In Arrowhead Capital Fin. Ltd. v. Seven Arts Entertainment, Inc. 2016 U.S. Dist. LEXIS 126545 (S.D.N.Y. Sept. 16, 2016), District Judge Katherine Polk Failla imposed significant sanctions upon both the Chief Executive Officer (“CEO”) and the lawyer for defendant Seven Arts Entertainment Inc. (“SAE”).

Background

Arrowhead Capital Finance, Ltd. (“Arrowhead”) sued SAE in 2014 seeking to enforce a judgment it had little ability to enforce because all of the assets held by the debtor had been sold to SAE.  SAE filed a motion to dismiss, arguing the Court lacked personal jurisdiction.  The Court denied the motion pending discovery.

In a letter dated September 21, 2015, Plaintiff claimed SAE and its counsel had engaged in various misconduct during discovery.  The violations alleged to have been undertaken to slow down discovery included:

  • SAE inflated their document productions with nonresponsive documents;
  • SAE refused to produce critical responsive documents;
  • SAE’s discovery responses were incomplete and replete with improper objections; and
  • SAE refused to produce key witnesses for deposition.

The Court held a conference to address Arrowhead’s complaints.  During that conference, SAE’s counsel acknowledged he had not reviewed the discovery responses interposed by his client and merely forwarded to his attorney the materials he received from SAE’s CEO.

As a result of this admission, the Court stated it had no confidence SAE would meet its discovery obligations and ordered SAE’s CEO to personally appear to testify concerning the alleged misconduct.  The Court also ordered SAE to produce the responsive documents Arrowhead requested but never received.

Notwithstanding the Court’s various orders, SAE refused to produce witnesses for deposition or produce the required documents.

Because the Court deemed SAE’s CEO to be directing counsel not to comply with the Court’s orders, Arrowhead moved for sanctions.  In response, the CEO testified his offices were “paperless” and the third-party server upon which documents were maintained was destroyed as a result of SAE’s failure to pay its bills (which he claimed was unintentional).  The CEO also cast blame on various staff people to whom he had purportedly delegated the task of complying with the Court’s orders.

The Court concluded SAE was willfully making misrepresentations to the Court and showed “flagrant disregard for” Court orders for the purpose of withholding information from Arrowhead.  As a result, the Court held SAE forfeited its jurisdictional arguments due to non-compliance with Court orders.  The Court further determined a spoliation instruction would be provided in connection with any claims ultimately submitted to the jury.  Defendants’ CEO also was ordered to pay Arrowhead’s costs in association with bringing its various motions and was ordered to retain separate legal counsel to conduct a thorough review of SAE’s files to assess whether additional responsive information remained to be produced.  Defendants’ counsel, who was deemed complicit in the violations,  was ordered to pay a portion of Plaintiff’s costs.

Conclusion

This decision reinforces that counsel may not turn a blind eye to a client’s behavior nor may counsel simply follow the instructions of clients.  Rather, counsel has a duty to ensure that good faith efforts are taken to comply with discovery obligations.  This case also reminds us that the amended Rule 37(e) does not lessen punishments for willful or intentional e-discovery misconduct.  Rather, bad faith behavior will be met with sanctions, not only for the party, but for counsel as well.

Clear-View Technologies, Inc. v John H. Rasnick, et al (2015 U.S. Dist. LEXIS 63579), reads as a list of the things you do not want to do if you want to avoid spoliation sanctions. The underlying dispute involved the development of an alcohol tracking product, and certain shareholders’ alleged conspiracy to steal the technology and start a new company.

The defendants, however, forgot they had discovery obligations (or they were not properly informed about them by their attorneys). After being on notice of a potential litigation, through a text message where they were threatened with a lawsuit, the defendants failed to take any steps to preserve discovery. Instead, they continued to delete emails and dispose of technology (like iPhones, iPads and computers). They also never even tried to do a fulsome search for responsive materials, but still certifying that they searched for and produced all of their ESI.

