eDiscovery Isn't for Rookies or Amateurs

The courts are starting to weigh in with mini "landmark" decisions and as a result, the financial stakes in eDiscovery are really ramping up.  A recent decision from the U.S. Court of Appeals for the District of Columbia Circuit affirms an order requiring a nonparty to spend $6 million (In re Fannie Mae Securities Litigation, 552 F.3d 814 (2009)) to comply with an eDiscovery subpoena even though it is obviously overly burdensome (in this case 9% of the parties operating budget) and way outside the principles set forth by the The Sedona Principles Addressing Electronic Document Production, Second Edition (June, 2007).

In some respects this case doesn't seem at all fair (an interesting and elusive term in litigation) but in other respects it "draws a line in the sand" indicating that eDiscovery isn't for rookies or amateurs, mistakes cannot be always be taken back and that there are consequences for your actions (sounds like a lecture that I would give to my 8 year old son). 

It will be interesting to see how this all unfolds.

My favorite Blog posting on this topic comes from Ralph Losey in a posting in early January 2009, titled, "D.C. Appeals Court Affirms Order Requiring a Non-Party to Spend $6 Million, 9% of its Total Annual Budget, to Comply with an e-Discovery Subpoena",  on his always entertaining and informative Blog eDiscovery Team.

Mr. Losey does a great job of explaining why this case goes too far and punishes the wrong people.

The full text of Mr. Losey's post is as follows:

Appellate courts do not often weigh in on e-discovery issues, but when they do, it is a big deal. The United States Court of Appeals for the District of Columbia did so on January 6, 2009, when it issued an opinion on e-discovery and sanctions. In re Fannie Mae Securities Litigation, _ F.3d _, 2009 WL 215282009, U.S. App. LEXIS 9 (D.C. App. Jan. 6, 2009). Typically, I would be glad to have a Circuit Court opinion on e-discovery. Not so here.

Unfortunately, In re: Fannie Mae Securities Litigation sets a troubling precedent in favor of enforcing exorbitant e-discovery costs. In this case, the Office of Federal Housing Enterprise Oversight (”OFHEO”), was required to spend six million dollars, representing nine percent of its total annual budget, just to comply with a subpoena for electronic documents. Although OFHEO clearly had relevant information to the multidistrict litigation against the Federal National Mortgage Assn. (”Fannie Mae”) and the Federal Home Loan Mortgage Corp. (”Freddie Mac”), they were not a party to the litigation. This fact, coupled with the high expense involved in an over-broad e-discovery request, did not seem to concern the court, which is why this decision is troubling.

Why Fannie Mae Is Dangerous Precedent
The Appellate Court in the opinion written by Circuit Judge David S. Tatel rejected with little discussion the argument that the respondent should not have been compelled to comply with the subpoenas without considering the costs of compliance, cost shifting, narrowing the scope of production, or showing good cause to retrieve inaccessible data. Id. at *7. The Circuit Court did not even address the merits of these arguments, but, instead, basically said it was too late, you “agreed” to it, so now you are stuck with it regardless of the costs and consequences. For this reason, Fannie Mae should be strictly limited to situations where the parties have knowingly consented to an order they later fail to follow.  Here is the language of the Court:
Federal Rule of Civil Procedure 45 requires courts to safeguard non-party subpoena recipients from significant expense resulting from compliance. See Watts v. SEC, 482 F.3d 501, 509 (D.C. Cir. 2007). According to OFHEO, the district court violated Rule 45 by compelling compliance without considering cost-shifting, narrowing the scope of the requests, or “find[ing] that defendants demonstrated good cause for forcing OFHEO to retrieve its inaccessible data.” Appellant’s Opening Br. 31-32.

Whatever the merits of these claims, OFHEO abandoned them by entering into the stipulated order. Indeed, OFHEO’s trial counsel agreed to the stipulation in the middle of a hearing scheduled for the very purpose of considering OFHEO’s objections to the subpoenas. Had OFHEO wanted review of the district court’s initial order to compel compliance with the subpoenas, it could have completed the hearing and attempted to convince the court to re-consider. Failing that, it could have defied the adverse ruling and appealed any ensuing contempt finding. See U.S. Catholic Conference, 487 U.S. at 76. Instead, it chose to sign the stipulated order, which ended the hearing and unquestionably settled the discovery dispute. Having stipulated to a schedule for complying with the subpoenas, OFHEO can hardly complain now about being held to its agreement.

