E-Discovery Law Review : Electronic Discovery Lawyers & Attorneys : Cozen O'Connor Law Firm : Data Preservation & E-Discovery Disputes

The proper preservation of electronic data for discovery has become an increasing source of contention between parties. Two recent cases illustrate the importance of mindfully preserving electronic data during discovery. 

In Gentex Corp. v. Sutter, No. 3:07-CV-1269, 2011 U.S. Dist. LEXIS 122831 (M.D. Pa. Oct. 24, 2011), the district court granted default judgment to the plaintiffs in a spoliation action. Gentex Corporation sued two of its former employees, Brad Sutter and Patrick Walko, for violating non-disclosure agreements. Gentex claimed that Sutter and Walko copied proprietary files when they left the company and shared them with a rival company, Armor. 

In response to the suit, Armor implemented a litigation hold and instructed employees to preserve “all paper documents and electronically stored information concerning the Company’s relationship with Brad Sutter and his work while at the Company.” Armor also obtained a consulting firm to help preserve documents relevant to the litigation. 

Sutter, however, began destroying evidence despite knowledge of the litigation hold. Sutter scrubbed his computer, explaining that he did so “because he was scared because Gentex had sued him.” Sutter destroyed all CD-ROMs containing Gentex information that he possessed and purposely destroyed a thumb drive after his deposition. Sutter also deleted numerous email messages when he was printing them for production to Gentex. 

Similarly, Walko knowingly deleted documents relating to Gentex files on his computer. Walko claimed that various supervisors, including Sutter, instructed him, “Do what you have to do to clean up. If you need to clean up, clean up.” 

Gentex’s expert concluded that the deletions were “intentional and coordinated and designed to circumvent the duty to preserve documents.” The district court agreed and found that Gentex had presented sufficient evidence to show that Sutter and Walko engaged in willful spoliation. The court ultimately determined that granting default judgment to Gentex was the “least onerous” sanction corresponding to the willfulness of the spoliation, given Sutter and Walko’s “unabashedly intentional destruction of relevant, irretrievable evidence.”

By contrast, another court facing similar facts refused to levy the ultimate sanction. In Cedar Rapids Lodge & Suites, LLC v. JFS Dev., Inc., No. C09-0175, 2011 U.S. Dist. LEXIS 110671 (N.D. Iowa Sept. 27, 2011), the court determined that “a stronger showing of bad faith [was] required” before it would grant default judgment to the plaintiffs. In that case, plaintiff investors sued the developers of a proposed hotel for fraudulent inducement. Following a protracted discovery dispute, plaintiffs sought default judgment against one of the defendants for failure to comply with discovery requests and for intentional destruction of evidence. 

The defendant previously produced seven computers, ten hard drives, and 23 CDs for inspection and copying. Although the plaintiffs’ expert extracted over 34,000 relevant documents from these sources, the expert concluded that external drives that had been connected to the laptop were missing. Additionally, the expert contended that a large number of relevant documents, folders, files, and emails had been targeted for strategic deletion. The expert, however, conceded that several innocent explanations existed for the deletions and missing drives. 

Citing an Eighth Circuit decision, the district court determined that there was no proof that the defendant intentionally engaged in spoliation. As an initial matter, the court seemed impressed by the sheer volume of documents that plaintiffs had already recovered from the defendants. The defendant had initially produced 875 documents followed by an additional 2,700 pages, not to mention the 34,000 documents extracted from various hard drives and computers. 

Additionally, the court found that plaintiffs had not met the relevant legal standard. To warrant any sanction, much less a default judgment, the court had to find: 1) intentional destruction indicative of a desire to suppress the truth; and 2) actual prejudice to the other party resulting from the spoliation. Here, the court deemed the defendant to be merely “unsophisticated in the requirements of litigation and preservation of documents” rather than willfully destructive. Further, the plaintiffs suffered no prejudice, as “[i]t would seem that Plaintiffs have plenty of information upon which to pursue their claims.” In denying the motion for sanctions, the court simply stated, “I believe a stronger showing of bad faith is required.” 

While a default judgment represents the ultimate sanction in spoliation cases, destruction of electronic evidence can result in sanctions running the gamut from claim dismissal and suppression of evidence to an adverse inference and attorneys’ fees and costs. As the district court judge in Gentex observed, “I am especially conscious of the deterrence value of harsh sanctions in cases like this where the crucial evidence exists in electronic form, and a party may destroy its opponent’s case with the mere click of a button.” These two cases teach us to beware the fine line that distinguishes behavior worthy of a default judgment and behavior that is merely vexatious.

