Complex Litigation

E-Discovery Requirements Clarified in New Decision

By Michael Hoenig - New York Law Journal - February 17, 2010

In a bombshell opinion and order issued just weeks ago by U.S. Southern District of New York Judge Shira A. Scheindlin, litigants and lawyers have been admonished (again) about their discovery obligations, particularly, to preserve, collect and produce electronic documents, records and data in their possession, custody or control. Judge Scheindlin, one of the foremost experts on the law of electronic discovery, was the author of the Zubulake line of decisions that many say ushered in a new era of robust electronic discovery. Now, her new blockbuster is the Pension Committee decision,1 which carries the picturesque title, "'Zubulake' Revisited: Six Years Later." Pension Committee promises to be a guide and oft-cited framework for complying with electronic discovery requirements.

Since the new decision copiously analyzes a series of discovery failures that led to sanctions against numerous plaintiff-companies, it is a practical roadmap on how real people and real attorneys may be confronted by real challenges regarding compliance only to wind up making judgments that come back to haunt them.

Pension Committee also is a kind of "how-to" manual setting forth key principles relating to issuing, monitoring and enforcing "litigation holds," discharging preservation and search techniques, and documenting appropriate behind-the-scenes conduct so that the responding party can withstand accusations of insufficient disclosure by the adversary. Then, too, there is advice regarding sanctions, what needs to be proved and by whom, the criteria of "relevance" and "prejudice," the legal behavior standards of negligence, gross negligence and willfulness, available remedies and, even, the text of an actual spoliation instruction.

Don't be fooled by the fact that Pension Committee is not a products liability case. The principles and lessons to be learned cut across the spectrum of major litigation. Lawyers, particularly, should become avid readers and keen students of the opinion for they are sucked into the eye of the discovery hurricane once they work on significant cases. The burdens being thrust upon lawyers' shoulders are heavy indeed. They present formidable challenges. Corporate or in-house counsels are not exempt. Electronic discovery has made complex litigation more onerous, more expensive and more time-consuming.

Pension Committee, initially, will likely be viewed by many as a burden-imposing treatise, intrusive in the breadth and scope of the obligations spelled out by the court. Yet, because of its declarative clarity, the decision can be used by responsible lawyers to help fashion a reasonable template for proceeding to litigate in the electronic records era. Clear rules, though deemed burdensome, help to minimize uncertainties and guesswork. Crisp admonitions against misbehavior can help mold vigilant practices by the well-intentioned. But, inevitably, life and survival in a post-Pension Committee world will come with a significant price tag. And, "gray area" questions will spring up nonetheless, catalyzing new guesswork by lawyers.

Since the facts in Pension Committee, a suit by investors to recover losses stemming from liquidation of certain offshore hedge funds, need not detain us, we proceed to elaborate certain key principles, lessons and highlights, presenting a succinct survey distilled from the opinion. In order to heighten the reader's focus, our discussion takes the form of questions and answers.

Questions Answered

Question: Are litigants expected to meet a standard of perfection in discharging disclosure obligations?

Answer: No! Courts cannot and do not expect perfection. They do expect, however, that litigants and counsel take necessary steps to ensure that relevant records are preserved when litigation is reasonably anticipated and that such records are collected, reviewed, and produced to the opposing counsel.2

Comment: Note, however, that key words above like "necessary steps" to "ensure" "relevant records" and "when litigation is reasonably anticipated" likely will call for acute, potentially dangerous judgments in compliance. Lawyers beware!

Question: What is the first step in a discovery effort?

Answer: The preservation of relevant information. When the duty attaches, a failure to preserve evidence resulting in the loss or destruction of relevant information is "surely negligent" and depending on the circumstances, may be "grossly negligent" or "willful." As an example, the intentional destruction of relevant records (paper or electronic) after the duty to preserve has attached is "willful."3

Question: Does a "litigation hold" have to be in writing or can it simply be an oral command to "hold" documents and prevent non-retention?

Answer: "Possibly" after October 2003 (when Zubulake IV was issued) and "definitely" after July 2004 (when the final relevant Zubulake opinion was issued), the failure to issue a written litigation hold constitutes "gross negligence" because that failure is likely to result in the destruction of relevant information.4

Question: What is the next step in the discovery process after preservation?

Answer: Collection and review. Here, too, conduct can be negligent, grossly negligent or willful. The loss or destruction of evidence due to failure to collect it or sloppiness in the review would be "surely negligent" or, perhaps, grossly negligent or willful. For example, a failure to collect records from "key players" constitutes gross negligence or willfulness. So does the destruction of e-mail or backup tapes "after the duty to preserve has attached."5 In footnote 99 the court clarifies that preservation of backup tapes may depend on whether they are the sole source of relevant information or whether accessible data satisfies the requirements of search and production so that saving backup tapes is unnecessary.

Question: What would be an example of negligence in the collection and review process?

