E-Discovery Sanctions: The Zubulake Wake-Up Call

Given the vast amount of electronic information retained by most companies, the complex task of managing discoverable ESI and the risk of severe sanctions for e-discovery missteps are a major concern and a potential liability for all companies. As such, it is imparative that all parties involved in the eDsicovery process understand the current trends and pertinent case law in eDiscovery sanctions.

In an article originally published in K&L Gates Newsstand, April 2007, Thomas J. Smith and Michael J. Crossey, Jr. do an outstanding job of summarizing and addressing the issues and the current applicable case law.

Introduction

It is now black-letter law that electronically stored information ("ESI" for short) is discoverable if relevant or likely to lead to relevant evidence. Indeed, the revisions to the Federal Rules of Civil Procedure ("FRCP") that went into effect on December 1, 2006 addressing the discovery of ESI confirm that the 21st Century is witnessing the transformation of traditional trial practice to accommodate ESI in all phases of litigation, from initial discovery and production through trial. Given the vast amount of electronic information retained by most companies, the complex task of preserving, retrieving, and producing discoverable ESI and the prospect of extremely harsh sanctions for discovery missteps, the discovery of electronically stored information, or "e-discovery," has become a major concern and potential liability for all companies.

The genesis of e-discovery sanctions stems from the historic imposition of sanctions for "spoliation"—the destruction or alteration of evidence, or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation. In federal court, a party that contravenes discovery rules or orders has always been subject to sanctions pursuant to FRCP 37. Additionally, all courts have the inherent power to police litigant misconduct and impose sanctions upon those who abuse the discovery process. The underlying basis for both Rule 37 sanctions and sanctions pursuant to a court’s inherent powers is to (1) penalize the culpable parties; (2) deter others from engaging in similar conduct; (3) redress the prejudice suffered by the innocent party; and (4) compel required disclosures.

To this end, courts have broad discretion regarding the type and degree of sanctions they can impose. Depending on the egregiousness of the e-discovery missteps, companies that have engaged in intentional, negligent, or even innocent, spoliation of electronic evidence have been assessed monetary sanctions (including both civil penalties and costs and attorneys’ fees associated with discovery), preclusion sanctions (i.e., precluding the offer or other use of certain evidence), adverse inferences (i.e., directing a jury to assume missing ESI is adverse to the spoliator), so-called "rummaging" (i.e., giving the discovering party hands-on access to an adversary’s computer system), revocation of pro hac vice admission of counsel, and even default judgments.

The Zubulake Wake-Up Call

A seminal series of e-discovery opinions were issued in the case of Zubulake v. UBS Warburg.1 Filed in 2002 in the Southern District of New York, Zubulake involved an employment discrimination dispute in which the plaintiff, a former Wall Street executive, requested ESI during the normal course of discovery.

In reaffirming the well-established principle that the duty to preserve and produce potentially relevant evidence extends to ESI, the Court found that the defendant’s failure to preserve and produce electronic evidence (including not preserving allegedly relevant e-mails and backup tapes), warranted severe sanctions. These sanctions included both monetary penalties and an adverse inference instruction to the jury. The jury ultimately returned a verdict for $29.3 million—including $20.2 million in punitive damages!

The Sanctions Trend

The Zubulake sanctions contributed to a focus on e-discovery and appropriate records management, but its progeny have perpetuated and expanded the field, and the imposition of sanctions for e-discovery failures is a continuing trend. As the following cases illustrate, Courts have issued a number of notable opinions with regard to discovery of ESI, and have imposed severe sanctions on litigants found to have fallen short in their duty to preserve and produce potentially relevant ESI:

Substantial Monetary Sanctions and Default Judgment for Failure to Produce Backup Tapes:
In 2005, a Florida jury awarded financier Ronald Perelman $1.45 billion in damages after the trial judge issued a default judgment against Morgan Stanley as a sanction for various alleged e-discovery missteps.2 The trial judge found that Morgan Stanley initially certified that all relevant electronic records had been produced, but then repeatedly uncovered new backup tapes months after the discovery deadline had passed. The trial judge ruled that Morgan Stanley had deliberately failed to comply with discovery and instructed the jury to assume that Morgan Stanley had helped to defraud Mr. Perelman. As a result of this instruction, Mr. Perelman had to prove only that he relied on Morgan Stanley’s representations to his financial detriment.