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Monetary sanctions, attorneys fees, and adverse inference jury instructions are the more common type of sanctions imposed on litigants for the spoliation of evidence, or not producing relevant documents. Recently, however, a court has increased the severity and impact of sanctions by applying them not only to current litigation, but also to a party’s future litigation, with the effects lingering for years to come.

The Underlying Suit

“Any competent electronic discovery effort would have located this email.” These words were written in an opinion by a United States District Judge in the Eastern District of Texas, filed on March 1, 2011, in Green v. Blitz U.S.A., Inc., No. 2:07-CV-372, 2011 U.S. Dist. LEXIS 20353 (E.D. Tex., Mar. 1, 2011)

Green involved a product liability suit in which the requirement of a flame arrester was in dispute. The jury returned a defense verdict, and the plaintiff collected a low settlement amount as part of a high-low settlement agreement. During discovery in a subsequent case with the same defendant and plaintiff’s counsel, counsel learned of documents that were not produced in Green. The plaintiff then filed a motion for sanctions against the defendant in Green and a motion to re-open the Green case. While the court denied the motion to re-open because the statute of limitations had expired, the court did impose sanctions for the discovery abuse.

The Defendant’s Failure to Conduct Adequate Discovery in Green

After 2004, the defendant had just one employee, Mr. Chrisco, who was responsible for searching for, and collecting, documents relevant to the litigation. Mr. Chrisco would meet with the defendant’s national counsel, go through the claims, and develop an understanding of what he would be searching for. He would then go to various departments, explain what he was looking for, and ask the departments to look for, and collect, documents. As the litigation was about flame arresters, any documents pertaining to that subject were relevant.

This is where Mr. Chrisco’s preservation and collection efforts ended and where his employer’s e-discovery troubles began. The defendant did not “institute a litigation-hold of documents, do any electronic word searches for emails, or talk with the IT department regarding how to search for electronic documents.” As a result an email entitled “FW: Flame Arrester,” of which Mr. Chrisco was a recipient, was never produced. Not disclosing this email showed “the gravity of [the defendant’s] discovery violations for failing to produce relevant documents.”

The court found it even “more shocking” that this email could have been discovered by a simple word search for the “obvious term,” flame arrester. Even worse was that the individual tasked with the defendant’s e-discovery efforts, Mr. Chrisco, admitted to being “about as computer . . . illiterate as they get.” The court concluded that one did not have to look any further than not searching for the phrase, “flame arrester,” to determine that the defendant did not make a reasonable effort to produce relevant documents.

The court also found that the defendant did not properly preserve documents. Instead of issuing a litigation hold, the defendant asked employees to delete electronic documents at least ten times during the two year period that the defendant was in litigation. Moreover, the defendant rotated its backup tapes every two weeks, causing any deleted emails to be permanently deleted.

Imposition of Sanctions

The court imposed three sets of sanctions against the defendant, each seemingly more severe than the previous. First, the court fined the defendant $250,000 to be paid to the plaintiff, the amount by which the court estimated the plaintiff was damaged by not seeing the documents during settlement discussions. Second, the court sanctioned the defendant an additional $500,000, which was to be tolled for thirty days. The court agreed to lift this fine if, in those thirty days, the defendant was able to prove that it issued a copy of the court’s memorandum and opinion to any plaintiff in each lawsuit in which it was involved for the past two years, or in which it is currently involved. Third, the court ordered the defendant to file a copy of the court’s memorandum and order with its “first pleading or filing” in any case in which the defendant was involved, “whether plaintiff, defendant, or in another official capacity,” for the next five years.

No litigant would want an e-discovery violation to be a recurring nightmare, as it was for the defendant in Green. The following are some ways that a party may fulfill its e-discovery obligations and avoid the result in Green.

• Put the Right Employees in Charge. Strategically choose the individual or individuals that are in charge of collection efforts in house (for example, do not choose an individual who is not familiar with the company’s technology).

• Take Advantage of Counsel’s Expertise. Engage in communications with counsel who has experience and expertise in e-discovery issues. This will ensure that obligations at each stage of the process are complied with and can be defended later.

