In a decision dated May 26, 2017, Justice Chan of the Supreme Court of the State of New York, New York County, struck the defendant’s answer.    Although the Court acknowledged that the imposition of this particular sanction was “severe,” Justice Chan deemed it warranted in light of the “egregious” and deliberate misconduct of the defendant.

The substantive allegations in the underlying lawsuit involve the parent company of an Indian programming channel (Mumbai-based Iris Mediaworks Ltd.,) accusing a former executive (“Vasisht”) and his company (“IKK Inc.”) of breaching fiduciary duties, competing unfairly and misappropriating trade secrets.  Specifically, the suit claims that Iris owned a South Asian entertainment channel called Get Punjabi that DISH broadcast on its satellite in the U.S., and that Vasisht set up IKK, Inc., a competitor that now broadcasts extensive programming previously shown on Get Punjabi. The complaint names six defendants and includes 12 causes of action.  That litigation was commenced on July 14, 2014.

The litigation was proceeding forward when, on October 26, 2016, the Chairman and Managing director of Iris (Rajendra Karnik) discovered that all the emails in his work account were being forwarded to another account (anonymous331100@gmail.com) without either his knowledge or his consent.    As a result, Karnik subpoenaed Google® requesting certain information about the anonymous331100@gmail.com account.   Karnik learned, among other things, that the “anonymous” account was created July 10, 2014 – four days prior to the instant lawsuit being commenced.

Karnik also learned – with the help of a computer forensic consultant – that the “auto-forward functionality” was enabled on his work email (without his knowledge or consent) to forward all of Karnik’ s emails to the “anonymous” account.  Therefore, every email in the Karnik account was simultaneously accessible by the “anonymous” account owner.   The consultant also determined that the “anonymous” account received Karnik’ s emails via the auto-forward functionality from July 10, 2014 through October 27, 2016 and, during that time forwarded 317 emails (including Karnik’ s communications with his attorney regarding the litigation strategy of this lawsuit) to another email account manish@a2zmediausa.com.    The consultant further demonstrated the existence of two other dummy accounts that received Karnik’ s emails and routinelyforwarded those emails to Vasisht.

Based upon the foregoing, plaintiffs moved by Order to Show Cause to have Vasisht’s Answer stricken based upon Vasisht’s intentional hacking of their emails and taking of protected materials.    In opposition, Vasisht did not offer any evidence to contradict the computer forensic consultant’s findings.  Rather, he interposed only a general denial of knowing about either the “anonymous” account or the dummy accounts, which Justice Chan categorized as “half-hearted.”

The Court in striking the answer, observed:

“There are no issues raised…as to whether the 2000 plus hacked emails were…protected material. However, even if there were an issue, the hacking of plaintiffs’ email during litigation can only be seen as an attempt to undermine plaintiffs’ case.  It is also indicative of…[a] disregard for the judicial process.  While striking a defendant’s answer is an extreme sanction, it is warranted here as hacking plaintiffs’ email to obtain information during litigation without going through proper discovery channels is an egregious act and sidesteps discovery procedures.” (internal citations omitted).

While this case is illustrative of unequivocal bad behavior that hopefully is infrequently encountered, it serves as an important reminder of the various sanctions – including the striking of a pleading – available to Judges.  When parties/counsel engage in conduct deserving of sanctions.

In Miller v. Zara USA Inc., (2017 N.Y. Slip Op. 04407, 1st Department June 6th, 2017), the First Department held that where, as here, a company’s written employment guidelines clearly provide that employees have no reasonable expectation of privacy when using a company-issued computer for personal purposes, no claim of attorney-client privilege over personal documents on that computer can stand.

Relevant Facts

Ian Miller (“Miller”), was the general counsel for Zara USA (“Zara”).  During his employment with Zara, Miller received and utilized a company-issued laptop (“Laptop”).  Miller used the Laptop for business purposes.  Miller also conducted personal business on the Laptop notwithstanding a company-issued handbook that provided, “[a]ny data collected, downloaded and/or created” on Zara’s electronic resources was “the exclusive property of Zara,” and “[e]mployees should expect that all information created, transmitted, downloaded, received or stored in Zara’s electronic communications resources may be accessed by Zara at any time, without prior notice,” and further added that employees “do not have an expectation of privacy or confidentiality in any information transmitted or stored in Zara’s electronic communication resources (whether or not such information is password-protected).”