Defendants’ discovery failures led the court to require the defendants to turn over all of their devices to an outside consultant to review. This is where things went from bad to worse. The consultant found almost 2,600 relevant documents, totaling almost 12,500 pages of materials the defendants did not produce (12,000 more pages than the defendants entire production). The forensic examiners also found that four separate optimization and computer cleaning programs was run on one of the laptops (including “crap cleaner”) which can be used to “wipe specific files and programs.” This was done six-days after the filing of the motion to compel. The defendants also purged outlook files from an external hard drive and purportedly were unable to provide passwords for certain email accounts.

All in all, the court was not accepting the defendants’ actions lightly. The court issued an adverse inference sanction and over $200,000 in attorney’s fees (though it declined to issue a termination sanction regarding defendants’ counterclaim). Adding insult to injury, the defendants stiffed the forensic expert, even though the court had ordered that they pay its fees. The court therefore issued an order to show cause as to why additional sanctions should not be issued.

A recent decision from the United States District Court of the District of Connecticut demonstrates the need for proper custodian interview before responding to discovery requests. Electrified Discounters, Inc. v MI Technologies, Inc. (2015 U.S. Dist. LEXIS 64950) involved a dispute over sales of replacement lamps for rear projector televisions and front projectors, via online marketplaces like Amazon.com.

The plaintiff alleged trademark infringement and related claims. The defendant counterclaimed seeking cancellation of the trademark and brought a separate action against the plaintiff’s principals. The two actions were consolidated. The problems arose with plaintiff’s discovery responses.

The plaintiff’s deposition testimony contradicted its discovery responses. For example, the plaintiff repeatedly responded that it did not maintain certain records, but during its deposition testimony its witnesses testified that the records were maintained in a QuickBooks database. This testimony also contradicted the information supplied in opposition to the defendant’s motion to compel.

The court reviewed 22 different requests for production, finding that each response was inadequate. The court did not place specific blame for these inconsistencies, but required that the plaintiff provide its counsel with access to its emails (which it was required to stop deleting), and image its ESI, including hard drives and QuickBooks files. The court further required plaintiff and its counsel to examine these records, provide all non-privileged responsive documents and information and a sworn statement that all responsive discovery has been produced. The court also required that the plaintiff show cause why the movant should not be awarded its attorney’s fees incurred in making the motion.

In an earlier post (SEE reference to my top 10 list), I noted the importance of issuing a timely and proper legal hold notice.  In case you failed to appreciate the critical importance of this step, a reading of the insurance case of Fidelity Nat. Ins. Co. v. Captiva Lake Invs., 2015 WL 94560 (E.D. Mo. Jan. 7, 2015) should drive the point home.

In this case, the defendant alleged that Fidelity failed to implement a legal hold notice and therefore scores of potentially relevant emails were deleted.  The defendant also argued that plaintiff allowed data in its electronic claims database to be overwritten, thus destroying discoverable evidence.  Defendant therefore sought sanctions against plaintiff due to this spoliation of relevant evidence. In response, plaintiff argued that Captiva was not prejudiced by the loss of emails because it received a substantial amount of emails during discovery and the overwriting of the claims database was a routine operation.

In siding with the defendant, the court imposed sanctions on the plaintiff, including an adverse jury instruction and attorneys’ fees. The court held that the plaintiff failed to implement a legal hold, deleted emails, and prejudicially delayed the production of relevant documents as a result. Notably, the court did not impose sanctions upon Fidelity pursuant to Rule 37(e) for overwriting the claims database because the Court found there was no indication that the plaintiff had the ability to prevent the system from overwriting files without incurring an extreme burden to do so.

In today’s litigious world, discovery is costly and can be perilous. Exacerbating this landscape is the fact that sanctions are imposed for discovery violations more than any other litigation error. Not surprisingly, avoidable discovery mistakes lead to client dissatisfaction.  Below are ten critical tips to avoid discovery sanctions and to remain compliant with discovery obligations.

