E-Discovery Law Alert : New York & New Jersey Attorneys for Electronic Discovery and Corporate Information Management Law

1. A legal hold notice directing employees to preserve paper and electronically stored documents and information should be issued to all witnesses with potentially relevant knowledge or information, not just those specifically identified in an attorney letter or lawsuit. Here, the Court determined that the witness’ involvement “should reasonably have been known” to the company and that had notice been issued as required, relevant documents would have been preserved. A “culpable mind” or willfulness on the part of the non-preserving party may be imputed where, as here, the in-house counsel knew or should have known of the importance of the witness.

2. Where in-house counsel assumes responsibility for litigation hold and preservation activities, s/he should investigate not only the identity of potential witnesses, but also work closely with the company’s IT professionals to identify the sources of or locations where relevant data may be stored. In this case, the in-house attorney testified that he directed the preservation of data and electronic files, wherever they may have been located (a “universal hold”), though the company disputed that a universal hold was required, relying on Fed.R.Civ.P. 26(b)(2(C) and Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212 (S.D.N.Y. 2003). Contradictory testimony was offered by the company’s IT staff that only specific locations were identified by the in-house counsel and only those were searched and preserved. Whether the search was intentionally limited or the result of mere miscommunication, the end result for this company was a default judgment as to the claim for which the employee was substantially prejudiced because of the missing documents, an adverse instruction as to the remaining claims, and an award of $10,000 in monetary damages.

3. Courts are not afraid to impose serious sanctions for spoliation. The District Court for the District of Arizona determined that a default judgment was appropriate as to one of the claims because the company’s conduct led to the destruction of evidence that would have assisted the employee in the litigation, the public’s interest in expeditious litigation was hampered by the company’s failure to timely provide relevant discovery, and the employee was substantially prejudiced by the destruction of evidence, which “threatened to interfere with the rightful decision of the case.” Lesser, though still severe, sanctions were imposed concerning the employee’s other claims only because the Court determined that the risk of substantial prejudice was not significant.

Susan L. Nardone is a Director in the Gibbons Employment & Labor Law Department and a member of the Gibbons E-Discovery Task Force.

Collection and Review of ESI

• Similar to the requirements of the Federal Rules of Civil Procedure, counsel are encouraged to meet and confer promptly after the start of discovery to develop a plan for electronic discovery. Transparency to the other parties regarding the process and parameters used to collect documents is essential.
• Experienced outside counsel, rather than the interested parties, should be actively involved in establishing and monitoring the procedures used to preserve, collect and review documents to determine that reasonable, good faith efforts are undertaken to ensure that responsive, non-privileged documents are timely produced. When practicable, outside counsel and professionals acting under their direction should conduct the document collection and review.
• In establishing an approach to electronic discovery, counsel should consider issues of burden and expense, taking into account the needs of the case, the amount in controversy, limitations on the parties’ resources, and the relative importance of the various issues at stake in the litigation. Because the Court has not adopted a one size fits all approach, it is essential and not optional that the parties candidly discuss these issues directly to try to reach a case-specific arrangement.

Assertion of Privilege and Preparation of Privilege Logs

• The guidelines caution against the tendency of lawyers to overdesignate documents as privileged. As a general matter, only communications involving an attorney acting as an attorney for the purpose of facilitating the provision of legal advice may properly be designated as attorney-client privileged.
• The guidelines recognize that the privilege analysis and the creation of privilege logs is time-consuming and expensive. Accordingly, parties are generally not expected to log post-litigation communications, they may agree to log certain types of documents by category instead of on a document-by-document basis, and they may dispense with a log for partially redacted communications where the face of the document provides the factual information that otherwise would appear on the log.
• When a document-by-document log is warranted, it must sufficiently describe the document being withheld, without revealing information that is itself privileged or protected, so that the opposing party and the Court can assess the propriety of the asserted basis for withholding the document. This should include document-specific descriptions, the context of the document, and information about the individuals identified on the log, including whether they are attorneys, their titles, and their affiliations.

The Role of Delaware Counsel
 

• Consistent with one of the overall themes of the Guidelines, the new discovery guidelines emphasize the Court’s expectation that Delaware counsel play an active role in the collection, review and production of documents, including ESI, and in the assertion of privilege.
• With respect to electronic discovery, the guidelines recommend that Delaware counsel and co-counsel collectively maintain a written description of the discovery process, including detailed information regarding efforts to preserve documents, custodians identified, search terms used, and what files were searched. They also include a checklist that is intended to assist counsel in developing a sound document collection process, subject to modification depending on the needs of the case.
• With respect to privilege issues, the guidelines instruct that senior Delaware lawyers must take reasonable steps to ensure that privilege only has been asserted in accordance with a good faith reading of Delaware law, that there has not been systematic overdesignation of privilege, and that the privilege log contains sufficient descriptions of the documents in question.

As the Chairman of the Court of Chancery Rules Committee has noted, the Guidelines, including the new discovery guidelines, “speak directly to what works well in Chancery litigation and what does not work so well” and are a “must read” for anyone who practices in the Delaware Court of Chancery.

Christopher Viceconte is a Director in the Gibbons Business & Commercial Litigation Department.

In holding that First American had a duty to issue a “litigation hold” to its independent agents, the Court placed great emphasis on the language of First American’s agency contracts. This should serve as a reminder to litigants and potential litigants to be aware of contract clauses regarding access to and control of documents. Such clauses may give rise to discovery obligations involving documents maintained or physically possessed by agents or independent contractors. Identifying the extent of discovery obligations and taking action is imperative to avoid potential litigation sanctions, ranging from fees, cost shifting, or adverse jury instructions, to dismissal or judgment.

