Legal Hold Pro

What started out as a seemingly run-of-the-mill employment case quickly fell down the spoliation rabbit hole resulting in severe sanctions including partial default judgment, an adverse inference instruction and a $10,000 monetary award. The 29-page opinion by U.S. District Judge Cindy K. Jorgenson goes into great detail about the facts of the defendants’ preservation efforts in Day v. LSI Corp., No. CIV 11-186-TUC-CKJ, 2012 U.S. Dist. LEXIS 180319 (D. Ariz. Dec. 20, 2012).

First, a little background: The plaintiff Kenneth Day left IBM to take a senior level engineering position at the defendant, LSI Corporation, with the expectation that he would receive stock options, promotions and bonuses in short order. He accepted the job in May 2008, received the promotion, bonuses and stock options in March 2009, which were revoked in March 2010. Day then claims he was harassed, including racial slurs, and was terminated in October 2010.  The defendant claimed the plaintiff was demoted due to a “reduction in force.”

Despite issuing a litigation hold, preserving and producing countless documents to the plaintiff, the case still pivoted from “discrimination case” to “spoliation case” due to an alleged loss of documents from a key hiring manager who had subsequently left the company and was not included in the original litigation hold, along with other potentially relevant information including internal Instant Messages, HR documentation of the plaintiff’s promotion and stock grant and the “reduction in force” details. (p.7-9) All in all, a relatively small pool of ESI, but the court believed them to be critical.

While numerous factors are mentioned in Judge Jorgensen’s opinion (many dissected in great detail), the failure to preserve the hiring manager’s documentation and the explanation of the defendant’s in-house legal counsel appears to have turned the case. The opinion states, “As legal counsel for LSI, it appears [he] had a culpable mind” and “it appears that [he] at least acted willfully here.” The court found that LSI’s legal counsel should have known of the documentation and then “misstated the facts regarding what kind of directive he gave regarding searches for relevant documentation.” (p.18)

The opinion is impressive in its detail and citation, so you are encouraged to read it for further insights. In summary, the court found key documents were lost that prejudiced the case and delayed justice. Judge Jorgenson leveled heavy sanctions against LSI Corporation for an improper legal hold that resulted in prejudice:

“Because LSI did not take action to ensure that all [hiring manager’s] documentation was retained, any e-mails of [his] that may have corroborated [his] assertion that his actions were separate from [department VP’s] cannot be used to support Day’s claim…. Day is substantially prejudiced on this claim. Failure to grant default would cause Day to suffer substantial prejudice because LSI’s destruction of evidence has “impair[ed Day’s] ability to go to trial” and “threaten[ed] to interfere with the rightful decision of the case.” (citations omitted) An award of partial default judgment on this claim is appropriate.”

In the final analysis, LSI did many things right – at least with regard to its preservation efforts by issuing holds to key custodians and efforts to remediate any loss. Their shortcoming was in either negligently or deliberately failing to save selected key documents. Had it stopped there, perhaps the sanctions may have not been as severe, save for legal counsel misrepresenting its actions. In Day v. LSI, the court unmistakably showed its intolerance for inadequate preservation and attempts to justify those shortcomings that results in substantial prejudice and interferes with an expeditious trial.

Further Reading

• Nardone, Susan L., A Bad “Day” for a Company Whose In-House Attorney Failed to Properly Preserve Relevant Documents, E-Discovery Law Alert, Gibbons P.C., February 28, 2013.
• Case Summary, Day v. LSI Corp., Applied Discovery
• Full opinion: Day v. LSI Corp., No. CIV 11-186-TUC-CKJ, 2012 U.S. Dist. LEXIS 180319 (D. Ariz. Dec. 20, 2012)

An opinion from March in a personal injury case involving the deletion of a Facebook account is a good lesson for e-discovery professionals about the vulnerability of social media to irretrievable loss. U.S. Magistrate Steven Mannion ordered an adverse inference instruction to the jury after the plaintiff in Gatto v. United Air Lines was determined to have “intentionally deleted the account” (*4). The plaintiff did avoid even harsher penalties because the court believed that he “does not appear to be motivated by fraudulent purposes or diversionary tactics, and the loss of evidence will not cause unnecessary delay.” (*5)

