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 this business dispute (Shawe v. Elting 2017 Del. LEXIS 61 [Del. Feb. 13, 2017]), the plaintiff – Phillip Shawe– appealed the Court of Chancery’s decision* sanctioning him for serious misconduct throughout a litigation with his former business — and romantic — partner, Elizabeth Elting.  Specifically, the Court of Chancery found that Shawe undertook various actions that (intentionally and negligently) undermined his adversary’s position, confused the court and delayed the litigation.  The misconduct included, intentionally deleting documents from his laptop, recklessly failing to safeguard his cell phone, improperly accessing Elting’s emails (by virtue of breaking into her office and remoting onto her email undetected), and knowingly giving false testimony.   As a result, the Court of Chancery ordered Shawe to pay 100% of the fees Elting incurred in connection with her motion for sanctions, and 33% of her litigation fees regarding the merits of the underlying business dispute.  Thus, the Court awarded Elting $7,103,755.00 in fees and expenses.  That’s right, $7 MILLION dollars. Shawe appealed the decision.

The Supreme Court of Delaware affirmed the judgment of the Court of Chancery noting Shawe acted in bad faith with his “egregious conduct and multiple falsehoods.” The appellate court further agreed that Shawe’s behavior caused delays, ubiquitous confusion, and even led the Chancery Court to make false findings.  Thus, the Supreme Court noted the Chancery Court was well within its discretion to impose sanctions, and further held the $7 million was not excessive as the sanction compensated the defendant’s actual litigation expenses.

Although I could end the blog here and remind everyone of their various ethical and ESI obligations to comply with hold notices and preserve relevant information, this case warrants special treatment.   Indeed, given the exceptionally unethical and troubling behavior engaged in by Phillip Shawe, details of Shawe’s antics are summarized below.  However, I encourage you to read the underlying decision as time allows.

Elting and Shawe were co-founders and co-CEO’s of Transperfect Global, Inc. (“TGI”).** During the course of their business relationship, the two also became lovers.  Certain business disputes arose between the two and Elting hired Kramer Levin to try and resolve amicably those disputes.  Shawe, however, became enraged by Elting’s retention of counsel and decided that rather than trying to save the business (and perhaps the romance) he would instead begin spying on Elting.  Not only did Shawe direct company employees to intercept Elting’s mail and monitor her calls, but eventually Shawe began monitoring Elting’s personal emails.  Initially, Shawe broke into Elting’s office and brought her computer to TGI’s forensic technology unit where it was imaged using a “write blocker” – a mechanism designed to conceal the fact that the drive was imaged.  Shawe then reviewed all of the imaged emails – including thousands of which were Elting’s privileged communications with her counsel.

Then, using his administrative privileges, Shawe began accessing remotely Elting’s computer.  He surreptitiously “remoted on” to Elting’s email at least 44 times.  And, as if access to Elting’s emails was not enough, Shawe also improperly accessed her paper files.  Specifically, Shawe hired someone to break into Elting’s office in the early morning hours for the purpose of taking and photographing hard copy documents.  In fact, Shawe hired a “personal paralegal,” to the tune of $250,000/year for this exact purpose.  All of Shawe’s malfeasance was unknown to Elting.

Perhaps not surprisingly, Elting’s efforts to resolve the business disputes were unsuccessful.  And, eventually, various lawsuits seeking dissolution and alleging breaches of fiduciary duties were filed.

Shawe timely distributed a litigation hold notice to senior management and certain TGI employees.  Thereafter, Elting issued a second hold notice to senior management and TGI employees.  Notwithstanding issuance and receipt of two litigation holds – including his own — Shawe failed to preserve his laptop and his cell phone.  Instead, Shawe concocted a crazy story about his phone – involving his niece, a cup of diet Coca-Cola and rat droppings. In actuality, however, it appears Shawe tossed his phone after the Chancery Court issued an expedited discovery process.  Perhaps more troubling, Shawe deleted 18,970 files from his laptop (including emails, internet files, and browser history) and only after doing so, imaged the laptop (the very next day, in fact) for purposes of this lawsuit.  Through the subsequent months, in deposition and open court, Shawe blamed the “inadvertent deletion of files” on an unidentified “assistant.”

