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New S.D.N.Y. Ruling in Pippins v. KPMG Focuses on Proportionality in Preservation

October 17, 2011

By Brad Harris

Pippins v KPMG, 2011 WL 4701849 (S.D.N.Y.) October 7, 2011

U.S. Magistrate Judge James L. Cott from the influential Southern District of New York (S.D.N.Y.) released an interesting opinion in early October that reflects on an emerging question: Should the principles of proportionality as articulated in FRCP Rule 26(b)(2)(c) apply to a litigant’s obligation to preserve potentially relevant information in anticipation of discovery? I appreciate Maura Grossman at Wachtell Lipton for bringing this case to my attention.

Pippins v. KPMG involves the treatment of exempt employees under the Federal Fair Labor Standards Act and New York State Labor Law.  The defendant sought a protective order limiting the scope of its preservation efforts by advocating a proportionality test as outlined in FRCP Rule 26(b)(2).  The two parties had failed to reach agreement as to what was reasonable to preserve, and the KPMG’s legal team had sought a protective order to limit the burden of preserving computer hard drives for thousands of former employees who might fall within a potential nationwide FLSA collective.

Judge Cott denied the motion based on the following three factors:

  1. Was the material to be preserved relevant? — The Court opted to consider relevance in the context of discovery as “an extremely broad concept” (citing Condit v Dunne).
  2. Was the material to be preserved created by or for “key players” in the litigation? — Citing Zubulake and others that materials created and/or retained by parties to the litigation could be considered as key players
  3. And finally, would the ongoing preservation be duplicative of other discovery materials being preserved? — The Court did reference the defendant’s “broad efforts to preserve ESI and other relevant documents” and arguments that other materials being preserved would be more than adequate.  However, it did not find sufficient information for ruling on probative value, and deferred addressing the issue of proportionality to another day.

Despite reported considerable expense and risk associated with preserving the hard drives (KPMG claimed it has spent more than $1.5M on hard drive preservation so far), the Court concluded that “until discovery proceeds and the parties can resolve what materials are contained on the hard drives and whether those materials are responsive to Plaintiffs’ document requests, it would be premature to permit the destruction of any hard drives.” (*3)

As litigants struggle to balance the increasing costs of preservation due to the exponential increase in ESI coupled with the increasing risk of spoliation sanctions, stakeholders in the U.S. legal system are searching for a solution founded on the principles of both reasonableness and proportionality.

FRCP Rule 26(b)(2)(C) exists to limit the frequency and extent of discovery where the burden and expense outweigh its likely benefit.  It will be interesting to see if this case helps or hinders a litigant’s need to apply the same principles when evaluating the reasonableness of actions taken to preserve information.

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DuPont v. Kolon: DuPont Avoids Sanctions by Maintaining Legal Hold Practices

July 12, 2011

8/16 UPDATE: See subsequent blog post: The Other Shoe Drops in DuPont v. Kolon: Sanctions for Defendant for Spoliation After Issuing Weak Legal Hold (8/16/2011)

E.I. du Pont De Nemours and Co. v. Kolon Industries, Inc., Civil Action No. 3:09cv58, 2011 U.S. Dist. LEXIS 45888 (E.D. Va. Apr. 27, 2011)

In an opinion from late April, Sr. District Judge Robert E. Payne from the Eastern District of Virginia denied the defendant’s motion for sanctions for spoliation on the basis that the plaintiff DuPont maintained a strong litigation hold process and was committed to e-discovery.  We first read about this case at Gibbons P.C.’s E-Discovery Law Alert blog where Jennifer Marino Thibodeau covered it.

The case involves appropriation of trade secrets when a DuPont employee left and went to work for a Korean competitor, namely Kolon Industries.  Once DuPont became aware of the situation, they involved the FBI and Dept. of Commerce since it involved an overseas company which came to light in May 2007 when it was discovered that the former employee was consulting with Kolon.

In reviewing the defendant’s assertions following discovery that documents from four employees were destroyed, Judge Payne did a thorough analysis in evaluating the timing of the duty to preserve (“trigger event”), relevance and culpability.  The court reviewed case law and relied on several recent cases, including Zubulake, Samsung v. Rambus, Jones v. Bremen H.S. and Victor Stanley, but somewhat notably made no reference to Pension Committee.

As the plaintiff, records showed that DuPont issued three litigation holds.  The first hold order in June 2007 was to a small group who had direct knowledge of the former employee’s work. The second and third were in quick succession in April 2009 once the company became aware that Kolon was filing a counterclaim and were issued to more than 2,500 employees in the pertinent division.  During discovery, Kolon learned that records from four employees were lost when their accounts were deleted according to the company’s document retention policy during the interim period.

The opinion is worth reading since it validates the need to have a strong preservation plan in place – one that includes a detailed audit trail.  As was pointed out by Jennifer Marino Thibodeau in her post, some key factors that helped keep DuPont out of hot water included that it refreshed the legal hold promptly, the company alerted foreign affiliates to the hold and educated them about it, and the institution of a document retention policy.  As Ms. Thibodeau points out:

 “Overall, DuPont demonstrated to the Court that its reasonable, professional attempts to preserve electronically-stored information were appropriate — and that its duty to preserve was satisfied — consequently, there was no spoliation to sanction.”

A copy of Judge Payne’s April 27th opinion is available here.

Further Reading:

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National Law Journal: “Until Next Rules Change, 2010 Cases Set the Standard” by Brad Harris and Ron Hedges

April 14, 2011

On the heels of their successful Pension Committee Revisited project, our own Brad Harris and Ron Hedges collaborated once again on a contributed article that appears in the April 11 edition of the National Law Journal.  The article, “Until Next Rules Change, 2010 Cases Set the Standard,” examines the state of preservation today based on recent case law.

