Making the case for uniform culpability standards for ediscovery sanctions

Victor Stanley, Inc., v. Creative Pipe, Inc., 2010 U.S. Dist. LEXIS 93644 (D.Md., Sept. 9, 2010), (“Victor Stanley II“)

The sanctions entered in Victory Stanley II, which included a civil contempt finding and potentially up to two years of jail time for egregious ediscovery violations, obscure the decision’s deeper significance. In Victor Stanley II, Judge Paul Grimm establishes the need for uniform federal standards for spoliation sanctions.

In what he described as “the single most egregious example of spoliation” encountered in nearly 14 years on the bench, Judge Grimm concluded that the defendant’s “pervasive and willful” acts of spoliation should be treated as contempt of court. He entered an uncontested default judgment on the plaintiff’s copyright infringement claim, and further directed the defendant be imprisoned for a period not to exceed two years, “unless and until” the defendant pays the plaintiff’s attorneys fees and costs “with respect to all efforts expended throughout the case to demonstrate the nature and extent of the defendant’s spoliation.” Judge Grimm explained that the sanction of civil contempt with the specter of jail time was “absolutely essential” because without it, the defendant would do everything possible to avoid paying any money judgment or fee award entered as a result of the defendant’s discovery misconduct.
Read the rest of this entry »

Rule 37(e)’s safe harbor provision used to limit sanctions requested under the court’s inherent authority

Grubb v. Board of Trustees of Univ. of Ill., 2010 WL 3075517 (N.D. Ill., Aug. 4, 2010)

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.

State court practitioners beware: sanctions can be entered against your clients for failing to preserve emails, even if your state has not adopted a set of ediscovery rules

Einstein v. 357 LLC, et. al. (N.Y. Supreme Court, October 21, 2009)

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

Failing to take prompt reasonable steps once notified of an inadvertent production results in privilege waiver – you’ve now entered the Twilight Zone

United States v. Sensient Colors, Inc., 2009 WL 2905474 (D.N.J. Sept. 9, 2009)

“You’re traveling through another dimension, a dimension not only of sight and sound, but of mind; a journey into a wondrous land whose boundaries are that of imagination – Next stop, the Twilight Zone.”

Any lawyer who inadvertently produces privileged information steps into a legal twilight zone. However, that legal twilight zone is not a “wondrous land,” but one filled with sleepless nights and many questions. How did it happen? When and how do I tell the client? How do I get the materials back? Will I lose the client, my job, my career? With ediscovery, the risk that privileged or confidential information will be inadvertently produced geometrically increases. While the use of clawback or nonwaiver agreements and FRE 502(b) lessen that risk, they do not eliminate it. Sensient Colors establishes that point.

Sensient Colors involved the electronic production of 45,000 documents totaling 135,000 pages or 450 boxes of records by the United States (“government”). Several months after that production was completed, the defendant initially returned a group of documents that were privileged. Over the ensuing months, the defendant continued to identify additional documents that the government had produced but were privileged. Ultimately, the defendant sought a ruling that the government had waived its right to assert privilege over the documents it had produced.

The court in Sensient Colors concluded the privileged documents were inadvertently produced by the government and that the requirements of FRE 502(b) were met as to the first group of documents the defendant returned. However, as to the subsequently identified privileged documents, the court ruled that the government waived its right to assert privilege under Rule 502(b) as to those documents because it had failed to promptly take reasonable steps to rectify its error after being notified of the initial inadvertent production.

The explanatory note to FRE 502 provides: “The Rule does not require the producing party to engage in a post-production review to determine whether any protected communication or information has been produced by mistake.” However, the court in Sensient Colors concluded that once a party has been put on notice that privileged information has been inadvertently produced, Rule 502(b)(3) requires the producing party take “prompt and reasonable steps to reassess its document production.” The court in Sensient Colors concluded the government failed to act reasonably and diligently to correct its error and waived its privilege and work-product protection as a result.

Read the rest of this entry »

Must a lawyer’s litigation hold letter be written by an IT professional?

Green v. McClendon, 2009 WL 2496275 (S.D.N.Y. Aug. 13, 2009)

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?

Read the rest of this entry »

Default judgment entered as a sanction for spoliation and deliberate withholding of ESI

MeccaTech, Inc. v. Kiser, 2008 WL 6010937 (D. Neb. April 2, 2008)

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.

