July's Notable Cases and Events in E-Discovery

E-Discovery Update

This Sidley Update addresses the following recent developments and court decisions involving e-discovery issues:

1. An Eastern District of New York case addressing the different spoliation standards applicable to tangible evidence under Second Circuit precedent and to electronically stored information (ESI) under revised Fed. R. Civ. P. 37(e) in rejecting defendants’ sanction motion, finding mere negligence by plaintiff in the loss of the documents and no prejudice to defendants;
2. A multidistrict product liability litigation decision applying amended Fed. R. Civ. P. 26(b) in denying plaintiffs’ efforts to obtain the personnel files of defendants’ employees whom plaintiffs planned to depose;
3. A Northern District of California case disallowing as disproportionate plaintiff’s request for five depositions and additional written discovery on a conflict of interest issue and instead directing the defendant to designate one or more witnesses pursuant to Rule 30(b)(6) to address certain specified issues; and
4. A Northern District of California order denying a spoliation motion because the plaintiff had failed to show that evidence was lost and that it had not been restored and produced by the defendant.

1. In Best Payphones, Inc. v. The City of New York, 2016 WL 792396 (E.D.N.Y. Feb. 26, 2016), Magistrate Judge Vera M. Scanlon addressed the different standards applicable to tangible evidence under Second Circuit precedent and to ESI under revised Fed. R. Civ. P. 37(e) in rejecting defendants’ sanction motion, ruling that plaintiff was merely negligent in its failure to preserve relevant information and that defendants had not demonstrated prejudice. Citing Rule 37(a)(5)(A), Magistrate Judge Scanlon nonetheless ordered plaintiff to pay defendants’ attorney’s fees and costs related to the motion.

Best Payphones, Inc. brought an action against the City of New York seeking compensatory and punitive damages for defendants’ alleged violations of plaintiff’s rights under the First and Fourteenth Amendments in connection with the regulation of public payphones on public rights-of-way. Id. at *1. As part of discovery in this litigation, defendants filed a spoliation motion asserting that plaintiff had failed to preserve relevant ESI and hard-copy information, including emails between plaintiff and third parties allegedly seeking to purchase plaintiff’s business. Id. Defendants claimed that the retention obligation arose when plaintiff commenced related litigation against defendants on July 11, 2000, and argued that this evidence was necessary to defend against plaintiff’s damages claim. Id. at *2.

Plaintiff responded with numerous objections but primarily asserted that (1) case law did not establish a litigation hold requirement until 2004, (2) defendants failed to establish that plaintiff acted with a culpable state of mind as to its preservation obligations, (3) defendants could have, but failed to, seek the information from third parties, (4) the missing documents were not relevant to proving defendants’ case and (5) defendants suffered no demonstrable prejudice. Id.

Looking to Second Circuit case law, the magistrate judge noted that the adoption of revised Fed. R. Civ. P 37(e) established spoliation standards for ESI that differed in various respects from the existing Second Circuit standards for spoliation of hard-copy documents, and she reviewed the claims under both standards, noting the differences where they existed. Id. at *3. As to the governing spoliation standard in the Second Circuit, Magistrate Judge Scanlon stated the three elements that defendants were required to prove: “(1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind and (3) that the destroyed evidence was relevant to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.” Id. (citing Coale v. Metro-N. Commuter R. Co., 621 F. App’x 13, 16 (2d Cir. 2015)).

The magistrate judge first examined whether plaintiff had a duty to preserve the documents that defendants sought. At the time that plaintiff filed its first federal lawsuit in 2001 (and the state court action in 2000), Second Circuit precedent indicated that the duty to preserve arose “when the party has notice that the evidence was relevant to litigation — most commonly when [a] suit has already been filed, ... but also on occasion in other circumstances, as for example when a party should have known that the evidence may be relevant to future litigation.” Best Payphones, Inc., 2016 WL 792396, at *3 (citation omitted; brackets and ellipsis in original). Based on this standard, the magistrate judge found that the plaintiff had an obligation to preserve all relevant evidence once it commenced its first action against defendants on July 11, 2000. Id. at *4. At that time, it was evident that significant litigation would continue until there was a complete resolution of the issues litigated in the 2000 lawsuit. In addition, plaintiff had a duty to preserve all relevant evidence once it decided it was going to bring this current action against defendants. Id.

