September Edition of Notable Cases and Events in E-Discovery

E-Discovery Update

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This update addresses the following recent court decisions involving e-discovery issues:

  1. An important decision by Magistrate Judge Paul Grimm (D. Md.) recommending a default judgment and holding a defendant in civil contempt for egregious e-discovery violations and addressing the conflicting judicial standards applicable to document preservation and spoliation issues;
  2. An opinion by Magistrate Judge John Facciola (D.D.C.) denying plaintiff’s motion for default judgment based on defendants’ discovery failures but setting an evidentiary hearing on other possible sanctions; and
  3. A federal court decision from New York denying a motion for an adverse inference because plaintiff failed to demonstrate the relevance of allegedly lost emails.

1. In Victor Stanley, Inc. v. Creative Pipe, Inc., 2010 U.S. Dist. LEXIS 93644 (D. Md. Sept. 9, 2010), Magistrate Judge Paul Grimm, a frequent writer and commentator on e-discovery issues, held a defendant in civil contempt and recommended a default judgment with respect to certain claims after concluding the defendants had intentionally and repeatedly destroyed electronically stored information (ESI) that should have been preserved. In reaching this result, Magistrate Judge Grimm provided an in-depth discussion of evolving e-discovery standards, noting the inconsistencies in the law governing preservation and spoliation sanctions among the various circuits. This opinion will join Pension Committee and Rimkus as influential decisions on the law governing document preservation and spoliation.

Background

In this copyright infringement case, plaintiff, Victor Stanley, Inc. (VSI) brought suit against defendant, Creative Pipe, Inc. (CPI) and its president Mark Pappas, after a CPI employee allegedly downloaded certain designs from VSI’s website. Id. at *13. These designs were then used to improperly compete with VSI. Id. Magistrate Judge Grimm described the e-discovery violations in this case as the “single most egregious example of spoliation that I have encountered in any case that I have handled or in any case described in the legion of spoliation cases I have read in nearly fourteen years on the bench.” Id. at *60. His recitation of the defendants’ spoliation efforts spans dozens of pages, and he concluded that the defendants committed at least eight specific preservation failures leading to the destruction of relevant evidence that the defendants were under a duty to preserve. Id. at *11-12. These violations included:

  • Failure to implement a litigation hold;
  • Direct orders by Pappas to destroy email after the suit was filed;
  • Failure to preserve Pappas’ external hard drive;
  • Multiple deletions of ESI (totaling over 13,000 files), both after the suit was filed and after the Court issued a preservation order; and
  • Use of “cleaner” programs on multiple occasions to ensure files were permanently deleted.

In the Fourth Circuit, spoliation sanctions are available if 1) the party with control over the evidence had a duty to preserve the evidence when it was destroyed, 2) the destruction was accompanied with a culpable state of mind, and 3) the evidence was relevant to the claims or defenses of the party that sought the evidence such that a reasonable fact finder could determine that the evidence would have supported the claims or defenses. Id. at *81.

As Magistrate Judge Grimm analyzed each element, he concluded the defendants’ actions clearly warranted sanctions, but he also took the opportunity to offer his assessment of what he characterized as a lack of “consensus” among the different jurisdictions on what standards should govern preservation and spoliation issues. Id. at *67. He also noted his concern for the increased cost to many corporate defendants caused by this lack of uniformity and the difficulty of complying with varying preservation obligations spanning multiple jurisdictions. Id. This analysis was Magistrate Judge Grimm’s self-described attempt to “synthesize” the law governing preservation and spoliation to provide an “analytical framework” to enable parties to “resolve preservation/spoliation issues with a greater level of comfort that their actions will not expose them to disproportionate costs or unpredictable outcomes of spoliation motions.” Id. at *69.

On the question of the court’s authority to impose sanctions, Magistrate Judge Grimm noted that a court has the inherent power to control the litigation process, but this “inherent authority only may be exercised to sanction ‘bad-faith conduct’ . . . and ‘must be exercised with restraint and discretion.’” Id. at *72 (citations omitted). A court also has authority under Fed. R. Civ. P. 37(b)(2) to impose sanctions for failure to comply with a discovery order. Magistrate Judge Grimm reviewed the case law and determined that this authority allowed imposition of sanctions for the failure to comply with preservation orders. Id. at *75-*80.