In March 2015, Miller was terminated from his employment with Zara.  Soon thereafter, he initiated a lawsuit against Zara alleging employment discrimination, hostile work environment, and wrongful termination. Pertinently, Miller continued to use the Laptop after his termination and did so to discuss with his personal attorney the impending litigation. In the employment discrimination lawsuit eventually filed by Miller, Zara sought access to the Laptop and to all files contained therein. Miller sought a protective order precluding Zara from accessing his personal documents on the Laptop, claiming the documents were protected by the attorney-client and work-product privileges.   The Supreme Court issued the protective order, in part due to Zara’s inability to articulate any reason why Miller’s personal files created after his termination were relevant and because the personal files, mainly correspondence between Miller and his attorney, were privileged.

Zara appealed.

In its decision on appeal, the First Department rejected Miller’s privilege claim, finding that — based on the unequivocal provisions of the employee handbook (of which Miller had at least constructive notice) — Miller lacked any reasonable expectation of privacy in his personal use of the Laptop.  Specifically, the Court accepted Zara’s argument that there was no reasonable expectation of privacy regarding the contents of the Laptop as a result of the provisions in the employee handbook pertaining to personal use of a company issued laptop. Zara argued that this was enough to remove any reasonable expectation of confidentiality, which is central to the formation of the attorney-client privilege, and the Court agreed.

The First Department, however, found that Miller’s storage of documents on the Laptop did not, by itself, waive the attorney work-product protection with respect to the documents.  Because the Court noted the work product privilege “is waived upon disclosure to a third party only when there is a likelihood that the material will be revealed to an adversary, under conditions that are inconsistent with a desire to maintain confidentiality.” (Bluebird Partners, L.P. v. First Fid. Bank, N.A..)  Zara never actually viewed any documents stored on the Laptop.  Therefore, the First Department concluded that “[g]iven the lack of any actual disclosure to a third party, ‘[plaintiff’s] use of [Zara’s computer] for personal purposes does not, standing alone, constitute a waiver of attorney work product protections.’” (internal citations omitted).  And so, the Appellate Division remanded the case to the Supreme Court for an in camera review of the documents Miller claimed to be attorney work product.

This case serves as an important reminder that in today’s workforce it is increasingly important to be mindful of, and understand completely, company policies pertaining to the use of company property. As far as the First Department is concerned, attorney client privilege will be subordinate to a clear policy regarding the use of company property; the decision further endangers any assertion of attorney work-product protection in the event the company executes the policy and disclosure occurs (i.e., the company seizes the company property containing the personal files and views as much).   Likewise, it makes practical sense for companies who issue laptops, iPhones and other electronic devices to employees to be certain company employees understand whether the content of those devices belong to the Company thus precluding any expectation of privacy in the usage of or contents on the device.

*A special thanks to Farrell Fritz Summer law clerk Philip Merenda for his research and drafting assistance with Just When You thought It Was Safe To Use Your Company Computer.  Philip is a student at Georgetown University Law and anticipates receiving his J.D. in 2018.

 

Most practitioners are familiar with the federal sanction powers as codified in the Federal Rules of Civil Procedure (i.e., Rules 11, 26, 30 and 37). However, all federal courts also possess inherent sanction power that is conceivably broader than those articulated under the various Rules.  And, notwithstanding that this is an ESI blog, the Court’s inherent sanction powers are not limited to issues involving electronic discovery.

On April 18, 2017, the Supreme Court of the United States (“SCOTUS”) provided guidance on the breadth of a federal court’s inherent authority to sanction a litigant for bad faith misconduct. Specifically, SCOTUS held in Goodyear Tire & Rubber Co. v. Haeger (137 S. Ct. 1178 (Apr. 18, 2017)), that when a federal court exercises its inherent authority to sanction bad-faith conduct by ordering a litigant to pay the other side’s legal fees, the award cannot be punitive but rather, must be limited to the fees the innocent party incurred solely because of the misconduct.

Relevant Background

In 2003, Leroy, Donna, Barry, and Suzanne Haeger (“Haegers”) were injured when one of the tires on their motorhome failed while they were driving on the highway.  This failure caused the motorhome to overturn. The tire was manufactured by The Goodyear Tire & Rubber Company (“Goodyear”). In 2005, the Haegers sued Goodyear, alleging various actions sounding in product liability. Specifically, the Haegers alleged that the Goodyear G 159 tire was not designed to withstand the level of heat generated when used on a motorhome at highway speed levels. After a protracted discovery period replete with disputes, due in part to Goodyear’s slow response to repeated requests for internal tire testing on the G 159 model, the parties reached a settlement prior to trial.

