Pegasus Aviation I, Inc., et al., Appellants,v.Varig Logistica S.A., Defendant, MatlinPatterson Global Advisers, LLC, et al., Respondents.

Brief

N.Y.October 13, 2015

To be Argued by: ROY L. REARDON (Time Requested: 30 Minutes) APL 2014-00294 New York County Clerk’s Index No. 603076/08 Court of Appeals of the State of New York   PEGASUS AVIATION I, INC., PEGASUS AVIATION IV, INC., and PEGASUS AVIATION V, INC., Plaintiffs-Appellants, - against - VARIG LOGISTICA S.A., Defendant, - and - MATLINPATTERSON GLOBAL ADVISERS, LLC, MATLINPATTERSON GLOBAL OPPORTUNITIES PARTNERS II LP, MATLINPATTERSON GLOBAL OPPORTUNITIES PARTNERS (CAYMAN) II LP, OSKARS INVESTMENTS LTD., VOLO LOGISTICS LLC and VOLO DO BRASIL, S.A., Defendants-Respondents. BRIEF FOR DEFENDANTS-RESPONDENTS ROY L. REARDON THOMAS C. RICE ISAAC M. RETHY SIMPSON THACHER & BARTLETT LLP 425 Lexington Avenue New York, New York 10017 Tel.: (212) 455-2000 Fax: (212) 455-2502 MICHAEL C. HEFTER KELLY KOSCUISZKA DAVID A. SHARGEL BRACEWELL & GIULIANI LLP 1251 Avenue of the Americas, 49th Floor New York, New York 10020 Tel.: (212) 508-6100 Fax: (212) 508-6101 Attorneys for Defendants-Respondents March 16, 2015 055232-0027-13477-Active.16977489.203/16/2015 12:01 AM CORPORATE DISCLOSURE STATEMENT In compliance with Rule 500.l(f) of the Rules of Practice of the Court of Appeals, Defendants-Respondents state that Defendant-Respondent MatlinPatterson Global Advisers, LLC (“MP Advisers”) is wholly owned by MatlinPatterson PE Holdings LLC (formerly MatlinPatterson Asset Management LLC), which is wholly owned by MatlinPatterson, LLC, which is wholly owned by David Matlin. The general partner of Defendants-Respondents MatlinPatterson Global Opportunities Partners II LP and MatlinPatterson Global Opportunities Partners (Cayman) II LP (together, the “MP Funds”) is MatlinPatterson Global Partners II LLC, which is wholly owned by MatlinPatterson PE Holdings LLC. Defendant-Respondent Oskars Investments Ltd. (“Oskars”) is wholly owned by the MP Funds. Defendant-Respondent Volo Logistics LLC (“MP Volo”) is wholly owned by Oskars. Defendant-Respondent Volo do Brasil S.A. (“VdB”) is wholly owned by MP Volo. i TABLE OF CONTENTS Page COUNTER QUESTIONS PRESENTED .................................................... 1 INTRODUCTION ....................................................................................... 2 COUNTER-STATEMENT OF THE CASE A. The MP Defendants’ Investment In VarigLog .................................. 6 B. VarigLog’s Operations and Management Between April 1, 2008, And March 3, 2009 ..................................... 11 C. Pegasus’s Lawsuits Against VarigLog .............................................. 14 D. Appellants’ Spoliation Motion And The Decisions Below ............... 15 1. The Trial Court Order ................................................................. 15 2. The Appellate Division Decision ................................................ 20 ARGUMENT I. LEGAL STANDARDS ..................................................................... 22 A. Standard Of Review .................................................................... 22 B. The First Department’s Spoliation Framework .......................... 24 II. THE FIRST DEPARTMENT CORRECTLY CONCLUDED THAT THE MP DEFENDANTS WERE NOT GROSSLY NEGLIGENT ..................................................................................... 26 A. The First Department Properly Analyzed The Facts And Circumstances Of This Case .............................. 26 1. VarigLog’s Preservation Obligations Arose At A Time When The MP Defendants Undisputedly Had Neither Access To VarigLog Nor “Control” Of VarigLog’s Documents ........................... 28 2. The MP Defendants Complied With Their Own Discovery Obligations ....................................... 31 3. VarigLog Was A Separate Organization From The MP Defendants And Was Treated As Such In This Litigation ...................................................................... 31 ii 4. The First Department Properly Considered The Highly Prejudicial Nature Of The Adverse Inference Sanction ...... 33 B. Appellants’ Inflexible And Absolute Gross Negligence Standard Is Legally Unsupported And Unworkable ................... 