Magistrate Judge Scanlon then examined whether plaintiff had a culpable state of mind. Because of the recent amendment to Rule 37(e), she noted that she had to analyze plaintiff’s culpability for spoliation of tangible evidence and electronic evidence separately. In regard to tangible evidence, in the Second Circuit, “the ‘culpable state of mind’ factor is satisfied by a showing that the evidence was destroyed ‘knowingly [or grossly negligently], even if without intent to breach a duty to preserve it, or negligently.”’ Id. at *4 (citing Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 108, 110 (2d Cir. 2002) (brackets in original)). As for electronic evidence, the magistrate judge noted that she may not issue an adverse inference instruction unless she found that the party acted with the intent to deprive another party of the information’s use in the litigation. Best Payphones, Inc., 2016 WL 792396, at *4. (citing Fed. R. Civ. P. 37(e)(2)).

As to the different standards, the magistrate judge concluded that she could issue an adverse inference instruction with regard to the tangible evidence (i.e., the bank statements and daily activity reports) on a finding that plaintiff acted negligently but may not issue an adverse inference with regard to the electronic evidence (i.e., the emails) unless she found that plaintiff acted with intent to deprive defendants of that information. Best Payphones, Inc., 2016 WL 792396, at *4. As to both categories of evidence, the magistrate judge concluded that plaintiff’s conduct amounted to mere negligence, finding that the record lacked significant evidence that plaintiff acted with the willfulness or with the carelessness required to sustain a finding of gross negligence. Id. at *5. She specifically pointed to plaintiff’s assertion that defendant could have obtained the emails with prospective buyers and bank statements from other third parties. Id. She also credited the declaration of plaintiff’s custodian of record stating that he did not willfully destroy emails but “believed he was satisfying his burden to retain all relevant records and was not acting willfully in his failure to preserve evidence” and that during the time period when the custodian’s emails were destroyed, “preservation standards and practices for email retention were in flux.” Id.

Because the magistrate judge had found that plaintiff’s conduct was mere negligence, she had to determine whether the destroyed evidence was relevant: “[W]hen the destruction is negligent, relevance must be proven by the party seeking the sanctions.” Id. (citing Deanda v. Hicks, 2015 WL 5730345, at *6 (S.D.N.Y. Sept. 30, 2015)). She noted that the Second Circuit had “made clear that relevant in th[e context of a spoliation motion] means something more than sufficiently probative to satisfy Rule 401 of the Federal Rules of Evidence,” Id. (citing Residential Funding, 306 F.3d at 108-09); instead, such evidence had to be “helpful in proving [a party’s] claims or defenses.” Best Payphones, Inc., 2016 WL 792396, at *6 (citation omitted; brackets in original). Although the magistrate judge acknowledged that the destroyed evidence was relevant, she concluded that some of the destroyed evidence offered little substantive information on the valuation issues. Id. at *6. Moreover, she again noted that defendants could have obtained much of the sought-after documents from third parties, stating that “the absence of prejudice can be shown by demonstrating ... that the other parties were able to obtain the same evidence from another source” Id. (citing R.F.M.A.S., Inc. v. So, 271 F.R.D. 13, 25 (S.D.N.Y. 2010). Given this finding and defendants’ failure to seek the evidence from third parties, Magistrate Judge Scanlon concluded that defendants were not prejudiced by its destruction and failed in their burden of proving spoliation under either Second Circuit case law or Rule 37(e). Best Payphones, Inc., 2016 WL 792396, at *6-*7.

