Litigation Hold

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In past blogs, I have discussed the importance of issuing a litigation hold notice (“Hold”), as soon as a litigation is reasonably anticipated. I have also written about various best practices when drafting one’s Hold. [See Practical Tips For an Effective Litigation Hold Notice and Your Litigation Hold Must be Generally Broad And Specifically Tailored]. In an effort to avoid reiterating those blog posts in full, suffice it to say it is critically important to:

  1. provide custodians with detailed instructions on what they are expected to do upon receipt of the Hold; and
  2. ensure that the Hold sets forth the specifics of what information must be preserved, thus limiting any discretion vested in the recipients of the Hold.

A recent decision out of the District of New Mexico reminds us of these best practices.

In N.M. Oncology & Hematology Consultants v. Presbyterian Healthcare Servs., 2017 U.S. Dist. LEXIS 130959 (D.N.M. Aug. 16, 2017), the plaintiff moved the District Court for adverse inference sanctions against the defendants alleging defendants failed to implement a proper litigation hold (“Notice”) because, among other things, the Notice impermissibly gave discretion to employees to determine what information might be relevant to the lawsuit and thus subject to the Notice. Plaintiff contended that permitting such discretion was per se inadequate.

The Court, however, concluded that the discretion the employees were cloaked with in this specific instance was limited and, therefore, the Notice was not inadequate.  Specifically, the employees were directed to retain documents and data “that mention or discuss or relate to any of” an exhaustive list of subjects. The recipient-employees were also directed that if “you are unsure about the relevance of a document, be cautious and preserve it.”

In reaching its conclusion, the Court observed that defendant’s employees were not given a generic retain relevant documents instruction but rather one with sufficient specificity that the employees had little, if any, discretion, and were further instructed to err on the side of preservation.

While the Court further noted that allowing individual employees to exercise discretion as to whether to retain data is not, alone, indicative of bad faith nor does it render a Hold per se inadequate, the decision reminds us that generic “preserve all relevant data” instructions should never be the basis of one’s Hold. The decision also serves as an important reminder that one’s Hold should be drafted in a way that it effectively becomes a checklist for the specific records you seek to preserve.  It is important that you include not only a broad description of the types of documents you seek, but also identify documents or locations with specificity to the greatest extent possible, thus eliminating discretionary decisions to the greatest extent possible.

I recently wrote about the importance of styling one’s litigation hold in a broad, but sufficiently specific way (See, “Your Litigation Hold Must be Generally Broad and Specifically Tailored”).  Some of you may be thinking, well, that’s all fine and good but what is a litigation hold? Why and when do I need one? And what should a litigation hold say?  If you have any of those questions, then continue reading.

Imagine your client was served with a complaint (or your client received a cease and desist letter or you learn it is reasonably foreseeable your client will be sued).*  What now?

Immediately, alarm bells should sound in your mind signaling you to take steps to preserve information relevant or potentially relevant to the lawsuit (or threatened lawsuit).    To this end, you want to draft and issue a written litigation hold notice (“Hold”).   While an oral directive may convey all the necessary information to the proper people, it is far better practice to paper your instructions.  Not only will a written document allow you to recall (perhaps years later) what information was subject to the Hold and who received the Hold, but it can also serve as a protective mechanism should information identified in the Hold as relevant slip through the cracks and be inadvertently deleted.** Thus, a critical function of the Hold is to serve as the means for proper compliance with one’s document preservation requirements and as the tool to avoid inadvertent destruction of evidence and potential sanctions.

It is helpful to envision the Hold as the catalyst that begins the process by which the client formally notifies key individuals that they must preserve relevant information.  Identifying who should receive the Hold can be a task in and of itself.  If, for example, your client is an individual sued in his/her individual capacity, the task is straightforward.  If, however, your client is a major financial institution with offices throughout the nation, the task of identifying the relevant custodians*** can be daunting.