Marc D. Bianchi is an Associate in the Gibbons Business & Commercial Litigation Department.

However, the Court refused to let the County off unscathed for its “gross negligence.” In particular, the Court found that the County’s failure to institute a litigation hold, to disable its automatic email deletion program and to preserve copies of its backup tapes warranted the imposition of reasonable attorneys’ fees and costs associated with State National’s time incurred in investigating the County’s email production. The Court reasoned:

In this case, when a party fails to issue a litigation hold despite pending litigation and does not preserve emails of relevant custodians in breach of its duty, the adversary is forced to explore whether sanctions such as an adverse inference or more drastic sanctions - dismissal or suppression of evidence - are warranted. To perform such an investigation requires the non-breaching party to expend attorney time, and in some cases, expert fees to determine the extent and scope of the deletion or destruction. If, following such an investigation, there is no basis to award such spoliation sanctions or, as in this case, a court concludes that there is a failure to demonstrate that an adverse inference is warranted, the non-breaching party still has suffered damages in the context of attorneys’ fees and costs.

The County appealed the Court’s June 30, 2011, decision, as it asserted that sanctions were inappropriate because there had been no showing of spoliation. The District Court summarily rejected the County’s arguments, and noted that the County failed to provide the Court with any cases calling into question the magistrate judge’s ability to impose sanctions in the form of attorneys’ fees and costs incurred by State National as a result of the County’s failure to preserve evidence.

In addition to the obvious lesson that litigation hold procedures must be timely and comprehensive, this case teaches that Practitioners should, to the extent possible, take all steps available to them to develop a record regarding the nature of the spoliated evidence, and particularly its relevance to the issues in the case, before making an application to the court for severe sanctions like an adverse inference or dismissal of claims/suppression of defenses.

A prior post discusses a New Jersey District Court’s finding of “gross negligence” based at least in part upon a party’s failure to institute a timely litigation hold.

Scott J. Etish is an Associate on the Gibbons E-Discovery Task Force.

Specifically, one of Plaintiff’s principals intentionally and routinely deleted emails for 2 ½ years after the litigation hold was issued, emails that may have supported its former counsel’s defense that Plaintiff itself was responsible for monitoring the letter of credit expiration. There were other failures as well. Plaintiff failed to investigate the ways in which emails were stored and retained by its principals, or to make any effort to ensure that custodians were complying with their preservation duties. Six of eleven principals, who also were primary custodians, completely failed to suspend automatic deletion functions associated with their files, even after receipt of the litigation hold. Plaintiff also failed to suspend deletion of back-up tapes or to create electronic images of their data. But most egregiously, in the Court’s view, was Plaintiff’s replacement of its email servers in 2011 - after the Defendant had raised concerns to the Court about spoliation - which rendered impossible any potential recovery of deleted emails.

Based on the identity and roles of the spoliating individuals in the failed real estate transaction, the Court found that the deleted emails were relevant to the critical issue of who was responsible for monitoring the expiration of the letter of credit. The Court pointed out that even if relevance of the deleted emails had not been established, it could be presumed because Plaintiff’s destruction of evidence was at least grossly negligent (and probably willful). The Court issued the ultimate sanction and dismissed Plaintiff’s Complaint in its entirety. The Court also awarded Defendant fees incurred in connection with the motion.

The Court’s finding of spoliation is in line with recent binding precedent out of New York State’s Appellate Division, First Department (covering Manhattan and Bronx Counties), which adopted the approach taken by the Southern District of New York in the well known Zubulake decisions. (A link to a prior blog post on the referenced Appellate Division case- Voom H.D. Holdings LLC v. EchoStar Satellite LLC, 2012 N.Y. Slip Op. 00658 (1st Dep't 2012)- can be found here.) The 915 Broadway Associates decision affirms that blatant destruction of evidence after the duty to preserve has arisen will result in sanctions in New York State, and that New York courts are not afraid to issue the ultimate sanction- dismissal of an action- where warranted.

Paul E. Asfendis is a Director on the Gibbons E-Discovery Task Force.

Judge Lowe rejected EchoStar’s argument that it was seeking an “amicable business solution” and therefore, no reasonable anticipation of litigation existed: “EchoStar’s argument ignores the practical reality that parties often engage in settlement discussions before and during litigation, but this does not vitiate the duty to preserve. EchoStar’s argument would allow parties to freely shred documents and purge emails, simply by faking a willingness to engage in settlement negotiations.” Finding EchoStar’s conduct constituted gross negligence, Justice Lowe ruled that a negative, or adverse inference against EchoStar at trial was an appropriate sanction.

The First Department affirmed the trial court’s order finding that “an adverse inference was warranted because EchoStar’s spoliation of electronic evidence was the result of gross negligence at the very least.” In doing so, the First Department expressly rejected the argument that the “reasonable anticipation” standard of Zubulake is “vague and unworkable”:

To adopt a rule requiring actual litigation or notice of a specific claim ignores the reality of how business relationships disintegrate. Sides to a business dispute may appear, on the surface, to be attempting to work things out, while preparing frantically for litigation behind the scenes. EchoStar[’s] approach would encourage parties who actually anticipate litigation, but do not yet have notice of a “specific claim” to destroy their documents with impunity.

