Good faith e-discovery error leads to sanctions

Lawyers and a federal judge say a recent ruling from the Southern District of New York shows that litigants who act in good faith but negligently fail to preserve electronic discovery can be subject to severe sanctions.

“This decision is extremely significant for federal practitioners, but even more so for in-house counsel,” U.S. Magistrate Judge Timothy S. Hillman said of Pension Committee of the University of Montreal Pension Plan, et al. v. Banc of America Securities LLC, et al. “It really is a tutorial on document preservation policies that everyone who does this kind of work has to read and be aware of.”

U.S. District Court Judge Shira A. Scheindlin, who authored the country’s seminal electronic discovery decisions in 2004, found in Montreal that although a group of plaintiffs did not egregiously destroy e-mails produced several months before the filing of a complaint, they deserved to be sanctioned for failing to properly preserve evidence.

“Once again, I have been compelled to closely review the discovery efforts of parties in a litigation, and once again have found that these efforts were flawed,” she wrote. “As famously noted, ‘[t]hose who cannot remember the past are condemned to repeat it.’”

The New York judge said that six years after her rulings in US Zubulake v. UBS Warburg, which required companies to put litigation holds on data that might be relevant to future legal disputes, litigants and their counsel are still conducting electronic discovery in an “ignorant and indifferent” fashion.

Blueprint

Hillman, who sits in Massachusetts, said Scheindlin’s ruling contains the most thorough definition of negligence any court in the country has ever provided in an electronic discovery dispute.

“The circuits are all over the place on this, but [Montreal] is probably the most emphatic pronouncement on the subject of what standard to apply in cases involving negligence in document preservation,” he said. “I expect this case to be cited by lawyers in support of requests for sanctions, especially with the spoliation instruction the judge crafts in the end, which is a pretty tough one.”

In addition, Scheindlin ordered the plaintiffs to pay the other side’s attorneys’ fees for time spent on the discovery issue.

George E. Lieberman, who sat on a federal electronic-filing committee in Rhode Island, said the case reinforces the principle that lawyers must send written litigation holds that clearly identify which items need to be preserved.

“It sounds simple, but it’s not because if you have a company that operates across the country or world, you have many different types of media on which this kind of information can be found,” said Lieberman, a lawyer in Providence.

Lieberman, who handled an influential spoliation case before the Rhode Island Supreme Court in the mid-1990s, said there have been numerous cases across the country that have made that point.

“The message was announced loud and clear many years ago that members of the bar have duties to oversee this part of the discovery process, and anyone practicing without that knowledge is engaging in less than careful conduct,” he said. “Counsel needs to be intimately involved, because as we have seen in [Montreal], they are going to be held responsible.”

Paula J. Clifford, who practices in Rhode Island and Massachusetts, said part of the judge’s sanction was imposed for conduct that did not involve the intentional destruction of evidence.
“There is no question the judge was clearly indicating that these mistakes, even though they weren’t done with any bad faith, were enough to lead to some serious sanctions,” she said.

“The judge seems to create an affirmative obligation to closely supervise the document preservation process in a way that would certainly be costly and time consuming.”
Lawrence M. Kraus, a federal litigator in Boston, added that the decision makes clear that parties with “pure hearts but empty heads” are not going to be given much leeway in Scheindlin’s court.

Kraus criticized the ruling for not taking into account the reasonableness standard contained in the Federal Rules of Civil Procedure, which were amended in 2006 in part to address electronic discovery.

“No matter what steps you take, there is always going to be another e-mail out there,” he said. “And the concern with this decision is that even though the judge said she doesn’t want litigation to become a ‘gotcha game,’ with her focus on individual e-mails, that’s where this seems to be going.”

Although the decision is non-binding, Kraus said, Scheindlin’s respected status means it will be widely read and frequently cited.

Judge Hillman called Scheindlin the “godmother of many of the changes that were made to the [FRCP] on electronic discovery. Her word clearly carries weight.”

Hedge fund fight

In 2004, a group of 96 investors sought to recover losses of $550 million from the liquidation of two British Virgin Islands-based hedge funds in which they held shares.
They asserted claims under federal securities laws against former directors, administrators and other officials connected with the funds.

The plaintiffs first produced electronic documents when the complaint was filed in 2004. They did so again in 2007 when a Private Securities Litigation Reform Act stay was lifted. At that point, some of the defendants alleged that substantial gaps were found in the plaintiffs’ document productions.

As a result, depositions were held. The court additionally ordered each plaintiff to provide a declaration stating efforts they undertook to recover documents.
Following the close of discovery, the defendants moved for sanctions, arguing that the plaintiffs had failed to preserve and produce documents, including several that had been stored electronically.

They also claimed the plaintiffs submitted false and misleading declarations.

Harmed integrity

In finding that 13 of the plaintiffs should be sanctioned for negligence and gross negligence, the judge wrote that courts do not expect any party to meet a standard of perfection.
“Nonetheless, the courts have a right to expect that litigants and counsel will take the necessary steps to ensure that relevant records are preserved when litigation is reasonably anticipated, and that such records are collected, reviewed, and produced to the opposing party,” she said. “As discussed six years ago in the Zubulake opinions, when this does not happen, the integrity of the judicial process is harmed and the courts are required to fashion a remedy.”

As part of their misconduct, Scheindlin wrote, the plaintiffs failed to send out litigation holds until the stay was lifted in 2007 and did not take appropriate steps to identify and preserve relevant evidence.

The duty to preserve arises whenever parties reasonably anticipate the possibility of litigation, the judge added. At that point, counsel must instruct them to suspend their routine document retention policy and put a litigation hold in place to ensure the preservation of relevant documents.

“A plaintiff’s duty is more often triggered before litigation commences,” she wrote, “in large
part because plaintiffs control the timing of litigation.”

Scheindlin said it was important to recognize that the case did not present any egregious examples of the purposeful destruction of evidence. Instead, she said, it was one in which the plaintiffs failed to institute timely written litigation holds and engaged in careless and indifferent collection efforts after their duty to preserve arose.

“While many treatises and cases routinely define negligence, gross negligence, and willfulness in the context of tortious conduct, I have found no clear definition of these terms in the context of discovery misconduct,” she wrote. “It is apparent to me that these terms simply describe a continuum. Conduct is either acceptable or unacceptable.”