The case stemmed from an on-the-job injury for the plaintiff, a baggage handler, who was injured while unloading baggage at JFK Airport in January 2008 and suffered serious injuries resulting in permanent disability. The defendants, as part of their discovery, wanted to look at the plaintiff’s social media to evaluate the impact on his lifestyle. In November 2011, the plaintiff granted signed authorizations to all of his social media and online accounts – all except for Facebook. (*1) The defense was persistent and it was agreed in a pre-trial settlement conference in early December 2011 that the plaintiff would allow access to his account and changed it to shared password of “alliedunited.” (*1)

The defense team accessed the plaintiff’s Facebook account and gathered some information. However, after the plaintiff received a few alerts of unfamiliar computers accessing the account, he deactivated it, claiming that his account had been hacked in the past. The defense had gathered some information, but had not completed its work and went directly to Facebook. The social media giant “instead recommended that the account holder download the entire contents of the account as an alternative method for obtaining the information. (*2)

In early January 2012, plaintiffs counsel agreed to allow access to the account but were subsequently informed on January 20, 2012, that the account had been lost. The plaintiff’s “account could not be reactivated because Facebook had “automatically deleted” the account fourteen days after its deactivation,” (*2) which occurred on December 16, 2011. The defense team claimed some “shenanigans” on the part of the plaintiff, specifically that he took more proactive steps to delete the information than simply being ignorant of the 14-day deletion policy. (*2)

The defense team requested an adverse inference and monetary sanctions. Judge Mannion determined that the threshold for issuing an adverse inference instruction had been met, including the following four factors (*4):

1. The evidence was within the party’s control;
2. There was an actual suppression or withholding of evidence;
3. The evidence was destroyed or withheld was relevant to the claims or defenses; and
4. It was reasonably foreseeable that the evidence would be discoverable.

The court didn’t find malice in the plaintiffs action but granted the adverse inference instruction because the “Defendants are prejudiced because they have lost access to evidence that is potentially relevant to Plaintiff’s damages and credibility. In light of all of the above, a spoliation inference is appropriate.” (*4)

Whether the data was lost by accident or “by accident,” is relevant to the consequences in this case. But the takeaway for attorneys is to understand how social media is handled and how it can be disposed of in order that they can avoid similar outcomes in the future.

Further Reading

• Gallagher, Mary Pat, Deletion of Facebook Page Found to Be Spoliation of Evidence, New Jersey Law Journal, April 1, 2013.
• Case Summary, Gatto v. United Air Lines, Applied Discovery
• Full opinion: Gatto v. United Air Lines, Inc., No.: 10-cv-1090-ES-SCM, 2013 U.S. Dist. LEXIS 41909 (D.N.J. Mar. 25, 2013)

[Correction — This article has been corrected to show that the ruling was from the Federal Circuit, not the Tenth Circuit as originally reported. - Ed.]

The patent infringement and trademark case of Phillip M. Adams & Assoc. v. Dell Computer Corp. has been an ongoing saga with actions dating back to the 1990s. In recent years the case had been on hiatus, but that ended on March 18, 2013 when the Federal Circuit announced its ruling on four claims that had been challenged from the earlier District Court opinion.

Of particular interest here is that the three-judge panel overturned an adverse inference sanction for spoliation that the District Court had imposed on ASUSTeK Computer Corp. (ASUS), a co-defendant in the case who had brought the appeal. Does this set a precedent  that signals a shift in the threshold for issuing an adverse inference?

The Back Story

This is a long, complex and messy case with many fact-specific issues, so the focus here will be on the spoliation sanction. It all began with a small innovation that detected and resolved defects in floppy drive controllers that could cause data errors in the most ubiquitous data storage technology of that era. It was discovered that computer manufacturers were selling defective products and a class action suit was filed. The first target was Toshiba which ultimately settled for $2.1 billion in 1999.

With the threat of a flood of class actions, computer manufacturers needed the plaintiff’s technology. ASUS developed software to detect and correct the defects in response to the Toshiba class action. Unfortunately, the plaintiff claimed this was in violation of a patent held by the plaintiff and inventor Phillip Adams who filed suit in May 2005 alleging infringement.

