One of the limitations in the protection provided by Fed.R.Civ.P. 37(e)’s “Safe Harbor” provision is that it ostensibly only applies to ediscovery sanctions “under these rules.” For that reason, I have referred to Rule 37(e) as a “wading pool,” rather than a safe harbor. So, when a court points to Rule 37(e) as a basis for exercising restraint when sanctions are sought under the court’s inherent authority, it bears highlighting.

Grubb involved a claim brought by a former professor at the University of Illinois that the University violated the Computer Fraud and Abuse Act when it accessed a laptop computer he had been using in order to remove University software. That laptop was not owned by the professor but rather by the American Board of Orthodontics (“ABO”), and allegedly contained personal and sensitive information as well as testing data and private patient information. After plaintiff filed suit, ABO gave him a new laptop to use and he returned the one that was involved in his claim against the University. Subsequently, ABO “wiped” the hard drive of that laptop. When the University learned of this development, it filed a motion which sought terminating sanctions under the court’s inherent authority arguing that plaintiff had permitted the destruction of evidence relevant to his claim. The University contended that plaintiff had allowed the spoliation of evidence to occur which rendered it impossible to refute the plaintiff’s Computer Fraud and Abuse claim.

In rejecting the University’s claim for sanctions, the district court noted that in Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991), the Supreme Court warned that a court’s use of its inherent powers “must be exercised with restraint and discretion.” Pointing to Fed.R.Civ.P. 37, the district court observed “restraint seems imminently sensible given the content of the federal rules.”

The district court in Grubb also pointed to the plaintiff’s lack of computer expertise as a basis for exercising restraint. The court noted that plaintiff’s computer expertise, “like most people, falls somewhere in that broad swath between technophobe and technophile.” Taking a common-sense approach to the issue, the district court aptly noted, “it cannot be said that everyday people would possess an understanding of how data are stored and how access history can be reconstructed (or destroyed).” Because plaintiff testified that while he knew how to turn on his laptop but little else about how computers work, the court had little difficulty in concluding that plaintiff did not take any actions for the purpose of hiding adverse information.

The court’s decision in Grubb should be contrasted with Green v. McClendon, 2009 WL 2496275 (S.D.N.Y. Aug. 13, 2009) where a defendant’s lack of computer expertise did not save her from the imposition of sanctions. The Green decision was critically analyzed in one of our prior posts, which can be found here. The outcomes reached in these decisions underscore the practical reality that parties and counsel now face – that the outcome of an ediscovery sanctions motion frequently turns on the approach generally taken in a given district court and by a given district court judge in particular. While uniformity will never be achieved, a more consistent approach would certainly ease the burdens of ediscovery on clients and their counsel, and is one of the reasons why various organizations are pushing to have the federal ediscovery rules amended.

Today’s post involves the sorry tale of a foreign company that failed to properly issue a litigation hold and allowed the deletion of emails to occur after suit was filed. To make matters worse, at an evidentiary hearing, the company’s CEO admitted that certain responsive documents that he felt were immaterial were not produced. The CEO also testified that because the plaintiff’s discovery requests were so disproportionate, he did nothing to preserve documents relating to the manufacture and sale of the product in question. The district court concluded the defendant’s conduct in failing to issue any type of litigation hold amounted to gross negligence and that the defendant’s search for responsive documents fell well below the minimum standard that a reasonably prudent person would use.

The court in Gnosis noted that in several discovery conferences, counsel for the defendant asked that the scope of plaintiff’s discovery be limited, but the court denied those requests because they were never properly raised. The court was also critical or counsel’s failure to supervise the client’s search for responsive documents and counsel’s failure to investigate the accuracy of plaintiff’s assertions that the defendant’s production was incomplete. At several points during an ongoing discovery dispute, counsel mistakenly represented to the court that the plaintiff was accusing the defendant of not producing documents that it had produced. Once the issue was properly investigated, counsel realized the error, and additional documents were promptly sent to the plaintiff. However, counsel waited for over a month after learning of the error, until the morning of an evidentiary hearing on that discovery dispute, to advise the court about counsel’s mistaken representation.

It should come as no surprise that the district court imposed sanctions in the form of costs and attorney’s fees that plaintiff expended in compelling defendant’s compliance with its discovery obligations. Additionally, the court imposed a $25,000 fine to deter future misconduct and “to instill in defendants some modicum of respect for the judicial process.”

The district court, however, elected not to apportion liability for those sanctions between the defendant and its counsel “under the belief they are best suited to make that decision.” The court indicated it would only intercede if the defendants and their counsel “are unable to agree on apportionment of these sanctions.” The court explained that to apportion the sanctions award between defendant and its counsel would require the disclosure of information that “could compromise attorney-client confidentiality.”

While the court’s desire to preserve the integrity of the attorney-client privilege is laudable, its order created an ethical dilemma for defense counsel and potentially drove an ethical wedge into the attorney-client relationship. Unless an attorney and client immediately agree that only one of them is solely responsible for such a sanction, the attorney should carefully evaluate whether Rule 1.7(a) of the Model Rules of Professional Conduct has been triggered. Rule 1.7(a) provides that a lawyer shall not represent a client if the representation involves a “concurrent” conflict of interest. It further explains that a concurrent conflict exists if there is a significant risk that the representation of the client will be materially limited by the personal interest of the lawyer. Comment 8 to Rule 1.7 notes that even when there is no direct adversity, “if a significant risk exists that a lawyer’s ability to consider, recommend or carry out an appropriate course of action for the client will be materially limited as a result of the lawyer’s other responsibilities or interests,” a conflict exists. Any lawyer subject to the type of sanction’s order entered in Gnosis would be personally interested in its outcome, and a claim could be made that it would be difficult to give “detached advice” under the circumstances. Thus, the specter of Rule 1.7(a) is arguably triggered by the sanctions order entered in Gnosis.

While this type of potential conflict can be waived by the client, it requires the lawyer to clearly identify and explain the nature of the conflict (in writing) to the client and obtain the client’s informed consent. This requires an explanation of the reasonably foreseeable ways the conflict could have an adverse effect on the client’s interests. Additionally, Model Rule 1.8(a) explains that the client should be informed in writing that the client may seek the advice of independent legal counsel on the transaction and be given a reasonable opportunity to obtain separate counsel to decide if the conflict should be waived. Accordingly, this type of ediscovery sanctions order will likely delay the proceedings and may require the involvement of separate counsel to address the issue.

The Gnosis decision brings into focus two important questions. The first is what should a lawyer do upon learning the client is refusing to follow counsel’s advise on preserving and producing electronically stored information (ESI)? The second is whether in light of the recurring damage being done to the attorney-client relationship as a result of ediscovery sanctions, are amendments to the federal ediscovery rules warranted, or is there a reasonable alternative to attorney sanctions that would adequately insure the attorney fulfills his ediscovery obligations to the client?

What should attorneys do when clients refuse to follow their instructions about preserving and producing ESI?

The answer requires a brief review of Rules 1.2 and 1.4 of the Model Rules of Professional Conduct. Rule 1.4(a)(2) requires a lawyer to “reasonably consult with the client about the means by which the client’s objectives are to be accomplished.” Rule 1.2 addresses the allocation of authority between the client and lawyer. Comment 1 to Rule 1.2 requires attorneys to consult with the client about the “means” to accomplish the client’s desired objectives as required by Rule 1.4(a)(2) and provides the lawyer “may take such as action as impliedly authorized to carry out that representation.” In an ediscovery context, this means that once the client has been properly advised about its obligations to preserve and produce ESI, the attorney is obligated to abide by the client’s decision on those issues. Hopefully, the client follows the attorney’s recommendations, but when that does not occur, what are the attorney’s options?

Rule 1.2 permits the scope of services provided by a lawyer to be limited by agreement with the client. Comment 6 to that Rule explains that such a limitation “may exclude actions the client thinks are too costly.” So a Fortune 500 company, with experienced general counsel staff and a large IT department, could advise its outside counsel that it will handle all ediscovery preservation and production in-house in order to limit the company’s ediscovery costs. Such an arrangement is permissible under Rule 1.2. However, when that occurs, the attorney should consider modifying the engagement letter with the client to reflect the limitation in the services being provided the client.