Over a year later, the Haegers’ attorney learned of relevant information – not previously disclosed during discovery – that was damaging to Goodyear’s defense.  Specifically counsel learned that, in an unrelated lawsuit, Goodyear had disclosed a set of relevant test results which established that the G 159 tire got unusually hot at specific speeds.  The Haegers’ attorney filed with the District Court a motion seeking discovery sanctions arguing that Goodyear committed discovery fraud by knowingly concealing crucial testing information. Goodyear opposed the motion and argued that it never represented that it had provided to the Haegers all of the records reflecting testing conducted on the tire at issue.

The District Court granted the Haergers’ motion, finding that Goodyear’s conduct rose to an “egregious level.” However, because the case had settled, the District Court determined it was not able to impose sanctions, and so, opted, instead, to award the Haegers’ attorney’s fees. In so doing, the District Court recognized that fees must be causally connected to the misconduct, but abandoned that standard, and awarded instead all fees in the case (approximately $2.7million) because the misconduct occurred early on and rose to a “truly egregious level.” * Goodyear appealed arguing that the District Court could not impose such sanctions without the additional procedural protections required for the imposition of punitive sanctions.

On appeal, a divided U.S. Court of Appeals for the Ninth Circuit held that the District Court did not abuse its discretion and affirmed the award finding the District Court’s inherent sanction authority permitted the Court to aware the amount it reasonably deemed the innocent party suffered “during the time” Goodyear acted in bad faith.  Goodyear petitioned the Supreme Court for certiorari review.

The Supreme Court, relying entirely on established precedent, reversed the Ninth Circuit and remanded the case to the District Court. Specifically, SCOTUS found that any imposition of sanctions must be compensatory, and not punitive in nature. While the Court acknowledged Goodyear’s misconduct and the importance of a District Court’s discretion, SCOTUS upheld the established standard that the imposed sanction for bad-faith conduct must be limited to compensate for the misconduct with a documented causal standard, and nothing more. SCOTUS reasoned that a sanction is only compensatory if it is calibrated to the damages caused by the bad-faith acts on which it is based, and a causal link between the bad-acts and the legal fees paid by the bad actor is necessary.**  Because, here, the District Court went beyond established precedent, SCOTUS reversed and remanded to the District Court for review based on the but-for test.

*The District Court also crafted a “contingent” award in the event of reversal, reducing the award to $2 million for fees incurred that were causally linked to the misconduct.

**The Court also reviewed the district court’s “contingent” award, noting that even after conducting a causal analysis, the District Court found that $700,000 of the incurred fees had nothing to do with Goodyear’s misconduct and were fees the Haegers would have incurred irrespective of whether Goodyear acted in bad-faith or not.  The Court declined to determine whether the “contingent” award was appropriate without the benefit of knowing whether the District Court has applied the appropriate “but for” test.

According to the Complaint filed in Michael Distefano and Nicole Distefano v Law Offices of Barbara H. Katsos, PC and Barbara H. Katsos, Michael DiStefano and a non-party were owners of a limited liability company that was the franchisee of three Cold Stone Creamery Inc. ice cream parlors.  In 2006, the three stores suffered financial difficulties due to an extended power failure earlier in 2006.  The Complaint further alleges that as a result, DiStefano sought legal advice from Barbara Katsos, Esq., and eventually retained her for the purposes of commencing a Chapter 11 bankruptcy proceeding.   That proceeding was ultimately withdrawn in 2010 and subsequently the DiStefanos filed the instant lawsuit. The Complaint interposes claims of legal malpractice in connection with the Chapter 11 proceeding along with claims for breach of contract and breaches of fiduciary duty.

The focus of this blog will be Katsos’ failure to preserve data relevant to the malpractice lawsuit.

Relevant Facts Per Court’s Decision

During a discovery status conference before Magistrate Judge A. Kathleen Tomlinson, counsel for Defendants advised the Court that Katsos had discarded her computer at some point prior to the malpractice litigation being commenced.  In response, the Court directed defense counsel to provide the Court with an affidavit detailing the circumstances of how the computer was discarded.   After receipt of the affidavit, the DiStefanos moved for spoliation sanctions pursuant to Rule 37.   The Court temporarily denied that motion, without prejudice, pending a hearing.  See DiStefano v Law Office of Barbara H. Katsos, PC, No. CV 11-2893, 2013 WL 1339548, at *9 (EDNY Mar 29, 2013).  Specifically, the Court found that “a hearing is necessary to explore the circumstances under which the alleged spoliation occurred” (id. at *8) (internal quotations omitted).  The Court instructed Katsos to be prepared to testify – or bring someone who could testify – as to specific topics relevant to the issue of spoliation (i.e., the document preservation undertaken when the DiStefanos instituted an adversary proceeding in March 2010).