The contributed article ran as the lead in the prestigious National Law Journal’s Electronic Discovery special section.  To read the full article, click here to open or download a PDF of “Until Next Rules Change, 2010 Cases Set the Standard.”

You may also be interested in downloading a complimentary copy of “Pension Committee Revisited” and a copy of Judge Paul Grimm’s “Spoliation Sanctions by Circuit” in either a poster or printable version which you can download at the Legal Hold Pro Resource Center.

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Two Cases Feature Extreme Sanctions for Preservation Failures; Both Cite a Failure to Issue a Legal Hold as Key Factor

April 4, 2011

By Brad Harris

Since Judge Francis’s Orbit One in October 2010, we haven’t read a lot about preservation issues. But that ended suddenly with two opinions that had come to light in recent weeks.

If the building case law has not been convincing enough, then take note of these sanctions that turn up the heat on preservation issues, including a $250,000 monetary sanction, adverse inference instructions, default judgment and even a referral for criminal prosecution! Following are briefs of both opinions, but be warned that you should be sitting down when you read them.

 

Green v. Blitz U.S.A., Inc. 2011 U.S. Dist. LEXIS 20353 (E.D. Tex. Mar. 1, 2011)

Coming from the Eastern District of Texas, Green v. Blitz was issued by Judge T. John Ward and involved a product liability case resulting in the accidental death of the plaintiff’s husband.  The plaintiff took the case to trial, the jury found for the plaintiff and she received a modest monetary award.

As it is often the case with product liability claims, the plaintiff’s attorney was involved in a similar litigation and uncovered “extremely relevant material” and petitioned to have the case re-opened a year after the trial. Although the petition to reopen the case was denied due to the stature of limitations, the court did proceed with a review of alleged discovery abuse and motion for sanctions, finding the defendant’s discovery practices to have been shoddy at best (and that’s putting it generously).

In addition to its analysis concerning inadequate search and document production, the court also addressed preservation obligations:

The Court also holds that Blitz failed to properly preserve documents for litigation. When litigation commences, a party must suspend its routine document retention and destruction policy and establish a “litigation hold” to ensure the preservation of relevant documents. (*7)

The opinion continued:

But Blitz also failed to preserve its electronic documents. Far from instituting a litigation hold on relevant electronic documents, Blitz actually asked its employees to routinely delete electronic documents. From 2004 through 2007, Blitz’s IT department head, Paul Hale, routinely sent emails to all Blitz employees instructing them and encouraging them to delete email. (*8)

So Blitz U.S.A. made very little effort to preserve relevant information, and encouraged employees to purge information, despite ongoing lawsuits and the expectation of the Court for it not to do so.  This also commenced in the post-Zubulake world so precedent had been set for a higher standard for preservation practices.

Naturally, none of this sat well with Judge Ward who found that the defendant willfully violated the Court’s Discovery Order resulting in “indisputably relevant” documents not being produced and the plaintiff being prejudiced.  With that in mind, the Court issued a $250,000 sanction for civil contempt.  The Court further ordered as a “sanction to encourage future compliance” that the defendant provide its Memorandum Opinion and Order “to every plaintiff in every lawsuit it has” currently or with in the past two years or suffer an additional $500,000 sanction.  The coup de grace was that the same Memorandum must be provided to the opposition in every lawsuit involving Blitz for the next five years. Ouch.

 

Philips Electronics North America Corp., et al. v BC Technical No. 2:08-CV-639-CW-SA, 2011 WL 677462 (D. Utah Feb. 16, 2011)

The opinion issued in mid-February is the adoption of the recommendations that were originally issued July 28, 2010, by U.S. Magistrate Samuel Alba in the District of Utah, so this is not a brand new case.

To review, the case started in January 2005 and involved a suit alleging copyright infringement and misappropriation of trade secrets for software that BC Technical (BCT) was selling and distributing.  The plaintiff motioned the Court for spoliation sanctions.  The 48-page opinion goes into great detail about the “who,” “when,” and “what” of the spoliating parties.

Magistrate Alba in his recommendations cites Pension Committee thus continuing to reinforce Judge Scheindlin’s opinion as the recognized standard for preservation issues.  The Court found in its research that the defendant did not issue a proper litigation hold for 19 months during which time five employees wantonly destroyed incriminating evidence.  BCT argued that the employees acted on their own, but the Court didn’t buy it:

BCT’s behavior such as failing to timely issue a litigation hold, failing to follow up on that litigation hold, failing to request discovery documents from key employees, and so forth, reveals its intentional failure to meet discovery obligations and its flagrant disregard of the obvious risk that it was highly probable the destruction of relevant documents would result from its behavior, and BCT’s conscious indifference to the consequences of that risk. *47, Philips Elecs. N. Am. Corp. v. BC Tech., No. 2:08-CV-639-CW-SA, 2010 WL 5838993 (D. Utah July 28, 2010)

The problem was that the defendant’s claims had zero credibility because they had not demonstrated a single good-faith effort to preserve evidence.  When push came to shove, Magistrate Alba declared their efforts to be in “bad faith.”

The resulting sanctions are about as tough as they get because they rose to the level of “bad faith” and “willful behavior.” As the Court stated: “[E]xtreme sanctions are warranted in this case where discovery abuses of a serious magnitude involving bad faith and willful disregard of two direct court orders occurred.” (Id.,*57)

Upon review at the U.S. District level, Judge Clark Waddoups affirmed Magistrate Alba’s overwhelming sanctions including summary judgment for the plaintiff, dismissal of counterclaims, attorneys’ fees (ed. — not insignificant!), and finally a referral for criminal prosecution for perjury.