Duty to Preserve Evidence and Breach of that Duty

On the duty to preserve, Magistrate Judge Grimm pointed out the inconsistencies among the circuits (and even within individual districts), on what specific steps a party must take to preserve relevant ESI and how exhaustive those measures should be. Id. at *90. He found that the inconsistencies in different jurisdictions range from how courts define what documents are under a particular party’s “control” (such that the party is obligated to preserve them), to whether, or when, a party is required to preserve backup tapes. Id. at *92-*96. In Magistrate Judge Grimm’s assessment, “reasonableness and proportionality should be at the forefront of all inquiries into whether a party has fulfilled its duty to preserve relevant evidence,” id. at *90, and he cited with approval what he characterized as the “highly instructive” Rimkus decision for addressing this issue. Id. at *89.

With respect to the preservation obligation, Magistrate Judge Grimm noted that the obligation is owed to the court and not to a party’s adversary. Id. at *98. He discussed the importance of this distinction:

“That the duty is owed to the court, and not to the party’s adversary is a subtle, but consequential, distinction. A proper appreciation of the distinction informs the Court’s decision regarding appropriate spoliation sanctions. Where intentionally egregious conduct leads to spoliation of evidence but causes no prejudice because the evidence destroyed was not relevant, or was merely cumulative to readily available evidence, or because the same evidence could be obtained from other sources, then the integrity of the judicial system has been injured far less than if simple negligence results in the total loss of evidence essential for an adversary to prosecute or defend against a claim. In the former instance, the appropriateness of a case-dispositive sanction is questionable despite the magnitude of the culpability, because the harm to the truth-finding process is slight, and lesser sanctions such as monetary ones will suffice. In contrast, a sympathetic though negligent party whose want of diligence eliminates the ability of an adversary to prove its case may warrant case-dispositive sanctions, because the damage to the truth-seeking process is absolute.” Id at *101-*102.

In the case at hand, Magistrate Judge Grimm concluded the defendants had a duty to preserve relevant evidence on the copyright dispute and that, based on defendants’ admission that relevant ESI had been deleted, this duty had been breached. Id. at *111.

Culpable State of Mind

Magistrate Judge Grimm then discussed the varying standards among the circuits regarding the level of culpability that must be established for imposition of sanctions. Id. He summarized the lack of uniformity as follows:

“a ‘distinct minority’ of courts ‘require a showing of bad faith before any form of sanction is applied’; some courts require a showing of bad faith, but only ‘for the imposition of certain more serious sanctions’; some do not require bad faith for sanctions, but require more than negligence; and others ‘require merely that there be a showing of fault.’” Id. at *113 (quoting United Medical Supply Co. v. United States, 77 Fed. Cl. 257, 266 (Fed. Cl. 2007).

Magistrate Judge Grimm reviewed the varying standards, id. at *113-*120, and noted that the lack of uniformity has caused confusion among lawyers and clients as to “what is required” in each jurisdiction and how to properly evaluate “the risks and consequences of noncompliance.” Id. at *112. In the Fourth Circuit, sanctions may be imposed upon a showing of any fault, with the level of culpability impacting the degree of sanctions. Id. at *113. In this case, Magistrate Judge Grimm concluded that the defendants acted in bad faith when they took “repeated, deliberate measures to prevent the discovery of relevant ESI” and then “nonchalantly lied” about what had been done. Id. at *121.

Relevance and Prejudice

On the issue of relevance and prejudice, Magistrate Judge Grimm noted that a party must establish both relevance of the evidence destroyed and prejudice to prevail on a sanctions motion. Id. at *122. In the Fourth Circuit, relevance was presumed if a party engaged in intentional destruction of evidence, but in the absence of intentional conduct, relevance of the evidence must be affirmatively established. Id. at *124. Magistrate Judge Grimm observed that, here too, the circuits varied in approach. The Seventh Circuit, for example, agreed with the Fourth Circuit, that “unintentional conduct is insufficient for a presumption of relevance,” while in the Second Circuit relevance may be presumed on a showing of bad faith or gross negligence. Id. at *124. In a footnote, he commented on the implications of this difference in standards between the circuits:

“This distinction is all the more significant because, as noted, in the Second Circuit, certain conduct is considered gross negligence per se. Pension Comm., 685 F.Supp.2d at 471. Thus, for example, if a party fails to issue a written litigation hold, the court finds that it is grossly negligent, in which case relevance and prejudice are presumed. Point. Game. Match.” Id. at *125 n.34.

