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

United States ex rel Guardiola v. Renown Health, No. 3:12-cv-00295-LRH-VPC, 2015 WL 5056726 (D. Nev. Aug. 25, 2015)

In this case involving a motion to compel, the District Court addressed Defendants’ claim that emails stored on backup tapes were not reasonably accessible because of the undue burden and cost associated with retrieving them.  Turning first to the question of “undue burden”, the Court noted that the party who bears the burden of establishing inaccessibility “must establish that restoration and production of its particular tapes or other storage media, due to their particular aspects and features, would impose undue burden or cost.”  Further reasoning that “there will be a burden or a cost, but not both,” the court noted that restoration was “technologically feasible,” as evidenced by the restoration of one tape, and reasoned that because Defendants indicated the need to rely on a vendor, “[b]y implication, [Defendants] will ameliorate the burdens of in-house production, though at some cost.”  Thus, per the court, the “remaining question [was] only whether undue cost of the third-party vendor ma[de] the … emails not reasonably accessible.”

Regarding the question of “undue cost,” the court rejected Defendants’ argument that “cost” under Rule 26(b)(2)(B) included document review and storage.  Thus, assessing only Defendants’ estimate that restoration would cost approximately $136,000, the Court concluded that the amount was not undue. Explaining that “[u]ndue cost is examined not as a number alone, but instead within context of myriad facts,” the court went on note that it was Defendants that “elected to store typical disaster recovery tapes with archival data,” and further reasoned that:

ESI is now a common part and cost of business. Businesses are best situated to weigh for themselves the costs and benefits of various technology solutions in light of their needs. These needs should include some thought to the risk of litigation and corresponding discovery obligations. To the extent that restoration costs in this case owe to Renown’s failure to earlier implement a sensible email retention policy and its choice to use an archival/backup solution that did not maintain ESI in an indexed or otherwise searchable manner—a conclusion that Renown itself advances—Renown must bear some responsibility within the consideration of whether the restoration cost is undue.

In further support of its determination that the cost of restoration was not undue, the court noted that the estimated amount was an “infinitesimally small portion of [Defendants’] annual revenues.”  Accordingly, Relator’s motion to compel was granted.

 

Earlier this summer, the California State Bar formally addressed the ethical obligations of counsel to be competent in matters of e-discovery and specifically established standards for counsel practicing in California.  (Formal Opinion No. 2015-193).  The Bar stated, “[e]lectronic document creation and/or storage, and electronic communications, have become commonplace in modern life…attorneys who handle litigation may not ignore the requirements and obligations of electronic discovery. A lack of technological knowledge in handling ediscovery may render an attorney ethically incompetent to handle certain litigation matters involving ediscovery, absent curative assistance.”  The Opinion went on to note that an attorney lacking the required competence for e-discovery issues has three options: (1) acquire sufficient learning and skill before performance is required; (2) associate with or consult technical consultants or competent counsel; or (3) decline the client representation. Lack of competence in e-discovery issues also may lead to an ethical violation of an attorney’s duty of confidentiality.

Although the State Bar’s Opinion is advisory only, it provides much needed structure in a field that has historically been faced with varied interpretations and even more varied levels of competence in the field.  Set within the parameters of a hypothetical bar exam question, the Opinion went on to discuss the 9 defined skills that attorneys should be able to perform in ediscovery (either “by themselves or in association with competent co-counsel”):

  1. Initially assess ediscovery needs and issues, if any;
  2. Implement/cause to implement appropriate ESI preservation procedures;
  3. Analyze and understand a client’s ESI systems and storage;
  4. Advise the client on available options for collection and preservation of ESI;
  5. Identify custodians of potentially relevant ESI;
  6. Engage in competent and meaningful meet and confer with opposing counsel concerning an ediscovery plan;
  7. Perform data searches;
  8. Collect responsive ESI in a manner that preserves the integrity of that ESI;
  9. Produce responsive non-privileged ESI in a recognized and appropriate manner.

Irrespective of whether the New York State Bar follows California’s lead, it is nonetheless critical for practicing attorneys (litigators in particular) to understand the intricacies of the ediscovery landscape and our many obligations in this area.   Ultimately, attorneys’ obligations evolve as new technologies develop and become integrated with the practice of law. Make sure you are staying up to speed!