Eventually, it became known to Elting’s counsel that Shawe had undertaken certain nefarious actions.  Yet, rather than admit to his wrongdoings, Shawe provided false deposition and trial testimony regarding, among other things, the identity of the individual/individuals who broke into Elting’s office, who deleted files from his laptop and who were responsible for his cell phone not being preserved.  Not surprisingly, when the true nature and extent of Shawe’s misconduct was discovered, the Chancery Court imposed sanctions.  Shawe’s conduct was unquestionably egregious and borderline criminal (i.e., perjury).  And, while the $7 million sanction may seem excessive to some readers, the Chancery Court imposed the sanction as a way to compensate the defendant for actual litigation expenses which were necessitated and exacerbated by Shawe’s malfeasance.

*The Chancery Court decision may be viewed at In re Shawe & Elting, LLC, 2016 Del. Ch. LEXIS 107 [Del. Ch., July 20, 2016]).

**TGI is a diversified family of companies that specialize in a variety of global professional and technology services including translation services, globalized consulting legal support (i.e., forensics e-discovery and document review) and website localization.  TGI is supported by more than 4,000 employees in 90 cities.

It is the beginning of a new year and I thought it the ideal time to list out those steps that are absolutely critical when an attorney is confronting his/her obligation to produce e-discovery in connection with a litigation.  Bear in mind, the below list is not exhaustive and each step is replete with technical and tactical sub-steps and decisions.  However, the nine steps below are a useful road map to get started.

  • Assess whether your case involves e-discovery. In today’s technology-laden world where emails are ubiquitous and many of us interface daily with the internet of things, chances are your case will involve e-discovery.
  • Implement (or cause to be implemented) a comprehensive and appropriate ESI preservation protocol.  Remember, it is wise to cast a large net when it comes to preserving data.  That strategy likely changes when it comes time to collect/process data.  Make sure to familiarize yourself with the client’s deletion policies, backup tapes, and shredding procedures.  See next step.  The scope of your hold notice is necessarily informed by your client’s data including its location.
  • Understand the client’s ESI systems and storage.  Remember, data maps can be helpful but are often out of date.
  • Understand (and educate your client about) the various options available for collecting ESI (i.e., self-collection vs retaining a vendor; targeted collection vs robust collection).
  • Identify the various custodians (and meet with/conduct collection interviews of live custodians) who may have potentially relevant ESI and understand the various media on which that ESI resides.
  • Meet and confer with opposing counsel to develop a mutually agreeable discovery plan that addresses common ESI issues including production costs and deduplication methods.
  • Collect ESI (ideally using a vendor especially when the custodians include complex or dynamic databases or servers) in a manner that is defensible and preserves the integrity of the data (for example, do not forensically image the hard drive of a Mac using a tool designed for Windows or run the risk of overwriting the hard drive’s boot sector).
  • Explore ways to minimize the review costs associated with reviewing for production the collected documents.
  • Finally, produce responsive non-privileged ESI in a recognized and appropriate manner.

As discussed in past blog posts, it is critically important for counsel to be involved in each step of the process as the recent case law makes plain that Courts expect counsel to be actively involved in collection/review and production.  Indeed, we have seen a spate of case law from 2016 where the Court imputes a client’s failures on counsel and sanctions both!  Finally, if you feel incapable of handling any of the above steps, get help!  Various ethics opinions (not yet adopted in New York) suggest an attorneys’ duty of competence owed to one’s client includes being competent in matters of ESI.

Recently, two separate New York courts (the First Department and the Southern District) issued decisions imposing sanctions upon litigants who failed to comply with preservation obligations.  While a summary of those decisions and hyperlinks to the full decisions follow, attorneys should take heed that it is critical to timely and properly issue litigation hold notices when litigation is reasonably anticipated.   Irrespective of whether we are practicing in State or Federal court, our obligations to preserve potentially relevant information are not to be taken lightly.