The magistrate judge then turned to defendants’ request for attorney’s fees for their motion. Under Rule 37(a)(5)(A), when a party provides discovery in response to a motion made pursuant to Rule 37, the court may “require the party ... whose conduct necessitated the motion, the party or attorney advising that conduct, or both to pay the movant’s reasonable expenses incurred in making the motion, including attorney’s fees.” Id. at *7 (citing Fed. R. Civ. P. 37(a)(5)(A)). Accordingly, she ordered that plaintiff pay the attorney’s fees incurred by defendant in making the motion because plaintiff, in fact, was negligent in its conduct. Best Payphones, Inc., 2016 WL 792396, at *8.

2. In the multidistrict products liability litigation In re Xarelto (Rivaroxaban) Products Liability Litigation, MDL No. 2592, 2016 WL 311762 (E.D. La. Jan. 26, 2016), District Judge Eldon E. Fallon denied plaintiffs’ effort to obtain the personnel files of defendants’ employees that plaintiffs planned to depose.

Plaintiffs sought discovery of various materials in the personnel files of defendants’ employees being deposed, including performance reviews and self-reviews relating to Xarelto. Id. at *1. Defendants resisted, arguing that privacy and public policy interests in the confidentiality of personnel files outweighed any relevance of the files to the litigation. Id. at *3. Plaintiffs responded that the sensitive information sought was relevant to their theory that Xarelto had been rushed to the market and to show the deponents’ bias. Id. at *1, *4.

The court noted that “Rule 26(b) commands that all discovery be both relevant and proportional” and reviewed the law on personnel files in the Fifth Circuit, finding that the leading case of Coughlin v. Lee, 942 F.2d 1152 (5th Cir. 1991) required the balancing of privacy and discovery interests as set forth in six factors relevant in civil cases against a private defendant:

1. "the impact upon persons who have given information of having their identities disclosed;”
2. "whether the information sought is factual data or evaluative summary;”
3. “whether the party seeking the discovery is an actual or potential defendant in any criminal proceeding either pending or reasonably likely to follow from the incident in question;”
4. “whether the plaintiff’s suit is non-frivolous and brought in good faith;”
5. “whether the information sought is available through other discovery or from other sources; and”
6. “the importance of the information sought to the plaintiff’s case.” Xarelto, 2016 WL 311762, at *3 (citing Coughlin, 942 F.2d at 1160 (quoting factors from Frankenhauser v. Rizzo, 59 F.R.D. 339, 344 (E.D.Pa. 1973)).

Judge Fallon noted that the Coughlin court and subsequent cases had highlighted the importance of “particularity, calling for a ‘case to case’ balancing of the variables,” with “appropriate weight to the ‘special concerns’ presented by personnel files in each case.” Xarelto, 2016 WL 311762, at *3-*4 (citations omitted).

Applying these factors, the judge pointed out that the only information plaintiffs had provided on the targets was that they were at one time employees of defendants and that plaintiffs planned to depose them. Id. at *4. Plaintiffs did not present their request for discovery “on a witness-by-witness basis” and thus did not “demonstrate sufficient relevancy and particularity” under the Rules and under the Fifth Circuit’s Coughlin test for discovery of personnel files. Id. In the court’s view, “[a] broadly sketched ‘rush to the market’ theory of liability in a products liability case or the ever-present search for evidence of witness bias are insufficient under Coughlin without additional evidence of relevance and particularity to compel the personnel file of every employee.” Id. at *5.

Judge Fallon denied the motion without prejudice, noting that plaintiffs might be able to obtain an in camera review of an employee’s personnel file if they made a request containing a particularized explanation of each category of information sought within a given deponent’s personnel file:

A request for personnel files which included a deponent’s job title and classification, his or her area of responsibility, his or her decision-making authority, his or her ability to influence policy, and a particularized explanation of the relevance of each category of information sought within the deponent’s personnel file may be sufficient to warrant an in camera review of the personnel file at issue. This information would provide sufficient context to allow the Court to weigh ‘the importance of the information sought to the plaintiff’s case’ and the propriety of disclosing each category of information sought by the PSC. Id. at *5 (citation omitted).