The Voom decision is notable for at least three reasons in addition to the guidance concerning the timing of implementing a litigation hold. First, while not expressly stating that self-collection in every case is improper, the First Department, citing Pension Comm. Of the Univ. of Montreal Pension Plan, 685 F. Supp. 2d 456, 473 (S.D.N.Y. 2010), found, “[i]n this case, EchoStar’s reliance on its employees to preserve evidence ‘does not meet the standard for a litigation hold.’” Second, the Court found the lower court’s consideration of EchoStar’s sanction for bad faith conduct relating to “substandard document practices” in an unrelated District of Maryland case, Broccoli v. Echostar Commc’ns Corp., 229 F.R.D. 506 (D. Md. 2005), to be proper and warranted in assessing gross negligence: “The [Broccoli] case demonstrates that EchoStar was well aware of its preservation obligations and of the problems associated with its automatic deletion of e-mails that could be relevant to litigation to which it was a party.” Third, the Court did not consider email “snapshots” that included relevant emails for certain relevant time periods that were recovered in connection with EchoStar’s other litigations to be a mitigating factor; to the contrary: “These e-mails -- a handful only fortuitously recovered, and highly relevant -- certainly permitted the inference that the unrecoverable e-mails, of which the snapshots were but a representative sampling, would have also been relevant.”

The Voom opinion raises difficult questions regarding when companies should decide that pre-litigation negotiations have deteriorated to the point that litigation is “reasonably likely,” and even whether that amorphous standard is an appropriate one on which to base litigation hold trigger decisions. In fact, Lawyers for Civil Justice (“LCJ”), which had filed an amicus brief asking the First Department to overturn Justice Lowe’s verdict, issued a “Special Update” on February 1, 2012 calling the Voom decision a “disappointing setback” and contending that it underscores the need for e-discovery reform. Specifically, LCJ argues that Justice Lowe’s verdict “places an unfair burden on corporations and creates an unattainable standard of practice that will leave even the best intentioned corporations vulnerable to unwarranted legal sanction.” The standard adopted by the First Department, one LCJ member stated, “would vastly inflate costs for corporations as electronic data increases.”

Notwithstanding the controversy surrounding this decision, Voom is instructive for several reasons. Voom should prompt an advocate to make herself aware of a company’s e-discovery past and present with respect to unrelated litigations and to counsel her client to learn from its prior mistakes. Further, it highlights that practitioners should weigh the pros and cons of self-collection. At the very least, where a client has self-collected electronic documents, a practitioner should anticipate opposing counsel’s invocation of this new case in an attempt to impugn that self-collection. Finally, and most significantly, Voom confirms that the duty to preserve electronic evidence is not necessarily synonymous with the commencement of a litigation. Indeed, as in Voom, these obligations can arise months before actual litigation and can be triggered internally when a company reasonably anticipates the commencement of legal action, even when that eventuality may be completely unknown to the future adversary.

Elizabeth Ann Fitzwater is Counsel to the Gibbons Business & Commercial Litigation Department and a member of the Gibbons E-Discovery Task Force.

Privilege Logs and Work Product: The Revised Default Standards seek to ease the burden presented by the creation of privilege logs by requiring the parties to meet and confer as to whether certain categories of information can be excluded from the logs and whether alternatives to document by document logs can be exchanged. In addition, parties need not include information generated after the filing of the complaint in their privilege logs. The Revised Default Standards also make clear that the parties’ information preservation efforts are protected from disclosure by the work product doctrine. The parties are also to confer on an appropriate non-waiver of privilege order and, until such an order is entered, privileged information, if produced, must be returned if it appears on its face to have been inadvertently produced or if notice is provided within 30 days of inadvertent production.

Initial Disclosures: As part of their initial disclosures, parties must disclose their 10 custodians most likely to have discoverable information and a list of the non-custodial data sources that are most likely to contain non-duplicative discoverable information. Parties must also provide notice as to issues relating to any ESI that a party asserts is not reasonably accessible, as well as anticipated third-party discovery and the timing and sequencing of such discovery. Parties are cautioned that their failure to provide such notice could result in their loss of the ability to protect or pursue such information.

Search and Production Protocols: (1) On-site inspections of electronic media are prohibited absent a showing of specific need and good cause. (2) If a party chooses to use search terms to locate potentially responsive ESI, it must disclose the terms to the requesting party. Absent a showing of good cause, the requesting party may request no more than 10 additional focused terms. Search terms are to be used on non-custodial data sources and emails and other ESI maintained by the party’s 10 custodians, as identified in its initial disclosures. (3) As to format, ESI and non-ESI are to be produced as text searchable image files (e.g., PDF or TIFF); however, the producing party must preserve the integrity of the underlying ESI, i.e., the original formatting, certain metadata, and, where applicable, the revision history. Native files may only be produced when they are not easily converted to image format. (4) Only the following categories of metadata must be preserved and produced to the extent such metadata exists: custodian, file path, email subject, conversation index, from, to, cc, bcc, date sent, time sent, date received, time received, filename, author, date created, date modified, MD5 hash, file size, file extension, control number begin, control number end, attachment range, attachment begin, and attachment end (or the equivalent thereof).

Overall, the Revised Default Standards are aimed at encouraging parties to cooperate to reach reasonable agreements concerning the discovery of ESI. The standards also impose some reasonable and common-sense provisions to follow absent an agreement among the parties. Such provisions should assist litigants in resisting unreasonable demands from an adversary and alleviate some uncertainty about a party’s burden to preserve and produce materials. Counsel practicing in the District of Delaware should pay careful attention to these new requirements.

Christopher Viceconte is a Director in the Gibbons Business & Commercial Litigation Department.

With respect to preservation, the parties are to agree on the scope and methods for preservation and discuss whether to disclose the dates, contents and recipients of “litigation hold” notices. The parties are required to discuss methods for search and review, including potential keyword searches, date restrictions, and whether backup files should be searched. In discussing the production of electronic documents, the parties should confer about the format for production (e.g., native, TIF), the timing of productions and the number of expected custodians. Parties must also address the issue of privileged material, inadvertent production/claw-back agreements and whether the parties have discussed a Rule 502(d) order (which have been addressed in other blog submissions). Click here for Rule 502/clawback blog posts, here for inadvertent production blog posts and here for inadvertent disclosure blog posts. The Submission also asks the parties to estimate the cost of electronic discovery and address any cost-shifting or sharing agreements. In recognition of the fact that knowledge concerning e-discovery issues and obstacles may develop during the case, the Submission contemplates that additions and modifications may be required.