Outside counsel should also explain to the client that some courts, like in Gnosis, have imposed a duty on outside counsel to supervise the client’s search for responsive documents, notwithstanding statements in the Advisory Committee Notes to Fed. R. Civ. P. 26(g) that when making a “reasonable inquiry,” an attorney “may rely on assertions by the client” so long as that reliance “is reasonable under the circumstances.” The attorney should consider discussing with any client taking over responsibility for ediscovery preservation or production, that in the event an ediscovery sanctions motion should be filed which is directed at the lawyer or both client and the lawyer, a conflict may arise. The lawyer will have an obvious interest in explaining why sanctions should not be imposed on him under the circumstances.

Comment 22 to Model Rule 1.7 explains that a lawyer may request the client “to waive conflicts that might arise in the future,” but explains the “effectiveness of such waivers is generally determined by the extent to which the client reasonably understands the material risks that the waiver entails.” It further explains that where the client is an experienced user of legal services and “is reasonably informed about the risk that a conflict might arise, such consent is more likely to be effective.” Moreover, where the “client agrees to consent to a particular type of conflict with which the client is already familiar,” Comment 22 provides that such “consent ordinarily will be effective with regard to that type of conflict.” Recognize however, that in this context, consent given to general or open ended waiver of future conflicts runs the risk of being judged ineffective because the conflict was not adequately explained and thus, the client can claim it did not understand the material risks involved with the waiver. So if an attorney heads down this path, carefully outline in writing for the client all of the reasonably foreseeable risks associated with this type of arrangement.

What should the lawyer do when a client refuses to waive a future conflict in the type of scenario noted above, or when the lawyer learns that a client has refused to follow his advise as to how ESI should be preserved or produced? In some cases, where the client has a knowledgeable general counsel, talk the issue through and attempt to reach an accommodation. Otherwise, the attorney should give serious consideration to withdrawing from the client relationship. In baseball, there is an old adage that a groundball will find a weak infielder. The same analogy is true with ediscovery. A sanctions motion will inevitably find its way to the doorstep of the attorney whose client has failed to properly preserve or produce ESI.

Some clients are simply not worth the time and trouble that a sanctions motion will entail. Fights over privileged communications will occur. The lawyer’s conduct, in addition to the client’s, will likely be put under the microscope. When the client refuses to follow the attorney’s advice, and that advice would have obviated the sanctions motion, a conflict between the attorney and the client’s interests exists and as explained above, Rule 1.7 must be consulted. Consequently, the lawyer should consider at the outset whether those issues are worth it and act accordingly when a client refuses to follow the attorney’s advice.

Are rule amendments or consideration of alternatives to attorney sanctions warranted?

Given the prevalence of ediscovery sanctions as referenced in our last post, we hope the Standing Committee will consider amendments to the federal ediscovery rules at its May 2010 conference at Duke University. One type of rule amendment that will generally help limit ediscovery sanctions is to adopt the approach taken by Principle 2.04 of the Seventh Circuit’s Electronic Discovery Pilot Program. Principle 2.04 recognizes that there are certain categories of ESI that are generally not discoverable in most cases, and where a party intends to request the preservation or production of those categories of information, that desire should be promptly brought to the attention of the opposing party and its counsel. If such a request is not made, then sanctions should not be available for failing to preserve those categories of information.

However, a broader question is what role should attorney sanctions play in an ediscovery context in civil litigation? Historically, when lawyers and judges operated in the world of paper discovery, perfection was not expected. Also, it was never an attorney’s duty to preserve discoverable documents; that was the client’s obligation. And, as noted above, even when the federal rules were amended to include Rule 26(g), an attorney could rely upon the reasonable representations of the client in complying with the attorney’s duty of “reasonable inquiry.”

Now that we have entered into the digital era, an attorney’s duty to advise the client has morphed into a duty to preserve ESI. The transformation of the attorney’s historical duty to advise the client into a duty to preserve has created innumerable harms to the attorney/client relationship and our civil justice system. The relative ease that the attorney-client privilege can be lost, discovery about discovery and satellite ediscovery sanctions litigation has become prevalent under the federal ediscovery rules. All of this is driving up the cost of discovery.

At a recent Sedona Conference, one of the topics discussed was the vanishing jury trial in federal courts and ways to reverse that trend. The answer is simple: to encourage more jury trials, make litigation generally, and discovery in particular, less costly. While that answer is simple, the best approach to accomplish that solution is not so clear cut. However, one point is clear. Ediscovery sanctions and the satellite litigation it is generating is driving up the cost of litigation, which is one of the primary causes of the vanishing jury trial.

As we explained in a prior blog post, the prevailing view in federal court is that once a preliminary showing of spoliation has occurred, the attorney’s otherwise privileged litigation hold letter to the client must be produced. Today’s post, and another recent post, discusses some of the ethical dilemmas that are triggered in an ediscovery context. In what other area of the law must an attorney provide advice to the client under pain of sanctions if the lawyer fails to do so, even though the attorney’s advice could be used as evidence against the client if a preliminary showing of spoliation is made? Have district court judges considered the broader impact of their decisions or the ethical dilemmas they are creating for lawyers in an ediscovery context?

Hopefully, courts will recognize that the attorney’s historical duty is to advise the client, not to preserve the client’s information for it. Obviously, in a digital era, the attorney’s advice has to be different than the advice given when we worked in a world of paper, but it is still advice, and should not be viewed as a duty to preserve information. If courts recognize that the duty to preserve rests with the client and not the lawyer, the damage being done to our civil justice and the attorney/client relationship through the imposition of ediscovery sanctions will be reduced. The marginal utility gained through the imposition of attorney sanctions in an ediscovery context is simply not worth the damage being done to the attorney/client relationship and our system of civil justice.

The views expressed by the author are his alone and do not reflect the views or opinions of Hinshaw & Culbertson LLP.

In Einstein, a trial judge in the Supreme Court of the State of New York recently entered sanctions against several defendants for their failure to implement a litigation hold which resulted in the loss of emails relating to the presale condition of a condominium unit purchased by the plaintiffs in Brooklyn, New York. The trial judge recognized that even though New York had not yet enacted any rules addressing electronic discovery, and that its Civil Practice Law Rules and common law decisions were silent on the need to institute a litigation hold, New York courts have turned to the Federal Rules of Civil Procedure and case law interpreting them for guidance in other contexts.

The crux of the problem in Einstein was the limited storage capacity of the company’s email server. Each of the company’s brokers were allocated 200 megabytes of space, and once that limit was reached, a broker could not send or receive emails until that space was cleared for more email traffic. As a result, brokers had to clear old emails from the system in the ordinary course of their business. Unfortunately, a litigation hold was never instituted, and as a result, emails (several of which the plaintiff’s produced to the defendants) were not preserved. While emails were forwarded through a central server, the company’s email system was configured in such a way that once an email was deleted by an individual user from the user’s inbox, it was also deleted on the central server. While daily, weekly and monthly backup tapes were made of the email server, the daily and weekly backups were periodically reused. Thus, if emails sent or received during a particular month were also deleted during that month, the monthly backup would not capture those deleted emails.

The court concluded the defendants’ counsel and the company’s IT director failed to investigate the basic mechanics of the company’s email system and its retention practices until 11 months after plaintiffs first served their document demands upon the defendants. The court further concluded that defendants were aware of the fact that the contents of their emails would be relevant to the litigation and recalled that it had repeatedly warned defendants about the need to make a complete production of those emails. Accordingly, the court ruled that the defendants’ failure to take any steps “to implement a litigation hold, relying instead on backup tapes that a reasonable investigation would have revealed failed to capture relevant emails deleted manually by individual users,” constituted gross negligence, and warranted a finding of spoliation.

Therefore, the court imposed sanctions in the form of an adverse inference instruction relating to the missing emails, and awarded attorneys’ fees as well as expert costs associated with the review of the defendants’ hard drives.