35 1. The Scope And Extent Of The MP Defendants’ Preservation Duties Is An Issue Of Law .............................. 37 2. Appellants Fail To Justify The Duty They Seek To Impose On The MP Defendants ............................ 38 3. A Growing Consensus Against Adverse Inference Instructions In Cases Of Negligence Further Supports Affirmance ............................ 45 4. The Low Threshold For “Practical Control” Articulated By The First Department Further Counsels Against Finding Gross Negligence ...................... 51 III. THE APPELLATE DIVISION CORRECTLY DETERMINED THAT APPELLANTS HAVE NOT ESTABLISHED PREJUDICE ...................................................................................... 57 A. The First Department Properly Held Appellants To Their Exclusive Reliance On The Presumption .................... 58 B. Appellants’ Attempts To Demonstrate Relevance Fail .............. 61 1. There Is No Evidence As To The Existence Of The Communications Appellants Seek ........................... 65 2. There Is No Evidence That VarigLog’s Lost ESI Would Support Appellants’ Alter Ego Claims ............. 69 3. Appellants Have Not Carried Their Burden As To The Allegedly Missing Bank Records ...................... 74 CONCLUSION ............................................................................................ 76 iii TABLE OF AUTHORITIES Cases: Page(s) 915 Broadway Assocs., LLC v. Paul, Hastings, Janofsky & Walker, LLP, 34 Misc. 3d 1229(A) (Sup. Ct. N.Y. Cty. 2012) ...................................... 42 Alleva v. United Parcel Serv., Inc., 112 A.D.3d 543 (1st Dep’t 2013) ....... 63 Am. Mach. & Foundry Co. v. Santini Bros., 283 N.Y.S.2d 574 (Sup. Ct. N.Y. Cty. 1967) ......................................................................... 66 Andon ex rel. Andon v. 302-304 Mott St. Assocs., 94 N.Y.2d 740 (2000) .............................................................................................. 22, 23 Aramburu v. Boeing Co., 112 F.3d 1398 (10th Cir. 1997) .......................... 48 Atlantic Aviation Investments LLC v. Varig Logistica, S.A., Index. No. 602920/07 (Sup. Ct. N.Y. Cty. Oct. 10, 2008) ....................... 30 Austin Instrument, Inc. v. Loral Corp., 29 N.Y.2d 124 (1971) ................... 38 Bashir v. Amtrak, 119 F.3d 929 (11th Cir. 1997) ........................................ 48 Beard Research, Inc. v. Kates, 981 A.2d 1175 (Del. Ch. 2009) .................. 50 Beers v. Bayliner Marine Corp., 675 A.2d 829 (Conn. 1996) .................... 49 Billy v. Consolidated Mach. Tool Corp., 51 N.Y.2d 152 (1980) ................ 39 Bracey v. Grondin, 712 F.3d 1012 (7th Cir. 2013) ...................................... 47 Brookshire Bros. v. Aldridge, 438 S.W.3d 9 (Tex. 2014) ........................... 49 Buckley v. Mukasey, 538 F.3d 306 (4th Cir. 2008) ...................................... 47 Cheng v. Lakeforest Assocs., LLC, No. CBD-13-1365, 2014 WL 2964082 (D. Md. June 30, 2014) ............................................................................. 51 Chin v. Port Authority of N.Y. & N.J., 685 F.3d 135 (2d Cir. 2012) ........................................................................................... 36, 43 Colnaghi, U.S.A. v. Jewelers Protection Servs., 81 N.Y.2d 821 (1993) ..... 27 iv Condrey v. Sun Trust Bank of Georgia, 431 F.3d 191 (5th Cir. 2005) ....... 47 Coral Group, Inc. v. Shell Oil Co., 286 F.R.D. 426 (W.D. Mo. 2012) ....... 51 County of Erie v. Abbott Labs., Inc., 913 N.Y.S.2d 482 (Sup. Ct. Erie Cty. 2010) .......................................................................... 42 Curcio v. Roosevelt Union Free Sch. Dist., 283 F.R.D. 102 (E.D.N.Y. 2012) ....................................................................................... 62 De Espana v. Am. Bureau of Shipping, No. 03 Civ. 3573, 2007 WL 1686327 (S.D.N.Y. June 6, 2007) ................................................... 63, 69, 72, 73 Denoyelles v. Gallagher, 40 A.D.3d 1027 (2d Dep’t 2007) ........................ 73 Di Ponzio v. Riordan, 89 N.Y.2d 578 (1997) .............................................. 37 Duluc v. AC & L Food Corp., 119 A.D.3d 450 (1st Dep’t 2014) ............... 68 Farrell v. Connetti Trailer Sales, Inc., 727 A.2d 183 (R.I. 1999) ............... 