The court concluded that any in camera review would balance the privacy interest against the relevancy and particularity of the sought information. Id. at *6.

3. In Sender v. Franklin Resources, Inc., 2016 WL 814627 (N.D. Cal. Mar. 2, 2016), Magistrate Judge Sallie Kim denied as disproportionate plaintiff’s request to depose five named individuals and obtain written discovery on a conflict of interest issue affecting the review of his ERISA claim and instead directed the defendant to designate one or more witnesses pursuant to Rule 30(b)(6) to address the specified issues.

Plaintiff sought additional discovery related to defendant’s alleged conflict of interest in the administrative review on his Employee Retirement Income Security Act claim. Id. at *1. Magistrate Judge Kim determined that while discovery related to this issue was appropriate, plaintiff’s request to depose five specified individuals, including defendant’s in-house and outside counsel, was not proportionate to the needs of the case under Rule 26(b). Id. at *2. She reasoned that it was “debatable” whether the individuals named were the appropriate individuals to testify on the subject of conflict or bias in the administrative review and that the conflict issue “does not require the duplication of testimony by deposing five people and written discovery on the subject.” Id.

For this reason, Magistrate Judge Kim allowed discovery on the conflict of interest issue but denied plaintiff’s request for the depositions of five specified individuals and additional interrogatories, and instead ordered defendant, under Rule 30(b)(6), to designate individuals to testify on seven specific topics related to plaintiff’s conflict of interest claim. Id.

4. In Fiteq Inc. v. Venture Corp., 2016 WL 1701794 (N.D. Cal. Apr. 28, 2016), the court denied a motion inlimine for a spoliation instruction under amended Rule 37(e) on the grounds that the plaintiff had failed to show that evidence was lost and that it had not been restored and produced by the defendant.

Plaintiff Fiteq moved inlimine for an instruction that the jurors may presume that defendant Venture carried out or allowed the destruction of relevant evidence favorable to plaintiff because one of the defendant’s executives deleted Fiteq-related emails following the termination of the parties’ operating agreement. Id. at *2. Fiteq claimed that the volume of the executive’s produced emails was so small relative to the executive’s role in the underlying issues that it was reasonable to infer that additional documents had been destroyed. Id. Fiteq argued that the court could award an adverse inference instruction either under recently amended Fed. R. Civ. P. Rule 37 or under the court’s inherent authority. Id. at *2-*3.

In resisting the motion, Venture responded that sanctions for failure to preserve ESI were improper because Fiteq had not satisfied the threshold requirement of Rule 37(e) that the lost ESI “cannot be restored or replaced through additional discovery.” Id. at *3. Venture stated that it had restored and produced the emails from the executive’s old computer and that Fiteq had not sought additional or alternative discovery regarding the ESI, such as through a deposition of the executive. Id.

United States District Judge Beth Labson Freeman denied the motion, stating that Fiteq had “failed to prove other responsive documents ever existed.” Id. Even if emails had been lost, in the court’s view, Fiteq had failed to “offer persuasive evidence to show that the ESI was not ‘restored or replaced through additional discovery’ – namely, Venture’s production of the emails” after restoration of the executive’s computer. Id.

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Sidley E-Discovery Task Force

The legal framework in litigation for addressing the explosion in electronic communications has been in flux for a number of years. Sidley Austin LLP has established an E-Discovery Task Force to stay abreast of and advise clients on this shifting legal landscape. An inter-disciplinary group of more than 25 lawyers across all our domestic offices, the Task Force monitors and examines issues and developments in the law regarding electronic discovery. The Task Force works seamlessly with our firm’s litigators who regularly defend and prosecute all types of litigation matters in trial and appellate courts, federal and state agencies, arbitrations and mediations throughout the country. The co-chairs of the E-Discovery Task Force are Alan C. Geolot (+1 202 736 8250, ageolot@sidley.com), Robert D. Keeling (+1 202 736 8396, rkeeling@sidley.com) and Colleen M. Kenney (+1 312 853 4166, ckenney@sidley.com).

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