On July 23, 2015, the Second Circuit, in Lola v. Skadden, Arps, Slate, Meagher & Flom LLP, Tower Legal Staffing, Inc., revived (see our earlier blog posts dated March 11, 2015) a putative collective action brought by David Lola, a contract attorney, against Skadden Arps and Tower Legal Staffing, Inc., alleging violations of the overtime provisions of the Fair Labor Standards Act (“FLSA”).  The Second Circuit held that Lola adequately pled that document review may not necessarily constitute “practicing law” under North Carolina law.  The gravamen of Lola’s complaint was that he performed document review under such tight constraints that he exercised no legal judgment whatsoever and thus, could not be considered to be “practicing law.”  Specifically, Lola alleged his document review was closely supervised and primarily consisted of:

  • looking at documents to see which search terms (pre-determined by Skadden attorneys) appeared in those documents;
  • categorizing those documents into categories pre-determined by Skadden attorneys; and
  • redacting documents based on specific protocols devised by Skadden attorneys.

Lola was paid $25 an hour and generally worked between 45 and 50 hours per week.  He was classified as exempt under the FLSA and therefore did not receive overtime pay.

Lola brought suit against Skadden and Tower Legal Staffing, Inc. as putative joint employers, on behalf of himself and similarly situated employees, alleging that he was misclassified as exempt under the FLSA and seeking overtime pay.  While attorneys generally qualify for the FLSA’s professional exemption, Lola alleged that he and other contract attorneys performing document review for Skadden were not engaged in the practice of law because they “performed document review under such tight constraints that [they] exercised no legal judgment whatsoever.”  The defendants moved to dismiss the complaint, arguing that  Lola, as an attorney, was exempt under the FLSA’s professional exemption.

The district court (Judge Sullivan, S.D.N.Y.) granted the defendants’ motion to dismiss finding, first, that the definition of “practice of law” is “primarily a matter of state concern,” and that because Lola resided at all relevant times in North Carolina, that state’s law should apply when analyzing whether he was practicing law under the FLSA.  The court then concluded that Lola was engaged in the practice of law under North Carolina law, and therefore an exempt employee under the FLSA.  Lola appealed the decision to the Second Circuit.

As a threshold matter, the Second Circuit agreed with the district court that North Carolina law should control the question of whether Lola was practicing law within the meaning of the FLSA’s professional exemption.  Constrained to accept the allegations in the complaint as true for purposes of the defendants’ motion to dismiss, however, the Court of Appeals disagreed with the district court’s conclusion that by undertaking the document review Lola was necessarily “practicing law” within the meaning of North Carolina law. Rather, because North Carolina defines the “practice of law” as requiring “at least a modicum of independent legal judgment” and a fair reading of the complaint in the light most favorable to Lola is that he provided services that a machine could have provided, Lola cannot be said to be engaged in the practice of law within the meaning of the FLSA and therefore did not qualify for the professional exemption.  For this reason, the Court of Appeals vacated the judgment of the district court dismissing the complaint, and remanded the case for further proceedings.

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.

Giuliani v. Springfield Township, No. 10-7518, 2015 U.S. Dist. LEXIS 74174 (E.D. Pa. June 9, 2015)

In the Third Circuit, mere negligence is not enough to support a claim of spoliation.

In this zoning dispute involving claims of civil rights violations and tortious interference with contractual relations, the court denied the plaintiffs’ request for spoliation sanctions where they could adduce no evidence that any records were destroyed in bad faith once the defendants anticipated litigation.  According to the court, any deletion of e-mails resulted from the Township’s “inadvertence, negligence, inexplicable foolishness, or part of the normal activities of business or daily living.” None of which amounted to bad faith.

The plaintiffs, property owners in the defendant Township, alleged an “unremitting campaign of harassment and discrimination, spanning the better part of fifteen years, aimed at divesting plaintiffs of every economically viable use of their property.” The zoning dispute ended in 2009, but the plaintiffs did not file their lawsuit two years later in January 2011.

Despite a “protracted discovery process,” the plaintiffs claimed the defendants “made no substantial or reasonable effort to identify and retain relevant documents” and destroyed internal e-mail correspondence, land development application files for other properties in the Township, and Planning Commission Board minutes.

The judge evaluated the claims under a four-part test for spoliation: “(1) the evidence was in the party’s control, (2) the evidence is relevant, (3) there was ‘actual suppression or withholding of the evidence,’ and (4) ‘the duty to preserve the evidence was reasonably foreseeable to the party.’” The judge decided that the documents were relevant and under the defendants’ control. However, he disagreed that the defendants had a duty to preserve the evidence because – according to the judge – defendants believed all issues relating to the plaintiffs’ land development applications had been resolved until two years later when the lawsuit was filed.