50 Food Pageant, Inc. v. Consolidated Edison Co., Inc., 429 N.E.2d 738 (N.Y. 1981) ............................................................................................... 27 Gass v. Woods, 954 N.Y.S.2d 759 (Sup. Ct. Nassau Cty. 2012) ................. 38 GenOn Mid-Atlantic LLC v. Stone & Webster, Inc., 282 F.R.D. 346 (S.D.N.Y. 2012) aff’d, 2012 U.S. Dist. LEXIS 70750 (S.D.N.Y. May 21, 2012) ................................................................. 29, 31, 44, 51 Goldstein v. Carnell Assocs., 74 A.D.3d 745 (2d Dep’t 2010) ................... 27 Guerrero v. Lenox Hill Hosp., 270 A.D.2d 179 (1st Dep’t 2000) ............... 69 Hallmark Cards, Inc. v. Murley, 703 F.3d 456 (8th Cir. 2013) ................... 47 Hamilton v. Miller, 23 N.Y.3d 592 (2014) .................................................. 60 Harding v. Careerbuilder, LLC, 168 Fed App’x 535 (3d Cir. 2006) .......... 47 Harkabi v. SanDisk Corp., 275 F.R.D. 414 (S.D.N.Y. 2010) ..................... 68 Harry Weiss, Inc. v. Moskowitz, 106 A.D.3d 668 (1st Dep’t 2013) ............ 42 v Hartford Ins. Co. v. Holmes Prot. Grp., 250 A.D.2d 526 (1st Dep’t 1998) ........................................................................................ 27 Haskins v. First Am. Title Ins. Co., No. 10-5044, 2012 WL 5183908 (D.N.J. Oct. 18, 2012) .............................................................................. 51 Hawley v. Mphasis Corp., 302 F.R.D. 37, 50-51 (S.D.N.Y. 2014) ............. 43 In re Pfizer Inc. Sec. Litig., 288 F.R.D. 297 (S.D.N.Y. 2013) .................... 62 In re Terrorist Attacks on September 11, 2001, No. 03-1570, 2013 U.S. Dist. LEXIS 155085 (S.D.N.Y. Oct. 28, 2013) ........................................ 62 In re Vivendi Universal, S.A. Sec. Litig., 2009 WL 8588405 (S.D.N.Y. July 10, 2009) .......................................................................... 52 Jennosa v. Vermeer Mfg. Co., 64 A.D.3d 630 (2d Dep’t 2009) .................. 73 Jerista v. Murray, 883 A.2d 350 (N.J. 2005) ............................................... 50 Jones v. Bremen High Sch. Dist. 228, 08 C 3548, 2010 WL 2106640 (N.D. Ill. May 25, 2010) ........................................................................... 41 Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377 (N.Y. 1983) ..... 27 Kavanagh v. Ogden Allied Maintenance Corp., 92 N.Y.2d 952 (1998) ........................................................................................................ 60 Kronisch v. United States, 150 F.3d 112 (2d Cir. 1998) ............................. 72 Longo v. Armor Elev. Co., 278 A.D.2d 127 (1st Dep’t 2000) ..................... 73 Mashreqbank PSC v. Ahmed Hamad Al Gosaibi & Bros. Co., 23 N.Y.3d 129 (2014) ................................................................................................. 23 Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Global Strat Inc., 22 N.Y. 3d 877 (2013) .............................................................................. 4, 22, 35 Michael Kane Color Litho, Inc. v. Willowtex, Inc., 305 A.D.2d 646 (2d Dep’t 2003) appeal denied, 100 N.Y.2d 512 (2003) ......................... 38 Morris v. Union Pac. R.R., 373 F.3d 896 (8th Cir. 2004) ........................... 34 Myers v. Sadlor, 16 A.D.3d 257 (1st Dep’t 2005) ....................................... 73 vi New York City Hous. Auth. v. Pro Quest Sec., Inc., 108 A.D.3d 471 (1st Dep’t 2013) ........................................................................................ 63 Orbit One Commc’ns, Inc. v. Numerex Corp., 271 F.R.D. 429 (S.D.N.Y. 2010) ........................................................................................ 66, 69 Ortega v. City of N.Y., 9 N.Y.3d 69 (2007) ....................................... 24, 33, 34, 39 Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., 685 F. Supp. 2d 456 (S.D.N.Y. 2010) ...................................................... passim Phillips v. Covenant Clinic, 625 N.W.2d 714 (Iowa 2001) ......................... 50 Pirrello v. Gateway Marina, No. 2008 CV. 1798 (KAM) (MDG), 2011 WL 4592689 (E.D.N.Y. Sept. 30, 2011) ......................................... 41 Pitney Bowes, Inc. v. Kern Int’l, Inc., 239 F.R.D. 62 (D. Conn. 2006) ....... 52 Prins v. Dir. of Revenue, 333 S.W.3d 17 (Mo. Ct. App. 2010) ................... 