Appellate Division, First Department Upholds (and Modifies) Sanctions Imposed by Trial Court Because of Plaintiff’s Failure to Timely Issue Litigation Hold.

This decision, issued on June 28, 2016, by the Appellate Division, First Department discusses what sanctions are appropriate when a party fails to comply with its preservation obligations.  Specifically, before the First Department was an Order of the Supreme Court, New York County (Carol R. Edmead, J.), which granted defendant’s renewed motion for spoliation sanctions, and dismissed plaintiff’s complaint.  The First Department unanimously modified the trial court’s decision to dismiss the complaint and instead awarded defendant an adverse inference charge at trial as to the spoliated evidence.

The factual underpinnings of the lawsuit involve allegations of legal malpractice against defendant Herrick, Feinstein LLP (Herrick) in connection with Herrick’s representation of plaintiff in negotiating a high rise construction loan with a developer.  The loan closed on May 8, 2007.  After a series of mishaps, including permit revocations and a crane collapse at the construction site, plaintiff retained counsel in June 2008 in connection with its potential claims against Herrick.  Thus, plaintiff’s obligation to preserve evidence arose at least as early as June 2008 (i.e., when it reasonably anticipated litigation).  In May 2010 – almost two years later –plaintiff finally issued a litigation hold.  As a result of this 23 month delay, plaintiff’s record destruction policies (including recycling of backup tapes, routine deletion of emails, and erasure of hard drives/email accounts upon an employee’s departure from the firm), went unsuspended until May 2010.  Plaintiff ultimately commenced its malpractice suit in 2011.

In or about June 2014, Herrick filed a motion seeking dismissal of plaintiff’s complaint as a sanction for plaintiff’s failure to preserve evidence. The trial court found plaintiff’s failures constituted ordinary negligence, and granted Herrick’s motion only to the extent of directing that Herrick be entitled to an adverse inference at trial.  Later that summer, plaintiff produced additional documents that identified various other custodians who likely had information relevant to the lawsuit.  Plaintiff claimed that its failure to produce these materials earlier was inadvertent.  In or about January 2015, Herrick moved to renew its spoliation motion, based on the new documents, including the identification of additional custodians, much of whose electronic records had been destroyed by plaintiff, either due to its failure to timely institute a litigation hold, or deliberately.  Plaintiff cross moved for fees.   Upon renewal, the trial court dismissed the complaint, and denied plaintiff’s cross motion for attorneys’ fees and costs.  This appeal ensued.

The First Department found that the motion court properly granted defendant’s renewal motion but held the trial court’s decision to dismiss the complaint as a spoliation sanction was an abuse of discretion.

The Court noted,“[F]ailures which support a finding of gross negligence, when the duty to preserve electronic data has been triggered, include: (1) the failure to issue a written litigation hold []; (2) the failure to identify all of the key players and to ensure that their electronic and other records are preserved; and (3) the failure to cease the deletion of e-mail” (VOOM HD Holdings LLC v EchoStar Satellite, LLC, 93 AD3d 33, 45 [1st Dept 2012]).  Thus, per prior decisional law, the trial court’s determination that plaintiff’s destruction was grossly negligent was upheld.  However, the First Department found dismissal of the complaint an improper sanction.  Specifically, the Court noted dismissal is warranted only where the spoliated evidence constitutes “the sole means” by which the defendant can establish its defense (Alleva v United Parcel Serv., Inc., 112 AD3d 543, 544 [1st Dept 2013]), or where the defense was otherwise “fatally compromised” (Jackson v Whitson’s Food Corp., 130 AD3d 461, 463 [1st Dept 2015]) or defendant is rendered “prejudicially bereft” of its ability to defend as a result of the spoliation (Suazo v Linden Plaza Assoc., L.P., 102 AD3d 570, 571 [1st Dept 2013] [internal quotation marks omitted]).  Because the record before the Appellate Division demonstrated a massive document production and many key witnesses available to testify, an adverse inference charge was appropriate.

