Archive for the ‘Uncategorized’ Category

NACCO v. Lilly: Spoliation Sanctions in Tennessee Case Shows Ongoing Challenge of Preservation

December 12, 2011

By Brad Harris

We just learned of another preservation case involving sanctions but what makes this one stand out is that the litigation started in 2011 – after Pension Committee, Rimkus, Victor Stanley II, and the other opinions showing the courts’ focus on preservation issues. This case out of the Western District of Tennessee, which is the first preservation sanction we’ve seen from this district, shows how the need for improved preservation practices is permeating the judicial landscape.

In NACCO Materials Handling Group, Inc. v. Lilly Co. (No. 11-2415 AV, 2011 WL 5986649, W.D. Tenn. Nov. 16, 2011), the plaintiff brought a motion to prevent further spoliation of evidence due to inadequate preservation efforts being demonstrated by the defendant.  The original lawsuit alleged unauthorized and improper access to the plaintiff’s secure dealer website.  After initial 30(b)(6) depositions and e-discovery, there was evidence of data spoliation, and the plaintiff sought sanctions for both the failure to adequately prepare the 30(b)(6) witness and failure to take reasonable steps to preserve potentially relevant information.

In determining if sanctions were warranted, the court looked at a number of factors:

In order to determine if sanctions against Lilly are appropriate, the court must first determine (1) when Lilly’s duty to preserve evidence arose; (2) the scope of Lilly’s duty to preserve evidence; (3) whether Lilly’s litigation hold and search and collection efforts were sufficient; and (4) if not, whether sanctions should be imposed on Lilly… [p. 6]

The court found that Lilly’s duty to preserve arose no later than when they were served with the lawsuit in December of 2011.  The court next looked at scope, concluding that “given the allegations concerning computer access, which Lilly did not deny, Lilly’s duty to preserve potentially relevant ESI was very broad” [p. 7].   The court then considered the defendant’s preservation actions, identifying a number of shortcomings:

Upon being served with the lawsuit on February 25, 2011, Lilly took no immediate action whatsoever to preserve any data, electronic or paper. In addition, upon receiving the preservation letter, approximately twelve days later, Lilly failed to issue a written company-wide litigation hold. Instead, Clark simply circulated the litigation hold letter to seven Lilly employees out of Lilly’s 160 employees without any additional instruction. The failure to issue a written litigation hold is “likely to result in the destruction of relevant evidence.” [p. 7]

The court went on to cite additional shortcomings, including not notifying all the “key players” who had access the secure dealer website, and that no actions were taken to prevent deletion of emails or backup data.  The court concluded:

In summary, after the duty to preserve was triggered, Lilly failed to timely issue an effective written litigation hold, to take appropriate steps to preserve any existing electronic records, to suspend or alter automatic delete features and routine overwriting features, and to timely and effectively collect ESI. Therefore, the court finds that Lilly breached its duty to preserve relevant evidence. [p.8]

The court then considered the level of culpability (in this case, finding negligence) and prejudice suffered (uncertain, but highly likely given the facts of the case).  The end result: the court imposed preservation actions, additional discovery and monetary sanctions.

It bears repeating. Lilly is required to bear these costs because its preservation and collection efforts were woefully inadequate. Parties must take their duty to preserve ESI seriously. In order to avoid sanctions, such as these, parties must cooperate and voluntarily preserve, search for, and collect ESI. [p.11]

We’re hearing such conclusions from the courts being repeated often, and they do indeed serve as fair warning that litigants must take their duty to preserve seriously and respond appropriately, especially now that these issues are under a white-hot spotlight.

Further Reading:

Just Published! ‘Preservation and Proportionality’ Solicits Opinions on How to Handle Preservation in the Post-Pension Committee World

November 16, 2011

Today we are announcing the publication of “Preservation and Proportionality: Perspectives on Lowering the Burden of Preserving Data in Civil Litigation,” a 36-page white paper that offers a comprehensive resource in the ongoing discussion around best practices for data preservation. “Preservation and Proportionality” is edited by our Brad Harris and Ron Hedges, a former United States Magistrate Judge.

How to manage the cost of preservation is squarely in the spotlight due to recent events, including the Dallas Mini-Conference in September and the Pippins v. KPMG opinion in October. In the post-Pension Committee world, the discussion has moved beyond “if” litigants need to preserve information to focus on “how.”