While admittedly, a trial court decision lacks any precedential value, Einstein amply demonstrates that parties who are sued in state court, even in those states which have not enacted their own set of ediscovery rules, are not immune from ediscovery sanctions. One of our recent posts identified those states which had adopted their own set of ediscovery rules. Outside counsel would be wise to advise their clients of the need to impose a litigation hold in every case in which they are retained, even state-court proceedings, and seek to preserve ESI in state-court litigation. Counsel also would be wise to investigate the client’s email and information systems as well as its paper and electronic retention/destruction policies. Companies and their counsel can no longer safely assume that because a particular state has not enacted its own set of ediscovery rules that the client has no obligation to preserve and produce relevant electronically stored information.

Photo courtesy Flickr user Mike Licht under this Creative Commons license.

View the opinion below or by clicking here.

Einstein_v_357

Wikipedia defines Morton’s Fork as “a choice between two equally unpleasant alternatives (in other words, a dilemma), or two lines of reasoning that lead to the same unpleasant conclusion. It is analogous to the expressions ‘between the devil and the deep blue sea’ or ‘between a rock and a hard place.’” Wikipedia explains that Morton’s Fork is “the opposite of the Buridan’s Ass.” It is similar to a “Catch 22” in that it involves a “no win situation,” but does not involve the use of circular logic.

What is the only area of law where a lawyer is required, under the pain of sanctions, to write a letter and provide advice to a client that potentially can be used as evidence against that client? Where else is “discovery about discovery” becoming the norm, rather than the exception? The answer is the post-Zubulake world of electronic discovery in which we now find ourselves.

Today, if a lawyer fails to issue written litigation-hold instructions, and/or then fails to take appropriate follow-up steps, the lawyer can be sanctioned if electronically stored information (“ESI”) is not properly preserved by the client. While a lawyer’s litigation-hold letters are generally considered privileged, e.g., Muro v. Target Corp. 250 F.R.D. 350, 360 (N.D.Ill. 2007), the court in Major Tours held that they must be produced when a preliminary showing of spoliation has been made. And, when that occurs, a lawyer’s litigation hold letter will invariably be used against the client as evidence that the client failed to heed the lawyers advice.

The court in Major Tours concluded that a duty to preserve was triggered by a letter sent to the New Jersey Attorney General and the Commisioner of the New Jersey Department of Transportation approximately twenty-two (22) months prior to suit being filed. A litigation hold was not issued until after suit was brought, and the court found it was “probable that relevant evidence was lost before the defendants issued their litgation hold.” Thus, in the court’s view, because a preliminary showing of spoliation had been made, the attorney’s litigation-hold letter had to be produced. In other words, the client forfeited the right to assert attorney-client privilege by failing to issue a litigation hold before the attorney’s privleged litgation hold letter was ever sent to the client.

The rationale applied in Major Tours could trigger an ethical dillemma, and the potential for a conflict for outside counsel in future cases when a duty to preserve ESI was arguably triggered before suit was filed, and the client failed to institute a litgation hold at that time. If the lawyer failed to send a litigation hold letter, the lawyer could be sanctioned. However, if the lawyer sends a hold letter and the court follows the approach taken in Major Tours, the attorney’s privileged communication potentially may become discoverable, and be used as evidence against the client. While a party may be entitled to learn what steps an opponent took to preserve ESI once a preliminary showing of spolilation occurs, finding the attorney-client privilege was forfeited in this scenario would appear to be an ill-concieved approach. It triggers for the lawyer a Morton’s Fork – a choice of protecting himself from sanctions knowing that his advice may potentially be used against the client. Thus, does Zubulake’s requirement that a lawyer issue written litgation-hold instructions inevitably create a conflict between the lawyer and his client?

Was a pre-suit duty to preserve ESI triggered?

In our recent “Top Ten” post, we discussed the fact that a duty to preserve ESI can be triggered prior to suit being filed, and the guidance which Judge Grimm in Goodman v Praxair Services attempted to provide by defining when that duty is triggered. As Judge Grimm explained in Goodman, a pre-suit letter, which identifies a dispute and invites the other side to discuss or otherwise negotiate, does not trigger a duty to preserve. However, a letter threatening to bring suit will trigger such a duty. As we explained in that post, distinguishing between an invitation to negotiate from a threat to sue can involve an exercise in “hair splitting.” Major Tours provides an example of how difficult that distinction is to apply.

The letter, which triggered a duty to preserve in Major Tours, complained that African American bus companies were being subjected to discriminatory treatment, suggested the owners were entitled to compensation for the losses they sustained, and requested a response “within two weeks in order to avoid recourse to litigation.” Contrast that letter and the court’s finding that it triggered a duty to preserve with Cache LaPoudre Feeds, discussed in our recent Top Ten post. There, a pre-suit letter notified the defendant that it was infringing on a trademark, and inquired if the defendant was willing to “determine whether the situation could be resolved without litigation and media exposure.” In Cache LaPoudre Feeds, the court held that a duty to preserve was not triggered by that pre-suit letter. 244 F.R.D. at 622. The pre-suit letters in Major Tours and Cache LaPoudre Feeds are not materially different.

It is an understatement to suggest that the standards for determining when a duty to preserve is triggered prior to suit being filed are not well defined. The “reasonable anticipation of litigation” standard is an inherently ambiguous concept. While it is understandable that courts want to encourage parties to preserve information when litigation is reasonably anticipated and when decisions addressing the issue are virtually impossible to reconcile, concluding that attorney-client privilege was forfeited in large part because a litigation hold was not implemented prior to suit significantly harms the profession. Years ago, the Supreme Court in Hunt v. Blackburn, 128 U.S. 464, 470 (1888) explained:

The rule which places the seal of secrecy upon communications between client and attorney is founded upon the necessity, in the interest and administration of justice, of the aid of person having knowledge of the law and skilled in its practice, which assistance can only be safely and readily availed of when free from the consequences or the apprehension of disclosure.

This view of attorney-client privilege is as true now as it was then, and does not change simply because the advise deals with electronic discovery.

New Attorney-Client Privilege Forfeiture Rule

Traditionally, a party is deemed to have waived attorney-client privilege by voluntarily disclosing privileged information to third parties (outside of another privileged context), or by partially disclosing privileged information on a particular subject matter. While the advice of counsel can waive privilege when counsel’s advice is raised as a defense, that defense was not raised in Major Tours, and that was not the basis of the court’s ruling.

The court in Major Tours appears to recognize a new rule for how attorney-client privilege may be lost – by a preliminary showing that spoliation has occurred. Even more troubling is the court acknowledged that it was “difficult to know what evidence was lost during the window of time in which a litigation hold was not put in place.” So based on an inference the court reached, it negated any assertion of privilege. Perhaps the crime-fraud exception would justify the override of the privilege where the attorney’s advise was to not preserve ESI, but again, that was not the case in Major Tours.

Notably absent from the court’s opinion was any explanation for its conclusion. The court simply stated it was adopting “the prevailing view,” and cited three other district court decisions for that proposition. To suggest that a “majority approach” or a “prevailing view” can be divined from three district court decisions where it is unclear if the privilege issue was asserted, and if so how vigorously it was raised, is a statement that should not be taken at face value.

First of all, “[w]hen an issue is not argued or is ignored in a decision, such decision is not precedent to be followed in a subsequent case in which the issue arises.” Nat’l Cable Television Assoc., Inc. v. American Cinema Editors, 937 F.2d 1572, 1581 (Fed. Cir. 1991), citing Webster v. Fall, 266 U.S. 507, 511(1925). Second, while a district court opinion is entitled to respect, it binds no one other than the parties in that case, and it is simply wrong to view a district court decision as precedential. See, e.g., Gould v. Bowyer, 11 F.3d 82, 84 (7th Cir. 1993) (explaining: “And really, such a decision has no precedential effect: a district court decision binds no judge in any other case, save to the extent that doctrines of preclusion (not stare decisis) apply”). See also Colby v. J.C. Penny Co., 811 F.2d 1119, 1123-24 (7th Cir. 1987) (“[d]istrict judges … must not treat decisions by other district judges, … as controlling”).