Admittedly, the spoliating behavior of the five employees in Philips Elec. v. BCT was egregious.  However, one must wonder how the outcome could have changed if BCT had implemented an effective litigation hold policy.  The same data may have been lost, but perhaps the argument could have been made that the company acted in good faith, or at the very least helped support BCT’s claims that the employees acted individually.  Unfortunately, they did not and now they join the ranks of Creative Pipe CEO Mark Pappas, the villain from Victor Stanley II, as cautionary tales of how intolerant the courts can be when faced with failed preservation due to willful destruction of evidence.

 

What Green and Philips Mean to Legal Holds

When looking at these two cases, here are a few takeaways for practitioners:

1. Without a defensible, repeatable process in place the “bad actor” defense is toothless. Both of these cases involved very poor preservation practices that were intentional in order to conceal evidence. In Philips, the defense tried to isolate the bad behavior as the actions of individuals.  In retrospect it appears that was highly unlikely, but what if it was true?  The fact that BCT had no process in place completely undermined this assertion.  If the actions were truly the fault of “bad actors” and they had a legal hold process in place they may have either intervened before spoliation had occurred, kept copies of key evidence, and even if evidence was lost BCT may have been inoculated from severe sanctions stemming from determinations of “grossly negligent” and “willful” conduct.

2. The lack of a written record makes defensibility that much more problematic.  Reading the transcript from the Show Cause Hearing in Green, the dialogue between the Court and the key witness about the lack of preservation efforts is precisely as one would anticipate when attempting to rely on the recollections of verbal conversations.

3. Spoliation sanctions are becoming more severe. The culprits in Green and Philips made decisions that were intentionally meant to undermine the judicial process.  The defendants paid the price for those choices with the most severe spoliation sanctions that we have seen in some time.  For Blitz U.S.A., the company will likely pay out damages on active and future product liability cases that will dwarf the $250K monetary sanction.  As for BCT, the case was lost on the spot and they have to pay attorneys’ fees in a high-stakes case that endured for several years. This further reinforces the intolerance that we have been seeing building through 2010 with opinions such as Victor Stanley II.

Be sure to have your preservation processes in order today.  Imagine standing in a courtroom a few years from now in the “post-Pension Committee” era and needing to defend your process.  What would you show the Court and how confident would you be?

Further Reading:

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Orbit One v. Numerex: Magistrate Judge Francis Offers His View on Legal Holds

December 6, 2010

By Brad Harris

Orbit One Communications, Inc. v. Numerex Corp., 2010 WL 4615547 (S.D.N.Y., Oct. 26, 2010)

In late October, Magistrate Judge James Francis issued an opinion that has continued the judicial debate about legal holds and other preservation practices kicked off in January 2010 with Pension Committee. Judge Francis in Orbit One openly disagrees with some of Judge Scheindlin’s Pension Committee stances including issuing sanctions for failing to issue a written legal hold as well as challenging The Sedona Conference’s take on proportionality, as Ralph Losey points out in his review of the case last week.

Let’s start with a quick recap of the case. It’s a situation where an acquisition went bad when Numerex acquired satellite communications provider Orbit One Communications. As part of the acquisition, Numerex offered $6 million worth of performance incentives for Orbit One execs to stay and run their former company as a standalone division.  However, when sales were clearly falling well short of earning those big bonuses, the execs alleged that the acquirer was mismanaging them and undermining their ability to earn incentives, thus devaluing the deal.  Orbit One’s shareholders and executives brought a suit and were then countersued by Numerex.

As the case went through discovery, Numerex’s attorneys probed on preservation and a few discrepancies were discovered.  In general, the legal team acted reasonably well in issuing timely legal holds, especially given the standards of 2007 when this was taking place. They suspended routine destruction of back-up media and saved equipment.

Some doubts about information were cast about the following actions by Orbit One’s CEO David Ronsen:

  1. He archived some of his corporate email at the urging of the IT department as part of a documented ISO-driven information management initiative. Ronsen did delete some files at that time, but they predated the Numerex litigation and were mainly personal items such as music.  At that point there was no trigger event about the Numerex case.
  2. At the time of his archiving, Ronsen failed to alert the IT administrator that he was on a legal hold for an unrelated IP case which may have changed how the information was handled.
  3. He also had under his personal control several external hard drives, including the back-up media from the server that had been stored in his safe, as well as his original desktop computer. When requested, Ronsen turned over the external hard drives and the veracity of the data on those media may have been checked (a forensic expert did review other ESI) but no mention is made in the opinion.

In light of these issues (relatively minor when compared with Judge Grimm’s Victor Stanley II opinion!), the defendants sought an adverse inference instruction from Judge Francis for spoliation and an award of attorneys’ fees and costs.  Judge Francis denied the motion despite acknowledging the failure to “engage in model preservation” because there was insufficient evidence that any lost ESI was relevant to the case.

 

What We Learned from Orbit One

As we’ve seen all year, the judiciary appears to feel the need to react to Judge Scheindlin’s Pension Committee and the bright lines that she drew around preservation.  With Orbit One, Judge Francis is throwing his proverbial hat into the ring.

Courts Are Still Digesting Pension Committee

Clearly some in the judiciary are still having a hard time swallowing Judge Scheindlin’s assertion that legal holds must be in writing.  When reviewing Pension Committee, that determination is specific to the facts of the case.  The sanctioned litigants were deemed to have failed to meet the contemporary standard and she determined that issuing a litigation hold in written form is a reasonable way for litigants to demonstrate the discharge of their preservation obligations.