The opinion should be limited to the “unusual” facts of the case. But, since the decision itself did not take pains to do so, the door is open for Fannie Mae to be exploited and cited to try to require parties and non-parties alike to incur excessive e-discovery expenses. I do not think that is what the appeals court had in mind, they were obviously just trying to uphold the lower court’s discretion, but that is the net result. As a consequence, other courts will have to deal with this precedent for years. I expect they will do so by carefully distinguishing and limiting the holding to the facts of the case.

Electronic discovery costs are a runaway train that must be stopped. This new opinion sets dangerous precedent making that task even more difficult than it was before. Certainly courts will distinguish and limit the case, but it is still a problem because many parties requesting e-discovery may try to inflate its importance to support outrageous demands.

Fannie Mae Shows Zero Tolerance For Common “Rookie” e-Discovery Errors
Even when limited to its facts, Fannie Mae is still dangerous because, like it or not, the facts presented are not all that unusual. When it comes to e-discovery, most lawyers are still struggling beyond their depth. It is not that uncommon for trial counsel to enter into agreements for search and production of electronic documents without first understanding its possible costs and burden. They also rarely understand how long it takes to review and produce gigabytes of data, nor do they know much if anything about modern search technologies. It is also not uncommon for generalist litigators to later make things worse with an “old-school” type fight-everything attitude and a series of  too little, too late, productions.

This is just what happened here. In the midst of a hearing, trial counsel agreed to restore backup tapes, search them using plaintiffs’ terms, and then produce all email and attachments that were not privileged. Obviously the attorney did not intend by this agreement to assume a $6 Million Dollar burden, nor did the client authorize their attorney to do so. How can you have a six million dollar agreement without a “meeting of the minds?” Yet, the district court keeps coming back to that agreement, made in the midst of a hearing, as the justification for requiring a non-party to spend 9% of their total annual budget to comply with a subpoena. The Circuit Court then upheld the decision as within the very broad discretion allowed to a district court to manage discovery. They did so without any comment or reaction as to the injustice of imposing this kind of e-discovery cost and burden.

This case sends a very strong message to the Trial Bar to be very careful about what they agree to in a midst of a hearing. It shows that they should never agree to anything concerning e-discovery without first consulting with an e-discovery specialist, preferably one who is part of a larger tech/law e-discovery team. In fact, this case clearly demonstrates that an e-discovery lawyer (if you can find one) should attend every discovery hearing.

Trial lawyers, no matter how smart and skilled they may be, are not qualified to swim in these waters alone. Fannie Mae shows just how dangerous these waters can be. You may think something can be done fairly easily and inexpensively, and later be shocked to learn that it will cost millions, and take months, or even years to do. Apparently the trial judge did not understand how common a mistake this is. I am confident that if the government lawyers for OFHEO had had an experienced e-discovery lawyer with them at the first hearing, they would not have stipulated to the order they did, and all of the disasters that followed could have been avoided. But they did not, and as a result, they were bushwhacked.

The requesting parties here were allowed to specify 400 keywords, which, not too surprisingly (to us anyway), returned over 660,000 emails and attachments. By the way, does anyone seriously think that the plaintiffs suing Fannie Mae and Freddie Mac will now actually review all of these emails? No way! They will cull it down and only review a small percentage, which is exactly what the government should have done. I am willing to bet that most of the 660,000 emails produced will have little or no probative value. Like most cases, it will probably come down to a few hundred key documents, and maybe a few thousand more of some interest (to the attorneys). At the end of the trial, the jury will only remember four or five. This kind of forced production of 660,000 emails is irresponsible over-kill on a vast scale. It is infuriating because we, the American taxpayers, are forced to underwrite this fiasco.

It gets worse. The obviously over-broad search terms retrieved approximately 80% of all of the agencies email. Yet, this did not seem to trouble the district court, nor the appeals court, who actually stated that the 80% return “figure may simply indicate that most of the emails actually bear some relevance, or at least include language captured by reasonable search terms.” Id. at *6.  Do they really think that 80% of the agency’s total email is relevant to the case? Obviously they have never read a large email collection before. The statement is incredible. As to the later explanation - “or at least include language captured by reasonable search terms” - the logic is meaningless and circular. Of course all of the emails retrieved contained one or more of the 400 search terms. That is why they were retrieved! How does that make them “reasonable” search terms?