The privilege is intended “to encourage full and frank communications between attorneys and their clients.” Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). How is the recognition of such a forfeiture rule consistent with the policies underlying attorney client privilege? Will such an approach advance compliance with electronic discovery rules when an attorney’s advice to the client can be lost simply because the client failed to realize a duty to preserve evidence was triggered before suit was filed? Shouldn’t we be encouraging (not discouraging) parties to seek legal advice to comply with these rules? If so, how does the court’s ruling in Major Tours advance that cause?

The federal discovery rules do “not expressly authorize discovery into the efforts a party may make to collect or preserve ESI.” In re eBay Seller Antitrust Litig., 2007 WL 2852364 at *2 (N.D.Cal. Oct. 2, 2007). However, courts have permitted a party to learn what steps an opponent has taken to preserve ESI, and isn’t such a fact based inquiry far superior approach to permitting an attorney’s advice from potentially being used against the client?

So why the picture of Tarzan in this post?

We know you have been wondering we selected the picture of Tarzan for the opening section of this post. Well, it’s not because the character Tarzan combined “the best attributes of civilized man and jungle beast” as one court described him. Rather, it has to do with Morton’s Fork. What’s the connection between the two you ask? Those of you who are copyright lawyers may remember Burroughs v. Metro-Goldwin-Mayer, Inc., 683 F.3d 610 (2d Cir. 1982), where the court discussed the dilemma of Morton’s Fork in a lawsuit brought by the heirs of Edgar Rice Burroughs who wrote the book Tarzan of the Apes. Burroughs is an eloquently written opinion, describing the case as a “literary version of the eternal triangle, the central characters [being] two films and a book.” The plaintiffs claimed that MGM’s 1981 film, Tarzan the Ape Man, infringed their copyright, and breached a 1931 license agreement under which an earlier (1932) film was made. The court in Burroughs concluded there was no infringement because the 1981 film was not substantially similar to the plaintiffs’ copyrighted work, except to the extent permitted under the 1931 agreement. In a footnote, the court commented on the plaintiff’s litigation strategy:

One might perhaps have expected the plaintiffs to contend directly, in light of the issues in this lawsuit, that the 1981 film is based on the Book. However, by mounting an indirect attack, in which the major premise is that the 1932 film is based on the Book, plaintiffs apparently hoped to impale MGM with a “Morton’s Fork”: either the 1981 film followed the 1932 film, thereby infringing the Book, or the 1981 film did not follow the 1932 film, thereby breaching the 1931 Agreement. Even if plaintiffs’ major premise were sound, which our discussion … demonstrates it is not, MGM was not necessarily forced into the dilemma that plaintiffs seek to create. Since the standard by which we judge the similarity of film to Book is not the same standard by which we must judge the similarity between the two films … the Fork is flawed by the fact that its tines are not true opposites. Thus the possibility remained that for its new remake MGM could eliminate the arguably infringing elements of the 1932 film in a way that did not substantially alter the story, thereby complying with both the copyright law and the 1931 Agreement. As it happens, this may have been the course MGM followed. Most of the specific incidents in the 1932 film that plaintiffs claim were taken from the book, i.e., Holt’s killing of the ape, Tarzan’s killing of the lion with a stranglehold, and Holt’s asking Jane if she can use a gun, are not in the 1981 film.

So if you happen to be a movie trivia buff, you can impress your friends with this tidbit about the movie Tarzan the Ape Man. But skip the part about how you learned it boning up on electronic discovery and attorney-client privilege. They may start to worry about you.

A series of Principles Relating to the Discovery of Electronically Stored Information (“ESI”) were developed and codified in a standing order. These principles are intended to serve as supplemental procedural ediscovery guidelines for the parties in selected cases. Individual district court, magistrate, and bankruptcy judges in the Seventh Circuit have agreed to adopt the principles and implement them in selected cases during Phase I of the program, which runs through May 1, 2010.

Kenneth J. Winters, the Managing Director of the Sedona Conference®, and former Colorado Supreme Court Judge Rebecca Kourlis, the Executive Director of the Institute for Advancement of the American Legal System (“IAALS”) at the University of Denver, assisted in the development and review of these principles.

IAALS is developing questionnaires to assess the efficacy of the principles. The questionnaires will be completed by the judges and lawyers participating in Phase I of the program. The results of the IAALS’ questionnaires will be presented to the Seventh Circuit at its annual meeting in May, 2010. At that time, the program’s ediscovery principles will be reviewed and refined as needed. Phase II of the program is scheduled to proceed from June, 2010 through May, 2011. It is contemplated that in May, 2011, Phase II findings will be presented and the Seventh Circuit’s final ediscovery principles announced.

Among other things, the principles require in the event of a dispute during the meet and confer process, the appointment of an ediscovery liaison who should be prepared to participate in ediscovery dispute resolution. These principles also recognize that that Rule 26(b)(2)(C)’s proportionality principles should be applied when formulating a discovery plan; provide that sanctions can be imposed for the failure to cooperate and participate in good faith in the meet and confer process; identify categories of ESI, which are generally not discoverable in most cases; and provides that if a party intends to request the preservation or production of these categories of ESI, that such a request be discussed at the parties’ initial meet and confer session or as soon thereafter as practicable.

Some of the other noteworthy aspects of the Seventh Circuit’s principles include:

• Acknowledging Fed. R. Civ. P. 1’s forgotten role in ediscovery by providing the purpose of these principles is to assist courts in the administration of the Rule’s requirement of securing “the just, speedy, and inexpensive determination of every action and proceeding.”
• Recognizing that an attorney’s ethical duty of zealous representation is not compromised by conducting discovery in a cooperative manner.
• Specifying that Rule 26(b)(2)(C)’s proportionality standard should be applied when formulating a discovery plan, meaning that requests for production and responses thereto “should be reasonably targeted, clear and as specific as practicable.”
• Noting that ESI disputes will be resolved more efficiently if before the initial conference with opposing counsel, the attorneys for each party review and understand how their client’s data is stored and retrieved in order to determine what issues must be addressed during their initial meet and confer discussions.
• Authorizing a court to require additional discussions prior to the commencement of discovery and/or to impose sanctions where appropriate on any party or counsel that fails to cooperate and participate in good faith in the meet and confer process.
• Requiring in the event of a dispute concerning the preservation or production of ESI, the designation of an ediscovery liaison for the purposes of meeting, conferring, and attending court hearings.
• Providing the ediscovery liaison may be an in-house or outside counsel, a third-party consultant, or an employee of a party.
• Specifying the ediscovery liaison must be prepared to participate in ediscovery dispute resolution; know the parties’ ediscovery efforts; and have access to those who are familiar with the parties’ electronic systems and capabilities in order to explain those systems and answer relevant questions. The ediscovery liaison must also have reasonable access to those who are knowledgeable about technical aspects of ediscovery.
• Providing that vague and overly broad preservation orders should not be sought or entered and noting that the information sought to be preserved through a preservation letter or court order should be reasonable in scope and mindful of Rule 26(b)(2)(C)’s proportionality factors.
• Explaining that if the recipient of a preservation letter chooses to respond, the response should provide useful information regarding the preservation efforts undertaken by the responding party. Examples of useful and specific information for such a response include the information a responding party is willing to preserve, the steps taken in response to any preservation letter, any disagreements with the preservation request, and any further preservation issues that were not raised.
• Mandating that every party and its counsel are responsible for taking reasonable and proportionate steps to preserve relevant and discoverable ESI within its possession, custody, and control.
• Recognizing that discovery concerning another party’s preservation and collection efforts may be appropriate, but noting that if used inadvisably, can cause unnecessary expense, delay, and may unnecessarily implicate work product and attorney-client privilege. Requires that prior to initiating such discovery, the parties are expected to meet and confer concerning its need and the suitability of alternative means for obtaining that information. Acknowledges this requirement does not preclude deponents addressing the merits of the case from answering questions concerning the steps taken to preserve and collect ESI.
• Specifying that certain categories of ESI are considered generally “not discoverable” in most cases and requiring a party that intends to request the preservation of production of those categories of ESI, discuss that discovery request at the parties’ initial meet and confer session, or as soon as practical thereafter.
• Identifying categories of ESI that are generally not discoverable to include: (a) deleted, fragmented, unallocated data, or data found in the slack space of computer hard drives; (b) random access memory (RAM) or other ephemeral data; (c) temporary internet files, history, cache, cookies, and other forms of on-line access data; (d) data in metadata fields that are frequently updated automatically such as last-open dates; (e) backup data that is substantially duplicative of data that is more accessible elsewhere; and (f) other forms of ESI whose preservation requires extraordinary affirmative measures that are not utilized in the ordinary course of business.
• Requiring in the event of a dispute concerning the scope of a party’s preservation efforts that counsel meet and confer and fully explain their reasons for believing that additional efforts are not reasonable or appropriate.
• Encouraging parties, at their initial Rule 26(f) conference, to discuss ways to eliminate duplicative ESI, including horizontal or vertical deduplication, the filtering of data by date ranges, file types, custodians as well as the use of search terms, keyword searching, concept clustering, or other advanced methodologies.
• Providing that ESI or other tangible or hard copy documents, which are not text searchable, need not be made text searchable when produced.
• Recognizing the requesting party is responsible for the incremental cost of creating its copy of any requested information.
• Encouraging parties to discuss cost sharing for optical character recognition (OCR) or other upgrades of paper documents or other forms of non-text-searchable ESI.
• Noting that ESI stored in a database or a database management system can be produced by querying the database for discoverable information resulting in a report or a reasonably useable exportable electronic file for review by the requesting party or its counsel.

