Oy Vey! Court attempts to define degrees of unacceptable ediscovery conduct and fashions a problematic adverse jury instruction in the process

January 28th, 2010 | By Steve Puiszis

Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC, 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010)

Pension Committee is an ediscovery opinion that is sure to garner a lot of attention. The opinion was written by Judge Shira Sheindlin, who authored the Zubulake decisions. Judge Scheindlin includes a subheading in Pension Committee that her decision is: “Zubulake Revisted: Six Years Later.” While noting that “[c]ourts cannot and do not expect that any party can meet a standard of perfection,” she nonetheless concludes “courts have a right to expect that litigants will take the necessary steps to ensure that relevant records are preserved when litigation is reasonably anticipated.”

In Pension Committee, ninety-six investors brought suit claiming the violation of federal securities law seeking to recover $550 million dollars in losses stemming from the liquidation of two British Virgin Island based hedge funds. Shortly after being retained, counsel telephoned and emailed the plaintiffs to begin document collection and preservation. Besides calling and emailing the clients, counsel also distributed memoranda instructing the plaintiffs to be over-inclusive, rather than under-inclusive in their efforts and noting that emails and electronic documents should be included in the production. After suit was filed, a stay of discovery was issued pursuant to the Private Securities Litigation Reform Act. However, a formal written litigation hold was not issued until after the discovery stay was lifted several years later. After discovery commenced, gaps were found in plaintiffs’ document productions, which prompted a motion for sanctions asserting plaintiffs failed to properly preserve and produce documents and electronically stored information.

Monetary sanctions were awarded against thirteen plaintiffs in Pension Committee for failing to timely issue a written litigation hold. An adverse inference instruction was also issued against a smaller group of plaintiffs found to be grossly negligent for engaging in “careless and indifferent collection efforts after the duty to preserve arose.”

A plaintiff’s duty to preserve evidence is typically triggered before a lawsuit commences because the duty is triggered when a party reasonably anticipates litigation and the plaintiff controls the decision to file and the timing of the suit. Judge Sheindlin concluded that counsel’s initial instructions did not meet the standard for a litigation hold because they did not direct the plaintiffs’ employees “to preserve all relevant records – both paper and electronic” and because they did not “create a mechanism for collecting the preserved records so that they could be searched by someone other than the employee.”

The court was also critical of placing “total reliance on the employee to search and select what the employee believed to be responsive records without any supervision from counsel.” Ultimately, the court found the conduct of several plaintiffs to be grossly negligent because they failed to execute a comprehensive search of documents and/or failed to sufficiently supervise or monitor their employee’s document collection efforts.

Pension Committee is remarkable for Judge Scheindlin’s attempt to define degrees of unacceptable conduct in an ediscovery context. When the most severe sanctions for spoliation are sought, e.g. dismissal or the issuance of an adverse inference instruction, a court must consider whether the missing evidence was “relevant” and whether the party seeking the sanctions suffered any prejudice as a result of the loss. However, relevance and prejudice may be presumed when the spoliating party acted in bad faith or in a “grossly negligent” manner. Thus, whether a court labels a party’s alleged discovery failures as negligent or grossly negligent will impact the availability of terminating sanctions or the issuance of an adverse inference instruction as well as the burden of proof required to obtain those sanctions. Acknowledging that concepts of negligence, gross negligence and willfulness have no clear definition in the context of discovery misconduct, the approach Judge Scheindlin proposes to define these terms itself proves to be problematic.

Conflict with the Advisory Committee Notes to Rule 26(g).

After announcing her original opinion criticizing counsel’s failure to supervise the client’s collection efforts, Judge Scheindlin withdrew that decision and replaced it with an amended opinion in which she added “not every employee will require hands on supervision from an attorney. However, attorney oversight of the process, including the ability to review, sample and spot-check the collection efforts is important.” While softening the duty imposed on an attorney to monitor a client’s collection and production efforts, the decision nonetheless still appears to go well beyond the “reasonable inquiry” approach historically espoused in the Advisory Committee Notes to Rule 26(g) which provide: “The duty to make a ‘reasonable inquiry’ is satisfied if the investigation undertaken by the attorney and the conclusions drawn therefrom are reasonable under the circumstances.” The Notes further state: “In making the inquiry, the attorney may rely on the assertions by the client and on communications with other counsel in the case as long as that reliance is appropriate under the circumstances.” The Notes highlight that an attorney’s signature “certifies that the lawyer has made a reasonable effort to assure that the client has provided all the information and documents available to him that are responsive to the discovery demand.”