The key point is that in Pension Committee, 13 of the 96 plaintiffs were deemed that they should have known and done better. Further, Judge Scheindlin specifically detailed her finding of gross negligence for six plaintiffs based on further missteps in addition to failing to issue a timely written litigation hold. Judge Francis draws an implication that because she found the plaintiff’s actions to be negligent, that discovery relevance was no longer considered.  Yet the Pension Committee opinion goes to great lengths to describe both relevance and culpability.

So when Judge Francis states that, “If this is a fair reading of Pension Committee, then I respectfully disagree,” it appears that he reached an implication that was not founded on the facts of the opinion.

In a related pronouncement in Orbit One, Judge Francis indicates that in some cases when an enterprise is small, that a formal litigation hold may not necessary.  Again, Judge Scheindlin does leave that to the discretion of the court, but her position is that a written hold is easy to do and should be expected so as to avoid spoliation and help avoid undue burden on the courts.

In Ralph Losey’s review of Orbit One, he accurately summed up a pragmatic approach to litigation holds:

I would not want rely on Judge Francis’ suggestion that verbal notices are ok and a formal lit-hold might not be necessary. I think that preservation notices should always be in writing, even for “small enterprises.” The only exception I can see is for an individual or sole-proprietor with no employees. I don’t think they should send a written notice to themselves, but their lawyer should notify their clients in writing of the duty to preserve.

He continued:

Bottom line to all of this, you should put your preservation notices in writing and follow-up with the key players, talk to them, and take other reasonable steps under the circumstances to preserve relevant information. Do not count on the client, the party to the litigation, to do all that is required, which is exactly what happened in Orbit One.

Losey encapsulated a prudent approach that, based on the numerous opinions, more accurately represents the current expectation of the courts.

Bright Lines Make for Easy Targets

The downside of Judge Scheindlin’s attempt to draw a bright line is that it creates an opportunity for opposing counsel to exploit an opponent.  Remember that in Pension Committee Judge Scheindlin wrote in the introduction that the objective is not for perfection but primarily to ensure that “relevant records are preserved when litigation is reasonably anticipated, and that such records are collected, reviewed, and produced to the opposing parties.”

What Orbit One represents is one side trying to exploit Pension Committee inappropriately. The record shows that there was little spoliation, the plaintiff’s counsel did a decent job issuing the legal hold, and that Ronsen complied for requests for production.  Was everything by the “best practices playbook?”  Clearly no. However, there was never any persuasive argument that anyone acted in bad faith and that any prejudicial ESI was lost.

So what’s a little confounding is on what grounds the counsel for Numerex felt they could approach the court asking for an adverse inference instruction. The standard for determining such a harsh sanction as Judge Francis lays out is that: a) evidence was lost and the party who had control of it knew it had an obligation to preserve; b) the records were destroyed “with a culpable state of mind”; and c) the destroyed evidence was “relevant” to the party’s claim or defense.

In Orbit One, the defendant did not come close to meeting this standard.  It appears as if it was a “long ball” by the defense to gain maximum leverage.  It failed. In fact, based on this opinion, it wasn’t even close. It’s surprising that Judge Francis didn’t acknowledge this and felt the need to write such a lengthy response to the motion.

 

What Orbit One Means to Legal Holds

Judge Francis’s Orbit One opinion is an alternative perspective from the Southern District of New York, arguably the epicenter of electronic discovery among the Federal Judiciary. It is definitely a different way to look at things, but it is also possible that it was a bit of reaction (and some would say an overreaction) to Pension Committee. Here are three conclusions:

  1. Cease issuing legal holds in written form at your own risk – Written holds are still the way to go.  Judge Scheindlin’s stance that they are a reasonable process to meet one’s preservation obligation may meet some judicial resistance, but mainly because they appear to be interpreting it in an absolute way in every single matter. She herself didn’t intend it to be interpreted that rigidly. (See her recent public comments.)  By not using a written form to issue a hold, the exposure to sanctions if spoliation were to occur is exponentially higher as well as not meeting the contemporary standard which opens the door to negligence and gross negligence determinations. Verbal holds are weak and easily challenged, so it is a big risk to not undertake a written hold.
  2. Opposing counsel is hyper-focused on preservation issues – The plaintiff actually did an okay job of preserving information.  However, there were some flaws and this motion was all about maximizing a tiny sliver of opportunity.  Conduct your preservation thoughtfully and thoroughly so you can avoid getting dragged into lengthy discovery battles because opposing counsel are going to be probing relentlessly for the foreseeable future.  Send the hold.  Follow-up with your custodians to ensure they are taking appropriate actions.  Issue periodic reminders.  Stay engaged as counsel.
  3. Is there a backlash coming? – Going hand-in-hand with the prior conclusion, some litigants may be relying too much on exploiting imperfect e-discovery practices.  It seems like only a matter of time before someone gets a serious rebuke for wasting the courts time for trying to make something out of nothing.  Remember, perfection is not the standard and dragging the court into a lengthy discovery battle comes with its own risks.

Some may wish to interpret Orbit One as a rebuke of Pension Committee and, thus, a loosening of the expectations around a legal hold.  That may be the eventual result, but it is far too early to tell and, frankly, it seems on the argument presented that it would not be a likely outcome.