When asked to produce key documents, ASUS’s response was meager. While producing a copy of the software program, it failed to deliver the source code which was considered critical to determining if ASUS copied Adams’ work or not. ASUS claimed the source code was lost due to “information management practices.”

Conflicting Opinions

The pre-trial first opinion (Adams v. Dell, 621 F.Supp.2d 1173, 1194 (D.Utah Mar 30 2009)) by U.S. Magistrate Judge David Nuffer determined that there was no determination of bad faith but that “ASUS’ lack of a retention policy and irresponsible data retention practices are responsible for the loss of significant data”(*15). He reserved any determination of sanctions on additional evidence to determine prejudice. In a July 10, 2009 opinion, the magistrate found no evidence of willful spoliation and “[i]n fact, the evidence… shows just the opposite.” Absent of bad faith, the order for sanctions was denied.

Subsequently, the district judge in (Phillip M. Adams & Assocs. V. Sony Elecs. Inc., No. 05-64, D. Utah Sept 26, 2011) reversed the magistrate’s opinion and “ordered an adverse inference sanction against ASUS for spoliation of evidence.” (p.6) The sanction was an adverse inference as it was deemed “an adequate penalty under the circumstances.” (p.6)

Appeals Court Overrides the Override

In the appeal, the Federal Circuit weighed in on ASUS’s assertion that the district court erred in imposing the adverse inference sanction on grounds of “abuse of discretion.” Following the July 2009 ruling, the plaintiff objected to the order which denied a sanction.

According the FRCP, the only rationale for reconsidering a magistrate’s pretrial order is if it was “clearly erroneous or contrary to law.” Despite this, the district court found no clear error in Magistrate Judge Nuffer’s ruling but still “determining a sanction was warranted and imposed a broad adverse inference sanction against ASUS.”

In footnote 7, the Appeals Court notes that the “district court’s decision could be interpreted as making an independent finding of bad faith,” in which it cites the September 2010 district court as ruling that “ASUS failed to preserve certain evidence with ‘pinpoint accuracy.’ If this was the case, the district court abused its discretion by failing to properly defer to the magistrate’s actual findings.”

The Federal Circuit reversed the ruling. It deemed the district court’s ruling to be in error because in that Circuit an adverse inference sanction “must be predicated on the bad faith of the party destroying the records.” (p.9 citing Aramburu v. Boeing) By reversing the adverse inference sanction, the panel would “consider whether there is adequate evidence to support the jury verdicts against ASUS absent such adverse inferences.” (p.9)

The Ruling’s Impact on Preservation

It may be too early to tell, but on first blush the decision is not likely to have an overarching impact. In the end, the standards for preservation remain the same: bad faith is a prerequisite for adverse inference sanctions. (As shown in the Spoliation Sanctions by Circuit chart) That is what the magistrate judge correctly ruled in his July 2009 opinion.

The crux of the Federal Circuit’s ruling pertains to the reasoning that the district court chose to overrule the magistrate’s opinion and give an adverse inference sanction. The court agreed there was not bad faith and the district court made an independent finding and therefore “committed legal error” (p.9), and a “district court by definition abuses its discretion when it makes an error of law.” (p.9)

In the end, the opinion focuses less on “what,” “when” and “how” spoliation occurred, but how the courts handled it. The Federal Circuit’s ruling offers little assistance in clarifying issues around timing of trigger events nor bright lines on preservation and legal holds. Organizations still need to have sound preservation practices in place otherwise based on the current legal standards they could find themselves in sanctionable territory.

Further Reading:

• Full opinion: Phillip M. Adams & Assoc. v. Dell Computer Corp. (Fed. Cir. Mar 18, 2013)
• Pre-trial opinion: Adams v. Dell, 621 F.Supp.2d 1173, 1194 (D. Utah Mar 30, 2009)
• InfoLawGroup LLP, The Other Shoe in Adams v. Dell Drops Gently, August 4, 2010. (Recap of July 2010 opinion by magistrate judge that ruled no sanctions are warranted.)
• Barkett, John M., Footnote 18, p.12, Zubulake Revisited: Pension Committee and the Duty to Preserve, Shook, Hardy & Bacon L.L.P., 2010. (Case brief on March 30, 2009 pre-trial opinion.)

