E-Discovery Duties and the Range of Sanctions for Failures to Comply
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.
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.”
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.
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.
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.
About the Author:
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.