While the judgment, including the award of punitive damages, was reversed on grounds unrelated to the e-discovery issues (which issues were left untouched by the appellate court), the trial court’s rulings and the jury’s findings are a cautionary tale regarding the potential impact of e-discovery miscues.

Adverse Inference and Monetary Sanctions Imposed for Failure to Halt E-Mail Recycling Program: In 2005, a Minnesota judge imposed monetary sanctions and granted an adverse inference instruction against a securities company after finding that the company failed to preserve and produce potentially relevant ESI. While the court could not find that that spoliation of paper documents occurred, the judge determined that the defendants’ destruction of hard drives, allegedly pursuant to a business closure, destruction of telephone recordings pursuant to defendants’ standard business practices, and defendants’ failure to retain e-mail messages by either placing a litigation hold on e-mail boxes or preserving backup tapes with copies of potentially relevant e-mails prejudiced plaintiffs so as to merit the sanctions imposed.

E-Discovery Abuse Warranted Adverse Inference Instruction: In 2006, a federal district judge in Minnesota adopted a magistrate judge’s recommended evidentiary sanctions against an alleged patent infringer.3 These sanctions included an adverse inference instruction, an order barring the alleged infringer’s attorney from attending the deposition of any defense witness or any third party, an order granting the plaintiff additional depositions and other discovery, and an award of reasonable fees and costs to the plaintiff associated with its sanctions motion. The court also affirmed the magistrate’s warning that further sanctions, including default judgment, could result if the defendant either failed to abide by the court’s rulings and the FRCP or engaged in further discovery abuse.

Adverse Inference Instruction, Preclusion of Evidence Order, and Award of Attorneys’ Fees Imposed for a Small Number of E-Mails Lost Pursuant to "Long-Standing" Document Policy: In 2006, the Southern District of California imposed sanctions against a defendant, an investor in Napster, Inc., in a copyright infringement action regarding musical compositions.4 After learning that the defendant’s employees routinely deleted e-mails pursuant to its "long-standing" document policy, without regard to whether the deleted e-mails were relevant to the litigation, the court issued a preclusion of evidence order, an adverse inference instruction, and an award of attorneys’ fees. The court determined these sanctions to be the appropriate remedy despite the fact that the defendant’s conduct did not constitute a pattern of deliberately deceptive litigation practices, and notwithstanding evidence that the number of e-mails actually lost was small.

Variety of Severe Sanctions Issued for Failing to Search E-Mails and Permanently Losing Others Pursuant to Standard Practices: In 2006, the New Jersey Federal Court imposed significant sanctions upon an ERISA class action defendant for repeated e-discovery abuses, including failing to search e-mails and permanently losing others due to standard e-mail retention practices.5 While reserving decision as to the propriety of a default judgment until certain class action issues had been resolved, the court, notwithstanding its proclaimed reluctance to sanction parties, issued a variety of sanctions, including: (1) deeming certain facts admitted by defendant for all purposes; (2) precluding evidence that was not produced by the defendant in discovery; (3) striking various privilege assertions by the defendant; (4) directing the payment of substantial costs and attorneys’ fees related to defendant’s misconduct; (5) imposing fines in an amount to be determined after the court considered defendant’s financial condition; and (6) appointing a discovery monitor at the defendant’s expense to review defendant’s compliance with the court’s discovery orders.

Inadequate Record Hold Notices Resulted in Adverse Inference Instruction and Award of Attorneys’ Fees: Ushering in 2007, the Southern District of New York granted plaintiff’s motion for sanctions in the form of an adverse inference instruction and awarded plaintiff its costs and attorneys’ fees incurred in connection with its sanctions motion, as well as additional discovery costs where the defendant was only able to produce e-mails for 13 out of the 57 current and former employees who were identified as "key players" in the suit.6 While the defendant sent out document hold notices early in the case, it failed to issue a reminder notice after going through a corporate reorganization that resulted in the creation of two separate entities, and, moreover, the initial hold memos that it distributed were ignored. The court explained that, in the Second Circuit, the "‘culpable state of mind’ requirement [for the granting of an adverse inference instruction] is satisfied . . . by a showing of ordinary negligence."7

Court Orders Default Judgment for Failure to Produce "Smoking Gun" E-Mails:
In a 2007 suit for specific performance of a contract for the purchase of a radio station, the Southern District of Florida awarded a default judgment and attorneys’ fees and costs to plaintiff based upon defendants’ discovery misconduct.8 The court found that the defendant, among other abuses, failed to produce key "smoking gun" e-mails during discovery. The e-mails, later obtained from a third party, directly contradicted testimony by defendant that it was in compliance with the purchase agreement’s exclusive dealing provision. Despite defendant’s assertion that the e-mails were purged "as a part of ongoing business practice . . . due to the limited amount of storage space," the court found the entry of a default judgment to be warranted.