Which Rule 37 Applies?

Before assessing the testimony presented at the evidentiary hearing, Judge Tomlinson was required to determine which version of Rule 37(e) was applicable to the motion – those in effect pre-2015 amendment? Or those currently in effect in 2017?    Citing Magistrate Judge Francis’ decision in Cat3, LLC v Black Lineage, Inc. (144 FSupp3d 488 [SDNY 2016]) (previously mentioned in my August 31, 2016 E-Discovery Update: ESI Sanctions in Federal Court During 2016 (Well, through July)), the Court noted that for cases filed before the effective date of the amendments, courts have discretion to determine which version of the Rule to apply based upon what is “just and practicable.”    Thus, Judge Tomlinson opted for the older version of the Rules based upon three considerations. First, the parties briefed the spoliation motion in 2013 based upon the former Rule 37 in.  Second, the evidentiary hearing was conducted under the tenants of former Rule 37.  And third, the conduct relevant to the motion began more than seven years before the current version of Rule 37 took effect.

Relevant Testimony At Hearing*

According to the Court, the testimony at the evidentiary hearing established the following facts:

  • While representing the DiStefanos in 2009, Katsos’ office computer crashed and a freelance computer technician told Katsos it “was bad and that nothing could be recovered”;
  • That same technician replaced the defective computer parts and drilled holes in the replaced hard drives;
  • At no time after this litigation began did Katsos take any affirmative steps to save electronic information;
  • Katsos did not issue any written instructions to her staff regarding the obligation to preserve ESI;
  • Katsos testified she was “amazed” she did not find more emails when searching her AOL accounts;
  • Katsos contacted her email provider only to learn that AOL “had no ability to save emails past the 27-day mark” absent some affirmative action by Katsos earlier;
  • Katsos’ electronic retention policies were essentially non-existent in that “everything was made in hardcopy” (and emails Katsos deemed subjectively relevant were often printed) and filed in storage cabinets;
  • There was no backup system in place to preserve electronic data;
  • Katsos was unaware of any method to set up automatic deletion of emails from her email account nor was she aware of how emails might be saved or deleted from a “sent folder”; and
  • Katsos’ office manager was not computer savvy and Katsos knew this when she hired the office manager.

Court’s Conclusion

Notwithstanding the foregoing facts, Magistrate Judge Tomlinson spared Katsos the most severe sanctions available to the Court under the pre-amendment Rule 37(e) because the Court believed that Katsos’ actions were not taken in bad faith.   Specifically, the Court noted that “[r]ather than bad faith…Katsos’ actions were occasioned by (1) her position as a solo practitioner utterly naïve about her obligations to preserve electronic evidence and (2) her total reliance upon and complete delegation to an outside consultant the responsibility for setting up and maintaining the computer system in her office.”   Moreover, the Court found that Katsos’ “utter ignorance of (i) her ESI preservation responsibilities and (ii) her efforts to save ‘substantive’ emails can be considered, to some degree, as ‘positive evidence’ of good faith.”

Ultimately, the Court concluded, “on the ‘continuum of fault ranging from innocence to the degree of negligence to intentionality’….this case falls on the spectrum between negligence and gross negligence, and closer to the former than the latter.’” Indeed, the Court found no evidence of intentional or malicious spoliation but said Katsos had “at the very least, acted with a ‘pure heart and an empty head.’”

Thus, the Court ordered Katsos to pay Defendants’ attorneys’ fees and costs incurred in connection with the spoliation motion as a sanction.