Attorneys may anticipate a more in-depth inquiry concerning e-discovery from the federal bench during the pilot program and should be prepared to discuss these issues with their clients, opposing counsel and judge at the outset of the litigation. For more information on other parts of the pilot program, including motion and final pretrial conference procedures, click the Report and the Gibbons Business Litigation Alert.

Paul A. Saso is an Associate on the Gibbons E-Discovery Task Force.

But the regulations may be more constrained for non-profits, thanks to the Sarbanes-Oxley Act of 2002, notes TechLaw's Landau.

“Certain SOX requirements impose criminal liability on exempt organizations that destroy records with the intent to obstruct a federal investigation,” he says. “Additionally, IRS’ revised Form 990—the annual information return filed by most publicly supported exempt organizations—indicates the agency’s intent to continue to scrutinize corporate governance policies of exempt organizations.”

The challenges aren’t limited to paper-based documents, notes Inventus' Melchionda.

“Despite the widespread use of electronic filings, the volume of paper records is increasing in about 56 percent of organizations, and it’s decreasing in only 22 percent,” he relates. “Concurrently, electronic records volume is increasing rapidly for 70 percent of companies and it’s not decreasing in any of them.”

Findings like those hint at the potential cost savings, and regulatory compliance that may be utilized by businesses, Melchionda points out.

“We worked with a Fortune 10 financial services company that requested a comprehensive physical records reconciliation project to comply with records retention rules and business process procedures,” Melchionda says. “The client was incurring a high annual carrying cost for records with inventory that was more than 10 years old.”

Completing the metadata record-keeping requirements associated with the non-compliant records meant the client was able to make “confident and defensible retention and destruction decisions” on the records “as well as provide cost savings opportunities,” he adds. “We developed a robust methodology and strategy that provided better planning and estimation of disposition, and created scalable, repeatable record classification methodology while aligning record classification with corporate taxonomy. We’ve had cases where improved record retention and destruction strategies have yielded annual savings of nearly $800,000, while easing the integration of legacy and present records through a manageable, scalable and process driven framework.”

Generally Accepted Recordkeeping Principles, or GARP, have been developed by ARMA International, a non-profit professional association that addresses issues concerning the efficient maintenance, retrieval and preservation of vital records and information, says Duffy.

“The eight GARP principles address accountability, transparency, integrity, protection, compliance, availability, retention and disposition,” he explains. “Being GARP-compliant involves identifying all laws and regulations, developing systematic processes to capture and manage records through their life-cycle, and establishing continuous audit and improvement processes.”

Adherence to GARP Principles can result in ethical decisions by organizations and individuals, he adds, noting that the success of such efforts means they must be embraced by board and C-level officers.

“In our experience, GARP compliance requires the establishment of a statement of purpose to ensure compliance, facilitate retrieval and reduce storage costs,” he says. “You also have to establish the scope of your efforts, including the identification of employees, business units and storage locations.”

Consider the reasonableness of your records management policies and practices, Duffy advises.

“Among other issues, examine their scope, purpose, application and compliance,” he explains. “Do they address preservation and production issues, and do they address the information life cycle, while providing for obligations and measures directed at protecting privacy of information that should be kept confidential, such as medical records or propriety company information?”

As Landau further explained, “over-restrictive IG policies and record retention plans will lead to underground archiving.” Policies need to focus on business continuity needs as well as regulatory compliance. They also need to allow employees to do their jobs effectively and efficiently. “Clearly defensibility and risk mitigation is critical and so is the ability and willingness to comply. It is a delicate balance that has to be managed,” says Landau.

"Overall, retention schedules should be prepared with care," Duffy adds.

“Bear in mind that consistent application of your records policy can demonstrate good faith legal compliance,” he cautioned. “So, when you group records into categories, use terms that all employees understand—and speak with your IT, regulatory/compliance and legal departments so they ‘make sense’ to the employees. If you do so, you're much more likely to facilitate understanding and implementation.”

The PowerPoint presentation that was used for this panel discussion can be found here.

Phillip J. Duffy is a Director on the Gibbons E-Discovery Task Force.

Before wrapping up this important roadmap to the ever increasing e-discovery issues faced by litigants and their counsel, the panel discussed and examined the challenges faced by the court with the advancements in technology and the Internet. As we are all aware, gone are the days when it took considerable time to learn about an important event or to research an issue. With the advent of smart phone devices and websites like Wikipedia, information about virtually everything is at one’s fingertips. Although extremely useful and beneficial in every day life, such instant access to information has been detrimental, at times, to the efficient administration of the law. The final hypothetical of the segment brought this very point to light when the distinguished attendees were asked to analyze what a juror did wrong when he decided to perform some research on Wikipedia regarding a critical fact of the case and then printed it out for review by his fellow jurors.

It is clear that the creation and storage of electronic data and the utilization of social media is here to stay with new advancements everyday. With these advancements, however, come new disputes and more intervention by lawyers and the courts to develop and manage methods to best keep up. It is clear that the landscape of e-discovery protocol is still unsettled with changes in methodology and philosophy popping up at a rapid pace. As the overview panel discussion made it equally clear, Gibbons is at the forefront in this area of the law and continues to strive to stay ahead for the benefit of its clients and those who may need assistance in the future.

The PowerPoint presentation that was used for this panel discussion can be found here.