Additional Reading:

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The Sedona Conference Publishes Updated Legal Hold Commentary

September 16, 2010

by Brad Harris

This week The Sedona Conference Working Group on Electronic Document Retention & Production (WG1) issued an updated Commentary on Legal Holds, reflecting evolving case law and best practices since 2007.  The document remains an exemplary resource for practitioners charged with determining when a legal obligation to preserve data arises (the “trigger”) and best practices for ensuring reasonable and good faith efforts are implemented to fulfill that obligation (the “process”).

A lot remains the same – the importance of establishing a well-defined and repeatable process, the value of documentation and record-keeping, and importance of good faith and reasonableness.   It reflects evolving trends toward the consideration of proportionality, as illustrated by the Rimkus opinion, when considering the scope of preservation efforts (e.g., accessibility, probative value of information, and relative burdens and costs of preservation efforts).  The Commentary takes into consideration the evolution of technology that can allow for other means of preservation, and it reinforces the value of cooperation and dialog between parties (referencing The Sedona Conference’s Cooperation Proclamation).

The Commentary’s Guideline 8 points out how the use of a written legal hold is often appropriate, although “it is simply one method of executing preservation obligations” – other approaches may be appropriate, such as when relevant information stored within an email archive can be reliably preserved in place, a pre-emptive collection is performed, or when records management policies and practices ensure data retention.

Yet a notice is most effective when it communicates clear expectations, is in an appropriate form, and is periodically reviewed and updated.  Guideline 8 goes on to describe the importance of ensuring compliance, including having a means of verifying the recipients understand their preservation duties and obligations. Further, Guideline 9 reiterates the importance of sound documentation and record keeping for defensibility.

The authors are to be commended for their work, and legal teams are encouraged to take a fresh look at their guidelines for best practice.

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Victor Stanley II: Judge Grimm’s Review of the State of Preservation

September 13, 2010

by Brad Harris

On Thursday, September 9, 2010, Judge Paul Grimm of the U.S. Fourth Circuit (D.MD) continuedthe 2010 tradition of huge opinions with his 89-pager about the ongoing spoliation saga in Victor Stanley, Inc. v. Creative Pipe, Inc., et al. (D.MD, Sept. 9, 2010). Craig Ball was the first to get the word out about Judge Grimm’s opinion the day after it was issued and this is another blockbuster coming on the heels of Pension Committee, Rimkus and Jones v. Bremen H.S.

Judge Grimm, in light of egregious spoliation, writes an existential essay on the meaning of spoliation and how it should be sanctioned. In fact, the length of the opinion is due mainly to his frustrations regarding inconsistencies about how sanctions have been handed out across the country. As he states on p. 38, this is his “attempt to synthesize” opinions, and his citations read like a “Greatest Hits of Spoliation” as he embarks on his quest to bring it all together.

Since this blog focuses on legal holds and the duty to preserve, that will be our concentration. However, this opinion is an important read so you may want to check it out in its entirety. Following Craig Ball’s convention, we’ll also refer to this opinion as Victor Stanley II.

He’s a Bad, Bad Man

This case has been around for some time, so let’s recap the story briefly. The CEO of Creative Pipe is Mark Pappas, and he’s a bad guy. It all started when he went to his competitor’s web site, downloaded their proprietary product design drawings and specs for office and public furnishings. (Think park benches, trash cans, bike racks and the like.) He surreptitiously took said plans, manufactured them and then sold them in direct competition to Victor Stanley, Inc., the originator of the designs.

Once Victor Stanley discovered what was going on, the company sued Creative Pipe for copyright infringement, patent infringement, unfair competition and Lanham Act violations. Those items have become a footnote because the real action started when the civil action was filed. Realizing that he was going to be caught red-handed, Pappas began purposefully destroying and overwriting files in order to obfuscate incriminating evidence.

He went to great lengths to do so, and enlisted co-conspirators to help him destroy electronic records. He deleted files, defragged disks, replaced servers, used “scrubbing” programs – and then he lied about it to the Courts. Even after two court orders to preserve data that were acknowledged – he continued to attempt to hide things. Judge Grimm characterized what he saw this way:

“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.” (p.34)

Suffice it to say that Judge Grimm is not a member of the Mark Pappas Fan Club.

Following Pappas’ epic attempts to cover up information, years of e-discovery effort and countless hours invested by attorneys and experts on both sides, in the end not much key evidence was lost. As Judge Grimm humorously put it, they were “the gang that couldn’t spoliate straight.” (p.5) Any information that was actually irretrievably lost was acknowledged as prejudicial by the Defendants.

Different Standards in Different Jurisdictions

This last point is what brings Judge Grimm to his judicial crossroads. If one engages in wanton spoliation efforts yet ultimately it fails and does little to prejudice the case, how is that sanctioned? In his quest, he noticed that “[r]ecent decisions…have generated concern…regarding the lack of uniform national standard governing” preservation and spoliation issues. (pp. 36-7)

The judge continues: “I will attempt to synthesize and provide counsel with an analytical framework that may enable them to resolve preservation/spoliation issues with greater level of comfort.” (p38) Without a doubt, the legal community owes Judge Grimm a debt of gratitude for taking on this weighty discussion.

In particular, he acknowledges that the courts are struggling with the following specifics (pp. 36-7):

  • To know when the duty to preserve attaches,
  • The level of culpability required to justify sanctions,
  • The nature and severity of sanctions, and
  • The scope of the duty to preserve and whether it is tempered by proportionality

At this point, Judge Grimm goes on a 50-page quest to bring some semblance of order to the disparate rulings. As mentioned earlier, we’ll focus on the areas pertinent to preservation and legal holds since that is our focus. A section discussing the duty to preserve (pp. 47-72) is most pertinent to this discussion.