In re: Fannie Mae Securities Litigation arguably stands for the proposition that if you agree to an e-discovery production, you may well be bound to your agreement, even if the agreement later proves to make no sense and the client has to go broke in the process. This is dangerous precedent. No one should be required to spend outrageous sums of money to comply with a subpoena, no matter what their lawyer may have said or done. Six Million Dollars, representing 9% of a governmental agency’s budget, is too high a burden to place on a party to litigation, much less a non-party. The principles of proportionality and Rule 26(b)(2)(C) should trump and prevail over any agreements inadvertently made by legal counsel.  No wonder the government is going broke, just like many of the homeowners that Fannie Mae and OFHEO were supposed to protect. 

Six Million Dollars
The district court later interpreted the stipulation that OFHEO’s attorney had made  in the middle of a hearing to allow the requesting parties to specify any search terms they wanted; so they did. They specified 400 keyword terms which returned over 660,000 documents. Even though the government lawyers clearly did not understand what they had agreed to, they went ahead with the search and spent $6,000,000 in the process. Another big mistake. They should have tried to get relief first before spending the money. If that was refused, they still should have refused to spend $6,000,000. Instead, as the appellate court later recommended, they should have “defied the adverse ruling and appealed any ensuing contempt finding.” The bottom line is, once you spend the money on e-discovery, it is very hard to get it back. Unless you have specifically reserved the right for cost shifting, and sometimes even when you do, there is no money back guarantee.

You may well wonder how they managed to spend $6,000,000 to comply with a subpoena. As is typical, the main costs were for privilege review. Here is the language of the appellate court:
OFHEO undertook extensive efforts to comply with the stipulated order, hiring 50 contract attorneys solely for that purpose. The total amount OFHEO spent on the individual defendants’ discovery requests eventually reached over $6 million, more than 9 percent of the agency’s entire annual budget.

One would think at that point the courts would give the agency a break. But no, the government lawyers had made a series of promises to the court that they did not keep, mainly as to when the review would be completed and the emails produced. There are consequences for such failures. Unless you have done big projects like this before, it is unbelievable how long review can take and how many things can, and do, go wrong. Delays are inevitable and should be anticipated. They should enter into the calculus as to when a project can be completed and production made.

Clearly the government lawyers were once again making promises and representations to the court without the assistance of an experienced e-discovery lawyer. They made promises they could not keep and did not give adequate explanations for the delays. They also failed to cooperate and make rolling productions. Instead, they produced nothing at all while the contract lawyer review expenses kept going through the roof. To the district court judge, who almost certainly was never involved in a large e-discovery project before appointment to the bench, it looks like a series of broken promises and downright contempt. I do not know what happened here, but it was probably a series of mistakes and miscalculations, not intentional defiance of the court.

Regardless of the true cause, some of the the courts in Washington have obviously grown tired of lawyers making promises and commitments that they do not keep. They wanted to send a message that their actions would not be tolerated, and that is exactly what they did. Here is the language of the district court explaining the situation at *3:

*3 On November 29, 2007, the day before an interim deadline for production of several categories of material, OFHEO informed the district court that it would be unable to meet that deadline and moved for an extension until December 21, assuring the court that it could meet that extended deadline. The court granted the motion, but two days before the extended deadline, OFHEO informed the court not only that its previous assurances had been based on insufficient data, but also that it had only recently hired the necessary number of contract attorneys. OFHEO told the court that it would be unable to comply with the extended interim deadline, and that although it could produce all non-privileged documents by the ultimate January 4, 2008 deadline, it would be unable to produce all the required privilege logs until February 29.

The individual defendants renewed their motions to hold OFHEO in contempt. On January 22, the district court granted the motions. The court recognized OFHEO’s efforts at compliance, but deemed them “not only legally insufficient, but too little too late,” stating:

[T]he Court is cognizant of the large number of attorneys, contract attorneys, and OFHEO personnel working to comply with the subpoenas and the resulting costs of this compliance. Nevertheless, OFHEO has treated its Court-ordered deadlines as movable goal posts and has repeatedly miscalculated the efforts required for compliance and sought thereafter to move them.

