E-Discovery
Duties and the Range of Sanctions for Failures to Comply
By Nick Brestoff, M.S.,
J.D.
Why is it that every litigator must become conversant with the language and intricacies of electronically
stored information (ESI)? And why is it
that they should feel highly motivated
to do so in a non-negligent manner? This
article addresses these questions.
Attorneys know, of course, that the
discovery of potentially relevant evidence is a standard part of every
lawsuit. But what is new is that, within
the last five years, it has been recognized that ESI comprises most of all potentially relevant evidence. It has been noted that even the smallest fender-benders
can involve ESI; for example, if the driver was texting just before the crash. In such a case, the amount of ESI might be
relatively small, but then again, the existence and timing of the texting might
be critical. In anti-trust, securities,
fraud, mass tort or employment class actions, and in trade secret and patent cases,
the amount of ESI is different and can, in fact, be prodigious.
Indeed,
the hallmark of ESI is its immense volume.
The larger cases can involve terabytes
of ESI. For context, a megabyte is about
75 pages; a gigabyte is about 75,000 pages, if printed. A
terabyte is a thousand times more than a gigabyte, which means 75 Million
pages, which is 25,000 boxes, and that’s the equivalent of about 50,000 trees.
Why
is there so much of it? The answer is
simple. In 2003, researchers at UC
Berkeley published an update to their study, How Much Information? They explained that, at in 2002, each of us
produced almost 800 megabytes of recorded information each year. There is no doubt that each of us produces
even more ESI today. Because the cost of
storing information electronically is cheap, ESI now goes by many names: (1)
voice-mail messages and files, (2) e-mail messages and attachments, (3) deleted
files, programs, or e-mails, (4) data files, (5) program files, (6) backup and
archival tapes, (7) temporary files, (8) system-history files, (9) website
information stored in textual, graphical, or audio format, (10) website log
files, (11) cache files, and (12) cookies.
While
we used to create paper one page at a time on a typewriter, ESI multiplies like
rabbits. There are copies stored
electronically each time we change a document, each time we send it to someone
else, and each time they send it back.
ESI is everywhere these days. It can be stored in a wide variety of
devices, e.g., desktop computers (office, home), laptops (office, home), cell
phones, network servers, disk drives, thumb/flash drives, photocopy machines
with digital memory, and backup tapes.
And, still more devices continually come into the marketplace. ESI can reside in all of these devices, and when
it comes to preserving ESI for possible future production, we have to gather up
all of these devices in order to gather up all of the ESI they contain. Thus, we can
define electronic discovery (e-Discovery) as encompassing the duties and
processes of collecting, preparing, reviewing and producing discoverable
information that is stored electronically.
So
the answer to the first question undefined why must
attorneys know about ESI undefined has two parts:
(1) ESI is the likely source of the evidence attorneys will present at
trial, and (2) we now have rules governing e-Discovery. While the rules for discovery in general are well-established, the
rules for e-Discovery are relatively new, if not brand new: - Effective December 1, 2006, the
Federal Rules of Civil Procedure (FRCP) were amended to cover ESI. In the FRCP, ESI is broadly intended to cover
all current and future media for storing information electronically.
- Effective June 29, 2009, California’s
Electronic Discovery Act amended §2031.010 et.
seq. and other provisions of the Code of Civil Procedure to provide rules
for the discovery of ESI. The California
rules generally follow the FRCP.
Although the rules are less than five years old,
e-Discovery has quickly become a multi-billion dollar industry, and there has
been sufficient time for “best practices” guidelines to be established. Best practices, recommendations and
principles have been promulgated by The Sedona Conference. Courts often cite the Sedona Principles as a
leading “industry” authority on e-Discovery.
Is there a rule
requiring attorneys to preserve ESI?
Specifically, no. Neither the
Federal Rules of Civil Procedure nor California Code of Civil Procedure impose on attorneys a duty to preserve
ESI, but the duty is there, no doubt because ESI is just one form of potentially
relevant evidence. The duty to preserve all potentially relevant evidence is an
affirmative obligation imposed on attorneys by the courts,
and it is imposed not only on outside counsel, but on in-house attorneys and,
take note, on certain high level executives as well.But there are several other, expressly stated sources
of the duty to preserve ESI: - Agreement
or court order (or both)
- Statutes
and Regulations
- Last but not least, a reasonable and good faith
effort to preserve ESI is required by Principle 5 of the Sedona Principles.