Robert D. Brown, Jr. is an Associate on the Gibbons E-Discovery Task Force.

It was discussed that preservation does not end with a good litigation hold letter, but that consistent follow-up is also required to effect the ultimate purpose of the litigation hold. The panel noted that this is an evolving process which may require an additional litigation hold with revised and/or new categories.

This panel moved beyond the nuts and bolts of drafting litigation holds and discussed their standing in current case law, including the consequences of a failure to issue a written litigation hold, the discoverability of litigation holds and the exceptions to the “privilege” that might otherwise attach to them. Recognizing that no party’s preservation efforts are ever going to be perfect when judged after the fact, the panel recommended that litigants should always be prepared to explain why their preservation efforts were reasonable when undertaken and maintain a solid contemporaneous record of what they are doing to preserve documents.

Elizabeth Ann Fitzwater is Counsel to the Gibbons E-Discovery Task Force.

Finding this conduct "grossly negligent" under the circumstances, Judge Salas stressed that the plaintiff "has been unable to clearly articulate the steps taken to preserve, search and produce the requested discovery." Additionally, in addressing the litigation hold deficiencies and NVE’s somewhat vague assertion that they did circulate "an email" requesting preservation, the Court noted:

this Court has no proof of the content of this communication nor can the Court be convinced that [plaintiff’s CFO's] memory is correct. Moreover, NVE's counsel, …. hired in or around May 2006, admits that it failed to issue a written litigation hold. As to collection and review, NVE's CFO, Mr. Jensen, who is not a licensed attorney, has been responsible for not only gathering documents to produce in discovery but making relevance calls without the assistance of counsel. The Court was extremely surprised to learn that Mr. Jensen has received of assistance from counsel, nor has any counsel … visited NVE over the five years this litigation has been pending to review documents. The Court cannot fathom how NVE can be confident that it has produced all relevant information and that no relevant information has been destroyed when there has not been a single attorney reviewing documents to confirm this fact is true.

The NVE opinion reinforces several now fundamental tenets of e-discovery and spoliation law:

• litigation hold obligations can arise years before a case is filed;
• the termination of an employee, under certain circumstances can trigger a litigation hold obligation;
• the inability to document and fully explain the litigation hold process can be fatal to a party’s contention that an effective hold was instituted;
• negligent conduct can support a spoliation finding and sanctions, including adverse inference;
• written litigation hold notices and effective follow up provide greater protection in the event of loss of evidence;
• whenever possible, parties should involve their counsel in all aspects of the litigation hold process, and particularly in decisions to retire systems, discard potentially relevant documents and replace or repurpose relevant computer software and hardware; and
• proper initiation and execution of a litigation hold is an obligation shared by parties and their counsel.

Prior posts discussing litigation hold obligations can be found here.

Mark S. Sidoti Chairs the Gibbons E-Discovery Task Force.

This article won the LitigationWorld "Pick of the Week." LitigationWorld is a free weekly email newsletter that provides helpful tips regarding electronic discovery, litigation strategy, and litigation technology.

Long after the Green trial concluded, some of these documents were produced in another suit against the defendant arising out of the same alleged product defect. Perhaps most notably, these documents included an email received by the employee charged with the document collection with “Flame Arrester” as the subject which -- contrary to defendant’s defense at trial -- admitted that the relevant technology existed. As to this document, the court found that “[a]ny competent electronic discovery effort would have located this email.”

While the facts giving rise to the defendant’s e-discovery failures seem extreme, Green provides valuable lessons for executing any e-discovery preservation and collection plan. For example, Green once again highlights the dangers of not having developed a litigation hold procedure and issuing an adequate litigation hold when appropriate. Likewise, while charging a computer illiterate employee with sole responsibility for discovery collection is an obvious gaffe, Green should nonetheless serve as a reminder that choosing appropriate personnel to work in conjunction with counsel is critical to a defensible collection plan. Finally, given the nature of the sanctions here, parties involved in repeated litigation should be aware that they could continue to face consequences from e-discovery violations even well after the conclusion of the litigation in which they occurred.

Jennifer A. Hradil is a Director on the Gibbons E-Discovery Task Force.

Before deciding DuPont’s spoliation motion, the Court ordered targeted discovery concerning the apparent spoliation, including forensic analysis. In addition to Kolon’s “overall obfuscatory conduct,” the targeted discovery specifically revealed that:

• On February 6, 2009, two days after it learned of the DuPont Complaint, Kolon’s legal department issued its first legal hold to only select upper-level employees, who were advised only that they “might want to provide the order to other personnel,” though nothing in the record demonstrated that the hold order was, in fact, communicated to any other employees at that time.
• On February 10, 2009, Kolon issued its second litigation hold, this time sending it to all employees. However, most of them were South Korean and did not speak English, and the hold was in English. • Shortly after learning of the DuPont Complaint but likely prior to the issuance of the litigation hold, a senior Kolon manager gathered several other employees to discuss “identifying documents on their computers that they may want to consider deleting at a later date.”
• It was not until February 23, 2009 that Kolon issued a third litigation hold to its IT department instructing them to “safeguard documents stored on Kolon’s server by backing up material on tapes and suspending the routine, good faith operation of Kolon’s document retention practices . . . .” Thereafter, Kolon imaged the hard drives of key employees.
• According to DuPont’s forensic analyst, who performed deletion analyses of the computers of thirteen Kolon employees, after February 1, 2009, Kolon’s employees deleted at least 17,811 files and emails (and perhaps hundreds more), many of which were deemed relevant to the case based on keyword searches and a review of recoverable data as well as analyses of file names and metadata (e.g., files with “last written” dates many years before they were deleted).