Several years ago, in an article to the members of the Illinois Association of Defense Trial Counsel, I wrote that if left unchecked, the cost of electronic discovery will prove to be the biggest single threat to our civil jury trial system. Only time will tell whether these steps will fulfill their purpose of streamlining ediscovery and reducing the cost of federal-court litigation or whether a more “radical” step such as some form of mandatory cost as under the Texas rules will be required.

Pilot photo courtesy of Flickr user UNC – CFC – USFK under this Creative Commons license.

This isn't Mrs. McClendon

In Green v. McClendon, the court ordered that sanctions be entered against Mrs. McClendon and her counsel for the failure to preserve certain electronically stored information (“ESI”) about an Excel spreadsheet that she produced in discovery. The ESI was lost when “the son of a friend” who was “familiar with computers” reinstalled the operating system on her home computer. The court in Green was uncertain if the plaintiff had actually been deprived of any information because all files on the defendant’s home computer were downloaded onto discs before the hard drive on the computer was reinstalled, and those discs were subsequently produced in discovery. Nonetheless, the court ordered that sanctions be entered, and in the process fashioned an order that may have spawned a potential conflict of interest for defendant and her counsel.

One of the criticisms of ediscovery is that it has evolved into a tactical game of “gotcha,” where one of the goals is to shift the focus from the merits of the case to sanctions on the opposing party. The court’s opinion in Green suggests that trend has not abated. Unfortunately, in a zeal to protect all things digital, the court in Green assumed either that a litigation hold was not properly issued or that the client “brazenly” disregarded those instructions. The court apparently never considered whether the client may not have known or failed to realize that the reinstallation of her home computer’s hard drive would result in the loss of electronic information under the circumstances.

An issue simmering beneath the surface of Green is how detailed must a lawyers’ litigation hold instructions be in order to comply with the attorney’s ethical and professional duties? Does the applicable standard of care require that lawyers now specifically advise their clients to not reinstall the hard drives on their home computers? If so, given the myriad of technological ways ESI can be lost, must a lawyer’s litigation hold letters be written by an IT professional? It is the client’s obligation to preserve evidence not the lawyer’s responsibility. As litigation-hold letters become longer and more detailed, how likely is it that they will be read, understood and followed by the client?

The defendants in Green were a New York couple who committed to purchasing a piece of art for $4.2 million dollars from the plaintiff, a London-based art dealer. After making an initial payment of $500,000, the couple experienced marital problems which resulted in a separation in anticipation of a divorce. They never paid the balance due and never took possession of the art. Plaintiff subsequently filed suit asserting claims of breach of contract and promissory estoppel.

Several months after responding to plaintiff’s discovery requests, Mrs. McClendon produced an Excel spreadsheet in written form apparently created on her home computer which referenced various pieces of art including the artwork involved the lawsuit. Plaintiff requested information about the spreadsheet including the date it was created, modified and the names of anyone involved in its creation or modification. Mrs. McClendon produced three additional electronic versions of the spreadsheet which varied from the original, along with a partial electronic history for each. No further ESI could be provided about the spreadsheet because “the son of a friend” reinstalled the operating system for Mrs. McClendon’s home computer. That caused the loss of the electronic information stored on the computer prior to the reinstallation process. However, files from the computer were downloaded onto discs prior to that reinstallation, which were produced to the plaintiff.

Court Assumes Litigation Hold Instructions Were Not Provided.

Admittedly, the court in Green may have been aware of facts or information not mentioned in its opinion which influenced its decision. However, the court in Green apparently assumed that counsel failed to meet his discovery obligations. This is evident from the court’s conclusion that “[u]nless [the defendant] “brazenly ignored her attorney’s instructions, counsel apparently neglected to explain to her what types of information would be relevant and failed to institute a litigation hold to protect relevant information from destruction.”

Thus, without knowing what if any litigation-hold instructions were provided to the client by her counsel, with “little insight into the precise circumstances under which the electronic information was destroyed” and despite being “uncertain whether the plaintiff ha[d] actually been deprived of any information” since “all of the files previously contained on [the computer’s] hard drive were purportedly transferred to CDs” which were ultimately produced in discovery, the court in Green nonetheless entered sanctions against both the client and her counsel.

How Detailed Must Litigation Hold Instructions be to Comply With the Standard of Care?

Green prompts the question of how detailed a litigation-hold letter must be to comply with a lawyer’s professional and ethical duties? Do your litigation-hold letters specifically instruct clients not to reinstall the operating systems of their personal or work computers? More importantly should they? These questions should not be confused with a lawyer’s ethical duty of competence under Model Rule 1.1, which requires that an attorney possess the knowledge and skills “reasonably necessary for the representation.”

Have we reached the point in the digital litigation era where lawyers must now advise their clients as to every conceivable technological way that ESI may be lost, and instruct clients not to take any such action without first contacting them? For instance, ESI can be lost as the result of a computer virus – in fact, that is frequently why operating systems need to be reinstalled on home computers. In order to comply with applicable ethical and professional duties, must a lawyer advise the client to maintain the latest version of virus-protection software? Is the lawyer at risk of having sanctions imposed if he fails to so advise the client and ESI is lost? Before answering the question, remember that installing new software can also trigger the loss of ESI. So what advice is legally or ethically required? Rules of Professional Conduct arguably do not require that lawyers be experts in the use of technology.

Merely turning on or off a computer can cause the loss of ESI, but no one would suggest that the standard of care requires that a client be advised that every company computer where potentially relevant ESI may be found must be taken out of service to harvest that ESI or that a forensic image of the hard drive be made before it can be reused. The mere loss of ESI does not necessarily established that a lawyer violated his professional or ethical duties, yet arguably, that appears to be the basis for the sanctions order in Green. These examples are intended to be provocative, because far too little thought or discussion has been devoted to the issues raised in this post.

Is an instruction to take no action with a computer that could result in the loss or deletion of ESI legally and ethically sufficient hold advice? If not, should lawyers now as a matter of routine consult with IT professionals and should their litigation hold letters now be written by IT professionals rather than counsel? Do more detailed instructions have to be provided to clients who may not be technologically savvy or to small businesses who may not have IT departments? Does the standard of care vary, given the nature of the client being represented? If so, how is a lawyer supposed to gauge the level of a client’s technological expertise?

Getting back to the original purpose of litigation hold letters, how likely is it that clients will read, understand and follow a lengthy and technologically detailed litigation hold letter? While from a risk management perspective, lawyers may feel compelled to make their hold letters longer and more detailed, as those hold letters grow longer and technologically more detailed, do they actually become counter productive? And is a lawyer’s litigation hold letter potentially creating evidence that can be used against the client in this context?