Conclusion

While the costs of complying with e-discovery can be expensive, the consequences of noncompliance can be far worse. As the above cases illustrate, courts across the country are increasingly willing to take a hard line with corporate litigants who mishandle e-discovery. Litigants can now expect some courts to review their e-discovery procedures in great detail before deciding whether their actions were reasonable. Clients and counsel that do not focus sufficient attention on ensuring the preservation and production of relevant ESI face the risk that the destruction of potentially relevant electronic evidence, regardless of whether the destruction was unintentional, can lead to severe sanctions and even tip the balance in determining litigation outcomes. For a more detailed evaluation and analysis of how your company can act now to implement best practices with regard to records management, and how you can reduce e-discovery risks and costs in future or currently pending litigation, please be in touch with one of your K&L Gates contacts or any of the other lawyers listed above.

Editor’s note: This article was originally published in K&L Gates Newsstand, April 2007, and can be found on the publication's Web site. Copyright ©1996-2007 Kirkpatrick & Lockhart Preston Gates Ellis LLP. All rights reserved. Reprinted by permission.

Notes
1 229 F.R.D. 422 (S.D.N.Y. 2004) ("Zubulake V"). See K&L Alert "Zubulake Jury Returns E-Discovery ‘Wake-Up Call’" (April 2005).

2 Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., Inc., No. CA03-5045 (15th Jud. Cir., Palm Beach Cty., Fla.), rev’d on other grounds, No. 4D05-2606 (Fla. Dist. Ct. App. Mar. 21, 2007).

3 3M Innovative Props. Co. v. Tomar Elecs., 2006 WL 2670038 (D. Minn. Sept. 18, 2006).

4 In re Napster, Inc. Copyright Litig., 2006 WL 3050864 (N.D. Cal. Oct. 25, 2006).

5 Wachtel v. Health Net, Inc., 2006 WL 2538935 (D.N.J. Dec. 6, 2006).

6 In re NTL, Inc. Sec. Litig., 2007 WL 241344 (S.D.N.Y. Jan. 30, 2007).

7 NTL, 2007 WL 241344 at *19 (emphasis added).

8 Qantum Communications Corp. v. Star Broad., Inc., 2007 WL 445307 (S.D. Fla. Feb. 9, 2007).

Labels: Distruction of Evidence, eDiscovery, ESI, FRCP, Sanctions, Spoilation, Zubulake

posted by Charles Skamser @ 8:45 AM 0 Comments

eDiscovery Request Limitations

Whether intentional or not, eDiscovery, even more so than traditional paper discovery, offers the opportunity to unduly burden opposing counsel with unrealistic discovery requests. As a result, responding to these requests for the production of e-mails and metadata, as well as electronic information contained on, among other things, hard drives, computer servers, backup tapes, voice mail and personal digital assistants (PDAs) can be very burdensome and extremely costly to the producing party. As such, as eDiscovery becomes more prevalent, state courts are taking note of these issues and are recognizing that certain situations do not justify the sometimes over-reaching requests that seek to obtain ESI, especially when requested from nonparties.

Following is an excellent article on eDiscovery Request Parameters by Mark A. Berman in the October 31, 2007 edition of the New York Law Journal that discusses three (3) recent New York State court decisions that have addressed over-reaching document requests seeking electronically stored information (ESI).

LIMITING OVERBROAD DEMANDS FOR ESI

In L-3 Communications, the court found that plaintiff was seeking "unfettered access" to confidential and proprietary information of two nonparty competitors of plaintiff, as well as access to one of the defendant's personal computers. Specifically, plaintiff sought "all documents and e-mail messages contained on [defendant's] personal computer, as well as all passwords and access codes in order to impound, clone, and inspect such computer."