• Issue Litigation Holds. Make sure that a plan is developed to identify triggering events that would give rise to the obligation to issue a litigation hold to your employees and ensure that the litigation holds are promptly issued and include a specific instruction not to delete documents.

The court’s sanctions are becoming increasingly harsh. The sanctions in Green had the same effect as publishing the defendant’s e-discovery violations in a newspaper. The above guidelines can help you avoid becoming the next headline.
 

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“Among the sanctions that this memorandum imposes is a finding, pursuant to Fed. R. Civ. P. 37 (b) (2) (A)(vii), that Pappas’s pervasive and willful violation of serial Court orders to preserve and produce ESI evidence be treated as contempt of court, and that he be imprisoned for a period not to exceed two years, unless and until he pays to Plaintiff the attorney’s fees and costs that will be awarded to Plaintiff as the prevailing party..”

The above quotation from a recent opinion out of the United States District Court for the District of Maryland is striking. The decision, Victor Stanley, Inc. v. Creative Pipe, Inc., 2010 U.S. Dist Lexis 93644 (D. Maryland 2010) contains the most egregious examples of eDiscovery misconduct of any recent case of note (and perhaps ever). In addition to imposing a sanction of possible jail time for civil contempt, the court also imposed a default judgment, and awarded attorney’s fees-- the court even considered forwarding the case to the U.S. Attorney’s Office for criminal prosecution as a criminal sanction for discovery misconduct.

The facts of the case are fairly straightforward, though somewhat unusual:

• Plaintiff Victor Stanley, Inc., (“VSI”) a manufacturer of bike racks, outdoor furniture, and other site furnishings sued, among others, competitor Creative Pipe, Inc (“CPI”) and its president Mark Pappas for alleged violation of copyrights and patents, and unfair competition.
   
• VSI alleged that someone from CPI logged into VSI’s website to download design drawings and specifications using the pseudonym “Fred Bass.” It was alleged that CPI used the drawings to develop products that would directly compete with similar VSI products. It eventually became clear that “Mr. Bass” was either CPI President Mr. Pappas or another person at CPI working under his direction.

The examples of eDiscovery misconduct in this case are almost too numerous to list:

• As the court explained “[f]or years, Pappas engaged in a cat and mouse game to hide harmful ESI from production during discovery, repeatedly trying to stall or prevent VSI from discovering evidence that he improperly accessed or used VSI’s website or drawings.”
   
• Just after VSI filed suit, computer forensics indicated 353 user-initiated deletions of files from Pappas’ laptop.
   
• Pappas sent an email to an Argentine business contact instructing him to “destroy various emails and attachments relating to the VSI drawings” that the Argentine contact was going to convert to CPI drawings.
   
• Pappas “attempted to delete over 5,000 files,” and later claimed to have moved the emails to a deleted items folder for “storage purposes.”
   
• Pappas “delayed in producing relevant ESI after Plaintiff indentified it and requested it in discovery, and he lied about the completeness of Defendants’ ESI production.”
   
• On the eve of a scheduled discovery hearing, “Pappas deleted 9,234 files from his work computer.”
   
• Four days prior to the plaintiff’s scheduled imaging of Pappas’s work computer, “Pappas deleted almost 4,000 files.”
   
• The court concluded that the defendants did not even consider, let alone implement a litigation hold after the Plaintiff filed suit or even after the court issued preservation orders. Under the circumstances that court concluded that “ESI would be lost or modified biweekly, under the best of circumstances” because no measures were taken to preserve potentially relevant electronic data.
   
• Forensic examination of Pappas’s work computer revealed that Pappas had used an external hard drive (“EHD”), and the EHD contained 62, 071 files that were copied from his work computer. The EHD was never produced and Pappas claimed that he had returned the EHD to “Bob from Office Max.”
   
• 9,282 user-initiated deletions of files from Pappas’s work computer occurred after the court issued a preservation order.
   
• At a discovery hearing, the court became aware that certain ESI had been deleted. Despite the court’s admonishments to preserve relevant ESI, someone logged onto Pappas’s work computer and ran a Disk Cleanup program, deleted files, accessed the Registry Editor, and ran the system’s Disk Defragmenter. The court concluded that the net effect of these actions was to “ensure that deleted filed could not be recovered.”
   
• Pappas / the defendants failed to preserve ESI when CPI replaced a server.
   
•  “Following a series of ESI preservation and production orders by the Court, Defendants allowed their computer consultant to run programs that eliminated temporary internet files.”