Answer: One form might be a failure to obtain records from all employees (some of whom may have had only a passing encounter with the issues in the litigation), as opposed to "key players" (a must). Another might be the failure to take "all appropriate measures" to preserve electronically stored information. "The varieties of efforts and failures are infinite" and each case will turn on its own facts. Recent case law, for example, has addressed problems in the failure to collect information from the files of former employees that remain in a party's possession, custody or control after the preservation duty has attached (gross negligence) as well as the failure to assess the accuracy or validity of selected search terms (deemed negligence).6

Question: Is there a common law duty to preserve relevant evidence?

Answer: Yes. It is "well recognized." The advisory committee note to FRCP Rule 37(f) observes that: "A preservation obligation may arise from many sources, including common law, statutes, regulations, or a court order in the case."7

Question: When does the duty to preserve evidence arise? Is there a difference for plaintiffs and defendants?

Answer: It is "well established" that the evidence-preservation duty arises when a party "reasonably anticipates litigation." That is when the party must suspend its routine document retention/destruction policy and put in place a written "litigation hold" to "ensure" preservation of relevant documents. A plaintiff's duty is more often triggered before litigation commences, in large part because plaintiffs control the timing of litigation.8

Gross Negligence

Question: What kind of discovery conduct could potentially, in a given case, constitute "gross negligence"?

Answer: Certain acts or omissions after the duty to preserve evidence has attached could support a finding of gross negligence. For example, failure: (a) to issue a written litigation hold; (b) to identify the key players; (c) to ensure that their electronic and paper records are preserved; (d) to cease the deletion of e-mail or to preserve the records of former employees that are in a party's possession, custody or control; and (e) to preserve backup tapes when they are the sole source of relevant information or relate to key players whose data is not accessible.9 The court deemed such failures non-adherence to "contemporary standards."

Question: Is it sufficient if counsel just contacts the party litigant to begin document collection and preservation; and, by telephone, e-mail and distributed memoranda, instructs the party to be over-inclusive rather than under-inclusive?

Answer: This instruction does not meet the standard for a litigation hold. It does not direct employees to preserve all relevant records, both paper and electronic. It does not create a mechanism for collecting the preserved records by someone other than the employee. Rather, it places total reliance on the employee to search and select what the employee believes to be responsive records without any supervision by counsel. Such memoranda by counsel to employees do not specifically instruct the litigant party not to destroy records so that counsel can monitor the collection and production of documents.10

Question: Does a comprehensive search for documents require supervision and monitoring of the employees tasked with document collection?

Answer: Yes. There must be guidance so that employees are charged with preservation and collection properly. It is helpful to document or record the steps taken to comply with discovery requirements so that, in the event the sufficiency of the effort is questioned by the court, the party and its counsel can show reasonable discovery conduct. Indeed, the court said that, if proceedings for sanctions are in play, the accused party has "a duty to adequately prepare knowledgeable witnesses with respect to these topics." The inquiry may include topics such as, "which files were searched, how the search was conducted, who was asked to search, what they were told, and the extent of any supervision…."11

Question: Why is supervision and monitoring by management and/or counsel so critical?

Answer: A general instruction to an employee, say a secretary or legal assistant, without detailed instructions on what to do and without monitoring the efforts can lead to the not-adequately-instructed employee impeding adequate preservation, collection, review and production. However well-intentioned the employee may be, he or she will only discharge what they think is best. But that does not necessarily match the standard required by law. As to one of the parties sanctioned by the court for gross negligence, for example, the discovery search had been delegated to H, an employee in the litigant's "due diligence area." But she had no experience in conducting searches, received no instruction on how to do so, had no supervision during the collection, and had no contact with counsel during her search. She only did searches on selected drives though aware that not all e-mails or electronic documents of key players would be on that drive. She never searched backup tapes. She asked only three employees out of a number of others to search their computers for e-mails and electronic documents. The court concluded that H "was ill-equipped to handle [the party's] discovery obligations without supervision. Given her inexperience, [H] should have been taught proper search methods, remained in constant contact with Counsel, and should have been monitored by management."12 Having management in charge is not an automatic solution, however. Even an executive can fall below the mark if he or she does the wrong thing.13

Sanctions Imposed

Question: Does a party's hiring of an outside vendor to retrieve electronic data and e-mail from backup tapes help stave off culpability and sanctions?

Answer: Not necessarily. The question is not only who does the search but whether reasonable compliance with preservation, collection, review and production duties was achieved. For example, one of the parties sanctioned hired a vendor in 2007 to retrieve electronic records from backup tapes when the adversary complained about gaps in production. The vendor's activity did not absolve the party litigant from earlier failures. Thus, prior to 2007 the party failed to search for or take steps to preserve pre-2007 electronic documents; it collected only paper documents. Further, the vendor's retrieval efforts as of 2007 from backup tapes fell short because the recycling of backup tapes was never suspended. Moreover, some key players were not asked for any documents and a number of e-mails were never produced. The court concluded that the "combination of these actions and inactions…amounts to gross negligence."14

Question: What can happen if the duty to preserve evidence relevant to the litigation is breached?