The full decision of the First Department can be accessed here: http://www.courts.state.ny.us/reporter/3dseries/2016/2016_05065.htm

The Southern District of New York Imposes Severe Sanctions Upon Village Due to Village’s Failing to Issue a Litigation Hold

In a separate decision from the Southern District, Judge Karas similarly imposed severe sanctions – an adverse inference and more than $40,000 in attorneys’ fees – against the Village of Ponoma for failing to timely issue a litigation hold.  That decision, and my colleagues’ blog about that decision can be read here:

For more on this topic See Facebook Posts And Text Messages Result In Monetary And Other Sanctions Being Imposed Against A Municipality 

 

We all know that it can be damaging to one’s case if a party to a litigation fails to preserve relevant information.  But when, exactly, does one’s duty to preserve (potentially relevant information) arise?  And what type of sanctions are federal courts imposing under the amended federal rules for preservation failures?

When Does One’s Duty to Preserve Arise?

Different jurisdictions have different rules regarding when the duty to preserve arises but the most common standard is once that party “reasonably anticipates litigation.” This standard is well established in the federal courts and is embraced in New York (see, e.g., Voom HD Holdings LLC v EchoStar Satellite, (2010 NY Slip Op 33764(U)).

And, while it can (sometimes) be difficult to pinpoint precisely when one reasonably anticipates litigation, a recent case in the Northern District of California demonstrates one party’s blatant disregard for its obligation to preserve.  Specifically, in Mathew Enter. v. Chrysler Grp. LLC (No. 13-cv-04236-BLF, 2016 U.S. Dist. LEXIS 67561 [N.D. Cal. May 23, 2016]), the plaintiff made no effort to preserve its internal or external emails after threatening the defendant with litigation.  Not only did plaintiff affirmatively change the email system it utilized for its business and did so after threatening Chrysler Group, LLC with a lawsuit, but Mathew Enterprises also failed to notify its database vendor of the litigation it threatened to file against defendant.   As a result, potentially relevant emails continued to be deleted regularly per normal business practice.  Indeed, there was no suspension of the auto-delete functionality used by Mathew Enterprises and no efforts were taken to otherwise maintain the emails.

Resulting Sanctions?

The Chrysler Group, LLC moved for sanctions against the plaintiff for the loss of these potentially relevant emails, highlighting there was no effort made to preserve and urged the court to utilize spoliation sanctions. The judge, Magistrate Judge Paul Grewal, issued FRCP 37(e) sanctions.  Specifically, he expanded the scope of evidence the Chrysler Group, LLC was allowed to bring to trial and he awarded reasonable attorney’s fees.   Moreover, Judge Grewal stated, “[Plaintiff’s] lackadaisical attitude towards document preservation took away [defendant’s] opportunity. Not only has spoliation occurred, but it also has prejudiced [defendant].”

The Mathew Enterprise case is a good reminder that preservation obligations must be taken seriously as the ramifications for failing to preserve can be significant.  It is thus critical that our clients are properly advised of the need to begin preservation efforts as soon as litigation is reasonably anticipated.  (i.e., upon receipt or transmittal of a cease and desist letter, for example).

As most of those reading this are aware, companies/entities/agencies doing business in the US generally are not required to indefinitely preserve business records and information.  However, those companies/entities/agencies must preserve relevant information when a lawsuit or an investigation is reasonably anticipated. This duty stems from both the common law duty to prevent spoliation of evidence and certain state and federal statutes and regulations. *

A “litigation hold” or “hold notice” is an instruction within a business organization directing employees to preserve (i.e., refrain from destroying or modifying) certain paper and electronic information that may be relevant to the pending or anticipated lawsuit or investigation.