49 Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99 (2d Cir. 2002) .............................................................. 25, 48, 49, 62 Roberts v. Corwin, 980 N.Y.S.2d 278 (Sup. Ct. N.Y. Cty.) aff'd, 118 A.D.3d 571 (1st Dep’t 2014) .................................................... 62, 68-69 Rogers v. T.J. Samson Cmty. Hosp., 276 F.3d 228 (6th Cir. 2002) ............. 48 Sage Realty Corp. v. Proskauer Rose, 275 A.D.2d 11 (1st Dep’t 2000) ........................................................................................ 63 Santana v. Castillo, 114 A.D.3d 621 (1st Dep’t 2014) ................................ 63 Sekisui Am. Corp. v. Hart, 945 F. Supp. 2d 494, 507 (S.D.N.Y. 2013) ...... 43 Sicav v. Wang, No. 12 Civ. 6682 (PAE), 2014 WL 2624753 (S.D.N.Y. June 12, 2014) ......................................................................... 52 Strong v. City of New York, 112 A.D.3d 15 (1st Dep’t 2013) ..................... 63 Surowiec v. Capital Title Agency, Inc., 790 F. Supp. 2d 997 (D. Ariz. 2011) ......................................................................................... 37 Surrells v. Belinkie, 898 A.2d 232 (Conn. App. 2006) ................................ 49 vii Talavera v. Shah, 638 F.3d 303 (D.C. Cir. 2011) ........................................ 48 Those Certain Underwriters at Lloyds, London v. Occidental Gems, Inc., 11 N.Y.3d 843 (2008) ............................................................................... 35 Trieweiler v. Sears, 689 N.W.2d 807 (Neb. 2004) ...................................... 49 Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68 (S.D.N.Y. 1991) ...... 72 United States v. Laurent, 607 F.3d 895 (1st Cir. 2010) ............................... 47 Vick v. Texas Emp’t Comm’n, 514 F.2d 734 (5th Cir. 1975) ...................... 47 Volo Logistics LLC v. Varig Logistica S.A., 51 A.D.3d 554 (1st Dep’t 2008) ........................................................................................ 7 Volo Logistics LLC v. Varig Logistica, S.A., Index No. 602536/07 (Sup. Ct. N.Y. Cty. Oct. 10, 2008) ........................................................... 7, 30 VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 93 A.D.3d 33 (1st Dep’t 2012) ........................................................ passim Wachovia Secs, LLC v. Loop Corp., No. 05-C-3788, 2008 WL 2625907 (N.D. Ill. June 27, 2008) ........................................................................... 53 Ward v. Consol. Rail Corp., 693 N.W.2d 366 (Mich. 2005) ....................... 50 Wuest ex rel. Carver v. McKennan Hosp., 619 N.W.2d 682 (S.D. 2000) ............................................................................................... 50 Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003) ................................................................... 24, 25, 33, 48, 61, 75 Statutes: CPLR § 3126 .............................................................................................. 18, 19, 24 Federal Rule of Civil Procedure 37(e) ......................................................... 45 055232-0027-13477-Active.16977489.203/16/2015 12:01 AM Defendants-Respondents MP Advisers, the MP Funds, Oskars, MP Volo and VdB1 (collectively, the “MP Defendants” or “Respondents”) respectfully submit this memorandum of law in opposition to the appeal from the Decision of the Appellate Division, First Department, dated June 5, 2014 (the “Appellate Decision”) filed by Plaintiffs-Appellants Pegasus Aviation I, Inc., Pegasus Aviation IV, Inc. and Pegasus Aviation V, Inc. (collectively, “Pegasus” or “Appellants”). The Appellate Decision reversed the decision and order of the Supreme Court, New York County (Hon. Barbara R. Kapnick, J.S.C.) (the “Trial Court”), dictated on the record on December 4, 2012, and entered on December 11, 2012 (the “Trial Court Order”), which granted Appellants’ motion for a “trial adverse inference” against the MP Defendants. R9-43 (Trial Court Order). COUNTER QUESTIONS PRESENTED 1. Did the Appellate Division correctly hold that a shareholder was not grossly negligent for failing to cause a corporation to implement document preservation measures with respect to pending litigation where, inter alia, at the time the litigation was commenced, the shareholder was embroiled in a dispute with the corporation itself and the corporation’s majority shareholders, who controlled a majority of the corporation’s board of directors and who denied the 1 Defendant-Respondent VdB disputes that this Court has personal jurisdiction. VdB hereby expressly preserves, and does not waive, that jurisdictional defense. 