A highlight of this publication is “Perspectives on Preservation and Proportionality” featuring 13 contriibuted essays by e-discovery luminaries including Craig Ball, Kevin Brady, Eugenia Brumm, David Cohen, Dr. Richard Esham, Maura Grossman, John Jablonski, Tom Kelly, Browning Maream, Ariana Tadler, Jeane Thomas, David Walton, and Paul Weiner.

This is essential reading for everyone in the legal community that is involved with responding to a duty to preserve ESI for litigation – whether as in-house counsel, litigation support, or outside counsel.

Download our latest Signature Paper “Preservation and Proportionality” in PDF format at no charge by clicking here. If you would prefer a printed copy, please email your request to info@legalholdpro.com.

New Jersey Company Found Grossly Negligent for Inadequate Legal Hold

October 7, 2011

N.V.E., Inc. v. Jesus J. Palmeroni, et al., Civil Action No. 06-5455 (ES), 2011 U.S. Dist. LEXIS 107600 (D.N.J., September 21, 2011)

On September 21, 2011, a new ruling out of New Jersey highlighted the intolerance of the courts for improperly implemented litigation holds.  In N.V.E. v. Palmeroni,  U.S. District Judge Esther Salas imposed monetary sanctions and an adverse inference instruction in her opinion that stated “[N.V.E] did not destroy records deliberately but was grossly negligent in failing to preserve them.”

The case began when N.V.E., a nutritional supplement company, sued its former vice president of sales Jesus Palmeroni who they had fired the previous January under the RICO Act. They accused Palmeroni of making deals with brokers for kickbacks on commissions. N.V.E. also added a claim that Palmeroni had conspired with other employees to buy products at less expensive international prices and resell them in the U.S. rather than export them. In response, Palmeroni filed a counterclaim accusing N.V.E. of firing him in response to his complaint of and refusal to participate in deceptive activities.

It’s interesting to note the timeline of events: Palmeroni was fired in January 2006. In May 2006 N.V.E. retained Pashman Stein of Hackensack, NJ. The lawsuit was not filed until November 2006. Pashman Stein admits that the firm failed to issue a litigation hold. The Chief Financial Officer of N.V.E. Erling Jensen, testified that counsel prior to Pashman Stein had sent out an email telling staff not to destroy documents, but there was no proof to back up this claim. Sometime after January 2006 N.V.E. deleted Palmeroni’s emails and destroyed all electronic records and papers. The electronic records had been on a computer system that N.V.E. was in the process of upgrading. The company stated that it could not “…have predicted we would not be able to get to our old computers.”

Also noteworthy is the comment by Aidan O’Connor of Pashman Stein who has since asked for reconsideration or an interlocutory appeal. He stated that from the time the case was filed until present time there has been a “sea change” in the law regarding litigation holds. He says, litigation holds are “now done as a matter of course.”

Isn’t that the truth? With a collaborative approach enabled by Legal Hold Pro, attorneys can now support clients in a way not possible only five short years ago in 2006. When faced with the possibility of litigation in 2011, counsel (both inside and out) need to imagine how they will demonstrate their preservation efforts if that case eventually goes to trial in 2014, 2015, or beyond – and then act accordingly.

Further Reading:

Four Takeaways from the Dallas Mini-Conference on Preservation and Sanctions

October 6, 2011

By Brad Harris

Last month, the Advisory Committee on Civil Rules called together a mini-conference to solicit greater insight in the nature and scope of the preservation problem, including how technology is contributing to the issue and how rule changes might help address the problem. Held under the auspices of the Discovery Subcommittee, the Mini-Conference on Preservation and Sanctions took place September 9 in Dallas, Texas.  The subcommittee was chaired by Hon. David Campbell and included representatives from in-house counsel, law firms, government and the judiciary.

Influenced by recent opinions on preservation and spoliation, the mini-conference participants were seeking greater clarity with regards to what constitutes a triggering event, how the preservation scope should be defined, and how sanctions apply.  Different approaches to possible rules distributed in advance of the conference ranged from highly detailed enumeration of preservation obligations, to a focus solely on sanctions and how to determine reasonableness.