The importance of complying with one’s obligation to issue and abide by a litigation hold was recently the subject of a decision in the Southern District of New York.  In early December, Judge Sweet denied New York City’s request to unseal 850,000 criminal court records for putative class members in a civil rights class action against the City of New York (“City”).  The complaint, originally filed in 2010, alleged that the City and the NYPD had engaged in a pattern of stopping, seizing, and issuing summonses to individuals without probable cause – thus violating the class members’ civil rights by requiring officers to meet quotas of summonses issued irrespective of whether a crime had occurred or probable cause existed.  The records were sealed pursuant to a privilege codified in New York’s Penal Law.  The City argued that the records should be unsealed so that defendants could identify potential class members and then seek discovery from them in order to challenge class membership.  Judge Sweet found that the privacy interests for the absent class members far outweighed the City’s request on the eve of the close of discovery.

Barely a month later, in early January, Judge Sweet granted in part a motion for sanctions against the City and the NYPD for spoliation of evidence.  Calling upon Second Circuit case law, Judge Sweet noted that spoliation is defined as “the destruction or significant alternation of evidence, or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.”  Judge Sweet found that the City failed to implement timely a litigation hold (FN) which, when combined with the NYPD’s existing document destruction policies, resulted in the destruction of critical information and evidence.  Specifically, the lack of preservation resulted in few, if any documents being produced for key custodians.

Notably, Judge Sweet did not find that the City and the NYPD had acted in bad faith, but instead concluded that both the City and NYPD acted with gross negligence in failing to implement a litigation hold:

The failure to circulate a litigation hold, and to ensure that it was properly implemented, was particularly damaging in the context of the NYPD’s standing document retention policies, which ensured that inaction on the part of the City would result in the destruction of evidence . . . . The NYPD cannot credibly argue that, despite setting guidelines for document destruction and providing an industrial shredding truck for that purpose, it did not know or intend that documents would be destroyed.

Judge Sweet noted that he is vested with “broad discretion” in crafting a proper sanction for spoliation but should focus on three priorities when fashioning a sanction: (1) deterring parties from engaging in spoliation; (2) placing the risk of an erroneous judgment on the party who wrongfully created the risk; and (3) restoring the prejudiced party to the same position s/he would have been absent the wrongful destruction of evidence.  Against this backdrop, Judge Sweet granted a permissive inference in response to his findings, and indicated that he will instruct the jury that the absence of documentary and email evidence does not establish in this case the absence of a summons quota policy at the NYPD.

*   Although see blog posts of Aaron Zerykier on January 6, 2016 and January 21, 2016 discussing relevant standard in NY and federal courts triggering preservation.

** The City did not issue any litigation hold until August 2013 – more than three years after the filing of the Complaint in this case.  Moreover, the evidence indicated that the litigation hold was not effectively communicated and that none of the officers named in the City’s initial disclosure ever acknowledged receiving the hold.

 Stinson v. City of New York et al – 10-Civ.-04228-Spoliation

For a long time, New York state and federal courts were out of sync with one another with regard to a litigant’s discovery obligations. For example, the state courts in New York required a party to take steps to preserve discovery materials upon the commencement of a litigation, while the federal courts required preservation upon the reasonable anticipation of litigation.  This divergence in standards placed counsel in a quagmire when advising clients, because a party did not necessarily know if their anticipated litigation would eventually be commenced in New York state or federal court.

The Appellate Division, First Department, put an end to this debate in 2012, when it adopted in VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., the federal standard.  Specifically, the Appellate Division adopted the  standard for preservation set forth in Zubulake v UBS Warburg LLC (220 FRD 212 [SD NY 2004]) that, “[o]nce a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents.”  The Voom court also adopted a negligence and gross negligence standard in analyzing ESI spoliation, holding that “[s]ince EchoStar acted in bad faith or with gross negligence in destroying the evidence, the relevance of the evidence is presumed.”

The Court of Appeals in Pegasus Aviation further adopted the negligence standard applied in Zubulake to determine if a party should be held liable for failing to timely issue a litigation hold.