2 shareholder from having any access to the corporation’s facilities, electronic systems or business operations, and by the time the Brazilian Court overseeing the shareholder dispute permitted the shareholder to regain access to the corporation, the corporation was already represented in the litigation by independent counsel, or did the Appellate Division err by not adopting a per se rule that a shareholder is grossly negligent whenever it fails to issue a litigation hold to a corporation? 2. Did the Appellate Division properly exercise its broad discretion to oversee discovery and provide appropriate and proportionate remedies for discovery deficiencies in holding that the extreme sanction of a trial adverse inference should not be imposed against a defendant for the loss of evidence in the possession of a corporate affiliate, where the Appellate Division found that the plaintiff did not even attempt to establish prejudice to its ability to prove its case and that the sanction would be gravely prejudicial to the defendant, or did the Appellate Division, in denying such a sanction, abuse its discretion? INTRODUCTION The Appellate Decision reaffirmed that New York courts should not adopt inflexible per se rules in deciding discovery sanctions motions, but instead should make nuanced and case-specific rulings that take into account the specific contexts of the disputes they are called on to resolve and the relief requested by a party seeking sanctions. Applying this rule of reason, the First Department 3 correctly held that Respondents, a New York-based private equity firm and certain of its affiliates, were not grossly negligent when their portfolio company, a Brazilian cargo airline, failed to implement a litigation hold. In coming to this conclusion, the Appellate Division found that (i) the airline’s preservation obligations arose at a time when Respondents had been frozen out of the airline by the airline’s then-majority shareholders; (ii) after they regained access to the airline (by virtue of a Brazilian Court Order), Respondents reasonably believed that the airline’s U.S.-based counsel had properly advised it of its discovery obligations; and (iii) Respondents fully complied with their discovery obligations when they were sued months later by Appellants as the airline’s purported alter ego. The Appellate Division thus concluded that “the record supports, at most, a finding of simple negligence” against Respondents. In light of this, the First Department reasoned that the “adverse inference” sanction Appellants sought (and the Trial Court granted) was wholly disproportionate to Respondents’ conduct, particularly given the prejudice that would result from instructing the jury in an alter ego case that Respondents were directly responsible for preserving their alleged alter ego’s documents but failed to do so and that the jury could infer as a result that the contents of the airline’s lost documents, which in this case primarily consisted of missing electronically-stored information (“ESI”) caused by an inadvertent computer crash, would support Appellants’ alter ego claims. In so 4 holding, the First Department faithfully applied this Court’s guidance that “[discovery] sanction[s] should be commensurate with the particular disobedience [they are] designed to punish, and go no further than that.