Generalizations about degrees of unacceptable ediscovery failures should be avoided.

Initially, Judge Scheindlin cites Prosser & Keeton’s venerable treatise on Torts in an attempt to delineate negligence from gross negligence and willful misconduct in an ediscovery context. However, that treatise undermines her approach because it explains: “Although the idea of ‘degrees of negligence’ has not been without its advocates, it has been condemned by most writers … as a distinction ‘vague and impracticable in [its] nature, so unfounded in principle,’ that it adds only difficulty and confusion to the already nebulous and uncertain standards which must be given to a jury.” Prosser & Keeton on Torts §34 at 210. That treatise further provides “[t]here is no generally accepted meaning” to the term gross negligence. Id. at 212.

Moreover, the Seventh Circuit in Archie v. City of Racine, 847 F.2d 1211, 1219 (7th Cir. 1988), concluded that a line could not be clearly drawn between negligent and grossly negligent conduct explaining:

Gross negligence blends into negligence; there is an indistinct and unusually invisible line between benefits exceeding the costs of precautions (negligence) and benefits substantially exceeding the costs (gross negligence). The malleable quality of these terms has produced scoffing among many, who see gross negligence as simply negligence “with the addition of a vituperative epithet.”

Thus, the applicable standards are not only vague and nebulous, but the distinction between negligence and gross negligence is also unworkable. Judge Scheindlin further acknowledges that the decision to award sanctions is “inherently subjective” and recognizes that discovery misconduct “cannot be measured with exactitude and might be called differently by a different judge.” She also notes: “Each case will turn on its own facts and the varieties of efforts and failures are infinite.” Because any sanctions inquiry by necessity requires a fact-driven approach, the search for consensus as to what type of conduct constitutes gross negligence as opposed to mere negligence, is like searching for the pot of gold at the end of the rainbow, enticing, but always out of reach.

In Judge Scheindlin’s view, once conduct is found unacceptable “the only question is how bad is the conduct.” While acknowledging that the terms negligence and gross negligence have no generally accepted meaning in a discovery context, Judge Scheindlin notes they “describe a continuum.” As an abstract principle she is right, but given the endless varieties of information systems and document retention practices, these concepts are context specific and generalizations should be avoided. Judge Scheindlin recognizes these points when she writes: “while it would be helpful to develop a list of relevant criteria a court should review in evaluating discovery conduct, these inquiries are inherently fact intensive and must be reviewed case by case.”

Nevertheless, she expresses the view that “[a]fter a discovery duty is well established, the failure to adhere to contemporary standards can be considered gross negligence.” She then states that under this contemporary standards approach, when a duty to preserve is triggered, the failure to: 1) issue a written litigation hold; 2) identify the key players and ensure their electronic and paper records are preserved; 3) cease the deletion of email or to preserve the records of former employees; and 4) preserve backup tapes when they are the sole source of relevant information or when they relate to key players if their relevant information is not obtainable from readily accessible sources, will support a finding of “gross negligence.”

In addition to the problems noted above, another difficulty with the contemporary standards approach to defining gross negligence in this context is that most ediscovery decisions are decided at the district court level. However, district court decisions are not considered precendential and do not clearly establish the law. See, e.g., Anderson v. Romero, 72 F.3d 518, 525 (7th Cir. 1995) (explaining district court decisions are “not authoritative as precedent, and therefore, do not establish the duties of nonparties”); Futuresource, LLC v. Reuters. Ltd., 312 F.3d 281, 283 (7th Cir. 2002) (observing “[t]he reasoning of district judges is of course entitled to respect, but the decisions of district judges cannot be controlling”); Colby v. J.C. Penny, 811 F.2d 1119, 1124 (7th Cir. 1987) (concluding district court judges “must not treat the decisions of other district judges … as controlling”).