Magistrate Judge Grimm again pointed out that the lack of a uniform standard “has created uncertainty and added to the concern that institutional and organizational entities have expressed regarding how to conduct themselves in a way that will comply with multiple, inconsistent standards.” Id. at *125.

On the record before him Magistrate Judge Grimm determined that the defendants acted willfully and that he therefore could presume relevance. Id. *126. He further concluded that it was “obvious” that the destruction of relevant evidence was prejudicial to the plaintiff’s ability to present evidence essential to its underlying claims. Id.

Imposition of Sanctions

Having concluded that the plaintiff established all elements of spoliation, Magistrate Judge Grimm turned to the imposition of sanctions. He pointed out that two considerations were at issue when fashioning sanctions: 1) the extent of prejudice and, 2) the culpability of the offending party. Id. at *127. Again, depending on the jurisdiction, this analysis could lead to varying outcomes, and Magistrate Judge Grimm reviewed the standards applied by courts in deciding on an appropriate sanction to be imposed. Id. at *132-*146. Depending on the court, the harshest sanctions may apply when severe prejudice and bad faith were present or when culpability was low but there was a considerable showing of prejudice or when prejudice was minimal but the culpability was great. Id. at *127-*128. In Magistrate Judge Grimm’s view, in whatever combination the factors were considered, all sanctions should be designed with three goals in mind:

“(1) deter parties from engaging in spoliation; (2) place the risk of an erroneous judgment on the party who wrongfully created the risk; and (3) restore the prejudiced party to the same position he would have been in absent the wrongful destruction of evidence by the opposing party.” Id. at *130 (internal quotations and citations omitted).

In the Fourth Circuit, the harshest sanctions were warranted only when “the spoliator's conduct was so egregious as to amount to a forfeiture of his claim, or (2) . . . the effect of the spoliator's conduct was so prejudicial that it substantially denied the defendant the ability to defend the claim.” Id. at *133 (internal quotations and citations omitted; emphasis in original). Given the extreme facts of this case, Magistrate Judge Grimm concluded that the harshest sanctions were warranted. He issued a recommendation granting plaintiff default judgment on the copyright claim and ordered the defendants to pay plaintiff’s attorneys fees and costs associated with the discovery dispute. Id. at *147 and *151. Magistrate Judge Grimm took the additional step of holding Pappas in civil contempt for his role in the destruction of evidence, ordering that he be imprisoned for a period, not to exceed two years, if he did not pay all attorneys’ fees and costs awarded to Plaintiff. Id. at 156.

Magistrate Judge Grimm included with his opinion a useful 12-page chart detailing preservation and spoliation sanctions law by circuit.

2. In D’Onofrio v. SFX Sports Group, Inc., 2010 WL 3324964 (D.D.C. Aug. 24, 2010), Magistrate Judge John M. Facciola denied plaintiff’s motion for a default judgment based on e-discovery misconduct but raised preclusion as a possible sanction and ordered further evidentiary hearings to address the sanctions issue.

This gender discrimination suit has involved several e-discovery disputes, and early in the case, U. S. District Court Judge John Bates attempted to push the parties toward resolution of the discovery disputes. When this was unsuccessful, however, and “the plaintiff continued to complain about defendants’ discovery failures,” id. at *1, the matter was referred to Magistrate Judge Facciola who attempted to resolve a second motion to compel and for sanctions. In 2008, the Magistrate Judge held an evidentiary hearing to consider the completeness of defendants’ production, the possibility of forensically analyzing defendants’ servers, as well as plaintiff’s spoliation allegations. He found that defendants had not implemented an appropriate litigation hold and also determined that defendants’ prior searches were not reasonably calculated to produce the requested discovery. After defendants agreed to permit forensic analysis of their servers, Magistrate Judge Facciola crafted the protocol for the search—including ordering defendants to restore any ESI that was newly discovered during the search to “render it ‘reasonably usable.’” Id. at *3 (citing Fed. R. Civ. P. 34(b)(2)(E)(ii)).