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Global Strat Inc., 22 N.Y. 3d 877, 880 (2013) (internal quotations and citation omitted). The First Department also properly held that Appellants had failed to demonstrate the relevance of VarigLog’s lost ESI to their alter ego claims and that this failure doomed their sanctions motion. Indeed, Appellants’ “brief [did] not argue, even in the alternative, that the record demonstrates the relevance of the lost [documents].” R1252 (Appellate Decision) at n.9. Instead, Appellants relied exclusively on a presumption of relevance that would apply only if Respondents were found grossly negligent. Given the substantial discovery taken by Appellants in the action, the more than two-year period that elapsed between Appellants’ discovery of the airline’s lost ESI and the filing of their sanctions motion and the lack of support in the record for any potential claim of prejudice, the First Department concluded that, rather than “giv[ing] [appellants] what would amount to a second bite at the apple,” their request for an adverse inference instruction against Respondents should be denied. This was an eminently proper exercise of the Appellate Division’s broad authority, as part of the Supreme Court, to manage the discovery process, and Appellants provide no basis for this Court to find any 5 abuse in the Appellate Division’s discretion. Moreover, even if this Court were inclined to entertain claims of prejudice that Appellants did not properly raise below, the record is clear that no such prejudice can be found. The First Department’s determination that Respondents should not be burdened with a highly prejudicial adverse inference instruction given the totality of the circumstances, based on an analysis of a robust record including deposition testimony and documentary evidence, reflects an eminently reasonable exercise of the Appellate Division’s discretionary authority. The contrary rule of law that Appellants advocate would impose unprecedented obligations on parent companies for the conduct of their subsidiaries; would place New York law at odds with an increasing trend in spoliation law that reserves the most severe sanctions, including adverse inference instructions, for cases involving culpable, bad-faith conduct; and would displace New York courts’ ability to resolve discovery disputes based on the facts and circumstances of the particular cases before them in favor of an approach based on inflexible and unreasonable per se rules. The First Department’s ruling should therefore be affirmed. 6 COUNTER-STATEMENT OF THE CASE A. The MP Defendants’ Investment In VarigLog VarigLog was a substantial Brazilian cargo airline, with its principal place of business in Sao Paulo, that operated routes throughout Europe, North America, Asia and Latin America and had over 1,000 employees globally. R656 (Verified Second Amended Complaint, dated September 16, 2011 (the “Complaint”)) ¶17. The MP Funds formed MP Volo to invest in the Brazilian aviation sector. See R657 (Complaint) ¶¶11-12; R691 (excerpt of deposition transcript of Lap Chan, a former partner at MP Advisers, dated March 17, 2010 (the “Chan Tr.”)) at 34:7-23. MP Volo partnered with Brazilian co-investors (the “Brazilian Shareholders”) and formed VdB, a Brazilian corporation that purchased VarigLog in 2006 in connection with the bankruptcy proceedings of VarigLog’s former parent company. See R728 (excerpt of deposition transcript of Santiago Born, a former partner of MP Advisers, dated January 26, 2012 (the “Born Tr.”)) at 178:3-20; R691 (Chan Tr.) at 34:17-23. As the Appellate Division explained, “the MP defendants’ Brazilian co-investors owned 80% of the voting stock of [VdB,] the entity that directly owned VarigLog; the remaining 20% was owned by MP [Volo].” R1239 (Appellate Decision) at n.2; R636 (Affirmation of Michael Hefter, dated April 4, 2012 (the “Hefter Aff.”)) ¶4-5; R694 (Chan Tr.) at 94:15-23. The Brazilian Shareholders exercised their voting control to appoint themselves to 7 three of the four seats on VarigLog’s board of directors.” R1239 (Appellate Decision) at n.2. In March 2007, VarigLog sold one of its wholly-owned subsidiaries. R741 (Purchase and Sale Agreement) §§ 4.1, 4.2. Thereafter, a major dispute arose between MP Volo and the Brazilian Shareholders concerning the use of the proceeds of that sale. In addition to owning an equity stake in VarigLog, indirectly through VdB, MP Volo also advanced capital to VarigLog in the form of loans that, by their terms, came due upon the sale of the subsidiary. See R701-02 (Chan Tr.) at 115:10-116:4. Consistent with the loan documents, the cash consideration that VarigLog received as a result of the sale should have been used to satisfy VarigLog’s debt obligations to MP Volo and other lenders. The Brazilian Shareholders refused to authorize repayment of the loans and instead