Introduction: This is the fourth article in a series of short informational pieces relating to one of the hottest topics in litigation over the past five years - electronic discovery. The purpose of these articles is to provide your business entity with some guidelines on how to most efficiently organize to deal with electronic discovery. The articles will continue to be emailed regularly over the next few months. If you are new to our distribution, or if you would like to view previous articles in this series relating to ESI, visit our website.

In our last ESI Alert, we discussed the obligation of an organization to put a "hold" on its document destruction practices even before litigation commences, when litigation is reasonably anticipated. This is called the litigation hold.

As noted in the last ESI Alert, we were going to discuss the principle of accessibility of electronic documents in this Alert. However, in the meantime, two very significant United States District Court opinions dealing with litigation holds were published. Thus, it seems appropriate to discuss them now.

The new opinions were issued out of the Southern District of New York and the Southern District of Texas. The New York opinion, The Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, 2010 WL 184312 (S.D.N.Y. 1/15/10), was authored by Judge Shira Scheindlin, author of the famous Zubulake opinions that are generally regarded as the leading cases on electronic discovery. The Texas opinion, Rimkus v. Cammarata, 2010 WL 645253 (S.D. Tex. 2/19/2010), was written by Judge Lee H. Rosenthal, the current chair of the Federal Judicial Conference Advisory Committee for Federal Rules of Civil Procedure.

The Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities

The Pension Committee case analyzes the duty to properly preserve relevant information, including ESI, from the perspective of the plaintiff. In this case plaintiffs failed to institute a written litigation hold in a timely manner and, when they did institute the litigation hold, they failed to properly preserve the relevant ESI, resulting in lost material evidence. Losing material evidence is called "spoliation", which can result in significant sanctions, ranging from an assessment of costs and fees to dismissal or default.

Judge Scheindlin started her discussion of the duty to institute litigation holds and preserve documents with the statement" "[B]y now it should be abundantly clear that the duty to preserve means exactly what it says and that a failure to preserve records - paper or electronic- and to search in the right places for those records will inevitably result in the spoliation of evidence."

Judge Scheindlin developed a four-pronged analysis to be used in the determination of possible sanctions for spoliation of evidence. The most important element of the analysis, for our purposes, is the level of culpability of the party with the duty to preserve, whether the conduct was acceptable, negligent, grossly negligent or willful. These levels of culpability are part of a continuum. Negligent conduct is that which is unreasonable and that creates a risk of losing relevant evidence, while willful conduct involves intentional or reckless conduct that makes loss of relevant evidence highly likely. The degree of sanctions will depend on where the conduct falls on the continuum.

Judge Scheindlin provided examples of conduct to help those with a duty to preserve understand the analytical framework:

  • Failure to issue a written litigation hold warning is gross negligence;
  • Failure to collect information from key players can be gross negligence or willful conduct;
  • Failure to preserve email or back-up tapes after the duty to preserve has arisen can be gross negligence or willfulness;
  • Failure to obtain records from all employees, some of whom may have had only a passing involvement in the events, as opposed to key players, will be negligence;
  • Failure to take all appropriate measures to preserve ESI is negligence at a minimum;
  • Failure to collect information from files of ex-employees where the employer has control over the information is gross negligence; and,
  • Failure to monitor the continuing collection of evidence will be negligence.


In Pension Committee, Judge Scheindlin determined that the spoliating party's actions in failing to timely institute written litigation holds, failing to execute a comprehensive search for documents and/or failing to sufficiently monitor their employee's document collection were grossly negligent. As a result, Judge Scheindlin instructed the jury that the plaintiffs were grossly negligent in failing to preserve evidence after the duty to preserve arose, and informed it that they could presume that such lost evidence was relevant and would have been favorable to the party.

One commentator concludes that the impact of the Pension Committee Case is that the "honor system" of allowing employee self-collecting or "preservation in place" has been called into serious question. "[T]otal reliance on any employees to search and select won't cut it in Judge Scheindlin's court." Rather, the older practice of preemptive collection for preservation with data reduction later will gain re-ascendency.

Rimkus v. Cammarata

To summarize the Rimkus v. Cammarata case, a group of employees left and filed a suit against their former employer, Rimkus Consulting, to release them from their non-compete agreements. In a countersuit, Rimkus alleged that the former employees violated their non-competes and additionally made off with trade secrets and proprietary information.

Judge Rosenthal's opinion in Rimkus expands on the "culpability continuum" of Pension Committee and introduces the concept of "preservation proportionality". Unlike Pension Committee, which involved negligent actions, Rimkus involved the intentional destruction of emails and other ESI when they were known to be relevant to anticipated or pending litigation. Further, the "spoliators" concealed and delayed providing information that would have revealed their spoliation.