As a result of the egregious eDiscovery misconduct described above, the court imposed a sanction of a default judgment for the copyright claims, awarded attorneys fees and costs allocable to spoliation, and found Pappas’s to be in civil contempt. In so holding, the court noted:

“I have explained the relevance of the evidence lost and why the loss caused prejudice to Plaintiff in prosecuting its case. Taken individually, each section demonstrates intentional misconduct done with the purpose of concealing or destroying evidence. Collectively, they constitute the single most egregious example of spoliation that I have encountered in any case that I have handled or in any case described in the legion of spoliation cases I have read in nearly fourteen years on the bench.”
 

Without a doubt, the Victor Stanley opinion is going to be widely cited throughout the country. Chief Magistrate Judge Paul Grimm provides a survey of national case-law on preservation / spoliation issues, which is, as he put it, “an analytical framework” that will enable counsel to “resolve preservation / spoliation issues with a greater level of comfort.” The case is also a welcome articulation of the different standards applied nationwide, which often make predictability on preservation issues difficult.
 

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A recent case out of Southern District of New York demonstrates the “perils of failing to strike the proper balance” between thoroughness and cost in analyzing data sets for relevant documents. In Harkabi v. SanDisk Corporation, 2010 U.S. Dist. Lexis 87483 (2010), Judge William Pauley III imposed an adverse inference and a monetary sanction of $150,000 against electronic storage giant SanDisk for discovery misconduct.
 

 Facts of the Case:

Plaintiffs Dan Harkabi and Gidon Elazar were executives and principal shareholders of a software development company bought by SanDisk.  They sued SanDisk for breach of contract related to the failure  to pay the plaintiffs for the use of their software in devices sold by SanDisk.

While employed by SanDisk, the plaintiffs were issued laptops and corporate email accounts. In 2007, when it became clear that litigation would be likely, plaintiffs’ counsel sent SanDisk a document preservation letter.  SanDisk’s in-house counsel issued four “Do-Not-Destroy” memoranda and instructed SanDisk’s Director of Global Operations to preserve the laptops that were issued to the plaintiffs.

The laptops were put in a secure storage area where they remained for approximately one year. Sometime in early 2008, SanDisk’s in-house counsel was forwarded a request from a “helpdesk employee” to reimage and reissue the plaintiffs’ old laptops.  According to the “helpdesk employee,” the request was approved. Before the re-imaging, data from the laptops was allegedly saved on a SanDisk file server.

In December of 2008, the plaintiffs requested electronic discovery from SanDisk. In response, SanDisk’s outside counsel advised the plaintiffs that when employees leave the company, laptops are typically recycled 30 days later.  SanDisk’s counsel omitted the fact that the plaintiffs’ laptops had been secured for more than a year and that SanDisk was unable to locate the laptop data on its servers.

When the plaintiffs noticed a Rule 30(b)(6) deposition of SanDisk on topics related to the preservation of documents, SanDisk provided a declaration from its in-house counsel stating “I have no reason to believe that the four ‘Do-Not-Destroy’ Memoranda issued on April 12, 2006 were not fully complied with by SanDisk and its employees, temporary employees, and contractors.”

The plaintiffs later served SanDisk with a specific request for copies of the hard drives of the SanDisk-issued laptops.  SanDisk produced 1.4 million electronic documents and labeled that production as “everything,” and refused to produce the hard drives stating “all electronic documents from the hard drives that are relevant to the dispute have already been produced.”

Despite spending considerable time and effort examining SanDisk’s native production for the laptop data and email files, the plaintiffs were unable to locate any of the material that they remembered being on the laptops.

SanDisk’s counsel later disclosed that information from the hard drives had not been included in the native production, and acknowledged that SanDisk was unable to locate the laptop data on SanDisk’s servers or backup tapes despite its “best efforts.”

After analyzing SanDisk’s native production, the plaintiffs hypothesized that SanDisk had not produced data from agreed upon records custodians.  The plaintiffs subsequently filed a motion for sanctions against SanDisk under Rule 37 of the Federal Rules of Civil Procedure.
 

Spoliation of the Laptops:

A party moving for a severe sanction such as dismissal or an adverse instruction for spoliation, must prove, among other things, that the opposing party “acted with a culpable state of mind upon destroying or losing the evidence.”