transferred the cash proceeds from the sale to bank accounts located in Switzerland. See R709 (Chan Tr.) at 174:13-23; R804 (Brazilian Court Order, dated December 9, 2008). MP Volo, among other lenders, sued VarigLog in New York, Switzerland and Brazil. See Volo Logistics LLC v. Varig Logistica S.A., 51 A.D.3d 554 (1st Dep’t 2008); Volo Logistics LLC v. Varig Logistica, S.A., Index No. 602536/07 (Sup. Ct. N.Y. Cty. Oct. 10, 2008). In July 2007, as a result of this dispute, the Brazilian Shareholders denied the MP Defendants access to VarigLog’s offices and systems and prohibited the MP Defendants from being involved in VarigLog’s business 8 affairs.2 As the Appellate Division found, based on the undisputed evidence, the MP Defendants were “completely froze[n] . . . out of VarigLog’s offices, facilities, and business,” and were adverse to VarigLog in pending litigation. R1239 (Appellate Decision) at n.2. As this intra-corporate dispute was brewing, the Brazilian Shareholders commenced an action against MP Volo in Brazil in which they sought to nullify MP Volo’s equity ownership in VdB, in an attempt to wipe out the MP Defendants’ equity ownership interest in VarigLog. It is undisputed that, although the Brazilian Shareholders at that time exercised majority voting control of VarigLog, the MP Defendants owned the largest economic interest in the company. Given the MP Defendants’ significant financial stake, MP Volo filed counterclaims against the Brazilian shareholders in the Brazilian Court to divest the Brazilian Shareholders from exercising majority voting control over VarigLog. See generally R869 (Brazilian Court Order, dated February 15, 2008); R803 (Brazilian Court Order, dated December 9, 2008). 2 Appellants do not dispute that the MP Defendants were forced out of VarigLog between July 2007 and April 1, 2008. The First Department finding in this regard was supported by substantial evidence. See R707-08 (Chan Tr.) at 162:25-163:10; R839-42 (excerpt of transcript of deposition of Mario Abad, a former consultant to MP Advisers, dated September 21, 2010 (the “Abad Tr.”)) at 41:24-42:20, 46:23-47:23 (From approximately July 2007 until April 2008, the MP Defendants “didn’t have any access to Varig Log,” had no “access to [VarigLog’s] company information or records,” could not “speak with any employees of Varig Log” and “didn’t have any access to any data” at VarigLog.); R20-21 (Trial Court Order) (“I believe that there was a period of time in the summer of 2007 until April 1st, 2008, that MatlinPatterson was not there.”). 9 The litigation in Brazil between MP Volo and the Brazilian Shareholders resulted in several court orders (each of which is significant in understanding the MP Defendants’ status and role with respect to VarigLog’s affairs). On February 15, 2008, the Brazilian Court issued a preliminary order in which it held that the Brazilian Shareholders had severely mismanaged VarigLog. As a result, the Brazilian Court appointed a judicial administrator, Mr. Jose Carlos Rocha Lima, a lawyer in Brazil, “to administer and manage” the company.3 R642 (Hefter Aff.) ¶ 29. The record evidence is clear that, during Mr. Rocha Lima’s tenure, the MP Defendants remained frozen out of VarigLog’s offices and business, despite the Brazilian Court’s preliminary determination of the Brazilian Shareholders’ malfeasance. By order dated March 17, 2008, the Brazilian Court installed a three- person “oversight committee” (the “Judicial Oversight Committee” or the “fiscais”) to evaluate VarigLog’s finances and supervise VarigLog’s operations pending the issuance of a final ruling in the underlying litigation between the Brazilian Shareholders and MP Volo. R882 (Brazilian Court Order, dated March 17, 2008); see also R1239 (Appellate Decision) at n.2. On April 1, 2008, the 3 Mr. Rocha Lima exercised his authority from February 15, 2008 until late March 2008. During Mr. Rocha Lima’s tenure, the MP Defendants did not “work with him with respect to the operations of VarigLog,” did not speak to Rocha Lima “about what to do with [VarigLog,]” did not “offer him any advice as to what he should do” with VarigLog, and did not have “any employees or consultants” at VarigLog. See R704-06 (Chan Tr.) at 142:13-144:24. 