Read the rest of this entry »

Court acknowledges the Fifth Amendment’s Due Process Clause may limit the sanctions that can be imposed for destroying electronic documents

Preferred Care Partners Holding Corp. v. Humana, Inc., 2009 WL 982460 (S.D. Fla. April 9, 2009)

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.

Read the rest of this entry »

The road paved with good intentions – A pure heart and an open checkbook

See, In re Quintus Corp., 353 B.R. 77 (Bankr. D. Del. 2006)

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.

Read the rest of this entry »

If John Constantine had been a lawyer, these sanctions would be his vision of ediscovery hell

Bray & Gillespie Management LLC v. Lexington Ins. Co., 2009 WL 546429 (M.D. Fla., March 4, 2009)

In the movie Constantine, Keanu Reeves plays an occult detective with the ability to detect demonic beings on earth, and to see into hell. Had his character been a lawyer rather than an occult detective, he would simply have to read the Bray & Gillespie decision to see what a vision of ediscovery hell looks like.

The Bray & Gillespie decision addressed some basic ediscovery mistakes involving a request for production of ESI in its native state with its accompanying metadata. However, those mistakes were compounded by what the Magistrate Judge described as material misrepresentations and omissions by counsel for the party producing that data. The decision also stands as a stark reminder that a supervising partner, and his firm can be held liable for the ediscovery snafus of their local counsel and predecessor counsel.

The court recognized that any motion for sanctions, even one which names only the party, puts both the party and its attorney on notice that the court may access sanctions against either or both of them, absent a showing of substantial justification for the conduct at issue. In Bray & Gillespie, the court determined that it was not appropriate to require the client to pay for the sanctions resulting from the decisions made by its outside counsel. Rather, the court sanctioned outside counsel and his firm, and also issued a Rule to Show Cause why another attorney from that firm should also not be personally sanctioned for his conduct in the case. Even more chilling is the fact that the Magistrate Judge indicated that she was willing to entertain additional sanctions, including a request that the court dismiss the case, if the data she ordered produced contained more metadata than what the sanctioned attorneys offered to produce in discovery.

Read the rest of this entry »

Buyer beware: suspicious timing warrants adverse inference instruction for spoliation of electronic data, and a punitive damage claim based on that inference

Smith v. Slifer Smith & Frampton/Vail Associates Real Estate, LLC, 2009 WL 482603 (D. Colo., Feb. 25, 2009)

A real estate broker and the brokerage firm he worked for were retained by the plaintiffs to sell a parcel of property in Vail, Colorado. The property was sold for $2,846,250, based on the defendants’ recommendation. Less than three months later, the same property was resold by the buyer in the first transaction for $7,200,000, with the defendants again serving as the broker for that transaction. Plaintiffs subsequently filed suit claiming negligent misrepresentation, fraud, concealment, and that the defendants had breached their statutory duties as a transaction broker.

In discovery, plaintiffs sought production of emails and other electronic documents on the brokerage firm’s servers, and on the broker’s work and home computers. A forensic examination of the broker’s home computer revealed that a secure deletion (wiping) software called “Anti Tracks” had been downloaded from the Internet, and used on the broker’s home computer resulting in the loss of data from thousands of files and folders. A similar examination of the broker’s computer at work revealed that information appeared to have been deleted from that computer as well, and that the computer’s hard drive had been reformatted. Plaintiff’s forensic computer expert opined that the process to reformat the drive was too involved and complicated to be unintentional.

The district court acknowledged that there was no smoking gun establishing who caused the data loss, nor could anyone pinpoint exactly what information had been deleted. However, it was apparent that the defendants had failed to properly preserve potentially relevant information. In the court’s view, the “highly-suspect timing” of the use of the wiping software on the defendant’s home computer and the reformatting of the hard drive of his work computer was sufficient to establish that evidence had been destroyed in bad faith to prevent disclosure of relevant information from those computers. Therefore, the court ordered that an adverse inference instruction be issued, and allowed the plaintiffs to add a punitive damages claim based on the adverse inference. The court further awarded plaintiffs their fees and costs, including expert costs associated with plaintiffs’ sanctions motion, and related discovery expenses incurred as a result of the defendants’ actions.

Read the rest of this entry »