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.

On October 4, 2016, District Judge Jon S. Tigar issued an opinion every federal court practitioner should read (Rodman v Safeway, Inc., [11-cv-03003] [N.D. Ca.] [JST]).  The decision serves as an important reminder that counsel has an obligation to assist their client when identifying and collecting  electronic documents responsive to discovery demands.  Indeed, it is not sufficient or defensible to have a non-IT savvy individual search electronic media for responsive materials and to do so without meaningful oversight and involvement of counsel.

The Rodman case is a certified class action for breach of contract.   Defendant, Safeway, Inc. (“Safeway”), entered with customers an online contract that determined pricing and delivery fees associated with online grocery shopping.  The essence of the allegations before the Court were that Safeway breached the contract by charging prices on Safeway.com that were materially different than those charged (for the same items) in the physical store from which the groceries were selected and delivered.

After multiple summary judgment motions, one issue remained for trial: whether class members who registered for the delivery service prior to 2006 agreed to the same contract as class members who registered after 2006?    As a result of this remaining issue, class representative Rodman requested documents showing the terms and conditions and registration process in effect from 2001 through 2005 (“Special Terms”).  On March 9, 2015, Safeway responded to this discovery demand advising that it did not have access to the Special Terms and subsequently reported (on April 7, 2015) that it could not locate any documents responsive to this request.

Seven days before trial, Safeway produced 10 highly responsive documents related to Safeway’s Special Terms.  These documents were found on a “legacy” hard drive and were found by Safeway’s Director of Marketing – Steve Guthrie – when he was prepping for the trial (more than 5 months after discovery closed).   Guthrie – who was designated to testify concerning all steps taken to locate documents and persons knowledgeable about the pre-2006 processes and Special Terms, previously testified that he had searched the legacy hard drive using “key word searches” and did not locate any responsive documents.    

Given the highly relevant nature of the documents produced, the Court continued trial for two months and permitted Plaintiff to take additional discovery.  Eventually, a judgment was entered against Safeway. That judgment is now on appeal before the Ninth Circuit.  

On April 6, 2016, however, and as is relevant to this blog, Rodman filed a motion for discovery sanctions.  Judge Tigar’s decision, granting in part and denying in part the sanction motion, entered on October 4, 2016, imposed a sanction in the amount of $516,484.00 against Safeway.

LEGAL STANDARD FOR DISCOVERY

In reaching its decision, the Court began by reciting the standard under FRCP 26(g) – that a “signing attorney [must] certify that a reasonable inquiry has been made with respect to the factual and legal basis for any discovery request or response.”  The Court further found that when an attorney makes a certification that violates this rule and does so without “substantial justification,” the Court “must impose an appropriate sanction on the signer, the party on whose behalf the signer was acting, or both.” (Rule 26(g)(3)). (emphasis added).

Plaintiff moved for sanctions based upon Safeway’s false statement that no documents responsive to his demand for the pre ’06 Special Terms existed.  Safeway responded that sanctions were not warranted because it made a reasonable inquiry into the basis for its response, including interviewing individuals, and searching the legacy drive for documents.  Safeway argued these steps were comprehensive and thus reasonable.

The Court disagreed and concluded that Safeway’s initial search of the legacy drive was unreasonable for at least three reasons.

First, the Court found “there [was] no indication that Safeway’s counsel guided or monitored Mr. Guthrie’s search of the legacy drive in any significant way.”  Rather, counsel relied on Guthrie’s own determination and seems not to have questioned the thoroughness of Guthrie’s search.  The Court found this “lack of guidance and oversight sufficient to “support” a finding of unreasonableness.”

Second, because there is no evidence that Guthrie had any experience in conducting searches of large document repositories, such as the approximately 300 GB legacy drive, the search was unreasonable.  Indeed, the Court found that Safeway’s counsel could have, but failed to, request a member of Safeway’s IT department (or anyone else familiar with modern e-discovery) conduct the search.

Third, the evidence indicates the search was objectively unreasonable. For example, this was not the case of Safeway being asked to locate the proverbial needle in a haystack.  Rather, many of the electronic file folders (now known to contain the responsive documents) had names like, “Special Terms,”  and “OldSiteDesign” – names that should have signaled to anyone conducting an adequate search that the folder was likely target rich.  Instead, Mr. Guthrie searched for the key words only in a file’s name (rather than in the body of, or content of the file or folder).  This too, shows counsel failed to guide, monitor or inform what Guthrie did.

Clearly if we are to internalize any lesson from this decision it is the obligation of counsel to actively participate in the discovery process.  We cannot allow our client(s)/clients’ employees to collect responsive information in a vacuum.  Rather, we must actively participate in the process and we must secure the expertise of individuals steeped in modern e-discovery when we or client lacks the expertise.  In fashioning the one half-million dollar sanction, the Court found it telling that a substantial part of the legal work Plaintiff sought the cost of performing (additional discovery, unnecessary trial preparation.) would have been avoided had a reasonable search – meaningfully informed by counsel – been conducted on the legacy drive.

 

In Kan-Di-Ki, LLC v. Suer (2015 WL 4503210 [Del. Ch. July 22, 2015]),  a case involving breach of contract claims, the plaintiff alleged that the defendant engaged in suppression and spoliation of evidence when the defendant deleted three sets of text messages and email chains pertaining to the foreseeable litigation between the parties. Plaintiff came to learn of the missing documents because it had received many of them from non-parties during discovery.  In response, the defendant argued that he had lost his phone and had no means of reproducing the text messages (sounds a lot like Tom Brady!) and the emails were received and deleted in the ordinary course of correspondence before he had a duty to preserve them.

The court granted plaintiff’s motion for sanctions due to the defendant’s suppression and spoliation of evidence.  Specifically, the Court reasoned that the defendant was reckless with respect to his duty to preserve relevant emails and documents, as the defendant had reason to anticipate litigation long before he deleted the emails at issue. Indeed, in connection with an earlier pending matter, defendant represented to the court that no relevant materials including these emails – were subject to “manipulation or even just being forgotten.”  The court also found that the defendant engaged in spoliation with regards to the lost text messages, as the court had previously alerted the defendant to the need to retain and potentially produce relevant documents in preparation for litigation, which included the text messages on the lost phone.  The Court imposed limited and specifically tailored adverse inferences and awarded Plaintiff’s attorney’s fees and expenses related to the motion for sanctions.