First of all, the opinion accepts that companies must issue a legal hold but he bristles at the different standards. He suggests that this causes concern among corporations, business and governments that operate in different jurisdictions because they have to design a preservation policy that complies with the most demanding standard. (p.51)

Judge Grimm cites examples about what courts deem information under their “control” but some Districts extend that duty to preserve information held by third parties while others do not (pp. 51-2). He also cites the fact that “courts differ in the fault they assign when a party fails to implement a legal hold.” (p.53) He compares Pension Committee’s automatic ruling of gross negligence versus Haynes v. Dart (N.D. Ill, Jan. 11, 2010) that a failure to implement a legal hold is relevant to the court’s consideration but in and of itself is not sanctionable.

Then he looks at scope which he starts by saying that it is not necessary for companies to preserve every shred of information forever. However, does a company need to retain multiple copies of pertinent files, i.e. back-up files, when the original is already preserved? He cites Zubulake IV that says that one must preserve “unique, relevant evidence.”

He then addresses reasonableness. The duty to preserve is breached when a party fails “to take positive action to preserve material evidence,” citing Jones. (p.54)

Finally he goes on a riff of how the failure to preserve is a huge burden on the courts, which was a big element in both Pension Committee and Rimkus. Citing Metropolitan Opera Association v. Local 100, 212 F.R.D. 178, 228 (S.D.N.Y. 2003):

For the judicial process to function properly, the court must rely “in large part on the good faith and diligence of counsel and the parties in abiding by these rules [of discovery] and conducting themselves and their judicial business honestly.” (p.56) Adding the following:

“The truth cannot be uncovered if information is not preserved. That the duty is owed to the court, and not to the party’s adversary is subtle, but consequential, distinction.” (pp.56-7)

Judge Grimm is adamant that the failure to preserve also injures civil justice by putting focus on e-discovery rather than merits of the case and that it is “frustrating to the courts that there is no way to sanction for the courts time.” (p.59)

The court’s conundrum in Victor Stanley II is how to match the appropriate sanction to the spoliating conduct (p.57). What’s worse: intentional spoliation that results in no prejudice or simple negligence that results in “total loss of evidence essential to an adversary?” Clearly, the judicial process is damaged more by the latter than the former.

His beef isn’t whether or not a hold is needed, but what the punishment should be. This opinion is not about whether the preservation duty was triggered, or whether reasonable and proportional steps were taken to preserve it, or whether this duty was breached. That is well established. The issue is what sanctions are appropriate. (p.62)

In the end, Judge Grimm metes out some harsh sanctions, but he does it thoughtfully. His approach to sanctions is captured in this statement: “In fashioning spoliation sanctions, Courts must strive to issue orders that generate light, rather than heat.” (p.74) He grants default judgment on the account of copyright infringement, but not on others since the spoliation did not result in “irreparable or substantial prejudice.” (p.83) The remaining claims will be “tried to the Court.” (p.84) Similarly, he issued a permanent injunction on the copyright violation which the Defendant did not oppose. (p.85)

He granted reasonable attorney’s fees and costs – which will be sizable. Since the Court believes the Defendant may avoid payment, he will hold him in prison for civil contempt for up to two years until the fees are paid. Finally, Judge Grimm admitted that Pappas’ conduct was likely criminal, but is not referring for criminal prosecution due to the burden it would place on the overstretched criminal system.

What’s Victor Stanley II’s Impact on Legal Holds?

Victor Stanley II is a meaty opinion and it is impossible to summarize all of the key points here, so let’s focus on some of the highlights. Despite Judge Grimm’s intentions, his conclusions understandably turn on the facts of this case – and what a set of facts they are! Here are four conclusions:

  1. Legal holds are a de facto standard, but the courts don’t agree on every nuance. – Judge Grimm examines Pappas’ failure to implement a legal hold as one of the preservation failures, so it stands to reason that he is not calling that action into question. Exactly what constitutes a trigger event? What information must a litigant preserve? What is the punishment for failure? What is a proportional and reasonable legal hold? It depends on where the case is being tried and takes into account those precedents but he doesn’t navigate any new territory here.
  2. When bad faith is involved, a legal hold will preserve very little. – Legal hold processes are only effective when implemented in good faith. If there is a bad actor (and in this case, a very bad actor!), little can be done to stop them. However, this is no reason not to implement a legal hold. They are designed to be processes to preserve responsive data and demonstrate a good faith effort to do so. “Spoliation stems from alleged destruction of or failure to preserve potentially relevant evidence” – legal holds address the latter. (p.35) This case is not about legal holds – probably because one was never implemented! – it’s about the “crime and punishment” of spoliation.
  3. Judges are really tired of dealing with spoliation motions. – Judge Grimm allocates a chunk of this opinion about how spoliation harms the judicial process. Echoing Judge Scheindlin’s famous “300-hours” footnote in Pension Committee, he writes about the “hundreds of hours of my time and my law clerk’s time” (p.4) consumed by this motion and how it prevented work on other work in other cases. He added, if a sanction were available for consuming the court’s time “this case would be the poster child.” (p.5) “The duty to preserve evidence relevant to litigation of a claim is a duty owed to the court, not to a party’s adversary.” (p.55) What it really shows is that the Courts probably need more recourse to deter litigants of such bad behavior.
  4. Egregious spoliation doesn’t always result in the harshest sanctions. – If there is any good news, it is this: If you willfully spoliate and you get a thoughtful jurist like Judge Grimm you may escape default judgments and your case will go to trial instead. However, you may also be put in prison for civil contempt. Good luck with that.