This broad request was rejected by the court because the plaintiff "failed to provide the court with a compelling reason for such broad relief" and plaintiff had "not established its entitlement to the broad disclosure of documents and e-mails stored on, as well as the broad access to, [defendant's] personal computer that it seeks."

Plaintiff further alleged that defendant had wrongfully deleted relevant ESI from his computer and was continuing to delete and destroy same after the court had issued a preservation order. The court, however, found that such contentions were "not supported by the record" and "that plaintiff had failed to meet its burden of proving how the document and e-mails in question were crucial to the prosecution of this matter or how the plaintiff was prejudiced by their loss." The court further noted that such deletions took place before the preservation order was issued, and that allegations of continuing deletions was "entirely speculative."

DEMANDS MUST BE TAILORED AND SPECIFIC

In Joyner, plaintiff brought a wrongful termination suit against Planned Parenthood alleging that she was terminated due to, among other things, her complaints of racial pay disparity and repeated complaints about defendant's pattern of alleged discrimination on the basis of race and national origin.

During discovery, plaintiff sought, inter alia, information contained in "electronically maintained files," but provided no date or a limitation on the scope for her requests. Defendant objected that the requested search for, and production of, materials would cause it to incur "significant costs. Although plaintiff recognized that she would have to pay for the cost of production, she requested an estimate of the cost so as to be able to "make decisions on [its] scope."

The court noted that: [d]efendant indicates a willingness to work with plaintiff, having previously provided plaintiff with a diagram of its computer system, the identity of software applications used, the identity of the person who maintains the system and other information. However, [defendant] has not provided [plaintiff] with an estimated cost for its search and neither party provides the court with any information as to the feasibility of tailoring an appropriate search. To assist defendant in tailoring its search for electronically stored information, defendant requests that plaintiff first identify information of which she is aware that is stored on defendant's computer system which has not already been produced.

The court held that it "must first determine whether the material sought is material and necessary to plaintiff's prosecution of this action. With respect to plaintiff's failure to include a date restriction, the court found that plaintiff's requests for information relating to her termination and a certain human resources report were easily identifiable, but noted that such was not the case with respect to the alleged pattern of defendant's purported discriminatory conduct."

Next, the court reviewed each specific request for ESI to determine whether it sought relevant information and also whether it was proper in scope, overbroad or unduly burdensome. For example, a request for "[a]ll e-mails and information about e-mail[s] (including message contents, header information and logs of e-mail system usage)" from plaintiff and nine other employees to any other employee of defendant with knowledge of plaintiff's termination was stricken as overbroad and unduly burdensome, where the request would "result in the production of material not relevant to the subject matter of the action, including personal e-mails, and potentially privileged and/or confidential information. However, the same request that was limited to e-mails pertaining to particular subject areas was deemed appropriate.

Nonetheless, even where a request sought relevant information, that did not mean that such ESI discovery was appropriate. For example, even though another request was limited to four relevant subjects, the court struck the request for "entire" databases, as plaintiff failed to "demonstrate any need for obtaining copies of the extensive information contained in entire databases." The court, however, did grant plaintiff's motion to compel "[a]ll logs of activity (both in paper and electronic formats) on computer systems and networks that have or may have been used to process or store electronic data containing information about or related to the relevant subjects." The court found that the "[p]roduction of such computer logs may arguably lead to relevant discovery and may also assist the parties in formulating specific requests and searches."

With respect to plaintiff's request for all word processing files, "deleted" files and file fragments concerning certain relevant subjects, the court granted such request as it applied to documents relating to plaintiff's departure and certain human resources report, but denied the request as overbroad with respect to prior discrimination complaints and pay equity issues, as the "plaintiff has not established at this juncture that hard copies of documentation on these subjects are insufficient." The court found that "[g]iven the potential volume of material sought to be produced and the cost attendant thereto, the court cannot conclude that plaintiff's need for such material and any probative value it might have outweighs the prejudice to defendant of searching for and providing duplicative word processing files, prior drafts and deleted files." For the same reason, the court denied requests that sought electronic data from computer programs that process financial, accounting and billing information and all data files relating to certain subject areas.

Significantly, the court ordered, prior to requiring defendant to produce any electronic discovery, that "defendant's counsel shall provide plaintiff's counsel with an estimate for conducting a computerized search for the items to be produced ... and for the reproduction of same ...."