Specifically, the Court of Appeals held that:

A party seeks sanctions for spoliation of evidence must show that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, that the evidence was destroyed with a “culpable state of mind,” and “that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense.” On the other hand, if the evidence is determined to have been negligently destroyed, the party seeking spoliation sanctions must establish that the destroyed documents were relevant to the party’s claim or defense.

Pegasus Aviation, however, did not acknowledge that the holdings in Zubulake were recently undermined by changes to Federal Rule of Civil Procedure 37(e) effective, December 1, 2015.  The change was adopted to establish a uniform standard in light of conflicting standards between the Federal Circuits: the Second, Sixth and Ninth Circuits on the one hand, which had authorized sanctions for negligent destruction of e-mails, and the First, Fifth and Tenth Circuits on the other hand which had held that mere negligence was not sufficient to obtain sanctions.  The new rules provides:

(e) Failure to Preserve Electronically Stored Information. If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court:

(1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or

(2) only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation may:

(A) presume that the lost information was unfavorable to the party;

(B) instruct the jury that it may or must presume the information was unfavorable to the party; or

(C) dismiss the action or enter a default judgment.

This new standard allows an adverse inference instruction only upon a finding that a party “acted with the intent to deprive another party of the information’s use in the litigation” (emphasis added).  The new Rule 37(e) removes any negligence from the standard.

Indeed, Judge Shira Scheidlin recognized that the new rule was out of step with her prior holding in Zubulake and other Second Circuit precedence.  In Sekisui American Corp. v. Hart, she noted that “[u]nder the proposed rule, parties who destroy evidence cannot be sanctioned . . . even if they were negligent, grossly negligent, or reckless in doing so” and “would require the innocent party to prove that it has been substantially prejudiced by the loss of relevant information, even where the spoliating party destroyed information willfully or in bad faith.”  This would be a change from existing Second Circuit law in that it would “abrogate” the Second Circuit’s holding in Residential Funding insofar as the Second Circuit previously held “that sanctions may be appropriate in instances where evidence is negligently destroyed.”

While the New York Court of Appeals may have intended to bring New York in line with Federal practice, and adopt what was the-then Second Circuit negligent spoliation standard, it failed to do so in as much as the Federal Rules changed just two-weeks before it issued the Pegasus Aviation decision.  Only time will tell if the Court of Appeals will revisit this issue in light of the new Federal Rules.

After sitting on the sidelines for years, the New York Court of Appeals (the highest appellate court in New York) has finally ruled on the standard to be applied to claims alleging spoliation of ESI. The decision, however, which was late in coming, places New York at odds with the new Federal Rules of Civil Procedure.  This post will address Pegasus Aviation I, Inc. v Varig Logistica, S.A. Next week’s post will address how Pegasus is at odds with the new Federal Rules of Civil Procedure.

Pegasus Aviation I, Inc. v Varig Logistica, S.A. involved litigation spanning multiple continents, and attendant discovery failures.  The underlying dispute arose from the leasing of cargo airplanes in Brazil, a Brazilian bankruptcy and a shareholder dispute.  The plaintiffs not only sued the company to whom they loaned money (the “VariLog Defendants”), but also a number of third parties who purchased the assets out of bankruptcy – the “MP Defendants.”

During discovery the VariLog Defendants advised that one or more computer “crashes” impaired their ability to produce ESI. The VariLog Defendants further explained that during the operative period the company did not have an email preservation system in place, emails were stored on local machines and employee computers were routinely returned “empty.”  These practices were later halted, but subsequent computer “crashes” resulted in the loss of much of the requested ESI.

The Trial Court found that the VariLog Defendants’ failure to issue a litigation hold amounted to gross negligence, and as such relevance of the missing ESI was presumed. The Trial Court further found that because the MP Defendants had been charged by a Brazilian Court with managing and administering VariLog, they were in control of VariLog for purposes of instituting the litigation hold.  The Trial Court sanctioned the defendants by striking Varilog’s answer and imposing an adverse inference sanction against the MP Defendants.