Is it time to reexamine the scope of the lawyer’s duty under Zubulake? In the Seventh Circuit, district court decisions are not considered precedential. See Futuresource, LLC v. Reuters, Ltd., 312 F.3d 281, 283 (7th Cir. 2002) (“The reasoning of district judges is of course entitled to respect, but the decision of a district judge cannot be controlling precedent”). However, courts follow Zubulake as a matter of routine without ever critically considering, whether on balance, the decision “got it right” or should be followed in light of the potential conflicts it arguably (some would argue inevitably) triggers between the attorney and client.

Potential Conflict of Interest Arguably Triggered by the Court’s Sanctions Order.

A troubling aspect of the court’s decision in Green is its proposed method for allocating fault in its sanction order. The court ordered that the defendant be re-deposed and permitted any person involved in the creation or modification of the spreadsheet also be deposed in order to determine if anything was actually lost. Following the completion of that discovery, the court directed plaintiff’s counsel to submit a fee application. Because the court could not currently ascertain the “respective blameworthiness” of the defendant and her counsel, the court indicated that after amount of the monetary sanctions was determined, it would afford Mrs. McClendon and her attorney “the opportunity to agree on an appropriate allocation or present this issue to me for determination.”

Such an order puts counsel in an untenable position. Unless both the attorney and client immediately agree that one of them is at fault, they are arguably potentially adverse to one another, and when adversity exists, the attorney has an ethical obligation to advise the client of her right to seek separate counsel at that juncture. For instance, the client in Green may have received a hold letter from the attorney but did not realize that reinstalling the computer’s operating system would result in the loss of ESI. In that scenario, would it not be in the client’s best interests to take the position that her lawyer should have advised her about that possibility? Wouldn’t the lawyer want to take the position that his advice was reasonable and appropriate under the circumstances or that he didn’t know about the clients’ plans?

Do both the attorney and the client need separate counsel from this point on if they can’t agree on who is at fault or their respective percentages of blameworthiness? Can a lawyer ethically negotiate with a client who is not represented by separate counsel how to divide up such a sanctions award? Ultimately, how can the court resolve the respective blameworthiness of the attorney and client without trampling the privilege that would otherwise exist as to their communications?

In the end, if the plaintiff was not deprived of any information, and if the defendant was not given an unfair evidentiary advantage, is the potential damage to the legal system and to the attorney-client privilege caused by the court’s sanctions order in Green under these circumstances worth it?

Can a Variation of the Mt. Healthy Rule on Damage Causation be Applied in this Scenario?

Even if no litigation-hold instructions were provided by counsel in Green as the court apparently assumed, a legitimate inquiry is whether the issuance of reasonable litigation hold instructions would have prevented the purported loss of ESI in this instance. In Green, the client was not a sophisticated IT professional. Otherwise she would not have had the son of a friend reinstall her home computer’s operating system.

The record is silent as to whether the defendant was aware that the reinstallation of a computer’s operating system would result in the loss of any ESI, once all files on the hard drive were loaded onto CDs. The opinion in Green also fails to mention whether the client ever called her attorney to let him know that she may need to have her home computer’s hard drive reinstalled. If a reasonable standard arguably does not require that the lawyer specifically advise the client to not reinstall the hard drive on a home computer, and if the client was not aware that ESI could be lost by the reinstallation of her computer’s hard drive, then one must question what damage resulted from the purported failure to provide the litigation hold instructions, if in fact they were not provided?

In Carey v. Piphus, 435 U.S. 247 (1978), the Supreme Court adopted the so-called Mt. Healthy rule on damage causation. Under this doctrine, if a defendant can demonstrate that the same result would have occurred absent the constitutional violation, a plaintiff is not permitted to recover damages because the plaintiff cannot establish that the constitutional violation was the cause in fact of any damages. Here, if a properly issued litigation hold instructions would not have advised the client to avoid reinstalling the hard drive of her computer, than the rationale of the Mt. Healthy rule would seemingly be in play.

Determining when the duty to preserve evidence arises can be a “sticky wicket” as our friends “across the pond” like to say. Clearly, when a party has decided it will pursue litigation, a duty to preserve ESI or documents potentially relevant to the claim is triggered. On the other side of the ledger, certainly by the time a defendant is served with a lawsuit, the duty to preserve relevant information has arisen. However, courts have recognized that a duty to preserve can be triggered long before a lawsuit is filed – the duty is recognized once litigation is “reasonably anticipated.” There are no bright lines to follow under the “reasonable anticipation” standard. Attempting to determine when the potential for litigation crosses the threshold from mere possibility to reasonable anticipation can depend on a number of different factors that can vary in importance from case to case.

In Realnetworks, the district court concluded that “[a] general concern over litigation does not trigger a duty to preserve evidence.” A “theoretical threat of litigation” or a “general apprehension of lawsuits,” does not suffice. The district court in Realnetworks held that a duty to preserve relevant documents or information was not triggered until a specific potential claim was identified or future litigation became probable.

In Realnetworks, the defendants claimed that ever since a July, 2000 internal presentation, plaintiff knew litigation was “inevitable,” and therefore had a duty to preserve potentially relevant information. However, the district court rejected the defendants’ argument finding that the presentation merely referenced “a theoretical threat of litigation ‘by Hollywood,’ and not an actual threat by any particular party.” The court further ruled that a duty to preserve was not triggered by evidence suggesting that a few employees at the company recognized that litigation concerning its new product was a possibility. The court noted that statements like “there may be litigation ‘one day’” did not “rise to a probability” that litigation would result.

Additionally, the fact that plaintiff was negotiating in good faith with several parties over the very issues that subsequently resulted in a lawsuit being filed did not trigger a duty to preserve when none of the parties involved in those negotiations had threatened litigation. Once objections were made to the plaintiff’s release of its new product because it purportedly violated the parties’ license agreement, a duty to preserve was triggered.

Delay in issuing a preservation directive did not warrant sanctions when no data or evidence was destroyed during that time frame

The district court in Realnetworks noted that there was “an obvious gap” in time between when the duty to preserve was triggered and when the plaintiff issued a preservation directive to its employees. The court declined to enter any sanctions, however, because the defendants did not allege or demonstrate that any potentially relevant information or data was destroyed during that time.

Preserve the records of terminated employees

In Realnetworks, sanctions were ultimately imposed against the plaintiff because it failed to produce one or more notebooks of an employee who had been terminated one week before the lawsuit was filed. The district court concluded that the plaintiff should have known at the time of its employee’s termination that the employee’s work product on the project was potentially relevant to the litigation. The fact that the plaintiff did not willfully destroy the notebook, but apparently had misplaced it, was not a basis for dodging sanctions.

However, because that employee’s notebooks were not the only possible source of information relating to the various issues involved in the litigation, and because there were other sources of information relevant to plaintiff’s knowledge and awareness of the issues, the court denied defendants’ request to preclude the plaintiff from challenging its former employee’s testimony on the various topics that were referenced in her notebook(s). The court also refused to issue an adverse inference instruction based on the missing notebook(s). In the court’s view, an award of attorney’s fees and costs relating to the missing evidence, and for bringing that aspect of the defendants’ motion for sanctions was sufficient punishment under the circumstances.

Conclusion

Determining when litigation should be reasonably anticipated can be elusive. Therefore, Sedona Conference’s Commentary on Legal Holds The Trigger & The Process (Warning: PDF) is a resource that should be consulted whenever questions on this issue arise. That Commentary explains that there are a number of factors that should be considered in determining whether to issue a litigation hold including:

• the nature and specificity of the complaint or threat;
• the party and the position of the party making the claim;
• the business relationship between the accused and accusing parties;
• whether the threat is direct, implied or inferred;
• whether the party making the claim is known to be aggressive or litigious;
• whether a party who could assert a claim is aware of the claim;
• the strength, scope, or value of a potential claim;
• the likelihood that data relating to a claim will be lost or destroyed;
• the significance of the known or reasonably anticipated issues;
• whether the company has learned of similar claims;
• the experience of the industry;
• whether the relevant records are being retained for some other reason; and
• press or industry coverage of the issue either directly pertaining to the client or of complaints brought against someone similarly situated in the industry.