In reading the notes from the conference, it was clear that there are no ready answers.  There did seem to be several common points of view from the discussions and here are my four takeaways from reviewing the conference minutes:

1. Preservation is an increasing burden.

It was clear from the comments of in-house counsel that preservation is a huge and increasing burden.  Driven by the fear of sanctions motions and the resulting reputational damage, corporations are preserving vast amounts of ESI.  The cost of such action, especially given the traditional approach of segregating, collecting and retaining ESI, is overwhelming.

This expense is in spite of the fact that the vast majority of the data will never be used for discovery. One corporate general counsel described how less than 10 percent is ever processed for discovery, and far less ever produced.  Microsoft’s GC pointed to this“monumental inefficiency” which is clearly driving the desire for greater clarity and certainty as to what constitutes reasonableness and good faith.  Advances in technology such as new  ways to communicate, the blurring of corporate and consumer technologies, and the rise of cloud computing and storage will only make things worse.

2. The threat of sanctions is enough to drive broad preservation.

Despite sanctions being involved in less than 1 percent of cases, the threat of sanctions motions is enough to drive a “de facto rule that there must be extremely broad preservation.”  One corporate GC  described having already spent in excess of $5 million on preservation and is incurring $100,000 a month to segregate and preserve information for a case that is still only anticipated.  Rather than a presumption of sanctions, one judge noted, perhaps a better presumption “that certain sorts of preservation efforts are ordinarily sufficient” even in the absence of a strict rule.

3. Rule changes are likely not the answer.

There seemed to be a lot of discussions about the limitations of potential rule changes, especially given the fact that “80 percent of the concerns of in-house counsel are about pre-litigation decisions” where rules don’t apply.  The group discussed the effectiveness of Rule 26(f) – that litigants seem reluctant to bring up preservation during meet and confer meetings (citing a recent Sedona survey where preservation was addressed fewer than 25 percent of the time) and how the meet and confer simply occurs too late in the process.   Discussions also illuminated some of the potential unintended consequences of bright lines when it comes to defining what constitutes a triggering event or attempting to arbitrarily limit scope of discovery.

4. The need for proportionality.

One interesting observation from reading the notes from the mini-conference was a lack of specific discussion about rules of proportionality.  I suspect proportionality was on everyone’s mind, especially when one general counsel described having spent over $3 million in discovery costs for a matter with a “small” value of less than $4 million.  Several judges expressed concern that perceived advances in review technology (e.g., predictive coding) may create a false-sense of security that overly broad collection and review isn’t really a problem (let alone the cost-prohibitive nature of such technologies for many parties to litigation).   Although not directly applicable to pre-litigation obligations, it seems appropriate to include the principles of Rule 26(b)(2)(c) when considering “objective guideposts” for reasonable preservation efforts.

We will watch eagerly as additional progress is made on this effort to see if a consensus emerges among the diverse group of stakeholders.

Further Reading:

Legal Holds Feature in Gibson Dunn’s 2011 Mid-Year E-Discovery Report

August 19, 2011

Since the law firm Gibson Dunn started covering electronic discovery rulings in its twice-per-year reports, they have become a “go to” resource for practitioners.  The team at Gibson Dunn recaps notable cases and organizes the report so that key trends are highlighted and they recently released the 2011 Mid-Year E-Discovery Report.

In the first half of 2011, they tracked 187 decisions that involved electronic data discovery, a remarkable increase of 82 percent at the same time in 2010.  Also interesting to note that the number of instances in which litigants sought sanctions continue to rise (more than double the number in the same 6-month period as last year) and that courts continue to award sanctions at essentially the same rate (56 percent).

