individual Defendants to turn over the mobile devices they had used to operate the business. Notwithstanding these orders, the Individual Defendants did not initially turn over their mobile devices and did not produce any Signal communications. Additionally, during a post-TRO deposition, Noland failed to disclose the Signal and ProtonMail accounts in response to direct questioning about the existence of any encrypted communications platforms.

It was subsequently discovered that Noland used his ProtonMail account to provide third-party witnesses with what was described as a script to follow when drafting declarations the Individual Defendants wished to submit in support of their defense (only identified when one of the recipients anonymously disclosed them to the FTC).  And, in August 2020, just as they were about to finally turn over their mobile devices for imaging, the Individual Defendants deleted the Signal app from their phones in coordinated fashion. Neither side’s forensic specialists were able to recover any of the Signal communications the Individual Defendants sent and received between May 2019 and August 2020.  As a result, the FTC sought an adverse inference against the Individual Defendants pursuant to Rule 37(e)(2) of the Federal Rules of Civil Procedure based on their intentional spoliation of evidence.

Judge’s Ruling

The Individual Defendants asserted that they switched from WhatsApp and iOS to Signal in May 2019 for an innocent reason— to avoid the hacking, eavesdropping, and infiltration efforts of former SBH associate and that Noland’s failure to disclose the use of Signal and ProtonMail was due to his being cut-off by FTC counsel before he could provide that information, but Judge Lanza disagreed, stating:

“The FTC has easily carried its burden of showing that the Individual Defendants acted with the intent to deprive the FTC of the information contained in the Signal and ProtonMail messages. The most decisive factor is the timing of the installation and use of Signal and ProtonMail. The Individual Defendants installed these apps in late May 2019, one day after Noland discovered the FTC was investigating him and SBH. The Individual Defendants would have the Court believe this timing was a coincidence—they happened to install elaborate encrypted privacy-focused apps immediately after discovering they were the subject of an FTC investigation because, around that same time, they noticed hacking attempts from Curry and his fellow “saboteurs.” This explanation is incredible. Apart from the Individual Defendants’ testimony, there is no documentary or other evidence supporting the notion that the Individual Defendants were being hacked at this time.”

Continuing, Judge Lanza stated: “The plausibility of this explanation is further undermined by Noland’s failure to disclose the existence of the Signal or ProtonMail accounts during his February 2020 deposition, despite being asked targeted questions on this exact topic. If the switch to these accounts was part of an innocuous effort to avoid hacking, Noland could have easily said so. His failure to do so raises the inference that the motivation for switching to the accounts was more nefarious.”  He also rejected Noland’s contention that he was cut-off by FTC counsel during the deposition, stating: “The deposition transcript contains no evidence of confusion or an interruption, Noland also failed to disclose the accounts in response to a later question about encrypted communications, and Noland made no effort to correct the transcript after the deposition was complete.”

As a result, Judge Lanza, stating that “[t]he Individual Defendants’ systematic efforts to conceal and destroy evidence are deeply troubling and have cast a pall over this action”, granted the FTC’s motion for spoliation sanctions, awarding an adverse inference instruction for the defendants’ intent to deprive the FTC of that evidence.

So, what do you think?  Should the FTC have gone for terminating sanctions like those awarded in this case?  Please share any comments you might have or if you’d like to know more about a particular topic.

Case opinion link courtesy of eDiscovery Assistant, an Affinity partner of eDiscovery Today.  See Kelly discuss this case on today’s ACEDS #caseoftheweek broadcast here!

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