Obviously not all of these factors may be relevant in any particular instance, and some may carry more weight than others depending on the circumstances presented. However, they demonstrate the fact-driven nature of the required analysis.

Since the party bringing the motion for sanctions bears the burden of proof, just as with a misstep on a sticky wicket in a game of cricket, the failure to timely issue a written litigation hold directive should not result in sanctions where the movant fails to establish that any data or evidence was destroyed before the hold was issued.

You know things are bad when the lawyers withdraw. In MeccaTech (MTI), the magistrate judge observed: “Misconduct of this magnitude is a rare occurrence.” It was determined through discovery that one of the defendants employed a consultant to intentionally erase items from his computer before he left MTI’s employment in attempt to shield his activities from discovery. Another instructed his co-defendants to make sure that all emails were on a platform to which MTI did not have access. The defendants, in response to MTI’s discovery requests, also claimed that there was no responsive information prior to February of 2005. However, ESI recovered from a discarded hard drive of one of the defendant’s computers established that the defendants were actively working on strategies to transfer business from MTI during that time frame.

The magistrate judge concluded that the failure to impose severe sanctions on the defendants “would only serve to reward their obvious disrespect for the judicial process and encourage others to engage in the same conduct.” Therefore, the magistrate recommended the entry of a default judgment against one defendant, that three other defendants should be precluded from defending the plaintiff’s claims of breach of duty and fraud, that the documents recovered from one of the defendant’s hard drives should be admissible in evidence, and that the facts contained therein should be considered established for purposes of the pending action. On April 23, 2009, the district court adopted the magistrate’s report and recommendations, and entered the proposed sanctions except as to one defendant, who in the interim had reached a settlement with MTI.

While MTI is notable for the sanctions that were imposed, the decision brings into focus the reality that where a client refuses to follow an attorney’s advice on the preservation or production of ESI, that attorney should carefully evaluate whether to withdraw from the engagement, and the potential for adversity that can occur when the attorney and client disagree on preservation and production issues.

MTI is in the business of assisting school districts comply with Medicaid rules and regulations as well as helping school districts recover money under Medicaid. At one time it had contracts with 180 school districts in Nebraska to provide Medicaid reimbursement and regulatory compliance services.

In February 2004, Gary Lange, the former CEO and president of MTI left the company, subject to a one year non-compete agreement. However, he began providing “marketing” services to a competitor, Strategic Governmental Solutions (SGS), before the term of the non-compete agreement expired. After Mr. Lange’s departure from MTI, what transpired can best be described as a mutiny by several of MTI’s employees. While they were still employed by MTI, those employees essentially induced school districts to not renew their contracts with MTI, and enter into new Medicaid service contracts with SGS. Several of those MTI employees subsequently went to work for SGS. As you might expect, MTI filed suit claiming tortious inference, civil conspiracy, RICO, fraud, and breach of the duty of loyalty by the defendants, several of whom were now their former employees.

Initially after MTI requested discovery from the defendants, they refused to produce any of the requested ESI or emails which pre-dated February of 2005, arguing that such information was not relevant to the parties’ claims and/or defenses. February, 2005 happened to correspond with when Mr. Lange’s non-compete agreement expired. MTI filed a motion to compel the pre-February 2005 discovery, which was granted. The SGS defendants then claimed that they produced everything which they were able to find via their search methodologies. However, when several former MTI employees were deposed, they testified that no one asked them to search their computers for information responsive to any of MTI’s discovery requests.

Mr. Lange claimed he could not produce any documents predating February, 2005 because his hard drive had crashed. However, the individual who determined that Mr. Lange’s hard drive could not be repaired failed to discard it. As a result, MTI was able to recover the hard drive, and a forensic examination recovered a treasure trove of damning ESI. Information was found on the Lange hard drive which contradicted the defendants’ sworn deposition testimony that they had never met prior to February, 2005 or discussed plans to transfer MTI’s Medicaid business. Also discovered was a letter, drafted by one of the former employee defendants while he was still employed by the company, that could be sent to Nebraska school districts for use in terminating their contracts with MTI. One of the recovered emails discussed a “transition” to SGS. An opinion letter was also recovered which confirmed that the defendants had sought legal advice in March, 2005 regarding the termination of MTI’s contracts with school districts.

None of this information was ever produced in discovery, and none of the defendants acknowledged the existence of the information or the events described therein in their discovery responses or depositions. This should come as no surprise because an email from one of the defendants was recovered which instructed his co-defendants to “erase all e-mails, contacts, etc., between any of us” from their MTI computers because “you [n]ever know when MTI might ask for your computer.” When they resigned from MTI, several of these employees did not immediately return their company computers as requested. Rather, the computers were recovered only after those employees first copied information onto disks, and then deleted the information from the computers.

It should come as no surprise, that in light of that abbreviated history noted above, the magistrate judge observed: “Misconduct of this magnitude is a rare occurrence in this court.” The sanctions that were imposed, which included the entry of a default judgment against one defendant and precluding several other defendants from defending claims brought against them, was completely warranted under the circumstances.

One point that was not discussed in the decision, was that during the course of discovery, the attorney representing SGS and several of the former MTI employees withdrew from the case. The basis of the attorney’s motion to withdraw was that a conflict prohibited by Rule 1.7 of the Rules of Professional Conduct had only recently come to light.

Potential Adversity to the Clients’ Interest

One ediscovery issue that has not garnered much discussion is the increased potential for adversity that decisions such as Zubulake have generated. The filing of a motion for sanctions for spoliation of ESI triggers the potential for adversity between the attorney and his client. In those instances where the attorney and client agree that one of them is at fault, and more importantly agree on which one it is, the attorney can continue to represent the client. However, where the attorney and the client disagree on who is at fault, what steps were taken to preserve and/or produce ediscovery or as to what advice or instructions were given, the potential for adversity has ripened, and triggers a duty on the part of the attorney to take those steps required of an attorney having a conflict of interest.

However, consideration of the adversity issue should occur long before any motion for sanctions is filed. When the attorney and client disagree over what steps should be taken to preserve ESI or disagree over what ESI should be produced in discovery, the attorney should carefully evaluate the need to withdraw from that engagement or the desirability of continuing the engagement even if withdrawal is not mandated. And from a risk management perspective, counsel should be documenting his instructions and advice to the client concerning the preservation and production of ESI.

It is every trial lawyer’s worst nightmare. You are one month away from trial, drafting motions in limine, and preparing jury instructions when your client calls to advise that they just found over 10,000 pages of potentially responsive electronic documents and emails in folders that were never searched. And to make matters worse, you learn that those electronic documents may support the claim you are defending that your client improperly used proprietary information which was obtained from your opponent pursuant to a confidentiality agreement. What do you do? Do you immediately contact opposing counsel about the additional records? Do you notify the court and seek its guidance as to how best to approach the problem that has now arisen? Or, as occurred in Preferred Care Partners, do you simply destroy the electronic documents while preserving paper copies without first notifying opposing counsel or the court?

It should come as no surprise that in Preferred Care Partners, the court entered sanctions for the “clearly egregious manner in which the defendant carried out its discovery obligations.” The fact that the electronic documents in question should have been destroyed long before the suit was filed pursuant to the terms of the confidentiality agreement under which they were obtained did not change the analysis. The defendant’s “print and purge” strategy was clearly inappropriate. However, the court ultimately concluded that the defendant’s discovery “shortcomings were neither intentional nor done in bad faith, but rather resulted from the grossly negligent oversights of counsel.”

What makes Preferred Care Partners notable is the district court’s acknowledgment that in light of Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 707 (1982), the Fifth Amendment’s Due Process Clause may limit the sanctions imposed for the loss of ESI. The court in Preferred Care Partners recognized that the Due Process Clause requires that discovery sanctions must not only be just, but also specifically related to the particular claim or defense affected by the misconduct. Therefore, due process requires a nexus between the lost or destroyed ESI, and either the plaintiff’s claim or the defendant’s defense.