Why are all of these opinions appearing this year? A lot of it has to do with the provocative position that Judge Shira Scheindlin took in Pension Committee. Judge Rosenthal of Rimkus and Judge Grimm in this opinion seem to be reacting to the “bright lines” that she drew, saying that they might not be so bright after all. The point that comes up often with Judge Grimm is that failure to issue a written legal hold is gross negligence. He sets that as one end of the sanction spectrum.

Does Victor Stanley II diminish the necessity for an effective legal hold? Not in the least. What a legal hold is designed to do is to act as a mechanism to help preserve information that can be used to communicate what information is needed to the people who control it. Then the system relies on them doing it. If you suspect someone will destroy evidence, then the hold may entail denying them the opportunity to destroy it. You need a fact record of that action tool. It’s not a magic wand, just a tool that can be effective process for making sure your organization is respecting the judicial process.

Author’s Note: Readers should read “The Enlightened Legal Hold” by Brad Harris and Craig Ball for a more in-depth look at recent case law relating to legal holds. A PDF of this white paper is available for download immediately at no cost.

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“The Enlightened Legal Hold” by Brad Harris and Craig Ball Is Published Today!

August 24, 2010


We are proud to announce that “The Enlightened Legal Hold: A New Approach to Legal Preservation Following the Pension Committee Opinion” co-authored by Brad Harris and Craig Ball was published today. The latest white paper in the Legal Hold Pro™ Signature Series examines issues that have caused problems for litigants and offers a new way to think about the legal hold process. “The Enlightened Legal Hold” is available to download immediately at no cost at www.legalholdpro.com/enlightened.


Click to Receive

Since Judge Scheindlin’s Pension Committee opinion in January 2010, there has been a steady drumbeat of opinions sanctioning litigants for failing to properly implement legal holds. The problems appear to be systemic as organizations have not adequately addressed the basic challenges of preserving electronically stored information (ESI). As the authors point out, “Legal holds can be complicated, but the reasons they fail are usually pretty simple.”

In “The Enlightened Legal Hold,” Harris and Ball start by examining the “Five Deadly Sins of Legal Holds” which are the common underlying reasons for the slow pace of change.  They then turn to a new way of thinking embodied in the seven “Principles for Legal Hold Enlightenment” that embrace the concept that a legal hold is an organic process and offer practical steps that any legal professional can follow to mitigate risk in legal preservation.

Download your electronic copy of the “The Enlighted Legal Hold” now!

About the Authors: The authors are nationally recognized electronic discovery experts:

  • Brad Harris, Vice President of Legal Products for Zapproved, has assisted Fortune 1000 companies to enhance their e-discovery preparedness and is a frequent presenter on the issue of legal holds.
  • Craig Ball is a Board Certified trial lawyer, certified computer forensic examiner, electronic evidence expert, and award-winning columnist.  He lectures internationally on aspects of electronic discovery and has been involved in some of the most challenging and well-known cases in the U.S.

Posted in Case Law, White Paper | 1 Comment »

Trendspotting in Legal Holds, Part 1 – Gibson Dunn Mid-Year E-Discovery Update

August 17, 2010

Two major reports on the electronic discovery sector were released within the last month.  The first is the Gibson Dunn & Crutcher 2010 Mid-Year Electronic Discovery and Information Law Update in mid-July followed by The 2010 Socha-Gelbmann Electronic Discovery Survey at the beginning of August. It is interesting to see in both reports – of case law and business trends, respectively – that preservation is front and center. Both reports, in their own way, reiterate what we’ve been saying: 2010 is the Year of the Legal Hold.


2010 Mid-Year Electronic Discovery and Information Law Update

Today we look at the Gibson Dunn mid-year report which reviews case law for the first six months of 2010 and summarizes key cases involving e-discovery.  It’s no lightweight at nearly 7,000 words, but it is an invaluable resource for its comprehensive analysis. Interestingly, nearly one quarter of that focuses on opinions relating to legal holds.  Here are some of the points relating specifically to legal holds in the areas of preservation and sanctions (with cited cases in parentheses):

Preservation Trends:

  • “The 2010 opinions addressing the preservation of electronic evidence continued to emphasize that the duty to preserve ESI may be triggered before the filing of a complaint.”  (Pension Committee, Crown Castle v. Nudd)
  • “Courts also continued to hold that parties need to preserve ESI that is stored in formats other than email, including ‘outlier ESI’ and ephemeral data that might otherwise be overlooked.”  (OCE N. Am., Inc. v. Brazeau, No. 09 C 2381, 2010 U.S. Dist. LEXIS 25523 at *19 (N.D. Ill. Mar. 18, 2010), Passlogix v. 2FA, Wilson v. Thorn Energy, LLC, No. 08 Civ. 9009 (FM), 2010 WL 1712236 (S.D.N.Y. Mar. 15, 2010))
  • “Courts placed increased responsibility on parties and counsel to ensure that preservation measures are effectively implemented.”  (Pension Committee, Jones v. Bremen H.S., John B. v. Goetz, No. 3:98-0168, 2010 U.S. Dist. LEXIS 8821, at *85 (M.D. Tenn. Jan. 28, 2010))
  • “Reflecting the maturation of e-discovery law, courts this year have stated that, going forward, what is reasonable will be judged instead according to ‘clearly established applicable standards.’” (Rimkus v. Cammarata)
  • “Several courts emphasized that the litigation hold must be written.” (Pension Committee, Crown Castle v Nudd)

Sanctions Trends:

  • “Courts have continued to impose monetary sanctions on outside counsel for failing to adequately supervise a client’s collection and preservation of ESI.” (In re A&M Florida Properties, No. 09-01162, 2010 WL 1418861 (S.D.N.Y. Apr. 7, 2010), Qualcomm, Inc. v. Broadcom Corp., No. 05-cv-1958, 2010 WL 1336937, (S.D. Cal. Apr. 2, 2010))
  • “The most notable and widely reported sanctions cases in the first half of 2010 concerned the imposition of adverse inference sanctions for failure to preserve relevant evidence.” (Pension Committee, Passlogix, Kwon v. Costco Wholesale Corp., Civ. No. 08-00360, 2010 WL 571941 (D. Haw. Feb. 17, 2010))
  • “[T]he court imposed an adverse inference sanction for gross negligence where the defendants had lost all data relevant to a large transaction when a USB drive was erased.” The court did not allow a safe harbor under FRCP 37(e) because “erasure occurred outside of any routine document management procedures.” (Wilson v. Thorn Energy, LLC, No. 08 Civ. 9009 (FM), 2010 WL 1712236 (S.D.N.Y. Mar. 15, 2010))
  • “In contrast with these cases, courts in other circuits have required a showing of willfulness before imposing an adverse inference, and have held that even grossly negligent electronic discovery failures are insufficient to impose such a severe sanction.  (Rimkus v. Cammarata, OCE N. Am.. v. Brazeau)
  • “Although courts demonstrated their willingness to impose sanctions on parties and counsel, there appears to be reluctance in most circuits to impose the harsher sanctions of dismissal and adverse inferences, particularly in the absence of intentional misconduct.” (Pension Committee, Passlogix, Diocese of Harrisburg v. Summix Dev. Co., No. 1:07-CV-2283, 2010 WL 2034699, Kwon v. Costco)

What It Means about Legal Holds

With the tone set by Judge Scheindlin’s Pension Committee opinion making waves right after the New Year, it clearly uncorked similar frustrations in lacking preservation efforts in jurisdictions around the country. The Gibson Dunn report clearly points to the need for counsel to take a careful look at their current data preservation and legal hold practices.

Counsel (both inside and outside) must be far more actively engaged in the preservation process, including recognition of when a duty to preserve has attached and what actions an organization needs to take in response.   Lackadaisical efforts – failing to send a hold in writing, failing to clearly articulate the scope of preservation actions, failing to actively supervise the implementation of those actions are – and will continue to be – met with increasingly harsh penalties.  It also reinforces the critical value of well-articulated and consistently practiced information management and preservation procedures.

Please visit our blog on Thursday to read Part 2…

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Coming Soon to Silicon Valley! “Hold Fast” CLE on July 15th

July 2, 2010

You are invited to join D4 and Legal Hold Pro for a complimentary lunch program and earn 1.0 MCLE credit approved by the California State Bar Association.

Thursday, July 15, 2010

Four Seasons Hotel Silicon Valley
2050 University Avenue
East Palo Alto, CA

Registration at 11:30 a.m. with lunch being served at 12:00 p.m.

Space is limited, so be sure to register for the event to ensure your place!

PROGRAM OVERVIEW

2010 is the Year of the Legal Hold

This has been a watershed year for cases involving legal holds and the need to preserve responsive electronically stored information (ESI). The Courts have been issuing monetary sanctions and declarations of “gross negligence” in multiple cases.

Hold Fast  is a comprehensive review of recent litigation hold cases starting with January’s Pension Committee v. Banc of America Securities, Rimkus v. Cammarata, Crown Castle v. Nudd Corp., Jones v. Bremen HS and other recent cases that are driving the need for making legal holds a priority in any litigation.

  • What are the three most common mistakes seen across these cases?
  • What are the responsibilities of the in-house counsel and the trial attorney for the preservation process?
  • Based on these opinions, what entails “best practices” for legal holds?

This timely program will relate recent case law to the following program topics:

  • The duty to preserve;
  • Triggering event analysis;
  • Preservation strategies;
  • Standards for collection;
  • Self-collection considerations; and
  • Spoliation examples.

About the Presenters

Joshua Gilliland, Esq., Professional Development Manager, D4, is a California attorney who focuses on electronic discovery issues for D4 LLC.  Josh has conducted over 100 e-Discovery seminars, covering all of North America, from St. Thomas to Anchorage, addressing the e-Discovery issues from the Federal Rules of Civil Procedure and Federal Rules of Evidence.  Josh is the blogger for the Bow Tie Law Blog, covering issues of identifying anonymous bloggers who commit defamation, ethical standards for electronic discovery, personal jurisdiction and other timely issues.

Josh has also been an invited speaker at bar association events and trade shows, in addition to serving as a guest lecturer on e-Discovery at several law schools.  He effectively applies his real-world knowledge to show lawyers how they can increase their efficiency and master factual issues using litigation support technology.

Follow Josh on Twitter @BowTieLaw

Brad Harris, Vice President of Legal Products, Zapproved, Inc., has more than 25 years of experience in the high technology and enterprise software sectors, including assisting Fortune 1000 companies enhance their e-discovery preparedness through technology and process improvement.  Brad is a frequent author and speaker on e-discovery issues and is an expert on litigation hold strategies.  He has published articles on the subject in Corporate Counsel, Metropolitan Corporate Counsel and KMWorld and presentations at leading industry events such as Legal Tech New York.  Most recently, he led electronic discovery readiness consulting efforts and product management for Fios, Inc., a leading e-discovery services provider, from 2004 to 2009 where he was instrumental at driving the expansion of professional services and legal technology consulting practice areas.

Contact Us:
info@legalholdpro.com
Phone: (866) 366-0666

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