Lesson

Although the Court demonstrated leniency when imposing its sanctions, there are many important lessons to internalize from the Court’s 60-page decision.  Included among them:

  • The pre-Amendment Rules are alive and well.  Given that litigations tend to span many years, it is possible you/client could be subject to stiffer sanctions under the still-viable former Rule 37(e);
  • Ignorance of one’s preservation obligations will not insulate you from sanctions.  In fact, while Katsos’ lack of computer sophistication may have helped her when it came time for sanctions to be imposed (i.e., she was merely negligent), the fact remains she was sanctioned!  And remember – certain state’s ethics decisions expressly find that ignorance of technology is a violation of one’s duty of competence; and
  • Finally, there are resources available to help smaller firms and solo practitioners comply with their various discovery obligations – including me!  Farrell Fritz’s E-Discovery practice group is always willing to help so don’t hesitate to contact us if confronted with an ESI issue

* Memorandum and Order, dated May 10, 2017

In Hsueh v. N.Y. State Dep’t of Fin. Servs., (No. 15 Civ. 3401 [PAC], 2017 WL 1194706 [S.D.N.Y. Mar. 31, 2017]) the Southern District imposed spoliation sanctions (specifically, an adverse inference) on the plaintiff in a sexual harassment case, because of her intentional deletion of a recorded conversation relevant to her allegations.  While the court deemed the recording ESI, it ultimately concluded the Rule 37(e) applied only to situations where a party failed to take reasonable steps to preserve ESI; not to situations where, as here, a party intentionally deleted relevant information.

Factual Background

Hsueh filed her sexual harassment complaint on May 1, 2015. During her deposition almost a year later (April 20, 2016), plaintiff stated she did not believe she had any recorded conversations relevant to her lawsuit, but it was possible she may have such recordings.  As the deposition continued, however, Hsueh eventually revealed that she had recorded one conversation with a Human Resources representative but later deleted the recording because it was not “worth keeping” and “was not very clear.” She testified she deleted that recording in either December 2015 or January 2016.

A few weeks after Hsueh’s deposition, defendants filed a letter with the Court requesting a pre-motion conference on a proposed motion for spoliation sanctions in connection with Hsueh’s intentional deletion of the recording. Immediately before Plaintiff’s response was to be filed, Plaintiff’s counsel informed the Court that Hsueh provided him with a recording of the deleted conversation, which Plaintiff was able to recover with the help of her husband.  The result – discovery was reopened for 90 days so that Defendants could depose (again) Plaintiff and her husband.  The Court also reserved the right to impose upon Plaintiff the attorney’s fees and the costs incurred by Defendant’s in connection with reopening discovery.

Notwithstanding the additional discovery and depositions, Defendants proceeded with their sanctions motion.

Relying upon the plain language of Rule 37(e), the Court found the Rule 37 inapplicable in the present instance. The Court continued:

“Because Rule 37(e) does not apply, the Court may rely on its inherent power to control litigation in imposing spoliation sanctions. A party seeking an adverse inference instruction based on the destruction of evidence must establish (1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense. If these elements are established, a district court may, at its discretion, grant an adverse inference jury instruction insofar as such a sanction would serve the threefold purpose of (1) deterring parties from destroying evidence; (2) placing the risk of an erroneous evaluation of the content of the destroyed evidence on the party responsible for its destruction; and (3) restoring the party harmed by the loss of evidence helpful to its case to where the party would have been in the absence of spoliation.”

The Court also rejected Plaintiff’s argument that sanctions were not appropriate because the recording in issue was ultimately produced.*

Thus, having concluded Hsueh’s actions were the result of a culpable mind, rather than inadvertence, the Court exercised its inherent powers, imposed an adverse inference on Plainiff and granted to Defendants its attorneys’ fees and costs incurred in bringing the spoliation motion and in reopening discovery.

*Specifically, the Court concluded the produced recording was incomplete due to a number of factors including the length of the recording, that it cut off in mid-sentence, and Plaintiff’s husband’s concession that he could not be sure the recording was complete.

Electronic discovery (a/k/a ediscovery and e-discovery) is the process of identifying, preserving, collecting, preparing, reviewing and producing electronically stored information (“ESI”) in the context of a legal or investigative process.   In order that counsel may bring discovery issues (including e-discovery issues) to the forefront early on in the development of a case, the Federal Rules of Civil Procedure impose on counsel certain obligations.  These obligations include, but are not limited to, requiring counsel to participate in a Rule 26(f) conference, and requiring counsel to making certain initial disclosures pursuant to Rule 26(a).  Note that these obligations are imposed upon counsel irrespective of whether there is ESI relevant to the dispute.  However, competent counsel should be prepared to attend the 26(f) conference educated as to their client’s electronic data content and infrastructure, including any data that may be difficult or costly to produce, and should be further prepared to discuss issues like inadvertent production of privileged materials and phasing of discovery.