The court also disagreed with the plaintiffs’ contention that the defendants’ discovery efforts were “feeble” because they failed to issue a written hold notice. Rather, the Township Manager met face to face with employees in the “very small organization” so he could “make sure that they knew what [he] was looking for.” And, the Township’s lawyer requested staff to gather all records relating to the property at issue, which he then collected and preserved. Once the Township Manager knew of the plaintiffs’ request for additional records for other properties, the staff saved them as well. The court found these efforts sufficient and denied the plaintiffs’ motion.

Giuliani v. Springfield Township, No. 10-7518, 2015 U.S. Dist. LEXIS 74174 (E.D. Pa. June 9, 2015).

Word to the wise to those practitioners representing smaller businesses (and small business owners) – rather than allow your client to follow a haphazard document retention enforcement policy, encourage the company to automate its processes to ensure it follows a consistent, documented, and defensible procedure.

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

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

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

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

 

Themis Bar Review, LLC v. Kaplan, Inc., WL 3397877 (S.D. Cal. May 26, 2015).

In this action, defendant served plaintiff with a request for production that sought, among other things, documents related to the plaintiff’s pass rate and the data substantiating the pass rates posted in the plaintiff’s advertising materials. The plaintiff produced the relevant data in a PDF format from Microsoft Excel spreadsheets.  This format, in turn, stripped the documents of all their “user friendly” capabilities (i.e., the ability to filter, sort, and/or search the excel charts).

The defendant complained that the PDF format was not the native format the data was kept in by plaintiff.  Defendant further stated that the plaintiff also failed to respond to any of its many requests during a meet and confer conference wherein defendant asked for the metadata and related email documents.  In response, plaintiff argued that they would comply with defendant’s request to produce the emails and metadata in native form only if defendant paid for the associated costs.

Under Federal Rule Civil Procedure 34, the production of documents or ESI must be produced in “a form or forms in which it is ordinarily maintained or in a reasonably usable form or forms.” As such, the court found that the defendant had notified the plaintiff of the need to produce the spreadsheets and emails in an Excel format, and had tried to meet and confer as contemplated by the parties jointly submitted “Discovery Plan.”

Not surprisingly, given the judicial desire for a cooperative discovery process, the court ordered the plaintiff to reproduce the emails and the associated metadata in searchable format and further ordered plaintiff to pay for the costs of reproduction.  This case, like many others in recent months, serves as a good reminder that often the client is best served by a counsel willing to cooperate during discovery.  What’s more – a cooperative counsel often retains credibility in the eyes of the Court.

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.

HMS Holdings Corp. v. Arendt, 2015 N.Y. Slip Op. 50750(U) (Sup. Ct. May 19, 2015).

In this lawsuit, HMS alleged that the defendants – former employees – misappropriated confidential information, including trade secrets, on behalf of their new employee, Public Consulting Group (“PCG”).  When the lawsuit began, PCG promptly issued a legal hold notice to certain of its employees, including two of the defendants – each of whom were licensed attorneys.

During discovery, the parties entered into a discovery stipulation requiring defendants to make forensic images of their computers and certain other sources of electronically stored information.  Defendant Sean Curtain produced images of his work and personal computers; defendant Danielle Lange imaged her work laptop and personal iPhone.  HMS’ expert promptly inspected those images and found that both attorney defendants had destroyed relevant information.  The Court agreed.*

The Court found both lawyers “engaged in egregious misconduct for which they bear a high degree of culpability” and their misconduct caused “substantial prejudice” to HMS.  Given the intentional and willful spoliation, the Court presumed the lost evidence was both relevant and supportive of HMS’ claims.  Neither Lange nor Curtain could rebut this presumption.

Having established spoliation, the issue left for the Court was one of sanctions.  The Court declined to impose an Order of preclusion because HMS could establish its claims through avenues other than the lost evidence.  However, the Court found a mandatory adverse inference  was appropriate given the “willful and deliberate” misconduct perpetrated by the defendants.  Specifically, the Court found “the trier of fact should be permitted to draw the strongest possible adverse inference from defendants’ bad faith and intentional destruction, deletion and failure to produce relevant evidence.”  The Court also ordered defendants to pay HMS’ attorneys’ fees, costs and all expenses stemming from their willful misconduct.  Finally, the Court forwarded its decision to the Committee on Professional Standards for the Third Department.  According to the Court, given the nature of the conduct undertaken by Danielle Lange, her “honesty, trustworthiness, and fitness to practice law” was severely called into question.

 *Please consult the Court’s full opinion for a detailed description of the egregious misconduct the individual defendants engaged in, including repeated use of  data wiping tools and affirmative misrepresentations of fact.