If you believe in coincidences, there was a significant one that occurred in February. Two Federal discrimination cases, EEOC v. JP Morgan Chase in the Southern District of Ohio (Sixth Circuit) and EEOC v. Ventura Corp. from the District of Puerto Rico (First Circuit), had rulings against defendants which were sanctioned for failing to preserve employment records that were responsive to their respective cases. The parallels between the cases show a pattern of how companies faced with EEOC claims inadequately responded to repeated preservation requests.

EEOC v. JP Morgan Chase Bank

In the first case E.E.O.C. v. JP Morgan Chase Bank N.A., No. 2:09-cv-00864 (S.D. Ohio Feb. 28, 2013), U.S. District Judge Gregory L. Frost handed down an opinion in an alleged discrimination by employees at the bank. The action was filed by the EEOC on behalf of female employees that were not given the opportunity to work with the most lucrative clients at the mortgage consulting group. Porter Wright’s Employer Law Alert brought the opinion to our attention.

When the bank was investigated, the Commission staff requested records showing the qualifications of the employees so that it would be possible to assess the alleged discrimination. As the case evolved, the bank was asked to produce data covering a three-year period. During the time when the scope of production was being debated, 10 months of data was destroyed per routine document deletion policies. Despite the fact that a formal document request had not been made before the data was deleted, it was established that a number notices sent about the anticipated action constituted a clear “trigger event” and commenced the obligation to preserve – including suspending automatic culling of data.

As Judge Frost made clear in the opinion, “Defendant’s failure to establish a litigation hold is inexcusable. The multiple notices that should have triggered a hold and Defendant’s dubious failure if not outright refusal to recognize or accept the scope of this litigation and that the relevant data reaches beyond the statutory period present exceptional circumstances that remove the conduct here from the protections provided by Rule 37(e).” (p.13)

The court based its sanctions because the failure to preserve inhibited “the integrity of the judicial process in order to retain confidence that the process works to uncover the truth.” The opinion goes into great detail on the legal foundation for sanctions and their severity based on standards set forth in the Sixth Circuit, including a three-part test for control, culpability and relevance. (p.17)

While denying the Defendant’s request for summary judgment, the court ordered a permissive adverse inference instruction to the jury as the “most reasonable and pragmatic course.” (p.17)

EEOC v. Ventura Corp.

Turning to the second opinion of Equal Employment Opportunity Commission v. Ventura Corp., Civ. No. 11-1700 (PG), 2013 U.S. Dist. LEXIS 19662 (D.P.R. Feb. 12, 2013) that was issued only two weeks prior. The Commission was investigating a Title VII complaint on behalf of male employees who claimed they were not offered managerial positions at the company.

Despite numerous warnings by the EEOC to preserve information relevant to the case, key evidence was lost including resumes from job applicants and critical emails among managers. The Commission sought sanctions for destruction of relevant records that hindered the ability to prosecute the claim. Ventura explained that the resumes were shredded at a warehouse and emails and other files fell victim to a company-wide “software migration.”

The Court was not able to determine bad faith on the part of the Defendant, but it found that sanctions were indeed warranted under First Circuit precedent that bad faith was not necessary and noted that sanctions can be imposed “if such evidence is mishandled through carelessness.” Key documents were spoliated by Ventura once a duty to preserve had attached following a “trigger event” – and the Court noted that it was likely prejudicial since the complainant had a copy of a similar email. The sanction consisted of exclusion of testimony showing hiring practices and an adverse jury instruction suggesting that the jury can infer that the lost emails were damaging to the defense’s case.

Corroborating Evidence – Four Conclusions from the EEOC Cases

Is it possible to connect these two cases even though it was happenstance that the opinions were issued only two weeks apart? While not directly related, the similarities are many, as follows:

1. Sanctions Despite Absence of Bad Faith – Neither sanction was the result of bad faith spoliation, rather the defendants lost key information due inadequate preservation processes and, perhaps, a lack of careful oversight by the responsible attorneys .
2. Pay Attention When the Other Party (especially the EEOC) Reminds of Obligation to Preserve – The EEOC was clear in its intentions in both complaints and notified both defendants about what was coming and what needed to be preserved, yet neither company adequately heeded the warnings.
3. Failure to Suspend Routine Destruction of Records – Interestingly (and perhaps coincidentally) both matters involved the parties losing evidence because they didn’t keep it from being destroyed.
4. Failure to Act in a Timely Manner to the Trigger – Particularly in the JP Morgan Chase Bank case, the legal team’s haggling over what to produce caused them to lose the plot entirely. The trigger to preserve had passed and they didn’t put controls in place to ensure that key data was not destroyed through a routine data management process.