When does the duty to preserve ESI arise? The duty to preserve potentially relevant
evidence arises at the time when a party or one of its key employees can reasonably anticipate litigation, e.g.,
based on the circumstances or upon receipt of a letter requesting preservation
of evidence. In certain circumstances,
the duty to preserve evidence arises before
a lawsuit is filed. For
example, in Doe v. Norwalk Cmty. Coll., ( Doe), a sex discrimination case, the
duty to preserve was found to have arisen even before the employer received the
intent-to-sue letter. Thus, almost any contentious job action will likely trigger
the preservation duty. Depending on the
circumstances, waiting for the lawsuit to be filed is simply waiting too long. When litigation can be reasonably
anticipated, “[the party] must suspend its routine document
retention/destruction policy and put in place a ‘litigation hold’ to ensure the
preservation of relevant documents.” It is vital to understand what a “hold” means. It means that attorneys are supposed to find
out about his or her clients’ routine document-retention-and-destruction policies
and, for the key personnel, act to have those policies suspended. In Doe, the defendant employer argued that
they had no option but to continue deleting information from their systems
because the plaintiff was only identified as Jane Doe. That argument proved unsuccessful and
sanctions were imposed. The scope of the duty to preserve evidence is
limited to all evidence that is reasonably
likely (or anticipated) to be the subject of a future discovery request,
not all potential evidence.
For
how long must ESI be preserved? The
answer is that the duration of the preservation duty is continuing, and it extends
into the indefinite future. It requires
not only monitoring but follow-up to identify still other “custodians” of ESI,
should they appear. Thus,
counsel are now required to become fully
familiar with her client’s document retention policies, as well as the client’s
data retention architecture. This will
invariably involve speaking with information technology personnel, who can
explain system-wide backup procedures and the actual (as opposed to
theoretical) implementation of the firm’s recycling policy. It will also involve communicating with “key
players” in the litigation, in order to understand how they stored information.
So, even seasoned attorneys must learn to speak “tech.” Because of their experience, they may have
spotted the issues. They may understand
how to deploy Requests for Admission, Interrogatories, and Requests for
Production of Documents. But ESI now
pervades the factual universe and so now dominates the discovery proceedings in
litigation and even arbitration proceedings,
and will do so into the indefinite future.
We cannot un-ring this bell. It
is fast becoming standard practice for an attorney’s first deposition in a case
to be the deposition of the manager of other side’s IT department. Sanctions
If
attorneys fail to put (and keep) ESI and e-Discovery at the top of their minds,
they may face a variety of serious sanctions.
In the early days of e-Discovery, courts were perhaps more lenient than
they are today. Those days are gone. Now the range of sanctions is worrisome indeed
to litigants and their counsel. A wide
range and severity of sanctions can be imposed for negligently or intentionally
failing to preserve potentially relevant evidence.
Sanctions
can take many forms. The most frequently
imposed sanction is monetary. The most serious sanctions are terminating
sanctions, burden-shifting orders, and adverse inference instructions.
When
a motion to compel further production of documents and for sanctions is
granted, the likely penalty will be monetary, usually in the form of an award
of attorney fees to the party who did not receive the documents it requested
and had to go to the expense of making the successful motion. Monetary
sanctions are the most frequently imposed sanction for negligent handling of
ESI. Monetary sanctions can be
significant, and can range from tens of thousands of dollars to millions.
The
case of Qualcomm v. Broadcom is famous
in part because it involved a sanction of $8.5 million. A sanction that high is worth some
discussion. Qualcomm was a patent lawsuit where critical to the claim was
whether Qualcomm participated in the Joint Video Team (JVT), an industry
standard-setting body, in 2002 and early 2003.
Qualcomm asserted that it had only begun to participate in the fall of
2003, after the standard had been set, and only with respect to professional
extensions (or additions to) the standard.
At trial, a key witness testified that she had not read e-mails indicating that she had participated in the JVT in
late 2002. But Broadcom’s counsel asked
the right question on cross: had she
received e-mails when the JVT was meeting?
The answer was yes. This revelation
prompted Broadcom to ask for the e-mails and, during the lunch break, Qualcomm’s
attorneys produced 21 of them. Qualcomm
and its counsel argued that they were not responsive to Broadcom’s discovery
requests and did not believe that these newly discovered e-mails called their
earlier search procedures into question. Initially,
the court believed that the attorneys knew better. As a result, the court levied an $8.5 million
monetary sanction against Qualcomm, and imposed a court-monitored Case Review and
Enforcement of Discovery Obligations (CREDO) program. As a result of the CREDO program, it was
discovered that, while more than a million pages of only marginally relevant
documents had been produced, 46,000 relevant documents (totaling more than 300,000
pages) had not been produced. Needless
to say, the court was not pleased and, in addition to the monetary sanction,
the court referred the offending attorneys to the State Bar for discipline.
But
on April 2, 2010, after substantial discovery proceedings on remand and a
three-day hearing, Magistrate Judge Barbara Taylor issued an order which lifted
the sanctions against the individual attorneys and relieved Qualcomm of its
obligations under the CREDO program.