Based on these facts, the Court found that “key employees . . . intentionally deleted relevant files and email items . . . after Kolon’s duty to preserve had been triggered and with knowledge of the filing of DuPont’s Complaint” — i.e., that Kolon spoliated evidence. Citing “[s]tandard principles of agency law,” the Court rejected Kolon’s argument that its employees’ conduct should not be attributed to it since their actions were “unauthorized,” “outside the scope of their employment,” “not taken . . . to aid Kolon” and “directly contradicted corporate directives.” And although some of the deleted data was recoverable, the Court summarily rejected Kolon’s argument that this mitigated its spoliation, noting that “[t]he fact of deletion has evidentiary significance.”

Notwithstanding the bad faith conduct of its employees, because Kolon attempted to put two litigation holds in place and also implemented a widespread effort to preserve files, and given that many deleted items were recoverable because Kolon preserved certain back-up tapes (thereby minimizing the prejudice to DuPont), the Court declined to enter a default judgment against Kolon. Instead, the Court imposed a “permissive” adverse inference jury instruction and awarded DuPont its attorneys’ fees, expenses and costs related to the motion.

There are several key takeaways from this decision:

• First, written litigation hold notices, which of course should be issued promptly after learning of litigation or when litigation is anticipated, must be issued to all employees who may have documents and information that are reasonably likely to be requested during discovery, and the record should reflect that these key employees received hold notices.
• Second, the litigation hold notice must explain the importance of preserving relevant data and, if any employees do not speak English, the litigation hold notice should be translated.
• Third, in-house IT professionals should be among the first recipients of the hold notice, as they are best positioned to act as guardians of potentially relevant evidence and, as such, they may be able to safeguard data on behalf of the company, insulating the company from any rogue employees who might otherwise spoliate evidence.
• Lastly, both counsel and corporate executives should closely monitor compliance with the litigation hold, particularly if the target of the hold is a foreign company unfamiliar with the preservation obligations imposed by the U.S. legal system.

Taking note of Kolon’s mistakes, and DuPont’s good example (as detailed in this post), will go a long way in insulating your company from spoliation sanctions.

Suzanne Herrmann Brock is an Associate on the Gibbons E-Discovery Task Force.

The Court concluded that DuPont did not violate its duty to preserve documents. Id. at *39-40. Instead, the Court reasoned that DuPont had no reason to know that the documents and information allegedly within the possession of the former employees “would be relevant, or potentially relevant, to the litigation against [its former employee] or Kolon.” Id. at *40. Moreover, the Court determined that the scope of DuPont’s duty to preserve was satisfied in its First Hold Order because “the universe of DuPont’s knowledge was quite limited at that point,” and the company had no reason to identify the former employees as “key players.” Id. at *41. Overall, DuPont did not have a duty to preserve the former employees’ email accounts, so no spoliation occurred. Id. at *46.

There are some practical pointers to draw from DuPont’s actions, each of which contributed to the Court’s denial of Kolon’s motion for sanctions:

• First, DuPont promptly hired counsel to assess its litigation hold obligations before it commenced litigation.
• Second, DuPont refreshed its litigation hold notice at several points throughout the litigation and did so promptly.
• Third, DuPont ensured that its foreign affiliates were aware of the litigation hold, demonstrating its recognition of the need to educate foreign employees about the U.S. legal process and the duty to preserve.
• Fourth, the Court recognized that DuPont’s employees adequately transferred information to their successors upon leaving the company or changing positions, some of which was ultimately produced to Kolon.
• Lastly, DuPont had a formal policy for deleting the email accounts of its former employees. Although the relative strength of that policy is debatable, DuPont’s institution and maintenance of a formal policy weighed in its favor.

Overall, DuPont demonstrated to the Court that its reasonable, professional attempts to preserve electronically-stored information were appropriate -- and that its duty to preserve was satisfied -- consequently, there was no spoliation to sanction.

Jennifer Marino Thibodaux is an Associate on the Gibbons E-Discovery Task Force.

Sanctionable Conduct and the Range of Potential Sanctions

Sanctions were awarded most often in response to failures to preserve ESI but were also awarded for ESI production failures and delays. In response, courts have imposed a range of sanctions, from the most severe -- dismissal of all claims or defenses, adverse jury instructions and monetary awards, some as high as $5 million -- to lesser but still significant sanctions, such as witness or evidence preclusion, shifts in burdens of proof and supplemental discovery. Some courts have devised more creative penalties by, for example, ordering participation in court-administered ethics programs or payments to fund bar association educational programs.

Attorneys Are Not Immune from Sanctions

In addition to discussing sanctions against litigants, the study also highlighted the increase in sanctions imposed against both in-house and outside counsel. These most commonly took the form of attorneys’ fees and cost awards in amounts from $500 to $500,000. In some instances, both counsel and the parties were responsible for paying those fees and costs. Those awards emanated from various levels of misconduct including negligence, gross negligence, reckless and intentional conduct. 

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Although sanctions motions and awards increased steadily through 2009, the Duke authors conclude that the pendulum may be swinging back to a more reasonable and proportional approach by the courts; although the number of sanctions motions filed in 2010 increased, courts granted 55% of those motions as compared with 70% in 2009. See 2010 Year-End Electronic Discovery and Information Law Update, published by Gibson Dunn. Thus, while the overall number of successful sanctions motions and awards remains staggering and a potent reminder of the pitfalls that await the unwary, perhaps courts in the sanctions context are implicitly recognizing the complexities and challenges of e-discovery as well as more practical and reasonable threshold inquiries such as whether discovery-relevant information was actually lost. A good example of this approach is the sanctions analysis in the recent Orbit One case. Orbit One Communications, Inc. v. Numerex Corp., 2010 WL 4615547 (S.D.N.Y. Oct. 26, 2010). Additional discussion of this case can be found here.