OFHEO was held in contempt of court, as punishment they would not only have to pay for everything, with no hope of cost-shifting, but they would be required to produce some 20,000 emails without advance privilege review. The production was to be made on an “attorneys-eyes-only” basis, and a chance to later assert the unique kind of government privilege at issue here, the “deliberative process” privilege, but still, opposing counsel will be allowed to see all.

Here is the appellate court’s explanation:
[T]he district court directed the office to provide the actual documents withheld on the basis of the deliberative process privilege and not logged by the deadline. The district court described the sanction as “designed to move the [d]iscovery process forward and to allow for [a] more targeted, and therefore more truncated, privilege litigation process.”Hr’g Tr. at 26 (Jan. 22, 2008). The district court therefore specified that the compulsory disclosure would not waive the privilege with respect to further disclosure; directed that the documents be provided only to individual defendants’ counsel; and created a mechanism for OFHEO to recover documents found to be privileged.

I am not troubled by the privilege sanction. It stops short of a waiver and it appears that OFHEO deserved this counter-measure to make up for its many prior delays.

The part of this decision that astounds and disturbs me is the affirmance of the propriety of requiring a non-party to spend 9% of its total budget to comply with a subpoena, simply because their attorneys blindly agreed to comply without considering the cost of compliance. Here is how the Appeals Court explains its holding at *8:

*8 District judges must have authority to manage their dockets, especially during massive litigation such as this, and we owe deference to their decisions whether and how to enforce the deadlines they impose. See Berry v. District of Columbia, 833 F .2d 1031, 1037 n. 24 (D.C.Cir.1987). Though we recognize OFHEO’s strenuous efforts to comply, the district court found them to be “too little too late,” Hr’g Tr. at 19 (Jan. 22, 2008), and determined that the office’s compliance was inadequate, id. at 21. In making this assessment, the court placed great weight on the long history of the discovery dispute and on OFHEO’s repeated requests for extensions, ultimately concluding that OFHEO had requested one extension too many and that strict enforcement of its deadline was warranted. Given the district court’s intimate familiarity with the details of the discovery dispute, the scale of the production requested, and the progress of the multidistrict litigation as a whole, we are ill-positioned to second-guess that assessment. Were we on this record to overturn the district court’s fact-bound conclusion that OFHEO dragged its feet until the eleventh hour, we would risk undermining the authority of district courts to enforce the deadlines they impose.

Conclusion
I understand the importance of district court discretion, enforcing deadlines, and not second-guessing discovery calls. I am in favor of that. Also, I have often called for judges to get tough and stop allowing all of the “hide the ball” games. On the whole, I think judges have been far too tolerant of attorney misconduct. But, this case goes too far and punishes the wrong people. A government agency has been unfairly punished for conduct of their legal counsel. In the process, the second of the fourteen Sedona Principles has clearly been breached:

2. When balancing the cost, burden, and need for electronically stored information, courts and parties should apply the proportionality standard embodied in Fed. R. Civ. P. 26(b)(2)(C) and its state equivalents, which require consideration of the technological feasibility and realistic costs of preserving, retrieving, reviewing, and producing electronically stored information, as well as the nature of the litigation and the amount in controversy.

A non-party should never be required to spend $6 Million to comply with a subpoena. Moreover, by requiring OFHEO to restore and search its disaster recovery backup tapes, the requesting plaintiffs and the courts also violated the eighth Sedona Principle:

8. The primary source of electronically stored information for production should be active data and information. Resort to disaster recovery backup tapes and other sources of electronically stored information that are not reasonably accessible requires the requesting party to demonstrate need and relevance that outweigh the costs and burdens of retrieving and processing the electronically stored information from such sources, including the disruption of business and information management activities.

This case demonstrates what can happen when these fundamental precepts are not followed. It cannot be fair and just to allow a lawyer’s actions to drain 9% of an agency’s total annual budget, a budget paid for by taxpayer funds. Congress did not approve OFHEO’s budget last year thinking that 9% of it would go to help a group of plaintiffs sue Fannie Mae. The appellate court, and the district court before it, should have made an economic analysis of the situation in reaching its decision and considered the gross inefficiencies of its ruling.