Noting, however, that the $8.5 million sanction had not been appealed,
Judge Taylor concluded:
It is undisputed that Qualcomm
improperly withheld from Broadcom tens of thousand of documents that
contradicted one of its key legal arguments.
However, . . . there is insufficient evidence to prove that any of the
Responding Attorneys engaged in the requisite “bad faith” or that (attorney)
Leung failed to make a reasonable inquiry before certifying Qualcomm’s
discovery responses.
As
the Qualcomm case indicates, monetary
sanctions are often coupled with other penalties. Besides awarding monetary sanctions and
reporting offending attorneys for discipline, a court might also order additional
searches, e.g., of servers and a CEO’s personal laptop, at the non-moving party’s
expense.
Or, as is sometimes the
case when parties are having discovery disputes, a court might appoint a “special
master.”
Terminating Sanctions
The
courts have hit both sides of a lawsuit with terminating sanctions because of
willful failures to comply with ESI preservation and discovery
obligations. When such case-ending
sanctions are ordered, two key factors are present: (1) evidence has been destroyed intentionally
and cannot be recovered and (2) without that evidence, the other side is so prejudiced
that a terminating sanction is the only fair remedy. When a defendant is found to have engaged in
such misconduct, the remedy is a default judgment. For
example, in Magana v. Hyundai Motor Am., Hyundai’s
in-house counsel, in response to discovery requests, searched for responsive
documents but only in its own legal department.
As a result, the trial court found that (1) the parties did not agree to
limit discovery, (2) the defendant falsely responded to plaintiff’s requests
for production and interrogatories, (3) the plaintiff was substantially
prejudiced in preparing for trial, and (4) the potentially relevant evidence
was lost forever. The trial court
considered lesser sanctions, but concluded that the only just remedy was the
entry of a default judgment – for $8 million.
Now that is a terminating sanction with real bite. The appellate court reversed, but the
Washington State Supreme Court reinstated the trial court’s ruling and awarded attorney fees pertaining to
the trial and appellate proceedings. E-Discovery mishaps can impale either side of a case, and Plaintiffs and
their counsel can also suffer “terminating sanctions” nightmares. In another e-Discovery case, a magistrate
judge recommended dismissal of plaintiff’s claims because of willful statutory
violations and disobedience of court orders to produce documents. Although the district court concluded that
total dismissal of all claims would be excessive, plaintiff’s claims for
damages arising from an alleged interruption of business were dismissed. In addition, plaintiff was ordered to pay
$75,000 to defendant for its costs in bringing the sanctions motion
Shifting the Burden of Proof
Short
of a default, could a court impose a sanction on a defendant that comes
perilously close to terminating sanctions?
Yes. In the Genger case,
the court found that defendant Genger had knowingly destroyed potentially
relevant evidence (emails). The court
considered but declined to enter a default judgment.
But
the sanctions it imposed were nevertheless severe, if not worse than a default. First,
Genger was ordered to pay attorney fees estimated at $750,000 for having made
and prevailed on a complicated but successful motion. In addition, Genger was ordered to produce
privileged documents. But that was
hardly the end of it. The court also
ruled that, to prevail on any affirmative defense or counterclaim, Genger could
not prevail by producing a preponderance
of evidence, but would have to provide evidence sufficient to meet the “clear
and convincing” threshold. And, Genger
could not prevail on any material factual issue if the only evidence in support
of his position was his own.
Imagine
having to go to trial with those burdens.
If Genger were a multi-armed God of some sort, all of his arms would be tied behind his back.
The “Adverse Inference” Instruction
Courts are understandably
reluctant to impose “terminating” sanctions or their like on either side. However, when courts conclude that the
e-Discovery duties have been willfully violated, and that evidence has been destroyed
as a result, they have yet another fearsome weapon: the “adverse inference” instruction. An adverse inference instruction tells the
jury that they may conclude that the reason some evidence was lost or destroyed
is because it was arguably unfavorable to the party who lost or destroyed
it. In a recent decision involving a
finding by the court that e-Discovery misconduct had been intentional, the
court wrote this:
The jury will
receive an instruction that in and after November 2006, the defendants had a
duty to preserve emails and other information they knew to be relevant to
anticipated and pending litigation. If
the jury finds that the defendants deleted emails to prevent their use in litigation
with [plaintiff], the jury will be instructed that it may, but is not required
to, infer that the content of the deleted lost emails would have been
unfavorable to the defendants. In making
this determination, the jury is to consider the evidence about the conduct of
the defendants in deleting emails after the duty to preserve had arisen and the
evidence about the content of the deleted emails that cannot be recovered.
Courts may also give adverse inference instructions in
other contexts, e.g., in cases where e-Discovery duties have been shirked due
to negligence and/or gross negligence,
as in or where lost or destroyed evidence makes it difficult to calculate
damages.