Once you’ve identified the proper custodians (and who the custodians are for this purpose should be revisited throughout the litigation and supplemented as information is learned) and the sources of information they each may have, you must draft your Hold.   A well-drafted Hold need not be lengthy nor should it be replete with legal-ese.  In fact, the shorter, and more simple the better.  You do not want your audience bogged down in trying to figure out what exactly is being asked of them.  Likewise, you do not want to send a multi-page document if you can streamline the message into two pages or less.  That said, every Hold should contain at least the following information:

  1. Introduction: Explain why a Hold is being implemented so that the recipients understand the importance of compliance.  Explaining the general purpose of the Hold may also help the recipients identify relevant information.  The introduction does not have to detail the lawsuit /investigation /subpoena with granularity.  Rather, a general description is all that is necessary.  For example:

[CLIENT] recently received a subpoena requesting documents relevant to an ongoing investigation by the United States Attorney’s Office for the District of Columbia (hereinafter the “Investigation”). We intend to respond to the subpoena in due course, and we are asking for your help.  Due to this Investigation, [CLIENT] must take all reasonable steps to preserve records related to the 8 topics below.  We are in the process of identifying all paper and electronic documents that may be relevant to the matter . . . You have been identified as a person who has had involvement with the [deal], or may possess relevant documents or communications.  We request your attention and assistance in preserving this relevant information for our attorney’s use as appropriate. The records must be preserved in accordance with this Notice, and must be preserved until released by a subsequent written Release Notice.

  1. What is to be Preserved: The Hold becomes a checklist for the specific records you seek to preserve.  It is important that you include not only a broad description of the types of documents you seek, but also identify documents or locations with specificity to the greatest extent possible.  As mentioned in my August 16th post, if you seek to preserve web browsing/search histories you must specify that in your hold. It is likely not sufficient to simply say preserve all ESI. You should also include a temporal limitation for the information you seek to preserve and a description of the relevant categories of information.  In addition to delivering the Hold to key employees who have an involvement in or awareness about the issues in the lawsuit (or threatened suit), it is advisable to send the Hold to relevant personnel in IT and paper records departments who control the ability to suspend normal deletion policies.

Effective immediately, it is critical that none of our employees delete, over-write, or otherwise alter or destroy any documents (print or electronic), records, and data, including without limitation,  [INSERT SPECIFIC DOCUMENTS] . . ., including any drafts of such documents, records, and data, from any device.  Devices that may contain information subject to this preservation include laptops, PCs, handheld devices (such as a BlackBerry or iPhone), and other hardware provided to employees of [CLIENT], including USB drives, shared drives, home computers and/or personal email accounts (if used to store work-related documents), departmental, regional, or local email services, or any other local or centralized storage media which may be accessed by members of your department dated from [INSERT DATE RANGE], and relating in any way to:

  1. Mandatory Preservation: Emphasize that preservation is mandatory, and that failure to comply may compromise the company’s ability to prosecute its claims or defend itself in the lawsuit.

Preservation is mandatory.  Electronically stored information is an important and potentially irreplaceable source of discovery in this matter.  Failure to retain these documents or communications, whether intentionally or accidentally or to ignore this Notice may result in the Company’s inability to prosecute its claims or defend itself in this matter.  Failure to do so could also result in financial and legal penalties against the Company that could negatively affect the outcome of this legal matter. You must take every reasonable step to preserve this information until further written notice.  

I also tend to include the following language in the introduction to ensure we capture the recipient’s attention:

Failure to read and comply fully with this Notice could subject you and [CLIENT] to civil and criminal penalties and could result in disciplinary action

  1. Confidentiality: Stress the confidential nature of the lawsuit and the company’s expectation that employees not discuss the matter with one another or others (i.e., spouses, friends) unless doing so is approved by counsel.  The purpose of limiting one’s ability to discuss the matter is to minimize discoverable communications that could impact the outcome of the lawsuit.
  2. Further Distribution: The Hold should request the names of any additional individuals that the recipients believe may have relevant information and advise recipient(s) not distribute further on their own.

Further Distribution of This Notice:  DO NOT DISTRIBUTE THIS NOTICE DIRECTLY. A distribution list is attached to this Notice.  Please notify [NAME] if you believe the Hold should be distributed further.  In addition, please contact [NAME] if you are aware of any relevant records that may be in the possession of someone who previously held your position.

  1. Duration of the Litigation Hold: The Hold should advise that individuals are required to preserve materials until they are notified in writing that the Hold has been released.
  2. Prompt for Questions: The Hold should provide the name and contact information for company counsel or another person designated to provide guidance and answer questions.
  3. Receipt and Acknowledgment: It is advisable to require recipients to respond in writing that they have read the Hold and will comply with its requirements.  I tend to embed both a read receipt in the Hold and an affirmative obligation to respond to me (or in-house counsel) in writing.  Responses can be sent by individual emails, or by embedding a voting button.  It is also wise to track each response and follow up as necessary with non-responsive recipients. 