Additionally, the proposed contemporary standards view of gross ediscovery negligence from Pension Committee fails to give any consideration to Rule 26(b)(2)(C)’s proportionality standard that applies to all discovery efforts under the federal rules. The Seventh Circuit’s Electronic Discovery Pilot Program has developed a series of principles which have been codified into a standing order. Principle 2.04, entitled Scope of Preservation, provides that parties “are responsible for taking reasonable and proportionate steps to preserve relevant and discoverable ESI.” One of our recent posts addresses Principle 2.04(d), which identifies categories of ESI that are not generally discoverable in most cases. Principle 2.04(e) requires that in the event of a dispute concerning the scope of a party’s preservation efforts, the parties must meet and confer to explain their reasons for believing that “additional efforts are not reasonable and proportionate pursuant to Rule 26 (b)(2)(C).

Take the two examples outlined below and ask for example, whether a failure to identify all key players amounts to gross negligence. The first example involves a family-owned business with a relatively small work force that has a practice of retaining all paper and electronic documents and emails. Contrast that small company that retains everything, with a Fortune 100 corporation that has a sophisticated IT department and follows a practice of automatically deleting all emails after 120 days unless they are moved to a folder by an employee. I can see how the failure to identify key employees in the later scenario could potentially result in the loss of information but not the former. Moreover, is Judge Scheindlin correct when she writes, “the failure to issue a written litigation hold constitutes gross negligence because the failure is likely to result in the destruction of relevant information,” in both of the examples described above? With the small company that has a practice of retaining everything, I think not. In the Fortune 100 scenario, a written litigation hold and even more may be advisable because the risk of loss is much greater. So, generalizations should be avoided even when from an esteemed Judge as Judge Scheindlin. Attempts to define ediscovery conduct that is negligent or grossly negligent simply should not be separated from the information system and data retention context in which that conduct occurs.

Obviously, attorneys should endeavor to issue written litigation hold directives in their cases. However, should such a failure occur, the totality of the circumstances should be examined before any conclusions are drawn or labels affixed to that failure.

Adverse inference instruction may result in a mini-trial about discovery failures.

Perhaps even more problematic for trial attorneys is the adverse inference instruction that will be given to the jury in Pension Committee as to those plaintiffs found to be grossly negligent. That adverse inference instruction allows the jury to decide if the missing evidence was “relevant” and would have been favorable to the defendants. In making those determinations, the jury is permitted to take into account the “egregiousness of the plaintiffs’ conduct in failing to preserve the evidence.” You can read that instruction here. That instruction will likely shift the jury’s focus from the merits of the plaintiffs’ claims to their efforts to preserve and produce relevant information.

While the court provided plaintiffs with the opportunity to rebut the adverse inference, wouldn’t a better approach allow the plaintiffs this opportunity at a pretrial hearing rather than at trial? Generally, evidence must be relevant to be admissible. Even relevant evidence may be excluded when the danger or prejudice or confusion outweighs its probative value. Typically, a judge makes these rulings, but that all changes with this instruction. The role of the judge is taken over by the jury which must determine whether the missing evidence is relevant. If evidence is not relevant, it should not be presented to the jury, missing or not. And, the test for relevancy in this context “means something more than sufficiently probative to satisfy Rule 401 of the Federal Rules of Evidence. Residential Funding Corp. v. De-George Fin. Corp., 306 F.3d 99, 108-09 (2d Cir. 2002). How is a jury supposed to make that determination? The proposed instruction provides no guidance. A mini-trial about the missing evidence and the parties attempts to preserve it will ensue, making a difficult case even more problematic to try.

In Pension Committee, the defendants were permitted to take discovery about the missing discovery and with the proposed instruction, now a trial about that missing discovery. How is that approach consistent with Rule 1 of the Federal Rules of Civil Procedure, which requires they be “construed and administered to secure the just, speedy and inexpensive determination of every civil action and proceeding”?

Practical ediscovery tip: In light of Judge Scheindlin’s view that the failure to identify key players and preserve their information constitutes “gross negligence,” be sure to cover this issue with opposing counsel at your initial Rule 26 conference. If opposing counsel agrees on those data custodians or key persons whose information should be preserved and produced, counsel will be hard pressed to later claim that additional persons should have been included.

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