DISCOVERY AND NON-PARTIES

In Maura, a proceeding to determine the validity of a marital election, respondent sought electronic discovery from a law firm that had drafted the prenuptial agreement between respondent and decedent. Respondent moved for contempt against the law firm for its failure to respond to nonparty discovery and the law firm cross-moved to quash the subpoena and for a protective order.

Specifically, respondent sought "(i) to copy all existing and deleted records [related to the prenuptial agreement], (ii) to recreate any billing records of the decedent for estate planning and the prenuptial agreement, (iii) to copy all other records with respect to the estate planning; and (iv) to obtain sample copies of other prenuptial agreements prepared by [decedent's attorney] with privileged material redacted."

Respondent proffered a computer forensic expert, who he had agreed to pay for and who would undertake a cloning of the law firm's hard drive. Respondent proposed that the hard drive be removed from the law firm's offices because to clone it at the expert's office would be less expensive because the expert's office had the hardware and software necessary to perform such task in the most cost-effective manner.

The law firm opposed the subpoena asserting it was wrongfully "invasive" and that permitting its hard drive to be cloned would violate the Rules of the Code of Professional Responsibility. The law firm further asserted that, if electronic discovery is permitted, the same information could be retrieved from its backup tapes, which would be less invasive.

The court denied respondent's application insofar as it sought the law firm's electronic billing records, which were found irrelevant, and electronic estate planning documents, because such documents were already provided in hard copy and "[t]here is no allegation that there is a need to determine whether the documents have been altered or deleted." The court also denied respondent's request for "access to computer records to copy other prenuptial agreements," as such would not bear on the "authenticity" of the subject prenuptial agreement and would constitute a violation of the attorney-client privilege.

However, the court granted respondent's application for access to the computer "to copy all billing records related to the prenuptial agreement and all existing and deleted records concerning the prenuptial agreement," as such are "'material and necessary' to the prosecution of the action." The court also found that an analysis of the law firm's backup tapes would not "yield deleted or altered information," which went to the gravamen of respondent's claim.

As such, the court ordered the hard drive of the law firm to be cloned, but rejected respondent's expert and "decline[d] to allocate the cost of the electronic discovery to the non-party," as it noted has been ordered in certain circumstances, especially in federal courts. Noting that the CPLR provides that the party seeking discovery absorbs the cost incurred in the production of discovery material, the court directed the law firm to proffer its own expert to clone the hard drive, to obtain a proposal from such expert, and to then submit it to opposing counsel. The court directed that respondent notify the law firm within 10 days whether it wishes to proceed with the requested electronic discovery, otherwise, it would be deemed waived.

CONCLUSION

Courts in New York state are analyzing and refining the appropriate scope of ESI discovery in each case, so that only "material and necessary" evidence is ordered produced, in order not to unfairly burden parties and nonparties with excessive costs and overbroad requests. As with paper discovery practice, and much more so with electronic discovery given the reluctance by courts to order discovery that could overwhelm a party with huge document review and production expenses, practitioners should strongly consider tailoring their specific ESI discovery requests. For example, it is imperative to include date and specific subject matter limitations in ESI requests.

Counsel should also be able to justify sufficiently the relevance and materiality for each ESI request, in the event motion practice ensues or risk that a request could be found overbroad and the entire request vacated, thereby foreclosing a party from obtaining relevant information.
Counsel should also use caution when seeking ESI so as to only request such materials where paper copy would be insufficient. Further, while a court may appreciate a party's offer to absorb ESI costs, as New York state ESI discovery law is making clearer, that is only part of the balancing that a court needs to engage in before permitting such discovery. "Tiered" ESI discovery should also be considered when seeking different types of ESI, such that general requests are followed by more specific ones.

Finally, counsel must remain cognizant that courts may not subject a nonparty to the broad ESI discovery that might be permitted of a party and may, in fact, permit ESI discovery of a nonparty conditioned upon the requesting party's agreement to pay for all of it, as well as other terms the court feels necessary to protect the nonparty. Accordingly, it is imperative that, before propounding ESI discovery requests, the prudent practitioner carefully consider each request.

Labels: Discovery, eDiscovery, ESI, FRCP, Litigation, Meet and Confer, Undue Requests

posted by Charles Skamser @ 3:19 PM 0 Comments