Rule 26(f) Conference

While the precise timing of the conference will depend on the individual Court’s scheduling orders and local practice, the 26(f) conference will inevitably give rise to one of the earliest opportunities for the parties to engage in comprehensive discussions regarding discovery, including issues relating to ESI.  Moreover, there is an expectation that the parties will exchange certain information, and reach agreement on many discovery-related topics.  Thus, it is critical that the attorney attending this conference be knowledgeable about his/her the client’s data, electronic storage systems and data retention.  

At the conference, counsel should discuss, among other things, the subjects on which discovery may be needed, when discovery will be completed, and whether discovery can and should be phased or limited to particular issues.  For example, as it relates to ESI, it may be most efficient to start with a discrete list of ESI sources (i.e., 5 custodians rather than 50), review fully that material, and agree to include additional sources at a later date if necessary. 

Relatedly, it is highly advisable to discuss the format of the eventual production(s) at this early stage. Even though production may not occur for many weeks / months, the ultimate format will aid in creating processing and review plans.  For example, without knowing the production format, one party may convert or otherwise manipulate its ESI in a way that is incompatible with the ultimately required production format.

Additionally, claw back agreements or protective orders dealing with inadvertent productions of privileged materials should be addressed at the 26(f) conference.  In almost all cases, the parties should agree to a process by which each side would have the right to identify and request the return of such material without the production resulting in a waiver. This agreement — commonly referred to as a claw back agreement—should always be incorporated into a court Order, either as part of the protective order or through another type of routine court order. The issuance of such an order should always precede any production in the case. Under Federal Rule of Evidence 502, if a court orders this kind of agreement, the order will protect the parties from claims of waiver if, among other things, the disclosure is inadvertent.  And, by creating this framework to resolve a potential inadvertent disclosure issue early on, it will inevitably reduce the potential for a dispute.

ESI and Rule 26(a) Disclosures

Rule 26 also imposes certain disclosure obligations on litigants.  Specifically, Rule 26(a)(1) requires each litigant to disclose to its opponent various types of information before any formal discovery requests are served in the case. The idea behind this “initial disclosure” is to require parties to be forthcoming with information relevant to the matter and to streamline the discovery process.  According to subsection (A)(ii) of the rule, each party must provide a copy — or a description by category and location — of all documents, ESI, and tangible things that the disclosing party has in its possession, custody, or control and may use to support its claims or defenses. Identifying specific custodians and non-custodial sources of ESI (i.e., departmental share drives or database programs) that are expected to be searched for relevant data should also occur at this stage.  It is critical to note that if you plan to argue that certain data is  not reasonably accessible for production due to the burden and/or expense of restoring/producing that data (i.e., legacy data or backup media), it must be disclosed to your adversary.   In fact, Rule 26(b)(2)(B) includes a provision related to “not reasonably accessible” ESI, which anticipates possible cost-shifting under particular circumstances. Under this provision, a party need not produce any ESI from sources that it deems to be not reasonably accessible so long as the party identifies the source with particularity to its opponent.  A source can be considered not reasonably accessible on the basis of “undue burden or cost.”*

Notwithstanding the obligations Rule 26 imposes, many lawyers enter a lawsuit (specifically as it relates to ediscovery) without a detailed understanding of their client’s ESI or a specific execution plan in mind. That’s a mistake that often proves to be costly.  Educating one’s self as to one’s clients’ ESI will inevitably result in a more efficient process, and may also help reduce discovery disputes and—most importantly—get parties to the litigation’s most relevant information faster.

* Note, however, once the source is identified as “not reasonably accessible,” the requesting party may nevertheless move to compel production from the identified source, but will need to make a showing of “good cause” to require it. If the court determines that good cause has been shown, it may in addition require the requesting party to bear the reasonable costs of production under the proportionality rule.

 

In connection with a declaratory judgment lawsuit wherein the Harleysville Insurance Company sought a ruling that it did not have to pay a loss claim for an October 2014 fire at a funeral home, United States Magistrate Judge Pamela Meade Sargent ruled, in a February 9, 2017 decision, that the Harleysville Insurance Company waived any claim of privilege to materials uploaded to an unprotected file-sharing site, which anyone with a hyperlink to the site was able to access.  Specifically, Harleysville’s privilege problems stemmed from an investigator for its parent company, Nationwide Insurance, who wanted to share information electronically.  The investigator uploaded video surveillance footage of the fire scene to Box Inc. and sent a hyperlink to an employee at the National Insurance Crime Bureau (“NICB”). Later, the senior investigator uploaded the insurance claims file and investigation file to the same Box site, and sent the same hyperlink to Harleysville’s lawyers. Defense lawyers for the funeral home obtained the link from the NICB after they sought the file related to the fire. The NICB forwarded the email from the Nationwide investigator with the hyperlink, which also included a confidentiality notice that the email included privileged and confidential information. When the funeral home lawyers used the hyperlink, they gained access to the entire claim file. They proceeded to download the file – ignoring the confidentiality notice – and reviewed the file without notifying Harleysville or Harleysville’s counsel.