Two cases don’t make a trend, but the similarities are eerie. The defendants clearly did not take the cases as seriously as they should, possibly due to them underestimating the implications of an EEOC complaint or the lack of training of Human Resources staff and the attorneys handling these employment matters. Whatever the reason, the sanctions serve as a cautionary tale for other organizations to step up their efforts to improve records management efforts and to better train and instill a “culture of compliance” among staff and attorneys overseeing employment matters.

Further Reading

• Koesel, Margaret M. and Tracey L. Turnbull, Caution: Recent Case Highlights Importance of Broad, Early Preservation Efforts, Employer Law Alert, Porter Wright LLP, March 6, 2013
• Full opinion in E.E.O.C. v. JP Morgan Chase Bank N.A., No. 2:09-cv-00864, S.D. Ohio, February 28, 2013
• Applied Discovery Online Law Library, Equal Employment Opportunity Commission v. Ventura Corp., Civ. No. 11-1700 (PG), 2013 U.S. Dist. LEXIS 19662 (D.P.R. Feb. 12, 2013).

Club owners and DJs going into business together may sound like a bad idea, and that notion was borne out in a recent Colorado case that involved an iPhone with text messages that had gone missing. District Judge R. Brooke Jackson issued a wide-ranging opinion in late January responding to seven motions; for the sake of brevity, this article will focus solely on the Plaintiffs’ Motion for Spoliation Sanctions. [Spoiler Alert – They were granted.]

According the opinion, when the case was initiated in December 2010 the plaintiffs “served a ‘litigation hold letter’ on the defendants, directing them to preserve several categories of documents, including text messages.” As the case progressed, no text messages were produced in discovery requests and then it was revealed the defendant had lost his iPhone along with any texts saved on it.

While admitting the loss of the phone, the defense took the position that the texts were “irrelevant.” In addition, they contended that they had “responded fully” to a discovery request in May 2011, prior to the loss of the phone the following August.

The court didn’t buy what they were selling. Judge Jackson put no weight behind the defendants’ claims, citing the fact that the defense counsel made no indication that the texts were reviewed as part of the production request. The fact was that “neither the plaintiffs nor the Court will ever know” if the texts were relevant.

In looking at sanctions, the Court noted that they are warranted when the litigant “knew, or should have known, that litigation was imminent” and that the “adverse party was prejudiced,” citing Turner v. Public Serv. Co. of Colorado. The duty to preserve had attached, and the defendants “did not do it.” In concluding that the loss was now willful (merely negligent), the Court found an outright adverse inference instruction to be “too harsh and is unwarranted as a sanction for the negligent ‘spoliation’ of evidence.”

The middle ground that Judge Jackson fashioned permitted the plaintiffs “to introduce evidence at trial, if they wish, of the litigation hold letter and defendants’ failure to preserve… text messages. Plaintiffs may argue whatever inference they hope the jury will draw. Defendants may present evidence in explanation, assuming of course that the evidence is otherwise admissible, and argue that no adverse inference should be drawn.”

The implication of this sanction is relatively benign, but given the contentiousness outlined in the full opinion, it’s entirely possible that such an argument could tip the scale toward the plaintiffs if a number of other factors remained equal as presented to the jury.

Further Reading:

• Applied Discovery Online Law Library, Christou v. Beatport, LLC, Civil Action No. 10-cv-02912-RBJ-KMT, 2013 U.S. Dist. LEXIS 9034 (D. Colo. Jan. 23, 2013).
• Full Opinion of Christou v. Beatport

An opinion out of the U.S. District of New Jersey weighed in on a gray area of data preservation when it ruled that “independent agents” were subject to the parent company’s preservation obligation and therefore required to receive a litigation hold. The case delved into issues pertaining to First American Insurance’s “possession, custody and control” of the agents who are critical to their business but are not employees as per FRCP Rule 34(a).