I understand the need to affirm trial court discretion, but the appeals court could have upheld the authority of the lower court and still mitigated the economic impact of this ruling in some way. For instance, it could have allowed for possible cost-shifting. At the very least, the appeals court should have carefully limited its holding and expressed some abhorrence of the burden imposed. It should have considered the possible impact of this ruling on the future jurisprudence of e-discovery. It did not. It went too far, just as the pendulum was beginning to swing the other way. The economy and fair minded judges everywhere will no longer tolerate this kind of excess. For this reason, I predict that Fannie Mae will come to be seen as the high-point of out-of-control e-discovery spending. It will be all downhill from here, especially if we can muster up the competence and cooperation needed to make it happen.


H. Christopher Boehning and Daniel J. Toal posted an outstanding overview of this case and the associated issues on the LAW.com Legal Technology site  in an article titled, "D.C. Circuit Delivers High-Cost EDD Lesson".  Mr. Boehning and Mr. Toal presented a message of caution indicating that agreements should be carefully negotiated and counsel should not agree to unmitigated keyword searches without reserving the right to negotiate search terms and without waiving the right to pursue cost shifting.  This is indeed sage advise as eDiscovery isn't for rookies or amateurs.
The full text of the article is as follows:

A recent decision from the U.S. Court of Appeals for the District of Columbia Circuit affirms an order requiring a nonparty to spend $6 million (9 percent of its annual operating budget) to comply with an e-discovery subpoena.

Litigators overseeing discovery know they must assess a client's documents, and particularly a client's electronic documents, at the outset of discovery. Estimating the resources necessary to collect and produce electronically stored information is a vital role of counsel today. Without such advance knowledge, lawyers may be blindsided by unexpected burdens and time pressure in the production process.

The D.C. Circuit's ruling in In re Fannie Mae Securities Litigation, 552 F.3d 814 (2009), highlights the importance of counsel understanding issues related to e-discovery, and the potential scope of that discovery, before entering into any type of agreement governing the future conduct of discovery in the case.
The circuit was unwilling to entertain an argument that the burden on a nonparty was too high to be reasonable once the nonparty had entered a stipulated discovery order. In particular, the court had little sympathy for the argument that the keyword search suggested by the requesting party resulted in an overwhelming number of documents, many of which surely would be of little probative value.[FOOTNOTE 1]

In re Fannie Mae upheld a district court order holding a third party in contempt and imposing sanctions for that party's failure to comply with a stipulated discovery order. The Office of Federal Housing Enterprise Oversight was the government agency charged with regulating the Federal National Mortgage Association (Fannie Mae).[FOOTNOTE 2]

In 2003, OFHEO opened a special review of Fannie Mae's accounting and financial practices, and concluded that the enterprise "had departed from generally accepted accounting principles in order to manipulate its reported earnings and inflate executive compensation."[FOOTNOTE 3] This report led to several private civil actions against Fannie Mae, its senior executives and others. These actions were consolidated into multidistrict litigation in the U.S. District Court for the District of Columbia.

During discovery, three individual defendants who were senior executives at Fannie Mae subpoenaed nonparty OFHEO, pursuant to FRCP 45(c)(2)(B)(ii), seeking records OFHEO had collected in preparing its investigation report. The district court denied OFHEO's motion to quash and ordered compliance. After receiving two separate one-month extensions in the summer of 2007, OFHEO reported to the district court that it had produced all documents requested. During a 30(b)(6) deposition, OFHEO admitted it had failed to search all of its off-site disaster recovery backup tapes. In response, the requesting parties moved to hold
OFHEO in contempt.

Following the first day of the contempt hearing, OFHEO and the requesting parties "entered into a stipulated order that held the contempt motions in abeyance and required OFHEO to conduct searches of its disaster-recovery backup tapes and provide all responsive documents and privilege logs by Jan. 4, 2008 [a date less than three months from the hearing]."
In language central to the D.C. Circuit opinion, the stipulated order's fifth paragraph stated:

OFHEO will work with the Individual Defendants to provide the necessary information (without individual document review) to develop appropriate search terms. By October 19, 2007, the Individual Defendants will specify the search terms to be used.