Much of what was deleted was no longer available from alternative sources; however, despite the deletions of emails subject to the duty to preserve, the adverse party had evidence available to prosecute its claims and respond to defenses. Because the Court found that there was sufficient evidence for the other side to prove its case, it declined to impose the most drastic sanction (judgment for the other party) and instead decided that the appropriate sanction was to inform the jury about what had been done and to give the jury the option of applying an adverse inference instruction, i.e. that the evidence that should have been preserved and if produced would have been unfavorable to the spoliating party.

Judge Rosenthal emphasized the need to consider both the spoliating party's culpability and the level of prejudice to the party seeking discovery. Even though there was willful destruction of evidence, a significant amount of the incriminating evidence was recovered by the plaintiff, meaning that the prejudice to the other party was not so great. In light of those facts, the Court was unwilling to issue the harshest sanctions.

Judge Rosenthal stated in her opinion:

Spoliation is the destruction or the significant and meaningful alteration of evidence. ...Electronically stored information is routinely deleted or altered and affirmative steps are often required to preserve it. Such deletions, alterations and losses cannot be spoliation unless there is a duty to preserve the information, a culpable breach of that duty and resulting prejudice.

These general rules [of spoliation] are not controversial. But applying them to determine when a duty to preserve arises in a particular case and the extent of that duty requires careful analysis of the specific facts and circumstances. It can be difficult to draw bright-line distinctions between acceptable and unacceptable conduct in preserving information and in conducting discovery, either prospectively or with the benefit (and distortion) of hindsight. Whether preservation or discovery conduct is acceptable in a case depends on what is reasonable, and that in turn depends on whether what was done-or not done-was proportional to that case and consistent with clearly established applicable standards. (My emphasis)

Quoting from The Sedona Principles for Electronic Document Production, Judge Rosenthal noted: "Electronic discovery burdens should be proportional to the amount in controversy and the nature of the case. Otherwise, transaction costs due to electronic discovery will overwhelm the ability to resolve disputes fairly in litigation." She then goes on to state: "For example, the reasonableness of discovery burdens in a $550 million case arising out of the liquidation of hedge funds, as in Pension Committee, will be different than the reasonableness of discovery burdens in a suit to enforce noncompetition agreements and related issues, as in the present case."

Judge Rosenthal concluded:

Applying a categorical approach to sanctions issues is also difficult, for similar reasons. Determining whether sanctions are warranted and, if so, what they should include, requires a court to consider both the spoliating party's culpability and the level of prejudice to the party seeking discovery. Culpability can range along a continuum from destruction intended to make evidence unavailable in litigation to inadvertent loss of information for reasons unrelated to the litigation. Prejudice can range along a continuum from an inability to prove claims or defenses to little or no impact on the presentation of proof. A court's response to the loss of evidence depends on both the degree of culpability and the extent of prejudice. Even if there is intentional destruction of potentially relevant evidence, if there is no prejudice to the opposing party that influences the sanctions consequence. And even if there is an inadvertent loss of evidence but severe prejudice to the opposing party, that too will influence the appropriate response, recognizing that sanctions (as opposed to other remedial steps) require some degree of culpability.

Lessons

The best way to avoid such risks and consequences? Have an effective litigation hold process in place which includes the following: 

  • Issue a legal hold that is written and that clearly articulates the preservation process. A written notification serves as a foundation for a defensible fact trail that will make it less likely for opposing counsel to bring spoliation into play.
  • Sending a written hold is not sufficient. You must take proactive steps to ensure understanding and compliance on behalf of the custodians. As in the Rimkus case, such action is a critical step toward isolating any "bad actors" that seek to inadvertently (or overtly) destroy evidence.
  • Ensure a means to effectively defend your actions and preservation process. In the case of spoliation motions, a well-understood and consistently applied process will always support the litigant faced with defending their actions as being reasonable and in good faith.

The real takeaway here is that preservation and the use of litigation holds continue to be a hot issue in the courts. With this level of notoriety, the courts are unquestionably becoming less tolerant of improper hold implementations. Take appropriate steps now, including contacting your outside litigation counsel, before you too become an example what not to do when it comes to legal holds.

______________________________________________

In the next Legal Watch Series: Preparing for E-Discovery newsletter, we will cover the concept of accessibility of ESI.

About the Author
For more information or questions regarding E-Discovery and the Rules for Electronically Stored Information Management, contact Michael R. Palumbo.

Michael R. Palumbo focuses his practice on commercial and real estate litigation. Particular areas of experience include banking (UCC Articles 3 & 4) litigation; title insurance, escrow agent and Deed of Trust litigation; and quiet title, adverse possession, homeowners' associations and real estate agent disputes. He has participated in more than 50 trials in the Superior Courts of Arizona and District Court of Arizona, in most of which he was lead counsel. Mr. Palumbo can be reached at 602.262.5931 or mpalumbo@jsslaw.com.

Resources Used for This Legal Watch

1. The Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, 2010 WL 184312 (S.D.N.Y. 1/15/10)

2. Rimkus v. Cammarata, 2010 WL 645253 (S.D. Tex. 2/19/2010)

3. The Sedona Conference Commentary on Legal Holds: The Trigger & The Process