The dispute in Haskins v. First American Title Insurance Co., No. 10-5044 (RMB/JS), 2012 U.S. Dist. LEXIS 149947 (D.N.J. Oct. 18, 2012) centered on the allegation that the defendant overcharged for title insurance so the plaintiffs were interested in the closing files from agents in order to learn of the amounts charged to homebuyers – clearly relevant to the matter at hand. U.S. Magistrate Judge Joel Schneider weighed the arguments after First American took the position that “it should not be required to produce documents in the physical possession of its agents because it does not possess or control the requested documents.” (p.8)

The Court rejected First American’s assertion after reviewing the contractual obligations of the independent agents. Judge Schneider reviewed the contracts and showed that the company had “control” of the documents due to contractual language that First American “may claim that the agent breached its contract if the agent does not produce the requested files” (p.9). The party may not have physical possession of documents but as long as it “has the legal right or ability to obtain the documents from another source upon demand.” (p.3)

Judge Schneider then reviewed the need to implement a legal hold after determining that the defendant had “control” of the documents. He cited a number of recent opinions including Major Tours v. Colonel and Mosaid v. Samsung among others and resolved that “the duty to preserve clearly applies to First American because litigation is already in progress” (p.11) and that “a litigation hold may extend to third parties, and courts have issued orders to this effect.” (p.10)

The court’s finding in Haskins v. First American closed up a possible loophole that First American was attempting to exploit. Judge Schneider showed that the legal obligation to preserve information extends to third parties when there is a contractual obligation to preserve documents and a legal right to access them is in place.

Further Reading:

• Bianchi, Marc D., “Independent Agents Subject to Litigation Hold,” E-Discovery Law Alert, Gibbons P.C., January 11, 2013.
• Case Summary: Haskins v. First American Title Insurance Co., Online Law Library, Applied Discovery.
• Full opinion  of Haskins v. First American Title Insurance Co., No. 10-5044 (RMB/JS), 2012 U.S. Dist. LEXIS 149947 (D.N.J. Oct. 18, 2012)

The pace of sanction cases continued unabated during 2012. The interesting development is that during 2012 the opinions were issued much more broadly than in past years, with key cases from the Western states as well as state courts. An interesting new twist is that several courts issued sanctions for preservation failures even when ESI was deemed to not have been lost because of the burden it places on the court.

Without further ado, here is our countdown of the Top 10 Preservation Opinions of 2012:

10. United States ex rel. Baker v. Cmty. Health Sys., Inc., (D.N.M. Oct. 3, 2012) – Court orders sanctions against DOJ for “lackadaisical attitude” toward preservation for failing to monitor legal hold that resulted in spoliation after the litigation hold was issued. The court also noted that the hold was late and that the government inappropriately withheld information on the grounds of privilege and work product.

9. Scentsy Inc. v. B.R. Chase LLC, (D. Idaho Oct. 2, 2012) – Plaintiff is ordered to pay additional costs after legal hold process was deemed “completely inadequate” and “borders on recklessness.” Scentsy also relied on a verbal litigation hold notification, but forensic efforts and additional depositions were able to recover documents thus avoiding more serious sanctions.

8. Hynix Semiconductor Inc., et al. v. Rambus Inc., (N.D. Cal. Sept. 21, 2012) – Seven years after the original trial, the defendant was deemed to have spoliated in bad faith by holding “shred days” after a trigger event. The final ruling is still under consideration, but the reduction in awards is likely to take a sizable chunk of the $397 million judgment.

7. State National Insurance Co. v. County of Camden, (D.N.J. March 21, 2012) – A District Judge upheld a Magistrate’s sanctions ordering it to pay costs up to $70,000 for not issuing a litigation hold on its email system – despite no evidence of spoliation. The ruling reinforces the need in New Jersey to issue a hold and take measures to preserve ESI, failing to do so results in sanctions regardless of whether the case was prejudiced because of the amount of the court’s time required to sort it out.

6. Danny Lynn Electrical v. Veolia ES Solid Waste, (M.D. Ala. March 9, 2012) – In spite of the failure to preserve ESI, the court found neither bad faith nor prejudice so denied a motion for sanctions. The court concluded that the defendant had an effective litigation hold process in place.