Judge Francis itemized the instances where Orbit One and Ronsen failed to adopt and implement model preservation procedures, but also observed that the data on Ronsen’s laptop, hard drive, backup disks and email account either had been archived, was uncompromised, was otherwise still retrievable and/or had actually been previously produced. As such, the court concluded that sanctions, particularly the severe sanction of an adverse inference, was not appropriate because there was insufficient evidence that any of Orbit One and Ronsen’s actions resulted in the loss of any “discovery-relevant” information -- information that is likely relevant even if only under the broad definition of the Federal Rules. The court noted that sanctions, particularly in the form of an adverse inference, are predicated on the loss of information that is “relevant” to a claim or defense and to “ameliorate any prejudice to the innocent party by filling the evidentiary gap created by the party that destroyed evidence.” Accordingly, the sanction of an adverse inference for inadequate preservation efforts must be tied to a showing of the loss of “discovery-relevant” materials and prejudice to the innocent party, not simply to the spoliating party’s gross negligence or bad faith. Magistrate Judge Francis took issue with Pension Committee for its omission of the discovery-relevance requirement and for the suggestion that sanctions are warranted by a mere showing that a party’s preservation efforts were inadequate. Under that standard, the court reasoned that litigation would become a “gotcha” game between the parties regarding lost information, however inconsequential, rather than a full and fair opportunity to address the merits of a dispute. Thus, Magistrate Judge Francis held that sanctions are only appropriate if the inadequate preservation efforts resulted in the destruction of “discovery-relevant” materials.

The law on sanctions, spoliation and preservation efforts favors a factored analysis approach to the imposition of sanctions, rather than a categorical approach that ignores culpability or the lack of any real damage to the innocent party. Thus, most courts have held that sanctions for the destruction of ESI data should be dictated by circumstances of individual cases and should only be imposed if discovery relevant material has been destroyed. Nonetheless, this contrast of opinions between two highly respected jurists and e-discovery specialists from the same jurisdiction highlights the controversial and constantly evolving nature of these principles, and cautions that the most prudent course is to always engage in broad, methodical and well-documented preservation practices.

The proposed rule is not without some criticism. Although adverse parties would theoretically be able to move to vacate or modify the order, some of the panelists expressed concern with binding potential parties over whom jurisdiction has not yet been established, and requiring them to seek redress from the Court before having even been sued. Also, the proposed rule leaves gray areas as to what constitutes an occurrence of “sufficient magnitude to make related litigation probable” or whether a party’s actions were taken in anticipation of asserting or defending against a claim. Judge Peck posited that the rule would increase the burden on courts, which would need to address preservation issues before litigation even began.

While there are no easy answers, most judges and litigators agree that steps should be taken towards establishing some uniformity and predictability in the area of document preservation. The devil, of course, is in the details, and we can expect the debate on how to best address these issues to continue for some time.

Paul E. Asfendis is an Associate on the Gibbons E-Discovery Task Force.

While the first and second mechanisms pertain to the courts’ rule-making authority, the third mechanism -- application of the Erie doctrine -- offers a practical approach founded upon existing jurisprudence. Under the Erie doctrine, unless there is an express federal law or regulation addressing the retention and/or the destruction of particular ESI, state law would govern the pre-litigation duty to preserve ESI, the scope of the duty, when the duty is triggered, the breach of the duty and the imposition of sanctions. The main issue is whether the general pre-litigation duty to preserve ESI would be considered procedural or substantive in nature. If New York courts were to interpret ESI duties as substantive, then under the Erie doctrine, New York state and federal courts would be bound to apply New York common law as it applies to pre-litigation preservation of ESI and spoliation of evidence sanctions. Application of the Erie doctrine is well-reasoned because the duty to preserve ESI, like the substantive rules espoused by Erie, is grounded in the common law obligation to preserve evidence and the substantive obligation of litigants to avoid tortious conduct. Although there is disagreement among the other federal circuits regarding the application of Erie to the pre-litigation duty to preserve ESI, the panel nonetheless encouraged arguments favoring the Erie doctrine because the Supreme Court had not yet ruled on the issue, suggesting that federal courts in New York would consider the Erie doctrine’s sound and reasoned approach to resolving the potential conflicts between New York state and federal law.

The panel also offered a presentation from Patrick V. DiDomenico, Chief Knowledge Officer of Gibbons, on the burdens associated with collecting, searching and producing ESI, the proportionality argument in defending against requests for discovery and shifting of fees and costs, and the impact on the cost-efficiencies as a result of emerging technologies.

Panel discussion materials are available here.

In attempting to identify solutions for some of the problems companies face in issuing legal holds, the panel probed the difficulties parties encounter in discharging their obligations to preserve data when they have failed to prioritize information governance, establish corporate data maps and develop a consistent records management program.

The panel also examined the issues from the perspective of establishing information management programs and implementing and monitoring legal holds, and offered numerous critical insights. The panel emphasized the absolute necessity of having “buy in” from the most senior levels when attempting to create an information management program. They also identified their successes in creating and implementing solid records management programs and reducing the overall number of places where data can reside.

The panelists further identified some of the challenges of managing legal holds when there are numerous holds in place at any given time, including identifying the appropriate custodians to receive the hold notice, tracking down data when the custodians move or change positions in the company and timely releasing holds when the matter is concluded.