  1. Implement Timely Litigation Holds Be sure your legal hold is implemented as soon as litigation is reasonably anticipated. Be certain that your hold notice is sufficiently broad, is sent to the right custodians, receipt is acknowledged, and it is updated as needed.
  2. Conduct Key Custodian Interviews A lawyer cannot rely only on the hold notice.  Rather, custodial interviews with key players, IT personnel and anyone else with information relevant to the dispute or the client’s network architecture should be conducted.  Minimally, these interviews will confirm the suspension of auto-delete protocols and will help identify all relevant information for preservation and collection.
  3. Be Proactive Because in today’s technology-intensive world there are substantial quantities of ESI, if you want to receive a document demand before preserving and collecting documents, you may not have time to respond to those demands.  Anticipate document demands so you can start the interview, identification and collection process.  You will have a better handle on the documents (what does and does not exist), and your client’s story such that you will be in the best position to comply with discovery and meet discovery challenges.
  4. Honesty is the Best Policy When Dealing with the Courts and Opposing Parties Never make a factual representation about the status of preservation, collection, or production efforts without confirming the underlying facts with original sources. While a client will rarely mislead their lawyer intentionally, it is common for clients to have incomplete information or operate under a misunderstanding of fact when information is communicated second- hand.   Moreover, courts and opposing parties understand that mistakes can happen at various stages of the discovery process.  Such issues must be addressed immediately and head-on.  Usually the optimal strategy is full disclosure along with remedial measures.
  5. Always Budget Obtain a realistic budget before proceeding with ESI collection processing and/or review.  This is a costly area of litigation and lawyers must manage client expectations. Update the budget as needed to accommodate changes attributable to collection volume or other factors.
  6. You Get More Bees with Honey… Seek a cooperative approach irrespective of how unpleasant or unreasonable opposing counsel may be. Indeed, a cooperative approach to discovery will invariably reduce disputes and expenses. Take the higher road and assume that every email and letter you write to opposing counsel may end up in front of the judge, so adopt a cooperative approach and reasonable tone in all communications with opposing counsel.    As one of our earlier blog posts showed (see Armstrong Pump, Inc. v. Hartman, No. 10-CV-446S, 2014 WL 6908867 (W.D.N.Y. Dec. 9, 2014)), Judges have very little patience for uncooperative behavior during a lawsuit’s “search for the truth.”
  7. There’s No Longer Room For Boilerplate Discovery The amended FRCP 26(g)(1)(B)(iii) provides that every discovery request and response must be signed by at least one attorney of record, and by signing you certify that the discovery request or response is proportional – meaning “neither unreasonable nor unduly burdensome or expensive considering the needs of the case, prior discovery in the case, the amount in controversy, and the importance of issues at stake….”  The Rule goes on to state that “[i]f a certification violates this rule without substantial justification, the court must impose an appropriate sanction on the signer, the party on whose behalf the signer was acting, or both.”
  8. Be Careful What You Wish For…Lest You Receive It In Return Never send a discovery request to an adversary that you or your client would be uncomfortable complying with were opposing counsel to author a reciprocal request to you.
  9. Carefully Devised Search Terms Are Critically Important The judgment of your legal team is a good starting point for crafting search terms, but is far from sufficient.  Review a preliminary “hit-by-term” report from your ESI vendor so you can appreciate which terms are too limiting or overbroad.  During custodial interviews (see supra) ask about project code names, and other unique search terms.  Then sample, sample, sample!  Sampling the documents—both the hits and the non-hits—can help refine search terms and validate the terms chosen.
  10. Wise Use of Technology Can Be a Litigator’s Best Friend ESI processing, review (even with contract attorneys) and production is among the most costly elements of any litigation.  When used efficiently and wisely, technology can significantly reduce those costs. Consider early data assessment, filtering and predictive coding technology as appropriate for each matter.