5. Pouncil v. Branch Law Firm (D. Kan., March 7, 2012) – The defendant in this legal malpractice case was a law firm that demonstrated a complete lack of awareness of the purpose or process of a litigation hold. The court ordered a long-overdue legal hold and warned of further sanctions if relevant evidence is later revealed to have been lost.

4. Voom HD Holdings LLC v. EchoStar Satellite LLC, (NY Appellate Division of the Supreme Ct., First Judicial Department, January 31, 2012) – Two years after Pension Committee, the New York State Supreme Court explicitly upheld Judge Scheindlin’s standard of preservation. The court upheld the lower court opinion that Echostar was “grossly negligent for failing to issue a litigation hold” and that an adverse inference instruction was an appropriate sanction.

3. Chin v. Port Authority of New York New Jersey, (2d Cir. July 10, 2012) – The Second Circuit denied a request for a ruling of gross negligence for failing to issue a written legal hold. The Port had preservation failures but the panel of judges ruled that the district court did not “abuse its discretion.” Despite some claims, the Chin opinion did not overturn Pension Committee standards.

2. Apple, Inc. v. Samsung Elecs. Co. Ltd., (N.D. Cal. July 25, 2012) – Adverse inference instruction for spoliation relating to Samsung’s poor efforts to preserve email by not suspending automatic deletion in high-profile, multi-billion dollar patent infringement case.

1. 915 Broadway Associates, LLC, v. Paul, Hastings, Janofsky & Walker, LLP, (N.Y. Sup. February 16, 2012) – The plaintiff in a $20 million legal malpractice claim had its case dismissed outright due to legal hold deemed completely ineffective. While issuing a written legal hold, the party did nothing to oversee it resulting in spoliation leading to the case-dispositive sanction.

We encourage to review these cases because they address real issues that in-house legal teams face every single day. However, there are more than just these ten. For a complete list of pertinent cases on preservation, we have compiled a comprehensive list of case citations in Appendix A (p. 30) of Legal Hold and Data Preservation Best Practices.

By Brad Harris

In a ruling that will have defense lawyers licking their chops, U.S. District Judge William P. Johnson on October 3 upheld U.S. Magistrate Alan C. Torgerson’s opinion when the Court unequivocally overruled objections regarding spoliation sanctions due to an inadequate litigation hold process. Department of Justice lawyers were attempting to overturn Judge Torgerson’s Report and Recommendation that was issued on August 31, 2012.

The long-running case started when DOJ filed an action in April 2005 against Community Health Systems alleging illegal receipt of Medicaid payments under the False Claims Act. The October 3^rd ruling addressed the Government’s challenge over spoliation sanctions after Judge Torgerson had found the “Government was culpable for its failure to issue a timely and an adequate litigation hold.” (p.2)

While the failures were many, let’s zero in on a few of the key shortcomings that the Court found, and ultimately upheld:

• Untimely Legal Hold – DOJ “first served notice on Defendants to issue a litigation hold to preserve evidence in December of 2005.” (p.3) It sent reminders in June 2008 regarding ongoing preservation and reminder to suspend routine deletion. However, the Government didn’t initiate its own legal hold until February 2009. “The Government seems to have been sufficiently aware of the importance of preserving documents to remind [a defendant] of its duty to preserve documents, but did not impose a similar obligation on itself until over three years later.” (p. 4)

• ‘Lackadaisical Attitude’ Led to Failure to Monitor Hold – Critical ESI was lost from two key players when the responsible Government attorney “did not alert [appropriate personnel] of the importance of preserving” information, “nor did she personally take any steps to preserve” data. (p.6) The Court found that information which had been preserved after the trigger but was later lost “suggested a ‘lackadaisical attitude’ with which the Government approached its ongoing duty to monitor the litigation hold.” (p.7) The opinion cited the Zubulake standard for trigger for taking affirmative steps to monitor compliance.