In reaching her decision, Judge Sargent wrote, “[I]n essence, Harleysville has conceded that its actions were the cyber world equivalent of leaving its claims file on a bench in the public square and telling its counsel where they could find it. It is hard to imagine an act that would be more contrary to protecting the confidentiality of information than to post that information to the world wide web.”

According to the American Bar Association BNA’s Lawyers’ Manual on Professional Conduct, Judge Sargent’s decision “should make lawyers think twice before putting confidential documents in a file-sharing site without password protection.”

Importantly, Harleysville was not the only litigant criticized in Judge Sargent’s opinion.  Judge Sargent scolded defense counsel for its improper and potentially unethical decision to access the  materials and use them without notifying lawyers for Harleysville.  In fact, Harleysville only learned that opposing counsel had the claims file only when they received a thumb drive of documents from the defense lawyers, which in turn caused Harleysville to file a motion to disqualify the defense lawyers.

Sargent, however, declined to disqualify defense counsel because of her decision on the privilege waiver. Instead, she said, defense counsel would have to pay the parties’ cost of obtaining her ruling on the matter.

This decision serves as an important reminder of the potential pitfalls inherent in our ever-growing digital world.   As attorneys, we should internalize the important lesson of properly securing documents before utilizing document sharing repositories and data rooms even those hosted by law firms, accounting firms and other trusted professionals.  It is critically important that we take the necessary precautions (i.e., encrypting documents, applying password protections, requiring double sign-on credentials) when we are handling and sharing documents that contain privileged information and other sensitive data (for example, personal identifying information).

In Fulton v. Livingston Financial LLC, 2016 WL 3976558 (W.D. Wash. July 25, 2016), U.S. District Judge James L. Robart sanctioned a defense lawyer who “inexcusabl[y]” relied on outdated case law and pre-2015 amendments to Federal Rule of Civil Procedure 26(b) in motion practice before the court.

On April 13, 2015, Plaintiff (Richard Fulton) filed suit against Defendants for allegedly violating the Fair Debt Collection Practice Act (“FDCPA”) 15 U.S.C. § 1692, et seq., and several Washington statutes.

On March 17, 2016 (after the Federal Rules were amended), Defendants moved to either compel discovery or exclude medical evidence presented by Mr. Fulton. Specifically, Defendants argued that Fulton “stated on numerous times since the beginning of this case that he was not seeking recovery for any medical condition, so his medical records and treatment were not in issue.”* Judge Robart found defense counsel’s inference “so unreasonable as to constitute a misrepresentation to the court,” as the plaintiff did seek recovery for emotional distress. Id. at *6, *8. More important to this Blog post, however, was Judge Robart’s finding that defendant’s counsel had “misstate[d] the law” regarding discovery by citing cases analyzing pre-amendment Rule 26. Id. at *7. And further finding, defense counsel proceeded to misstate the law in their reply brief continuing to rely upon case law that existed before the highly publicized amendments that took effect December 1, 2015. Judge Robart declared that such citations to outdated case law were “inexcusable” and “inexplicable.” Id. at *7, *8.

Judge Robart then proceeded to sanction defense counsel in an oral ruling. In addition to awarding Fulton his fees and costs incurred in litigating the motion, Judge Robart ordered defense counsel to provide a copy of his offending motion to the supervising members of his firm, with the explanation that the court had entered sanctions against him “for quoting provisions of the civil rules that are badly out of date, and also making direct misrepresentations to the court.” Id. at *8. Judge Robart also threatened an additional sanction of requiring defense counsel to report this sanction on future pro hac vice applications. Id.

Before determining whether to require counsel to report the sanction on future pro hac applications, defense counsel filed a supplemental memorandum in response to the court’s oral ruling, stating that he had acted in good faith and noting that his conduct did not affect the administration of justice in the case. For these reasons, defense counsel requested that the court exercise its discretion in not taking disciplinary action or, in the alternative, limiting the disciplinary action to an informal, private admonition that would not need to be reported on future pro hac vice applications. Id. As the defense counsel’s memorandum was not denominated a motion for reconsideration, Judge Robart declined to reconsider his oral ruling and instead considered only whether to impose the additional pro hac vice reporting sanction. Id. at *8.