Pursuant to the stipulated order, the individual defendants submitted over 400 search terms, which returned 660,000 documents (approximately 80 percent of the offices' e-mails). Of the 400 search terms, 150 contained wild-card characters. One such search term alone, "*le percentann percent*" returned all documents containing such words as "Fannie," "annual," "loans," "plan" and "meaningful." The terms captured clearly irrelevant documents such as e-mails between spouses forwarding family photographs and an e-mail exchange in which two spouses are contemplating a holiday cruise.[FOOTNOTE 4]

OFHEO objected on the grounds that paragraph five "limited the [requesting parties] to 'appropriate search terms.'" The district court disagreed and held that the agreement left the search terms in the sole discretion of the requesting parties and provided no limitations on those terms.
Indeed, according to the circuit, the only limit to the right of the requesting parties to designate search terms under the agreement is "the general contractual duty of good faith and fair dealing." Thus, a request for "every word in the dictionary would have been in bad faith and invalid."

Despite the breadth of the search terms and the large number of documents returned, the circuit found that this large figure "may simply indicate that most of the emails actually bear some relevance, or at least include language captured by reasonable search terms." But by this circular logic, any search list would be valid because all the documents retrieved contained the search terms -- that's how they were retrieved.
This actually reveals nothing about whether these search terms were "appropriate" (as OFHEO argued was required by the contract language) or "reasonable" (as apparently read into the contract by the circuit) or whether the mass of documents returned actually have probative value in the multidistrict litigation.
The focus on the language of the stipulated order highlights the importance for practitioners of negotiating these terms in advance. Agreeing that the requesting parties could designate search terms opened the door for the designation of broad and far-reaching search terms. If counsel had fully appreciated the possible problems with a large search request, perhaps the stipulated order would have been drafted to offer OFHEO some protection against such burdens.

NO EXCUSE DELAYS
On Nov. 29, 2007, the day before an interim deadline for production of several categories of material, OFHEO informed the district court that it would be unable to meet that deadline and moved for an extension until Dec. 21. The court granted the motion, but two days before the extended deadline, OFHEO informed the court that it would be unable to comply with the extended interim deadline, and that although it could produce all non-privileged documents by the ultimate Jan. 4, 2008, deadline, it would be unable to produce all the required privilege logs until Feb. 29.

OFHEO hired 50 contract attorneys and incurred over $6 million in expenses (more than 9 percent of the agency's entire annual budget). Despite the high costs and "extensive efforts" undertaken by OFHEO, the district court found that its efforts were "not only legally insufficient, but too little, too late."
Moreover, the district court admonished OFHEO for "treat[ing] its court-ordered deadlines as movable goal posts and ... repeatedly miscalculat[ing] the efforts required for compliance and [seeking] thereafter to move them." For this reason, the court held OFHEO in contempt.

As a sanction, the district court ordered production of all documents withheld on the sole basis of qualified deliberative process privilege and not logged by the Jan. 4, 2008, deadline. The court ordered that these documents would be produced only to counsel and that the production would not waive privilege.
OFHEO also argued that the contempt finding was an abuse of discretion because the district court compelled compliance without considering cost-shifting, narrowing the scope of the requests, or finding that defendants demonstrated good cause for forcing OFHEO to retrieve its inaccessible data.
The circuit was unsympathetic, holding that OFHEO waived these arguments by entering into the stipulated discovery order. If OFHEO wished to pursue these arguments, the circuit suggested that OFHEO should have continued the hearing scheduled to consider the subpoenas, and if the district court nonetheless compelled production, OFHEO could have "defied the adverse ruling and appealed any ensuing contempt finding."

In response to OFHEO's argument that it substantially complied with the order, the circuit stated that "[w]ere we deciding this matter in the first instance, we might not have held OFHEO in contempt." However, the circuit could not find that the district court had abused its discretion, given "even two and a half weeks after the final deadline set forth in the stipulated order, OFHEO had produced just six of the required thirty-one privilege logs. Not until after the district court held OFHEO in contempt did it provide the remaining logs, and according to the individual defendants even these are incomplete."
The district court had also noted producer's repeated extension requests, "ultimately concluding that OFHEO had requested one extension too many and that strict enforcement of its deadline was warranted."