• Loss of Work Product Immunity and Privilege – The Government made the matter more complicated by withholding documents citing “work product immunity, deliberative process, and attorney client privilege.” (p.12-13) The Court upheld the conclusion by Judge Torgerson that the Government was attempting to use these doctrines “as both a sword and shield by selectively using the privileged documents to prove a point but then invoking the privilege to prevent an opponent from challenging the assertion.” (p.13)

In the end, the Court upheld Judge Torgeson’s assessment that “the Government’s misconduct may not rise to the level of bad faith or willful misconduct, but that it’s pre-litigation attempts to preserve ESI and other documents were ‘woefully inadequate and go beyond mere negligence.’” (p.11)

The Court upheld sanctions for spoliation which included: 1) an order to produce documents and emails being withheld relating to certain key witnesses; 2) recovery of attorney fees and costs associated with the Motion for Sanctions; and 3) a forensic search at the Government’s expense on network drives to recover lost ESI pertaining to certain key players (unless the Government can show cause in writing why it should not).

All in all, the review by the District Court of New Mexico resoundingly rejected every claim by the DOJ’s legal teams. This case makes it clear — plaintiffs must recognize when their own preservation obligations trigger and realize the implications when not taking such obligations seriously.

Further Reading:

• Sitarchuk, Eric W. and Meredith S. Auten, “Government Sanctioned for Destruction of Documents,” Morgan, Lewis & Bockius LLP, October 17, 2012.
• Bernasconi, Andrew and Nathan Fennessy, “Government Sanctioned in False Claims Case for Failing to Preserve Documents,” Global Regulatory Enforcement Law Blog, Reed Smith LLP, October 17, 2012.
• Full opinion of United States ex rel. Baker v. Cmty. Health Sys., Inc., No. 05-279 WJ/ACT (D.N.M. Oct. 3, 2012).

By Brad Harris

Earlier this month, Chief Judge B. Lynn Winmill (D.Idaho) issued a court order against Scentsy Inc., the plaintiff in a copyright infringement case between two scented candle makers, for failing to issue a litigation hold and inadequate retention policies. While the court determined that spoliation was unlikely, it took the matter seriously and ordered Scentsy to pay the costs of additional depositions required to get further clarification on matters at hand. The Chief Judge also cautioned that it was “a shot across the bow that if there is evidence that spoliation occurred, future consequences will be harsh.” (*9)

The opinion in Scentsy Inc. v. B.R. Chase LLC, No. 1:11-cv-00249-BLW, 2012 WL 4523112 (D. Idaho Oct. 2, 2012) addressed four motions, two by each side, but we’ll focus on the Defendants’ motion to compel Scentsy to do a forensic exam to recover data that should have been subject to a litigation hold. In his analysis which only cited case law entirely indigenous to the Ninth Circuit, Chief Judge Winmill expressed concern that spoliation may have occurred due to Scentsy’s “inadequate retention policy coupled with its late and imprecise litigation hold.” (*7)

In the opinion, Chief Judge Winmill wrote:

The Court has serious concerns with Scentsy’s retention policy and litigation hold process. Generally not deleting documents, and orally requesting certain employees to preserve relevant documents concurrently with filing a lawsuit, is completely inadequate. It is very risky – to such an extent that it borders on recklessness. (*8)

The Court held that it was “unlikely that relevant documents were destroyed” due the time frame of the case. (*9) As such, it held that the only immediate sanction for the Plaintiff was paying for deposition costs relating to the spoliation motion. However, Chief Judge Winmill added that “if information is uncovered that spoliation occurred, the Court will consider giving an adverse inference instruction at trial or dismissing some or all of Scentsy’s claims.” (*9)

The impact of Scentsy v. B.R. Chase is three-fold:

1. Reinforcing the need for a well-defined process to recognize and timely respond to a trigger event;
2. Bolstering the argument to issue holds in writing (addressing the perceived inadequacy of relying on verbal instructions);
3. Cautions an organization against relying on the lack of a retention policy (that would otherwise call for the disposition of aged documents) as being the same as instructing employees to retain documents indefinitely.

While the consequence was relatively light for Scentsy, once again a plaintiff has failed to take adequate steps in response to a trigger event which has the potential to seriously undermine its claim.

Further Reading:

• Electronic Discovery Law Blog, “Concluding Litigation Hold and Document Retention Policies Are ‘Clearly Unacceptable,’ Court Allows Depositions to Determine if Spoliation Occurred,” K&L Gates, October 16, 2012.
• Full opinion of Scentsy v. B.R. Chase LLC