In narrowing our perspective to issues pertaining to data preservation practices, Gibson Dunn noted the following topics in the “Preservation and Legal Holds” section as highlighted in the second key topic area (behind sanctions):

  • Must legal holds be written? “[A] number of courts in the first half of 2011 deliberated over whether a legal hold notice must be written or whether oral notification is sufficient. Several courts have been unwilling to follow Judge Shira Scheindlin’s 2010 Pension Committee decision, which held that failure to issue a written legal hold notice constitutes gross negligence per se and gives rise to a presumption of spoliation and prejudice to the opposing party.” (p.2)
  • When exactly is the trigger event? – “Another hotly litigated issue continues to be when the duty to preserve is triggered. In the first half of 2011, the Federal Circuit dealt with this issue in the latest chapter of the long-running Rambus saga.” (Ibid.) “Decisions in the first half of 2011 also reinforced that the duty to preserve is triggered when litigation is reasonably foreseeable, which may be well before a complaint is actually filed.” (p.8)
  • Counsel’s ongoing obligation to manage holds. “Courts also continued to remind counsel of their obligation not only to ensure that a legal hold notice is issued in a timely manner, but also to monitor its implementation.” (p.2)

The continued focus of the courts on issues pertaining to legal holds is a sign of the growing intolerance of jurists to a lackadaisical approach still shown by some litigants when addressing their preservation obligations.  We have covered most of the key opinions in previous posts, but it is impactful to see summaries and analysis of them by Gibson Dunn to help reinforce the need for organizations to be proactive about their preservation processes.

More Reading:

The Other Shoe Drops in DuPont v. Kolon: Sanctions for Defendant for Spoliation after Issuing Weak Legal Hold

August 16, 2011

by Brad Harris

In July, we posted about the DuPont v. Kolon opinion in April which was noteworthy in that DuPont escaped any sanctions in spite of spoliation by having a strong preservation plan in place.  The Eastern District of Virginia’s Senior District Judge Robert E. Payne issued a subsequent ruling on July 21 responding to a counterclaim for misappropriation of trade secrets filed in February 2009.

Despite Kolon producing nearly 1.2 million pages of discovery, in reviewing the outcome, DuPont noted a “suspiciously low document production totals” from certain key players as well as indications of intentional document destruction. (*2)  DuPont filed its spoliation motion and request for a default judgment in August 2010.

This case is an extremely interesting and well-worth a detailed read.  Judge Payne not only provides numerous case cites to back up the court’s findings, but also in discussing how relevance and culpability play such important roles in determining fault.

Judge Payne starts with a discussion of the three elements required when seeking sanctions for spoliation of evidence – that there was there a duty to preserve, that the destruction or loss was accompanied by a “culpable state of mind,” and was the information being destroyed or altered was relevant to the case.

In Kolon v. DuPont, the duty to preserve attached no later than when the case was filed.  Kolon did respond by issuing two litigation hold notices, the first to a handful of upper-level executives, and a second to all employees.  However, after what the court described as a “long, and oftentimes tortuous, journey on the part of DuPont,” (*2) it was determined that key players had indeed engaged in bad faith deletion of files and emails that were subject to their duty to preserve.

When determining appropriate sanctions, the court then needs to consider both the “quantum of fault” and the degree of prejudice suffered.  Judge Payne did conclude that Kolon had “breached its duty to preserve when key employees… deleted files and email items from their personal computers in the days after DuPont filed this action.” (*26)  However, was this enough to warrant a case-dispositive sanction as sought by DuPont?  In this case, the court found insufficient evidence of widespread and wanton disregard of its duty to preserve, ruling instead for the imposition of “sanctions in the forms of attorneys’ fees, expenses, and costs related to this motion, and an adverse inference instruction.” (*37)

The court did cite Kolon’s efforts in issuing litigation holds and subsequent efforts to preserve files (including preserving backup tapes and capturing images of custodian hard drives) in its decision against a default judgment.  However, it found the litigation hold process lacking – the first hold was sent only to a handful of employees, with no evidence that the hold was forwarded on to others in the company.  The second issued a week later was distributed broadly, yet done so in English to mostly non-English speaking employees, and with “insufficient instruction given to employees about the importance of preserving relevant files and email items.” (*5)

As we’ve seen in so many other cases over last two years, the Courts are demanding a more rigorous preservation process and actively engaged counsel.   The continuing battle between DuPont and Kolon illustrates ways to reduce the risk and ultimate cost of spoliation claims – including timely written legal holds addressed to individuals expected to take action, clear and concise instructions as to what is expected of those custodians, routine updates and reminders, and a detailed audit trail documenting the steps taken.