The panel also explored how having a solid understanding of one’s duty to preserve information can be effectively leveraged to achieve proportionality in appropriate cases. For example, they noted that in smaller cases that do not justify spending “big dollars” on data collection, processing and review, they have had some success by taking a straightforward and transparent approach to the identification of custodians whose data will be searched and produced. When this is explained to the adversary and the court at the outset of the case, quite often, courts go along with that proactive approach. The panelists agreed that efforts should go beyond implementation of the legal hold, and extend to conducting follow-up with explanations of what must be preserved, as well as monitoring compliance with periodic compliance checks.

Finally, the panel expressed the consensus that that there are many critical issues to consider in crafting and implementing effective legal holds, but essential components include:

• timely issuance of written legal hold notices;
• follow-up with custodians to ensure that they understand what must be preserved;
• document custodian interviews;
• assistance in data collection where necessary;
• re-issuance of the hold from time to time with updates and reminders; and
• documentation of preservation efforts to enable litigants to make a showing as to their good faith efforts to discharge their preservation obligations to any reviewing court.

Philip J. Duffy is a Director on the Gibbons E-Discovery Task Force.

Discussion regarding Quon and Nelson

Next, the panel reviewed the United States Supreme Court’s opinion in City of Ontario v. Quon, rendered on June 17, 2010, which examined the Fourth Amendment privacy rights of government employees in their workplace communications. At issue in Quon was whether the Fourth Amendment's ban on “unreasonable searches” puts any limits on searches by public employers. The Court held that a police chief did not violate the constitutional rights of an officer when he read the transcripts of sexually explicit text messages sent from the officer’s work pager. A panel member noted that in so holding, the Court effectively “punted” the constitutional issue by assuming that the police chief's reading of the text messages was a search under the Fourth Amendment, but holding that the search was sufficiently narrow to pass constitutional muster.

The panel also noted that the case of NASA v. Nelson, which was argued before the United States Supreme Court on October 5, 2010, represents a new opportunity for the Court to make a broader statement regarding privacy rights. Nelson involves the constitutional right of employees of federal contractors to keep private personal information in conjunction with background checks.

Practical Pointers for Employers Offered

In light of the recent case law regarding employee privacy, the panel then provided practical points as to how employers can craft and execute a reasonable and enforceable electronic communications policy. The panel stressed that the best policies are clear to the intended audience and unequivocally state the employer’s position with respect to an employee’s expectation of privacy in their electronic communications. Training employees and requiring them to sign annual acknowledgements are important in this regard. Additional tips for employers on how to formulate a clear and understandable electronic systems policy are included in an April 2010 New Jersey Law Journal article authored by Kristin Sostowski.

The panel also discussed the importance of having proper monitoring mechanisms and protocols in place, such as reviewing employees’ emails, tracking the time spent by employees on personal websites, and blocking access to certain websites, password-protected email accounts and social networking sites like Facebook.

Finally, the panel addressed issues that companies – particularly national and multinational companies or those who store their data off-site – may have to confront regarding privacy protections found in the federal Stored Communications Act, which prohibits the unauthorized access of stored communications such as e-mail and Internet accounts. The panel also noted the existence of broader privacy protections afforded by the European Union Privacy Directive and other similar international protocols.

The panel fielded a wide range of questions regarding the content of electronic communications policies and the types of monitoring permitted. With regard to content, the panel noted that a policy permitting limited personal use but clearly spelling out an employer’s right to access workplace information, supported by proper monitoring, is usually the most realistic and enforceable approach.

The Court found that the text messages were discoverable under the Jencks Act, 18 U.S.C. § 3500, and Federal Rule of Criminal Procedure 26.2 and should have been preserved and produced. The Court declined to impose the harsh sanction of suppressing Dwek’s testimony and all tape recordings in which he participated, but carefully analyzed the propriety of giving the jury one of various forms of adverse inference instructions. Consulting the Honorable Shira A. Scheindlin’s decision in Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC, 685 F. Supp. 2d 456 (S.D.N.Y. 2010) (corrected in part by Order dated May 28, 2010), the Court ordered the most “flexible” and “least harsh” adverse inference instruction: permitting, but not requiring, the jury to presume that the lost text messages were both relevant and favorable to defendants, but mandating that the jury consider rebuttal evidence on these issues. The Court acknowledged that, although defendants were clearly prejudiced in their ability to impeach the government’s cooperating witness, there was “little evidence” to suggest that the government acted in bad faith. On October 27, 2010, the jury acquitted defendant Suarez on all counts (conspiracy to commit extortion, attempted extortion and bribery) and convicted defendant Tabbachino of attempted extortion and bribery.

As with all decisions imposing sanctions for spoliation of evidence, U.S. v. Suarez underscores the critical importance of promptly issuing a litigation hold and properly preserving evidence. Failure to discharge these now well established duties, even absent bad faith, can result in severe sanctions that may negatively impact the prosecution of a case, both in the criminal and the civil context.

Jennifer Marino Thibodaux is an Associate in the Gibbons Business & Commercial Litigation Department & a member of the Gibbons E-Discovery Task Force.

Based on this willful destruction of ESI, the Court presumed the destroyed ESI was relevant, and that it prejudiced Plaintiff’s efforts to prove its claims against CPI. The Court recommended entry of a permanent injunction and default judgment on liability. Indeed, CPI consented to the default judgment. The Court also held that, as the prevailing party, Plaintiff was entitled to attorney’s fees and costs allocable to the spoliation. The Court declined for the moment to pursue criminal sanctions, but held that Pappas’s individual violations warranted civil contempt sanctions so that Pappas would be imprisoned for two years unless and until he pays the attorney’s fees and costs awarded to Plaintiff. Notably, the decision also includes an invaluable 12-page chart entitled, "Law of Spoliation," that identifies the prevailing standards for preservation and spoliation issues by jurisdiction. This benchmark decision is a must read for anyone involved in e-discovery issues.