After a six-month break in proceedings for mediation, plaintiff filed another spoliation sanctions motion, seeking default judgment as to one count, an adverse inference jury instruction based on spoliation of evidence and discovery misconduct, and attorneys’ fees and costs. Magistrate Judge Facciola found that defendants’ obligation to preserve arose on October 6, 2005, when plaintiff sent a letter to one of the defendants “indicating that she intended to initiate litigation and requesting that electronically stored information be preserved.” Id. at *7. Contrary to defendants’ arguments, that letter put the parent company and its subsidiaries (even though they did not receive a copy directly) on notice of “plaintiff’s intent to pursue her claims in court.” Id. at *8.

Magistrate Judge Facciola had previously established that defendants had failed to preserve ESI-including throwing away plaintiff’s computer and stating that her file on the server was empty. Subsequent efforts had restored some lost data, but not all. Id. On the issue of a default sanction, Magistrate Judge Facciola concluded that “[w]hile it is evident that defendants failed to act to preserve evidence, plaintiff has not shown, by clear and convincing evidence, that defendants acted in bad faith, i.e. with a purposeful intent to destroy evidence.” Id. Further, he noted that “if the Court can find a less drastic sanction than dismissal or default that is fully effective, it should impose that lesser sanction.” Id. For these reasons, he declined to recommend that a default judgment be entered.

Judge Facciola also declined plaintiff’s request for attorneys’ fees, concluding that such an award would be an abuse of discretion, as defendants had already spent “a veritable king’s ransom on the forensic search of the Legato server and an examination of its contents for relevance and privilege.” Id. at *9. As defendants had already spent over a million dollars on these efforts, Judge Facciola reasoned:

“The heart and soul of any sanction is its proportion to the harm done and the prejudiced sustained. . . . Given what defendant has already expended, adding attorneys’ fees under the Court’s inherent power to sanction crosses the line from fairness to disproportional punishment. That, put simply, is to place Pelion upon Ossa, and I will not do it.” Id.

Magistrate Judge Facciola declined to recommend imposition of an adverse inference because there was no clear and convincing evidence of bad faith. Id. at *10. He did, however, sua sponte raise the possibility that a preclusion sanction might be the “most appropriate way to right evidentiary balance that was upset by the loss.” As there were still issues as to the prejudice suffered by the plaintiff, Magistrate Judge Facciola concluded that he did not have a sufficient evidentiary record to craft a balanced sanction, and he ordered an evidentiary hearing to determine the exact nature of any lost evidence and any prejudice the plaintiff had suffered. Id. at *11.

3. In Siani v. State University of New York at Farmingdale, 2010 WL 3170664 (E.D.N.Y August 10, 2010), Magistrate Judge William Wall denied a pro se plaintiff’s motion for an adverse inference based on defendants’ spoliation of electronic records, ruling that plaintiff had made no showing that the deleted emails were relevant or favorable to him.

In this age discrimination suit, plaintiff filed New York. Freedom of Information Law (FOIL) requests and subsequently learned that at least one defendant was “routinely deleting email files and . . . could not supply the records sought” by the FOIL requests. Id. at *1. As a result, plaintiff later established that there were discrepancies between documents produced and email logs obtained through FOIL requests, and that these discrepancies indicated that deletion was ongoing during a time when defendants had a duty to preserve electronic information. Id. at *2-*4. The Magistrate Judge agreed that deletions occurred after the duty to preserve had arisen; however, plaintiff had not established that defendants acted in bad faith or that any relevant or potentially damaging emails had been lost. The Magistrate Judge noted that plaintiff had apparently received many of the emails on the missing email logs (i.e., alleged gaps in the production) from other sources. Id. at *9. He had not, however, made any showing that the allegedly missing emails were relevant:

“The parties agree that many of the emails on the missing logs were actually produced to Siani by the other parties. He might have come forward with samples of those emails showing that they were relevant and favorable to him and thus suggestive that any missing emails were also likely to be relevant and favorable. He has not done so. Indeed, he has not pointed to any emails as rising to the level of relevance and favorability that must be shown.” Id.

On this basis, Magistrate Judge Wall denied plaintiff’s motion for an adverse inference.

Please refer any questions on these important developments to Alan C. Geolot (+1.202.736.8250, ageolot@sidley.com), Colleen M. Kenney (+1.312.853.4166, ckenney@sidley.com), Joel M. Mitnick (+1.212.839.5871, jmitnick@sidley.com), or your regular Sidley contact.

Sidley Austin LLP E-Discovery Task Force Updates

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