More Reading:

Haraburda v. Arcelor Mittal: Court Orders Litigation Hold After Defendant Attempts to Delay Until after ‘Meet and Confer’

July 18, 2011

Haraburda v. Arcelor Mittal USA, Inc., No. 2:11 cv 93, 2011 WL 2600756 (N.D. Ind. June 28, 2011)

An opinion in late June from the Northern District of Indiana firmly reiterated the need for a legal hold and shot down one litigant’s attempts to postpone its timing until after the Rule 26(f) meeting.  That strategy was rebuffed when U.S. Magistrate Judge Andrew P. Rodovich upheld the plaintiff’s motion for an Order to Preserve on June 28, 2011.  Thanks to K&L Gates’ Electronic Discovery Law blog for bringing this case to our attention.

The employment matter was initiated when the plaintiff filed a complaint for employment discrimination on March 11, 2011, against Arcelor Mittal, the world’s leading integrated steel and mining company, with operations in more than 60 countries and 2010 revenues of $78 billion.  The plaintiff’s legal team worried that relevant emails were deleted during the EEOC investigation (and well after the ‘trigger event’) and in response said that those emails were company property.

When asked for assurance that the defendant would preserve relevant information,  “Mittal responded that it refused to implement a litigation hold or other process to preserve evidence until after the Rule 26(f) discovery conference, explaining that Haraburda’s request was premature. Mittal further indicated that it would decline all requests from Haraburda for information and documents, including non-litigation documents. (*1)

Naturally, this did not sit well with the court which, in a granted motion reminiscent of March 2009’s Synventive v. Husky out of the District of Vermont.  The court cited the defendant’s lack of preservation efforts and statements on the subject, in addition to the potential burden of spoliation on the plaintiff’s case when it ordered Mittal to “place a litigation hold on any and all documents and information that may reasonably be related to the pending litigation.” (*3)

Haraburda v. Arcelor Mittal is a strong reminder that timeliness is critical when issuing a litigation hold.  As it was reiterated in Judge Rodovich’s opinion the duty to preserve starts when “[a party] knows, or should have known, that litigation was imminent” (*1, citing Trask-Morton v. Motel  6) and that is precisely when a legal hold should be issued – otherwise the court will do it for you — as Arcelor Mittal discovered.  It also shows that even large, publicly traded multinationals such as Arcelor Mittal still have much to learn about what is appropriate in today’s legal environment.

Further Reading

Webinar: “A Compelling Need for Change in Legal Hold Practices” with Charlotte Riser Harris and Brad Harris

June 19, 2011

Charlotte Riser Harris, Litigation Support Manager for Hess Corporation, and Brad Harris, leading national 

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preservation expert and VP for Legal Products at Zapproved (no relation to Charlotte), team up for a one-hour webinar designed to help in-house legal teams adapt to the latest preservation standards. The content is adapted from their co-authored article that appeared in the June issue of ALM’s The Corporate Counselor®.

The year 2010 saw one of the highest rates of spoliation motions ever, reflecting a growing trend that actions taken in response to a duty to preserve data for discovery are coming under increasing scrutiny by savvy litigants and demanding jurists.  As the costs and risks associated with e-discovery continue to proliferate, organizations must take stock of their current practices for recognizing and responding to a duty to preserve, or face certain peril.

How has the litigation landscape changed over the past 18 months since Judge Scheindlin issued her noteworthy Pension Committee opinion?  What “reasonable and good faith” efforts are now expected when responding to a preservation obligation?  What are the consequences of failing to meet this standard? And how have tools and processes evolved to lessen the burden on organizations?

The presentation will include how one organization has responded to this compelling need for change and invested in improving their efficiency, defensibility and effectiveness of their legal hold processes.

After registering, you will receive a confirmation email containing information about joining the Webinar.

Some Say Courts Don’t Agree with Pension Committee – But Is That Really the Case?

June 7, 2011

By Brad Harris

The preservation landscape appears to be settling down considerably compared to the turbulent year that was 2010. (If you need a refresher, see Pension Committee Revisited white paper and webinar for a complete recap.) A few opinions have come up in recent months that provide additional insight into how the courts are interpreting reasonable steps that litigants need to take when responding to a duty to preserve data.