Judge Robart rejected as “post hoc speculation” defense counsel’s claim that because pre-amendment Rule 26 could have applied “insofar as just and practicable,” his citation to pre-amendment cases was in good faith. Id. The court held that by relying on pre-amendment cases in an argument on discoverability and making “no reference to the proportionality requirement,” counsel “misrepresented the scope of discoverable information in a motion to compel or exclude evidence” and then failed to “own[] up to his misrepresentation,” which was “tantamount to bad faith.” Id.

In conclusion, Judge Robart noted that despite [defense counsel’s] flawed efforts to excuse his comportment, the previously issued sanctions (i.e., providing a copy of offending motion to supervising members of firm and awarding plaintiff his fees and costs in litigating this motion) “nearly suffice” to deter counsel from misrepresenting facts or the law in the future and thus decided that counsel did not need to report the sanctions on future pro hac vice applications. Id. Judge Robart did add, however, an additional sanction, requiring counsel to disclose the sanctions imposed if, at any point in the next five years, a federal court threatened or imposed sanctions on him. Id. In Judge Robart’s view, “[t]his requirement will alert courts presiding over future cases that [defense counsel’s] misrepresentations in this case constitute strikes one and two against him. Future courts will then be sufficiently informed to properly sanction any further bad faith by [defense counsel].” Id.

This case serves as an important reminder of our obligations to remain current with and conversant in an organic and evolving body of rules and decisions.

*This conclusion was based on Fulton’s statements that “he did not seek formal medical treatment for stress, worry and inconvenience brought on by Defendants’ conduct.”

 

The Federal Rules are undergoing more changes!  And, effective December 1, 2017, there will be two new Federal Rules of Evidence (Rules 902[13], [14]) that will directly impact e-discovery in the federal courts.  These Rule changes are critical because, as aptly put by recently retired Magistrate Judge John Facciola, “[t]he Federal Rules of Evidence were…established to create uniformity in evidence law by providing guidance for every evidentiary problem that could be reasonably expected to occur at trial…But, as our tangible world has grown increasingly virtual, so too has the evidence,…[which] the [existing federal] rules are ill-designed to accommodate.”  Thus, the new rules deal directly with e-discovery and forensic collection processes and the authentication of same in federal litigation. The proposed Rules are designed to bridge this gap and demonstrate an important step toward updating the FRE to be more in sync with the increasingly digital world in which we live.

Specifically, Rule 902(13) provides for a certification process for ESI, produced by a computer system or computer process (analogous to Rule 902[11]’s certification of business records).

And, FRE 902(14) provides that electronic data recovered “by a process of digital identification” is to be self-authenticating, thereby not routinely necessitating the trial testimony of a forensic or technical expert where best practices are employed, as certified through a written affidavit by a “qualified person.”   Here, the authentication of the file would be established using the file’s hash value (i.e., the digital fingerprint).

Familiarity with the proposed changes are important for a number of reasons.

First, although the Rules aren’t expected to take effect for almost a year, ESI collected in a Rule 902(14) compliant manner any time prior to the Rule’s effective date (i.e., today) can be subject to the new Rule’s provisions once the Rule goes into effect. This is important, because digital evidence is routinely collected well in advance of trial.  So, practitioners need to understand and account for Rule 902(14) immediately given that electronic evidence that is collected today may not be used at trial until sometime after December 1, 2017.

Second, the expectation is that the new Rules will provide a streamlined and efficient process to establish a foundation for ESI collected in a Rule 902(14) compliant manner. This will increase predictability by eliminating surprise challenges, and will encourage the use of  ESI practitioners by allowing written certifications in the place of expensive and time-intensive in-person testimony.  Indeed, the ability to eliminate foundational testimony will undeniably result in significant cost savings to one’s client and help promote judicial efficiency.  (However, this necessarily presupposes that practitioners in the federal courts will understand what a 902(14) compliant collection means.)

For anyone who has interest in reading a very educating and comprehensive Law Review article about the proposed Rule 902(13) and (14), check out, “Law of the Foal:  Careful Steps Towards Digital Competence in Proposed Rules 902(13) and 902 (14),” 1 GEO. L. TECH. REV. 6 (2016), written by Hon. John M. Facciola & Lindsey Barrett.