October’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. A Sixth Circuit ruling upholding a district court’s taxation of e-discovery-related costs for imaging a computer hard drive, finding that such imaging fell within the definition of “making copies” under 28 U.S.C. § 1920(4);
2. A Middle District of Florida decision refusing to sanction an employer based on an employee’s spoliation of evidence and bad faith because there was no evidence of employer bad faith and the evidence was not crucial to the case;
3. A Southern District of California ruling granting an adverse inference instruction and awarding fees and costs against a plaintiff for failing to preserve or diligently search for a telephone recording regarding a key issue in the case; and
4. A Western District of Pennsylvania decision rejecting sanctions against defendants for spoliation and failure to institute a litigation hold, finding that the plaintiff had not demonstrated that ESI was actually lost or that defendants acted in bad faith.

1. In Colosi v. Jones Lang LaSalle Ams., Inc., 781 F.3d 293 (6th Cir. 2015), the United States Court of Appeals for the Sixth Circuit upheld a district court decision to allow the taxation of e-discovery-related costs for imaging a computer hard drive, finding that such imaging fell within the definition of “making copies” under 28 U.S.C. § 1920(4).

Plaintiff lost a wrongful termination lawsuit against her former employer and the court clerk approved the prevailing defendant’s bill of cost for $6,369.55. Plaintiff objected to most of the charges and moved to have the bill reduced. Id. at 295. The district court denied plaintiff’s motion, finding the costs reasonable. Id.

On appeal, plaintiff challenged many of the costs, including the taxation of e-discovery-related costs for imaging her personal computer. Under 28 U.S.C. § 1920(4), courts are authorized to tax “the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” Id. at 296. Thus, the Sixth Circuit was tasked with determining whether imaging a computer hard drive fell within the ordinary meaning of “making copies” under § 1920(4). Id. at 296-97.

Upon reviewing the dictionary definition of “copy,” the congressional history of § 1920(4), and other courts’ interpretations of “making copies,” the Sixth Circuit concluded that “a plain reading of the statute authorizes courts to tax the reasonable cost of imaging, provided the image file was necessarily obtained for use in the case.” Id. at 297.

Plaintiff relied on Race Tires America, Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158 (3d Cir. 2012), in which the Third Circuit had rejected a prevailing party’s efforts to recover a variety of e-discovery-related costs, such as imaging hard drives, deduplicating image files, populating a database and reviewing the files for discoverable information. Colosi, 781 F.3d at 297. In fact, the court in Race Tires allowed only the taxation of the costs to scan hard copy documents, convert native files to TIFF images and transfer VHS tapes to DVD, reasoning that these processes were the “functional equivalent of ‘making copies.’” Id.

The Sixth Circuit in Colosi found the Third Circuit’s § 1920(4) analysis “overly restrictive.” Id. The court held that the appropriate analysis under § 1920(4) required answering only the “context-dependent question of whether the prevailing party necessarily obtained its copies for use in the case.” Id. at 297-98. The court also noted that trial courts generally have “discretion to tax the cost of ‘copies attributable to discovery’ as necessarily obtained for use in the case, even if neither party uses the copy at trial.” Id. at 298 (citing Jordan v. Vercoe, 1992 WL 96348, at *1 (6th Cir. May 7, 1992)). In this case, plaintiff tendered his entire computer in response to a production request but demanded that defendant use a third-party vendor to obtain an image of the computer before it could search plaintiff’s hard drive for discoverable information. Colosi, 781 F.3d at 298. In short, making a copy of the hard drive was the only means by which defendant could review plaintiff’s files. Id. The court analogized this situation to “the more typical—and taxable—cost of a party delivering an image file in response to an opponent’s production request.” Id. Based on these facts, the court stated that there was nothing in the record showing that the district court abused its discretion in ruling the taxation of imaging costs reasonable and necessary.

Accordingly, the Sixth Circuit held that the imaging of the computer was “for use in the case” and therefore taxable as costs under a plain reading of § 1920(4). Id.

2. In Selectica, Inc. v. Novatus, Inc., 2015 WL 1125051 (M.D. Fla. Mar. 12, 2015), Magistrate Judge Thomas B. Smith refused to sanction an employer based on an employee’s bad faith spoliation of evidence because there was no evidence of employer bad faith and the evidence was not crucial to the case.