In sum, a Hold should include at least the above essential information and should be drafted in a clear and comprehensive fashion such that recipients understand what is being asked of them.   The Hold will serve as the means for proper compliance with the client’s document preservation requirements.

* Different jurisdictions have different rules as to when one’s obligation to preserve information arises.  The most common standard however, and the one embraced in New York state and federal courts alike, is “Once a party reasonably anticipates litigation…”

** Because the inadvertent destruction of relevant evidence can (depending on the circumstances) lead to judicial sanctions or a judgment against the client, a Hold committed to writing will empower you to defend yourself and the client should inadvertent destruction occur.   

*** For purposes of this blog, “Custodians” is used to refer to the individuals / sources (i.e., shared drives, file cabinets) most likely to have potentially relevant information (i.e., related to the claims or defense in the lawsuit).

In Eshelman v. Puma Biotechnology, Inc., No. 7:16-CV-18-D (E.D.N.C. June 7, 2017), Magistrate Judge Robert B. Jones, Jr., denied Plaintiff Eshelman’s motion seeking a jury instruction in response to Puma Biotechnology Inc.’s (“Puma”) failure to preserve (or identify in its litigation hold notice the need to preserve) internet web browser and search histories.  In denying Eshelman’s request, Judge Jones concluded that Eshelman was “not entitled to [either] a sanction pursuant to Rule 37(e)(1)” or “an adverse jury instruction as a sanction pursuant to Rule 37(e)(2).”

Case Background & Holding

This lawsuit involved alleged defamatory statements made by Puma in an investment presentation.  Eshelman brought a lawsuit and soon thereafter Puma issued a Litigation Hold Notice (“Notice”).  That Notice defined “documents” broadly to include electronically-stored information (“ESI”) but failed to reference specifically internet browser / search/or viewing histories.   The Notice did, however, advise Puma employees to err on the side of preservation if uncertain as to whether they were in possession of potentially responsive documents.   In May 2016, a few months after the allegedly defamatory investor presentation, Eshelman’s counsel sent a letter to Puma’s counsel requesting that Puma preserve, as relevant to this dispute, “web browser histories” of individuals involved in the drafting of the January 7, 2016 presentation.  Eshelman renewed this same request a few weeks later in his first demand for documents.

Puma’s counsel responded to the discovery demand that due to the internet browser the Company uses (i.e., Google Chrome®)  web browser history is automatically deleted after 90 days.  And so, the web browser history sought in the document demand was no longer available, nor did it exist at the time of the May preservation letter issued by Eshelman’s counsel.  Upon receipt of this response, Eshelman moved for “a jury instruction to mitigate the harm caused by the defendant’s failure to preserve electronically stored information.”

Judge Jones denied Eshelman’s motion concluding that “the plaintiff has not established one of the threshold elements of Rule 37(e)—namely, that the lost ESI ‘cannot be restored or replaced through additional discovery. . . .’”

Because Judge Jones believed “other avenues of discovery are likely to reveal information about the searches performed in advance of the investor presentation” the Judge concluded Eshelman was “not entitled to a sanction pursuant to Rule 37(e)(1).” Specifically, the Judge opined that Eshelman could seek information about the internet searches performed by the individuals who prepared the investor presentation through deposition testimony.

Moreover, Judge Jones further determined that a sanction was not warranted under 37(e)(1) or (2) because: (1) “the plaintiff has failed to make a sufficient showing of prejudice to support relief under Rule 37(e)(1)” and (2) Eshelman “failed to show that the defendant acted with the requisite intent to deprive him of the ESI in order to support the imposition of an adverse jury instruction under Rule 37(e)(2),” noting that “[a]t most, the circumstances indicate the ESI was lost due to the defendant’s negligence, but do not suggest the presence of intentional conduct. Negligence, however, will not support an award of sanctions under Rule 37(e)(2).”

Conclusion

This case serves as an important reminder that one’s legal hold notice must be drafted in a robust way (i.e., calling for all documents) that is also sufficiently granular such that it specifies exactly the types/categories of documents sought to be preserved.  Drafting an effective hold notice is an art that requires great thought.  Form/template notices –while a good starting point – should not be relied upon blindly.  Stay tuned for a coming blog on drafting effective hold notices.

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

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.

 

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.