Answer: If the failure to preserve evidence amounts to "spoliation of evidence"—the destruction or material alteration or failure to preserve relevant evidence—then the court has inherent power to impose sanctions. In the new decision, Judge Scheindlin applied a variety of sanctions proportional to the misconduct and degree of egregiousness of the discovery failures. These included a so-called "spoliation" or "adverse inference" instruction to be read to the jury as well as money sanctions. Choosing the appropriate sanctions involves a court's weighing of the circumstances and facts, the magnitude of the misconduct and achieving the policy purposes behind sanctions: (1) to deter the parties from spoliating evidence; (2) to place the risk of the party's error in judgment upon the wrongful creator of the risk; and (3) to restore the prejudiced party to the same position it would have been in absent the wrongful destruction of evidence.

The court "should always impose the least harsh sanction that can provide an adequate remedy." The array of choices a court has include, from the least harsh to the most, further discovery, cost-shifting, fines, special jury instructions, preclusion, and the entry of default judgment or dismissal (terminating sanctions). The ultimate sanction is justified only in the most egregious cases, such as where a party has engaged in perjury, tampering with evidence or intentionally destroying evidence by burning, shredding, or wiping out computer hard drives. Judge Scheindlin did not find misconduct justifying terminating sanctions but did award a variety of lesser sanctions.15

Question: Who has the burden of proof in the court's inquiry following a party's request for sanctions?

Answer: This is a rather complex issue and it is best to review the court's discussion on it.16 As the court said, "what can be done when documents are no longer available…is not an easy question. It is impossible to know what lost documents would have contained." Briefly, the burden of proof question depends on the severity of the sanction. Less severe sanctions, e.g., fines and cost-shifting, focus more on the spoliator's conduct than on the relevance and prejudice factors. In the case of more severe sanctions, dismissal, preclusion, an adverse inference instruction, the court considers not only the spoliator's conduct but also the relevance of the missing documents and the prejudice caused by the loss. Here the innocent party must show "relevance" (the destroyed evidence would have been responsive to a document request) and "prejudice" (the evidence would have been helpful in proving its claims or defenses). "Proof of relevance does not necessarily equal proof of prejudice."

The innocent party proves three elements: (1) the spoliator had control over the missing evidence and an obligation to preserve it at the time it was lost or destroyed; (2) the spoliator acted with a culpable state of mind; and (3) the missing evidence is relevant to the innocent party's claim or defense.

When the spoliator acts in bad faith or in a grossly negligent manner, relevance and prejudice may be presumed. A spoliator's mere negligence, however, will require the innocent party to prove both relevance and prejudice to justify imposition of a severe sanction. Any presumption is rebuttable by the alleged spoliator. Thus, whenever the spoliator undertakes to rebut the presumption of relevance and prejudice (in egregious cases), the burden of proof shifts to the spoliator.17

Conclusion

There is much more substance to Pension Committee than the foregoing survey. Thus, intensive study of the opinion is recommended. Depending on their points of view, readers pondering the heavy load thrust upon them will no doubt see the good, the bad and the ugly in this carefully constructed decision. Nevertheless, it is the law. Its message will spread rapidly to other judges and U.S. magistrate judges. Lawyers and litigants will need to not only read but heed the message too. But, in fairness, courts also will need to squelch the epidemic of sanctions motions sure to come in the wake of Pension Committee, a likely surge of applications by practitioners playing "Gotcha" discovery or what has come to be known as setting up the "discovery tort."18 That also is a form of discovery abuse courts should police.

Michael Hoenig is a member of Herzfeld & Rubin.

Endnotes

1. The Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC, 2010 U.S. Dist. LEXIS 4546 (SDNY Jan. 15, 2010), No. 05 Civ. 9016 (SAS) (SDNY Jan. 15, 2010) (Slip Opinion and Order).

2. Slip Opinion at 2.

3. Slip Opinion at 9.

4. Slip Opinion at 9.

5. Slip Opinion at 10.

6. Slip Opinion at 10-11.

7. Slip Opinion at 11.

8. Slip Opinion at 12. Case examples of when plaintiffs must preserve evidence pre-filing of the suit are found in footnote 27 of the Opinion.

9. Slip Opinion at 24.

10. Slip Opinion at 28.

11. Slip Opinion at 37.

12. Slip Opinion at 49-53. In its footnote 68 the court clarifies that not every employee needs hands-on supervision from an attorney. However, attorney oversight of the process including the ability to review, sample or spot-check the collection process is important. Search adequacy is evaluated on a case by case basis.

13. Slip Opinion at 47-49. For example, as to one of the other parties sanctioned, the company's president took no steps to request documents from, or search the files of one current and one former employee to whom the president had assigned relevant work. Finding gross negligence, the court said the president's "continued deletion of e-mails…is inexcusable" as is his "failure to seek any [relevant] documents or e-mails" from a current and a former employee.

14. Slip Opinion at 56-59.

15. Slip Opinion at 18-24.

16. Slip Opinion at 13-18, 81-84.

17. Slip Opinion at 13-18.

18. See Slip Op. at 17, where the court refers to litigation becoming a "gotcha" game.

125 Broad Street, New York, New York, 10004 - Phone: 212-471-8500 - Fax: 212-344-3333
©2004 -2014 Herzfeld & Rubin, P.C.