The plaintiff advanced several arguments on SanDisk’s culpable state of mind, and one of the most salient was the contention that “SanDisk’s expertise in electronic data storage undermines its claim of an innocent mistake.”

In accepting this argument the court noted:
 

Plaintiffs’ third argument must mortify SanDisk, a global business that champions itself a leader in electronic data storage. Its size and cutting-edge technology raises an expectation of competence in maintaining its own electronic records. The concatenation of omissions and missteps at SanDisk reveal a lack of attention to detail that has worked a hardship on the Plaintiffs and delayed this litigation.

The court held that “at a minimum SanDisk was negligent” due to “a cascade of errors, each relatively minor, which aggregated to a significant discovery failure.” Nevertheless, the court did not consider SanDisk’s conduct egregious enough to warrant terminating sanctions, and instead chose to fashion an adverse instruction to the jury.

Sanctions for the Late Produced Emails:

If not for the plaintiffs’ herculean effort in “forensic analysis and their counsel’s persistence,” the nature of SanDisk’s discovery deficiencies may never have become known.  The court imposed a sanction of $150,000 against SanDisk for compensation of the “David-and-Goliath-like struggle for electronic discovery” and specifically for the late produced emails.  In so holding, the court recognized the delicate economic balance at hand:

Integral to a court’s inherent power is the power to ensure that the game is worth the candle—that commercial litigation makes economic sense. Electronic discovery in this case has already put that principle in jeopardy. From this Court’s perspective, a monetary sanction of $150,000 should be sufficient to compensate Plaintiffs for their added expense and deter SanDisk from taking shortcuts. Experienced counsel on both sides of this litigation may accept this Court’s view or not. If either side believes it necessary to litigate the precise dollar amount of a monetary sanction, then this Court will entertain further submissions. But any further detour into Rule 37 should be expedited because the parties are well past the time that they should be addressing the merits of this lawsuit.

Take Away Points:

Proving electronic discovery misconduct can be incredibly expensive. In Harkabi, plaintiffs’ counsel contended that their attorney time and expenses related to the sanctions motion were estimated to be $201, 096.25.  The plaintiffs, who were computer experts, also spent a considerable amount of their valuable time analyzing data sets to prove discovery deficiencies. The costs that the plaintiff incurred  point to the frustrating reality that, unfortunately, in many cases, it may not be cost effective to undertake the effort necessary to prove discovery misconduct.

Another important lesson from the Harkabi case is that cooperation between inside counsel, outside counsel, and employees within a company is critical to proper compliance with a litigation hold.  The judge in  Harkabi  noted that SanDisk’s in-house counsel was “notably absent at critical junctures” including during an upgrade of SanDisk's computer systems which may have impacted the storage of the plaintiffs data.  Without active and continued cooperation, the management, processing, and maintenance of relevant electronic data sets is difficult—even for an expert in electronic data storage like SanDisk.

Although electronic data storage has made life much easier in many ways, the fact that we now store much larger volumes of data than in the past is not without significant costs.  In Harkabi, the court noted that in order to respond to the plaintiffs' electronic discovery request, SanDisk would have needed to search its backup tapes, which would require the processing of billions of pages of documents “at significant cost.”  There is no indication that SanDisk weighed the cost of complying with the electronic discovery request (considerable) against the probable cost of sanctions for non-compliance (also considerable), but many companies likely engage in this calculus.  In order to deter bad actors, judges will often take into consideration the incentives and disincentives inherent within the rules governing electronic discovery.  But as Judge Pauley recognized, it is also important, given the soaring costs of electronic discovery disputes, that  judges not allow eDiscovery related litigation to add significant delay or burden to resolution of an underlying dispute on the merits.
 

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Although the imposition of sanctions for misconduct involving electronic discovery continues to gain momentum, it is still rare that courts turn to the ultimate sanction: the dismissal of a lawsuit. One plaintiff in an Illinois tort case left the court with little choice. In Peal v. Lee, et al., 2010 Ill. App. LEXIS 760 (Ill. App. Ct. 1st Dist. July 30, 2010), the appellate court affirmed the dismissal of a lawsuit due to the plaintiff having intentionally destroyed over 20,000 computer files the day before the defendants’ expert was to inspect the computer.