Adverse inference instructions can have a devastating
impact on a jury. In Zubulake v. UBS Warburg, the plaintiff
was an individual who brought a case against her former employer for sex
discrimination. UBS Warburg had a duty
to preserve potentially relevant evidence after Laura Zubulake complained about
how she had been treated by her supervisor and others, and the company
recognized that litigation was likely.
This was several months before Zubulake filed a complaint with the EEOC
and then filed her lawsuit. After
determining that UBS had willfully destroyed potentially relevant emails after
the duty to preserve them had arisen, the court decided to give an adverse
inference instruction. At trial, the
jury awarded $9 million in compensatory damages and $20 million in punitive
damages, for a total of $29 million. Zubulake was the “poster child” for Big Damages in a
case where an e-Discovery failing was critical; that is, until Coleman (Parent) Holdings, Inc. v. Morgan
Stanley & Co., Inc. Here’s
what happened in Morgan Stanley: Sunbeam Corporation retained Morgan Stanley
to advise it on the merger with Coleman.
After the deal closed, Sunbeam declared bankruptcy. Coleman’s parent holding company sued Morgan
Stanley alleging that it had intentionally misrepresented Sunbeam’s true
financial condition, so that the deal would close and Morgan Stanley could collect
its commission. During the lawsuit,
Coleman sought documents that Morgan Stanley was required to keep under the
federal securities laws. But Morgan
Stanley, the court found, not only did not
produce a large amount of relevant records or search the attachments of many
emails it did in fact produce, Morgan Stanley continued the practice of
overwriting email messages for more than 12 months after it had instructed its
own employees to preserve paper documents. Worse still, perhaps, was this: Morgan Stanley’s litigation counsel certified
that the company had complied with the court’s discovery orders even though it
was later discovered that the company still had not searched nearly 2,000
backup tapes that had, in fact, been located. As
a result, the court entered a partial default judgment, decided to give an
adverse inference instruction, and shifted the burden of proof to Morgan
Stanley. Coleman did not have to show
the first few elements of fraud and needed to prove only its reliance on what
happened and damages. To win, Morgan
Stanley had the burden of proving that it had not defrauded Coleman, and it is
notoriously difficult to prove a negative. For
Morgan Stanley, the outcome was predictably and enormously adverse. The jury awarded $600 million in compensatory
damages and $850 million in punitive damages, for a total of $1.45 billion.
Avoiding Sanctions Sanctions
will not always be the order of the day.
A motion for sanctions will be denied, for example, if a requesting
party has been dilatory either in seeking information or in making a motion to
compel and/or for sanctions. In these
circumstances, a motion to compel further ESI will likely be denied and, in
that circumstance, a request for sanctions will also be denied. In this connection, it should be remembered
(when practicing in federal court) that it is the District Court who sets the
discovery cut-off date. Magistrate
Judges, who usually hear and decide discovery motions, will be forced to deny
relief if it means changing a cut-off date they have no authority to alter. To
avoid sanctions on the merits, counsel should comply with the eight factors set
forth in Zubulak V, which, along with
the Sedona Principles, should be considered as basic guidelines. While law firms may engage consultants to
assist them, it must be said, however, that neither counsel nor their clients
can shirk their duties by engaging either consultants or e-Discovery vendors,
and remain ultimately responsible for preserving and producing ESI. Conclusion
ESI is a daily tsunami of information, and many attorneys
are playing “ostrich” at their peril.
The rules are new, but they have been in place long enough for the
courts to believe that attorneys should have received the message by now. The intelligent use of e-Discovery can help
an attorney win his or her case, or mount a successful defense to a claim
without merit, but e-Discovery can also be used as a trap for the unwary: to create failures that make attorneys look
negligent at.
If you haven’t faced up to e-Discovery, get over it; it
is here to stay. |
Nick Brestoff, M.S., J.D.
Nick Brestoff
earned an M.S. in environmental engineering science from Caltech and graduated
from U.S.C. Law Center in 1975. Mr. Brestoff is currently a consultant to
attorneys as a Principal with Stonefield Josephson, Inc., a California
accounting firm, where he focuses on matters pertaining to economic damages,
ESI and e-Discovery.
A megabyte is about 75 pages; a gigabyte is about 75,000 pages, if printed. A terabyte is a thousand times more than a gigabyte, which means 75 million pages, which is 25,000 boxes and that's the equivalent of about 50,000 trees.
When does the duty to preserve ESI arise?
The duty to preserve was found to have arisen even before the employer received the intent-to-sue letter.
ESI now dominates the discovery proceedings in litigation and even arbitration.
Initially, the court believed that the attorneys knew better.
It is undisputed that Qualcomm improperly withheld from Broadcom tens of thousand of documents that contradicted one of its key legal arguments.
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