CONCLUSION
In re Fannie Mae serves as a cautionary tale to all practitioners faced with discovery demands. Agreements should be carefully negotiated and counsel should not agree to unmitigated keyword searches without reserving the right to negotiate search terms and without waiving the right to pursue cost shifting.
If the producing party cannot reach a fair agreement with the requesting parties, nonparties may be better served by refusing to comply with subpoenas until the court considers the burdens and rules on cost-shifting rather than entering into broad agreements.
H. Christopher Boehning and Daniel J. Toal are litigation partners at Paul, Weiss, Rifkind, Wharton & Garrison. Joanna L.W. Trachtenberg, an associate at the firm, assisted in the preparation of this article.

::::FOOTNOTES::::
FN1 The High Court in the United Kingdom has also been unsympathetic to the complaints of parties that electronic discovery would impose high costs. In Digicel (St. Lucia) Ltd v. Cable & Wireless PLC, [2008] EWHC 2522 (Ch) (Oct. 23, 2008), the court found that despite an expenditure of over two million pounds and 6700 hours of attorney time, the producing party would be required to do a further production after failing to properly meet and confer about electronic discovery prior to collecting documents.
FN2 OFHEO has since been succeeded by the Federal Housing Finance Agency.
FN3 In re Fannie Mae Sec. Litig., 552 F.3d at 816.
FN4 Brief for Appellant United States Office of Federal Housing Enterprise Oversight (Aug. 5, 2008) at 13; Status Report of OFHEO's Production and Request for Forbearance of Interim Deadline by Office of Federal Housing Enterprise Oversight (Nov. 29, 2007) at 2-3.

Labels: eDiscovery, In re: Fannie Mae Securities Litigation, Key Words, Sanctions, Sedona Conference, Spoliation

posted by Charles Skamser @ 9:18 AM 0 Comments

Qualcomm Inc. v. Broadcom Corp, 2008 WL 66932 (S.D. Cal. Jan. 7, 2008)

In a possible response to the question that I posed in my last post of whether or not the Zubulake rulings are still relevant, Broadcom has recently been awarded over $8 Million in Attorneys Fees and Qualcomm’s Lawyers have been referred to the California State Bar Due to Discovery Misconduct.

This may be the answer to whether Zubulake continues to have "teeth" in regards to the responsibilities/critieria of legal teams to produce or not produce ESI. Or, it may just be an example of the ignorance and/or arrogance on the part of the Qualcomm legal team? However, it is hard to believe that anyone involved in such an important case would be ignorant to the requirements set down by Zubulake.

This case, which is rapidly taking on the legendary status of Zubulake, involved the failure by Qualcomm’s attorneys to turn over 46,000 e-mails, many of which were deemed highly relevant to Broadcom’s core defenses. Qualcomm brought the suit in 2005, alleging Broadcom’s infringement of several of Qualcomm’s patents. One of Broadcom’s key defenses hinged on whether Qualcomm participated in a Joint Video Team (“JVT”) in 2002 and early 2003.

Broadcom argued that evidence of such participation would show that the patents at issue were unenforceable due to waiver. Throughout the case, Qualcomm’s lawyers repeatedly argued (and its witnesses testified in depositions) that Qualcomm did not participate in the JVT in the key time period. As the case progressed, however, e-mails surfaced that suggested that Qualcomm did, in fact, participate in the JVT in 2002. While preparing for trial, one of Qualcomm’s attorneys found an e-mail sent to one of Qualcomm’s witnesses in 2002 that welcomed her to a mailing list related to the JVT. That attorney then searched the witness’ laptop and found 21 other e-mails, some from 2002, where the parties discussed issues related to participation in the JVT. None of these e-mails had been produced to Broadcom.

Nevertheless, Qualcomm’s trial team decided not to produce the e-mails, claiming that they were not responsive to the discovery requests. During trial, Broadcom discovered the existence of the e-mails and Qualcomm finally produced them. Ultimately, Broadcom learned that Qualcomm had more than 46,000 e-mails responsive to the discovery requests that it failed to produce.

On January 7, after a number of oral arguments and an initial ruling by the court awarding attorneys’ fees, the court ordered Qualcomm to pay Broadcom over $8.5 million in attorneys’ fees (with credit for amounts already paid in response to a previous order) and referred a number of Qualcomm’s attorneys to the State Bar of California for an investigation in to possible ethical violations.

Labels: Broadcom, Discovery, email, ESI, Litigation, Qualcomm, Sanctions, Zubulake

posted by Charles Skamser @ 10:03 PM 0 Comments

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