In a prior post we noted that various courts had concluded that a party seeking sanctions for spoliation should not be held “to too strict a standard of proof regarding the likely contents of the destroyed [or unavailable] evidence.” However, as Preferred Care Partners recognized, the Due Process Clause requires a link between the lost or destroyed information and the plaintiff’s claim or a party’s defense, which may temper the nature or extent of any sanctions imposed in appropriate circumstances.

Humana had been engaged in negotiations to acquire Preferred Care Partners (“PCP”), and was provided with certain sensitive, proprietary information about PCP pursuant to a confidentiality agreement. Under the terms of that confidentiality agreement, if the acquisition failed to occur for any reason, Humana was to destroy all copies of the proprietary information about PCP. After the negotiations broke down, PCP sued Humana claiming that Humana breached the confidentiality agreement by failing to destroy that proprietary information. PCP alleged that Humana was using the information to unfairly compete against it.

Approximately one month prior to trial, Humana found over 10,000 pages of proprietary documents on their computers which should have been destroyed under the terms of its confidentiality agreement. Humana’s employees originally created files in which all PCP emails and attachments were placed. Those files were deleted after the negotiations fizzled. However, Humana didn’t realize that copies of those emails and electronic documents remained in folders located elsewhere on their computers.

Humana issued a “print and purge” directive asking their employees to search for any emails or proprietary information concerning PCP, and send a printed copy of any information that was found to its counsel. The employees were also instructed to delete any electronic documents or emails about PCP that remained on their computers. Humana explained this step was taken “in a good faith effort to mitigate its technical breach of the confidentiality agreement by removing the confidential data from the hands of individual employees disbursed throughout the company, while at the same time complying with its obligation to preserve documents relevant to the litigation by printing documents prior to deletion.” However, Humana did not contact the plaintiff or advise the court about the ESI it had discovered before purging that information. In response to PCP’s argument that Humana destroyed relevant evidence supporting PCP’s claims, Humana represented to the court that it did not destroy anything that could not be reconstructed from its backup systems.

Discussion of Sanctions and the Due Process Clause

The court noted that the decision by Humana’s counsel to print and purge documents “without consulting opposing counsel or advising the Court was an exercise in bad judgment and constituted a breach of Humana’s discovery obligation to preserve evidence relevant to ongoing litigation.” However, the court noted that the sanctions a court may award under Rule 37 should be “reasonable” in light of the circumstances presented. It observed that a court must consider whether a less drastic, but equally effective remedy could be fashioned. The court also explained that the violation of a discovery order caused by simple negligence or which was due to confusion, a misunderstanding, or the inability to comply with a court’s order does not justify a Rule 37 default judgment or dismissal.

Concerning a court’s inherent authority to regulate its docket, and sanction parties for abusive discovery practices, it observed:

The broad discretion of the district court to manage its affairs is governed, of course, by the most fundamental safeguard of fairness: the Due Process Clause of the Fifth Amendment. To comply with the Due Process Clause, the court must impose sanctions that are both ‘just’ and ‘specifically related to the particular claim’ or defense affected by the misconduct. Thus, for example, if there is no nexus between the information destroyed were not produced and Plaintiff’s claim or Defendant’s defense, it would not be appropriate to enter a default.

Here, the court found that Humana mistakenly believed it was in compliance with the PCP confidentiality agreement because its employees thought they had deleted all of the proprietary information, and were unaware that copies remained in separate folders. The court concluded that the decision to print and purge that information was not accomplished in bad faith, but rather was the product of bad judgment.

Accordingly, the court concluded the appropriate sanction was to permit PCP to conduct additional discovery relating to the information that Humana had untimely produced. The court determined that a monetary sanction was appropriate, given Humana’s grossly negligent discovery conduct. That sanction included the payment of PCP’s costs and attorneys’ fees stemming from the supplemental discovery which the court allowed, as well as PCP’s costs and attorneys’ fees incurred in bringing the motion for sanctions. The court further ordered that PCP be permitted to conduct a forensic examination of Humana’s backup systems to verify that it maintained copies of all of the purged emails. Humana was also ordered to pay the cost of that forensic examination.

Lesson to be Learned

While Humana escaped the entry of a default or the issuance of an adverse inference instruction, the sanctions which the court imposed will ultimately prove to be quite costly. Had the print and purge directive not been given, the costs of the forensic examination of Humana’s systems could likely have been avoided. However, the problem that was dropped in counsel’s lap on the eve of trial could have been avoided if adequate steps had been taken to initially search Humana’s computers for the proprietary information. While in this economy no one wants to unnecessarily incur ediscovery costs, the failure to use a third party vendor in the instance, probably ended up costing Humana more in the long run. If an ediscovery vendor had been hired to at least search a random sample of Humana’s computers to ensure that all proprietary information was located and destroyed, these sanctions probably could have been avoided.

When any attorney is presented with a unique or difficult ediscovery issue that could potentially result in the imposition of sanctions against the client and/or counsel, the best thing to do from a law firm risk management perspective is to consult with another knowledgeable lawyer either in your firm or elsewhere. Don’t try to solve the problem yourself. And be sure not to overlook your State’s rules of professional conduct in any such discussion. Here in Illinois, for example, Rule 3.4(a) provides that a lawyer shall not “unlawfully alter destroy or conceal a document or other material having potential evidentiary value.”

Finally, where your opponent brings a sanction’s motion for the spoliation of ESI, take a look at Preferred Care Partners. Don’t overlook the fact that the Fifth Amendment’s Due Process Clause requires a link be established between your opponent’s claim and any ESI that was not properly preserved.

A valid explanation is not enough.

Bankruptcy Court can be a dangerous place. What you knew or should have known can often be viewed through the 20/20 vision of hindsight. One example of this can be found in a decision out of Delaware.

A software vendor filed for protection under Chapter 11 of the Bankruptcy Code. While in Chapter 11, the debtor sold the majority of its assets to a competitor in return for cash, a note, and the asset-purchaser’s assumption of certain of the debtor’s liabilities. Nine months later, the case was converted to Chapter 7, and a Trustee was appointed to oversee the liquidation of the debtor.

Not long after the case was converted to Chapter 7, the asset-purchaser failed to make certain payments as required under the terms of its agreement with the debtor, and the Trustee brought suit. Discovery was commenced and cross-motions for summary judgment were filed.

The Trustee sought judgment in part, based on the purchaser’s destruction of certain of the debtor’s books and records, which it had purchased, but which it had agreed to preserve as part of the terms of the purchase.

The purchaser responded that it had deleted those portions of the debtor’s books and records from its computer servers prior to any of the acts or omissions which the Trustee alleged as the basis of his suit, and explained that the electronic information at issue was destroyed prior to the commencement of the adversary proceeding. Finally, the defendant argued that the electronic information was not intentionally deleted to thwart the Trustee or anyone else but, was instead deleted so as to free up memory on the computer system.

The Bankruptcy Judge was unconvinced.

From the court’s perspective, the question was if there had been a willful spoliation of evidence?

Parsing the defendant’s arguments down to their simplest essence, the court concluded that the destruction of electronic information issue was not accidental. In the court’s view, it was willful since the electronically stored information was destroyed pursuant to a deliberate decision of the defendant to regain storage space on its computer system. The court also found that since the defendant had a duty to pay the liabilities at issue and had not done so, the defendant should have anticipated litigation over its failure to do so. The court went on to find, therefore, that the deletion of the information from the computer system was willful, and therefore constituted willful spoliation of evidence. Finally, the court found that the defendant’s destruction of the electronic information severely prejudiced the Trustee.

What is missing from the court’s decision is any finding of malice or ill will on the part of the defendant in what it decided to delete or when it decided to make the deletions. In essence, no bad faith or malicious intent was necessary before sanctions are available. The lesson to be learned is that the deletion of ESI can result in severe penalties being assessed. How severe?

Summary judgment was entered in favor of the Trustee and against the defendant in the amount of $1,888,000.00.