Selectica sued Novatus, which had hired former Selectica employees, Graham Holt and others, for misappropriation of trade secrets and related claims. Selectica had provided Holt with a laptop that synced with Holt’s personal cloud storage account on Box.com and copied any files saved to his laptop (the Selectica Files). Id. at *1. After he became a Novatus employee, Holt offered to share the Selectica Files with a Novatus senior manager. Id. The Magistrate Judge noted that there was no evidence that this Novatus senior manager ever reviewed the information in the Selectica Files. Id.

On December 17, 2013, Novatus received from its counsel Selectica’s litigation hold letter. There was no evidence that Novatus discussed the hold with Holt until January 2014 and no evidence that Novatus addressed Holt’s Box.com account at that time. Id. at *2. In the meantime—both before and after Selectica had sent the litigation hold letter—Holt had deleted thousands of Selectica Files that Holt testified he “thought would . . . potentially put my current employer in jeopardy.” Id (quotation marks omitted).

Selectica moved for sanctions against Novatus based on Holt’s “flagrant spoliation” of the Selectica Files and the metadata associated with those files. Id. at *3. Magistrate Judge Smith found that Novatus had a duty to preserve the Selectica Files because it had the practical ability to control the evidence at the time it received Selectica’s hold letter. Id. at *4-*5. He emphasized that Holt “was a willing and cooperative employee” who had previously offered to share the Selectica Files with Novatus management, and Holt was a Novatus employee when Novatus received the hold letter. Id. at *5.

Magistrate Judge Smith nonetheless denied the motion on the grounds that the evidence was not crucial to Selectica’s case and there was no evidence of bad faith by Novatus. He explained that the destruction of the Selectica Files did not cause the information to be lost because those files were copies, and the information was still available to Selectica on Holt’s Selectica laptop. Id. at *6. While the unavailable metadata could have shown whether the files had been altered, “there is no evidence that the metadata would have revealed the identity of the perpetrator(s) or what they did with the information.” Id.

On the issue of bad faith, the Magistrate Judge ruled that the “court has no difficulty finding that Holt acted in bad faith when he destroyed the [Selectica Files].” Id. at *7. Novatus, on the other hand, could not be sanctioned for spoliation because a showing of bad faith was required, and “there is no evidence that [Holt] acted on instructions from Novatus, or with its knowledge or approval.” Id. After examining Novatus’s actions, the Magistrate Judge concluded that such actions might constitute some form of negligence but did not rise to the level of bad faith: “There is no evidence that Novatus acted willfully, purposefully, or otherwise in bad faith when it failed to place a litigation hold on the information in Holt’s Box account. So, while Novatus’s inaction may be characterized as negligence or even gross negligence, it will not support the imposition of sanctions.” Id. The Magistrate Judge denied the motion for sanctions.

3. In Compass Bank v. Morris Cerullo World Evangelism, 2015 WL 2180436 (S.D. Cal. May 8, 2015), Magistrate Judge William V. Gallo found that an adverse inference instruction was appropriate and awarded fees and costs against the plaintiff for its failure to preserve or diligently search for a telephone recording regarding a key disputed issue in the case.

A key issue in the lawsuit between plaintiff Compass Bank and defendant Morris Cerullo World Evangelism was whether plaintiff issued a letter of credit to defendant. Defendant sought all audio recordings related to the alleged letter of credit, but plaintiff did not produce any audio recordings in response. Plaintiff’s Rule 30(b)(6) designee Geraldine Gurley, however, testified that she had a telephone conversation with another employee, Jack Wilkinson, during which Wilkinson admitted he had issued the letter of credit. Gurley further testified that plaintiff automatically recorded her phone calls in the regular course of business. Id. at *1-*2. Defendant promptly requested the recording of Gurley’s conversation with Wilkinson, which plaintiff could not locate. It later was disclosed that plaintiff had searched only one of the two recorded phone numbers that Gurley used. Id. at *3. The defendant moved for terminating sanctions.