The Appellate Division reversed the sanction. While the Appellate Division agreed on the “control” issue, it differed with the Trial Court finding that there wasn’t a showing of gross negligence, because the issuance of a litigation hold cannot be considered gross negligence per se.  The Appellate Division further placed the burden on the movant to establish that the lost ESI would have supported its claims, and failing to have done so, an adverse inference sanction was not required.  Notably, the Appellate Division decision included a concurring and a dissenting opinion.

The Court of Appeals agreed with the Trial Court and Appellate Division’s findings that the MP Defendants were sufficiently in control of VariLog to trigger an ESI litigation hold. The Court of Appeals also agreed with the Appellate Division that the failure to issue a litigation hold does not amount to gross negligence per se, but was merely one factor to be considered when determining the spoliator’s culpable state of mind.  The Court of Appeals differed, however, with the Appellate Division’s determination that the movant did not show relevance.

Specifically, the Court of Appeals found that:

A party that seeks sanctions for spoliation of evidence must show that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, that the evidence was destroyed with a “culpable state of mind,” and “that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense.” On the other hand, if the evidence is determined to have been negligently destroyed, the party seeking spoliation sanctions must establish that the destroyed documents were relevant to the party’s claim or defense.

The Court of Appeals remanded the litigation to the Trial Court for a determination as to whether the negligently destroyed evidence was relevant to the claims against the defendants, and if so, the appropriate sanction (if the Trial Court deems one warranted).

In reaching its decision the Court of Appeals relied on the Appellate Division, First Department’s decision in VOOM HD Holdings LLC v EchoStar Satellite L.L.C. (93 AD3d 33, 45 [1st Dept 2012]), and the Southern District’s Zubulake v UBS Warburg LLC (220 FRD 212, 220 [SD NY 2004]).  The Zubulake burden shifting rubric has been placed into doubt by recent amendments to the Federal Rules of Civil Procedure.  More on that next week

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 the latest of a string of decisions relating to ediscovery spoliation, the First Department, on Jun 11, 2015, reconfirmed a basic principal of a spoliation motion: the party seeking sanctions must demonstrate that the spoliated materials were relevant to their case.  This requirement must be satisfied even if the spoliation was caused by gross negligence.

In AJ Holdings Group LLC v IP Holdings LLC et al., (2015 NY Slip Op 04943 [1st Dept 2015]), which arose from a licensing dispute, the First Department reversed the Trial Court’s spoliation sanctions, which included an adverse inference and an award of the movant’s expert and attorneys’ fees in bringing the motion.  The plaintiff alleged that the defendant improperly terminated its license for “MUDD” branded products so that it could enter into a licensing arrangement with Kohl’s.  The defendant claimed that the plaintiff orally agreed to modify the termination provision in their licensing agreement.

The problem was that the plaintiff failed to properly implement a litigation hold after it was on notice of the potential litigation and destroyed its internal emails.  In the words of the First Department:

Plaintiff’s failure to ensure that its principals, who were all involved in the instant transactions, preserved their emails on various accounts used by them, and its failure to implement any uniform or centralized plan to preserve data or even the various devices used by the “key players” in the transaction, demonstrated gross negligence with regard to the deletion of the email.

The Court’s analysis did not end there.  The grossly negligent spoliation only gave rise to a rebuttal presumption that the spoliated materials were relevant.  The defendant in AJ Holdings, rebutted the presumption by demonstrating that the defendant’s claimed defense – the oral modification – necessarily turned on communications to or with defendant’s, not plaintiff’s internal communications.  Again, in the words of the First Department:

because defendants can have only relied on communications they received from plaintiff to establish this defense, there is no sense in which the deleted internal emails of plaintiff would be relevant.  As such, it was error to impose spoliation sanctions.

The lesson for the practitioner is that when bringing a spoliation motion one must not forget to demonstrate the relevancy of the spoliated materials, which cannot be taken for granted.