The plaintiff ice skating instructor sued his employer and others for, among other things, defamation and intentional infliction of emotional distress. While the Complaint alleged that the tortious conduct occurred in 2005, the defendants were in possession of letters that the plaintiff had submitted to the defendants in 2004 complaining of the same conduct. As a result, the defendants moved to dismiss under the statute of limitations, but the court refused to do so because the plaintiff denied authoring those documents.

Fast forward to discovery: The defendants sought to obtain evidence confirming that the plaintiff had written those 2004 letters. After the plaintiff violated a court order requiring that he produce his computer, the court again ordered that the computer be produced by April 10, 2009. The defendants’ forensic expert would later uncover that, on April 9, 2009, the plaintiff used four different data “wiping” programs to permanently delete data from the hard drive, and that before that date, the plaintiff had used three other such programs. This, notwithstanding that his attorney had sent him defense counsel’s electronic discovery preservation letter.

The defendants wisely moved to dismiss the case because of spoliation. To say the least, the trial court was not humored by the plaintiff’s explanation that he had downloaded “cleaning programs” to remove viruses on his computer. After an evidentiary hearing, the court dismissed the case with prejudice. The appellate court found “no evidence” showing that the trial court abused its discretion in dismissing the case. The court’s disdain for the plaintiff’s misconduct was evident, and perhaps best reflected in its colorful description of plaintiff’s arguments: “completely disingenuous,” “nervy,” “hollow,” “patently untruthful,” and “pure pettifoggery.” The plaintiff claimed he did not act in bad faith; the court responded that the plaintiff’s conduct is “the personification of bad faith.”

Few can be surprised by the trial court’s dismissal and the appellate court’s biting affirmance given the plaintiff’s shocking conduct. Still, this case demonstrates that courts can and will resort to the sanction of all sanctions when a party takes such nefarious steps to thwart the discovery process and more generally to undermine the integrity of the judicial system.

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Undeniably, the nature of electronic communications and electronic data retention has dramatically increased the scope and complexity of discovery.  However, it has also made it increasingly simple for opposing parties to identify spoliation and non-compliance with discovery orders.  More often than not, the parties have exchanged electronic correspondence and documents prior to litigation.  When that information is not produced during discovery, one party can easily identify information that has been withheld and seek sanctions for spoliation. 

For instance, the defendant in In re A&M Florida Properties II, LLC et al., v. American Federated Title Corp., Bkrtcy. No. 09-15173, 2010 WL 1418861 (Bankr. S.D.N.Y. Apr. 7, 2010) requested that the plaintiffs produce documents related to an important defense raised in response to plaintiffs’ claims.  Among the documents requested were a series of emails that the defendant believed would reveal important facts about what the plaintiffs knew and when.  The defendant was confident that these emails existed because it possessed its own copies of certain emails sent by the defendant to the plaintiffs.  Surprisingly, when the plaintiffs responded to the defendant’s request, the emails the defendant was already aware of and expected to find in the production were entirely absent. 

Over the course of a year and a half, the defendant made multiple requests for the email correspondence that it believed existed.  Eventually, an additional 38 emails were produced and then, finally, the correspondence the defendant believed existed was sent along with 9,586 emails responsive to the initial discovery request.  The bulk of these emails were stored in archive folders that were not initially search as part of the plaintiffs’ “live” system.  Under this court’s holding, attorneys have an obligation to go beyond simple requests to look for documents to "become fully familiar with [the] client's document retention policies, as well as [the] client's data retention architecture."

Although the judge stated that neither dismissal of the plaintiffs’ claims nor an adverse inference were appropriate sanctions because the failure was not intentional, the plaintiffs and their counsel were ordered to pay all of the costs associated with two forensic searches of electronic data and the expense the defendant incurred in bringing its motion to compel the documents and the motion for sanctions. 

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It is pretty rare for a court to sanction a non-party, but in Amerisource Corp. v. Rx USA Int'l Inc., et al.,2010 U.S. Dist. LEXIS 67108 (July 6. 2010), that is exactly what the Eastern District of New York decided to do when faced with serious litigation misconduct. Plaintiff Amerisource filed a motion for sanctions based on the non-party principal of Defendant Rx USA’s fabrication of emails, false and misleading testimony, and failure to correct discovery responses. The Court granted the motion for sanctions and ordered both RxUSA and non-party President and CEO of RxUSA Robert Drucker to pay $50,000 to plaintiff Amerisource as well as an additional $50,000 to the Clerk of the Court.