Magistrate Judge Gallo determined that sanctions were appropriate. First, the Magistrate Judge found that it was reasonable to believe that Gurley had in fact had a conversation with Wilkinson about the letter of credit because she had similar conversations with others during the same time period. Id. at *10-*11. Second, plaintiff had a duty to preserve the recording because, while the recording was made long before plaintiff filed suit, plaintiff stated previously to the court that it anticipated litigation regarding the letter of credit at that time. Id. at *11. Third, plaintiff had a culpable state of mind because it had failed to produce the recordings of any calls in response to defendant’s original document requests and had not even acknowledge that it recorded calls. Id. at *12. Moreover, there was no evidence that plaintiff ever instituted a litigation hold. Id. Finally, Magistrate Judge Gallo emphasized that during a hearing on the motion, plaintiff’s counsel “evaded the Court’s questions . . . when asked why [plaintiff] only searched one of Ms. Gurley’s two phone lines” and never offered to search the other line. Id. at *13.

Having determined that sanctions were appropriate, Magistrate Judge Gallo refused to enter terminating sanctions because he could recommend the less drastic sanction of an adverse inference that Wilkinson admitted issuing the letter of credit. Id. at *16. In addition to recommending an adverse inference instruction, Magistrate Judge Gallo awarded monetary sanctions. He found that plaintiff’s conduct violated an earlier order in which he had warned plaintiff “that continued gamesmanship and attempts to withhold discovery would result in sanctions” and imposed monetary sanctions under Rule 37(b) for violation of a court order. He also ordered monetary sanctions under the court’s inherent power given that plaintiff’s conduct was “tantamount to bad faith.” Id. at *17 (quotation marks omitted).

4. In Flanders v. Dzugan, 2015 WL 5022734 (W.D. Pa., Aug. 24, 2015), U.S. District Judge Nora B. Fischer rejected plaintiff’s request for sanctions as a result of defendants’ alleged ESI spoliation and failure to institute a litigation hold, finding that plaintiff had not demonstrated either that ESI was actually lost or that defendants acted in bad faith.

Plaintiff brought this Section 1983 action against defendants in connection with a building permit approval process and claimed that defendants had failed to institute a court-ordered litigation hold and may have lost relevant emails. Id. at *2. The plaintiff argued that the emails recovered from the searched email accounts could not possibly be all the emails relating to Flanders and that additional email accounts were never searched at all. Id.

Early in the litigation, the parties entered into a Joint ESI Protocol Status Report that limited defendants’ email search to four particular employees of the defendant municipality. Id. From the four individuals, defendants produced 33 emails relating to the events giving rise to the litigation. Id. Based on the content of a few select emails—particularly one in which a defendant wrote that he was “[g]etting tired of [plaintiff]”—plaintiff argued that there may have been other similar emails referencing plaintiff that were not produced. Id. Plaintiff also argued that defendants should have searched the emails of all individuals who appeared on the 33 emails, not just the four specified in the ESI Protocol. Id. at *3.

Spoliation sanctions required a showing of the following: (1) the evidence was in the party’s control, (2) the evidence was relevant to the claims or defenses in the case, (3) there has been actual suppression or withholding of evidence, and (4) the duty to preserve the evidence was reasonably foreseeable to the party. Id. at *4 (citing Bull v. United Parcel Serv., Inc., 665 F.3d 68, 73 (3d Cir. 2012)). The court indicated that the party seeking spoliation sanctions must make a showing that specific evidence was suppressed or withheld, Flanders, 2015 WL 5022734, at *5 (citing U.S. v. Nelson, 481 Fed. Appx. 40, 42 (3d Cir. 2012)), and that the evidence was withheld in bad faith. Flanders v. Dzugan, 2015 WL 5022734, at *4 (citing Bull, 665 F.3 at 79).

Although the court agreed that defendants should have issued a litigation hold, the court ultimately found that plaintiff failed to prove any of the other elements of its spoliation claim. Flanders, 2015 WL 5022734, at *5. Specifically, Judge Fischer found that plaintiff had not demonstrated with specificity that email evidence was withheld but instead relied on vague inferences and assumptions that other emails must have existed and must have been lost by defendants. Id. at *5. The court further held that although defendants’ record keeping was “rather slipshod” and “sloppy,” this did not “rise to the level of bad faith.” Id. at *6. Last, the court rejected plaintiff’s claim that defendants should have searched emails of others besides the four listed in the Joint ESI Protocol Status Report, stating “[i]t is not clear how Plaintiff’s ‘litigation decision’ to not request emails from certain individuals constitutes spoliation on the part of Defendants.” Id. Accordingly, the court denied plaintiff’s motion.

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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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