In reviewing commentaries of these cases, I frequently read how these opinions either undermine or refute Judge Scheindlin’s Pension Committee opinion (e.g., “failing to issue a written legal hold is per se gross negligence”).  Yet a full reading of Judge Scheindlin’s opinion includes an understanding of the degree of analysis and nuance that the court applied when considering culpability and sanctions.  Too often when boiling Pension Committee down to one or two sound bites, as so often seems the case, such commentaries miss the point. Judges are entrusted to evaluate each case within a broader framework and Pension Committee offered some new guidance to help them on their way.

In late April, U.S. Magistrate Leslie G. Foschio issued an opinion in Steuben Foods, Inc. v. Country Gourmet Foods, LLC (WL 1549450,WDNY April 21, 2011) denying a request for sanctions merely because of a failure to issue a written legal hold.  The defense counsel in the breach of contract case had asserted that documents they had obtained from a third-party should have been produced by the plaintiff. However, the plaintiff in the case, Steuben Foods, had issued an oral hold to key players and produced nearly 12,000 pages during discovery (*4). The court ruled that the missing documents did not prejudice the case and there was no evidence of spoliation. In spite of a “failure to issue a written legal hold,” the court denied the sanction request.

In May, a similar case and result emerged from the Southern District of New York in Centrifugal Force, Inc. v. Softnet Communication, Inc. (S.D.N.Y. 08 Civ. 5463, May 5, 2011).  The roles were reversed in that the plaintiff’s counsel was seeking the sanction for failure to issue a timely written legal hold. In this case, the defendant had issued an oral hold right away, followed by a subsequent written legal hold notification.  U.S. Magistrate Gabriel W. Gorenstein ruled that in this case that the defendants’ response was adequate under the circumstances.

So where does that leave the written legal hold?

It remains what it always has been:  a vital tool for demonstrating an entity’s due diligence in its preservation efforts.  As Judge Scheindlin has said as far back as the Zubulake opinions, having a detailed audit trail of who did what and when is invaluable when defending one’s actions to the court.  As Judge Scheindlin said in a public appearance last November:

I know that a lot of the world is unhappy with me about this litigation hold issue, but I‘ve never understood what the big problem is. Write it up, protect yourself… Spell out for your company what they have to do. It‘s wise. Instead of fighting me about it – just do it. Because if you just do it you will have a defensible process and people will have guidance as to what they have to hold on to.

Written legal holds are here to stay.  Are they necessary in every circumstance? Of course not, but that was never the point.  What they are is the best mechanism for notifying and recording a necessary process, the absence of which creates undue burdens on litigants and on the courts.  The more frequently litigators heed Judge Scheindlin’s advice, the easier we can get beyond frivolous sanctions motions that are prolonging the very problem (e.g., wasting the courts’ time on e-discovery issues) that written legal holds are meant to remedy.

Further Reading:

‘Legal Holds and Healthcare’ Webinar on March 30 with National Experts Brad Harris and Ken Rashbaum

March 27, 2011

Leading national experts Brad Harris and Ken Rashbaum present a one-hour program that will help any legal practitioner working in the healthcare industry. The presentation will review recent case law and its impact on preservation, look at trends in the healthcare sector and what they mean. Harris and Rashbaum then will provide recommendations for ‘best practices’ so that you will be ready when the next matter arises.

The agenda includes the following:

  • What’s Changing in Healthcare
  • Recent Trends in Case Law
  • The Preservation Process
  • Recommended Next Steps

The amount of digitally-stored medical information continues to grow at an accelerating rate, being driven by government stimulus and overall efficiency initiatives in the healthcare profession.Simultaneously, the threats of litigation and government investigation, which require increasing volumes of electronic medical information, are creating an untenable risk for healthcare practitioners and insurance providers due to potential missteps when responding to a duty to that preserve information.

The HITECH Act (Health Information for Clinical and Economic Health), a component of the American Reinvestment and Recovery Act of 2009, appropriated roughly $27B to assist in and facilitate the transition to digital healthcare records. The availability of these funds, as well as quality of care advantages through enhanced coordination of medical disciplines, will drive tremendous growth in the use of electronic media (including email and text messaging) to capture patient information and enhance communications between caregivers.

The healthcare industry is one of the most litigious sectors in our economy. Now is the time to educate yourself so your organization will be prepared to meet the contemporary standards for legal holds.

Be sure to download our recent white paper called Electronic Medical Information Preservation and Legal Holds. Download it now by clicking here.


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