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A recent case out of the Southern District of New York has created a bit of buzz on the blogs. In In re A&M Fla. Props. II, LLC, 2010 WL 1418861 (Bankr. S.D.N.Y. Apr. 7, 2010), Chief Bankruptcy Judge Arthur Gonzalez was asked to impose sanctions pursuant to Federal Rule of Civil Procedure 37(d) for intentional obstruction of the discovery process

The facts of the case are pretty simple:

• Lawsuit between Plaintiff GFI Acquisition, LLC and Defendant American Federated Title Corp for breach of a $41 million purchase and sale agreement.
   
• Defendant American Federated sought email communication from GFI related to the purchase and sale agreement.
   
• The requested emails were not produced even after a “company wide" search, and even though American Federated had evidence that the emails existed (American Federated was the recipient of some of the emails at issue).
   
• American Federated and GFI jointly retained a computer forensic technician to search the GFI computer system, but the emails were still not uncovered.
   
• American Federated requested an emergency status conference to discuss the possible spoliation of evidence.
   
• Prior to the emergency status conference, GFI’s counsel disclosed that some emails were kept in archive folders and might not have turned up in the “company wide” search.
   
• The computer forensic technician performed another search, which uncovered the emails at issue. The emails were reviewed by GFI’s outside counsel for privilege, but were not turned over to the plaintiff for several months and only after a motion to compel had been filed.

The court considered imposing terminating sanctions (dismissal with prejudice), but concluded that the lack of intentional destruction of evidence / failure to obey court orders meant that “dismissal would be unjustly harsh here, especially considering that American Federated eventually acquired the documents it sought all along.” For the same reason, the court declined to impose a severe sanction of an adverse inference.

Nevertheless, the court decided to impose monetary sanctions for the substantial delay and cost in producing the requested emails. The absolutely critical point about this case is the recognition by the court that when responding to a discovery request for ESI , outside counsel must become familiar with the client’s document retention system. Here, outside counsel was perhaps unaware of the difference between emails stored in a “live inbox” versus emails that have been archived. Employees of GFI removed emails from the “live inbox” to archived personal folders. The archived emails apparently did not come up in the “company wide” search performed first by GFI and later by a expert consultant.

The take away lesson from the opinion is that outside counsel has an obligation not just to request documents from his/her client, but to search for sources of information. Even without a finding of spoliation of evidence, a party may face sanctions for obstruction of the discovery process:

“Had Nash fulfilled his obligation to familiarize himself with GFI’s policies earlier, the forensic searches and subsequent motions would have been unnecessary. The Court finds that monetary sanctions are appropriate here and orders GFI and its counsel to reimburse American Federated its half of the cost of the forensic searches. GFI and its counsel are also ordered to reimburse American Federated for the costs associated with bringing the motion for sanctions and the motion to compel.”
 

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No? Well, you might want to prepare yourself for sanctions. In a recent eDiscovery presentation,  John Jessen,  a chairman of the Sedona Conference executive committee,  hit on the importance of Active Management. Mr. Jessen expressed that  there is a growing expectation that attorneys establish a comprehensive and defensible eDiscovery plan right from the start of a matter. Gone are the days where attorneys may make up eDiscovery management as they go along. Instead, as has been recognized in many of the leading eDiscovery cases, including the Zubulake and Pension Committee decisions, judges are stressing the importance of comprehensive planning. As one judge recently put it:

“Without a discovery plan that incorporates a comprehensive and defensible electronic discovery preservation and processing protocol right from the start---and then active management of the timelines and milestones associated with the plan---the perception of negligence or willful destruction is almost unavoidable”

With the growing consensus among decision makers that the absence of Active Management is per se negligent, Active Management is no longer just an option---it’s a requirement. So how does one pass the Active Management test? While perfection is not required, judges are expecting eDiscvoery models with a reasonable plan for data selection, collection, review and production. A successful model needs to have built in checks and balances to create some likelihood that a good data set will be collected and that a defensible document review protocol will be established. Any defensible eDiscovery model must also memorialize all important project decisions so that if the model is challenged, there is an ability to defend strategic choices made by counsel.

The bottom line is that a practitioner will be much better protected against sanctions with a defensible eDiscovery model and active management to guard against error. Succesful Active Management means having oversight over the eDiscovery process such that potential issues are easily identified and resolved. To find out more information about a comprehensive eDiscovery plan, check out Daticon’s eDiscovery methodology: here 
 

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