10 Brazilian Court issued another preliminary order, pursuant to which (1) the Brazilian Shareholders were excluded from having any role in the management and operations of VarigLog and (2) MP Volo was vested with “[t]he administration and management” of VarigLog and VdB. R904 (Brazilian Court Order, dated April 1, 2008); see also R1239 (Appellate Decision) at n.2. A critical aspect of the April 1st Order was that any authority vested in MP Volo by virtue of the Brazilian Court’s order was “under judicial oversight.” Id. The April 1st Order did not divest the Judicial Oversight Committee of its supervisory authority over VarigLog. Instead, it remained in place to supervise the management of VarigLog from April 1, 2008, until December 9, 2008, the date of the Brazilian Court’s final order and judgment. R808 (Brazilian Court Order, dated December 9, 2008). Pursuant to its final order, the Brazilian Court found against the Brazilian Shareholders and granted MP Volo’s requested relief, negating the Brazilian Shareholders’ equity interest in VarigLog. It was only at this point that the Brazilian Court also terminated the role of the Judicial Oversight Committee. In early March 2009, VarigLog, which had been on the brink of insolvency for over a year due to the Brazilian Shareholders’ mismanagement of the company, filed for bankruptcy protection in Brazil. See R1013 (VarigLog’s Chapter 15 Complaint) ¶10; see also R904 (Brazilian Court Order, dated April 1, 2008); R804 (Brazilian Court Order, dated December 9, 2008). Upon the 11 bankruptcy filing, the Brazilian bankruptcy court appointed Alfredo Kulgelmas, one of the Judicial Oversight Committee members, to serve as VarigLog’s bankruptcy trustee. R652 (Hefter Aff.) ¶ 64. B. VarigLog’s Operations and Management Between April 1, 2008, And March 3, 2009 Throughout the entire relevant period in this litigation, VarigLog operated its business in Brazil separate from the private equity business of the MP Defendants in New York. VarigLog had its “own offices, staff, operations and computer systems.” R1247 (Appellate Decision). Between April 1, 2008, and March 3, 2009, VarigLog was managed by a majority of independent directors and officers. On April 8, 2008, shortly after the April 1st Order, which effectively removed the Brazilian Shareholders from VarigLog’s corporate governance, VarigLog reconstituted its board of directors and replaced the Brazilian Shareholders as members of the board. The reconstituted board of directors initially was comprised of three new members, each of whom was a Brazilian citizen. These individuals were independent of the MP Defendants. In May 2008, the VarigLog Board of Directors resolved to expand the board to include a fourth member. At that time, Peter Miller, a then- partner at MP Advisers (the investment manager of the MP Funds), was appointed to the VarigLog board. Mr. Miller served on the board until December 2008. R964 (Table B to VarigLog’s Answers to Pegasus’s First Set of Interrogatories 12 (“Table B”)) (listing all directors on VarigLog’s board from July 2004 through the present). In July 2008, VarigLog’s board expanded to include an additional member, Chan Lup Wai Ohira. Id. Ms. Ohira was a business woman and Brazilian citizen, who was the sister of Lap Chan (then a partner at MP Advisers). In April 2008, VarigLog’s then-existing board, which at the time included neither Mr. Miller nor Ms. Ohira, selected a new team of executives to manage VarigLog’s business, including a new Chief Executive Officer (“CEO”) (Mr. Eduardo Artur Rodriquez Silva), Chief Financial Officer (“CFO”) (Mr. Marcos Aurelio Motta) and Administrative Officer (Mr. Fernando Jose dos Santos Barbosa). See R992-93 (minutes of board meeting, dated April 18, 2008); R963 (Table A to VarigLog’s Answers to Pegasus’s First Set of Interrogatories (“Table A”)) (listing VarigLog’s officers from July 2004 through the present). Again, each of these officers was independent of the MP Defendants. In November 2008, an independent executive, Wagner Gutierrez, replaced VarigLog’s CFO (Motta). At or about the same time, Ms. Ohira was named as VarigLog’s new CEO as a replacement to Mr. Silva. See id. Based on these facts, among others, the First Department found that: There is no indication in the record that corporate formalities were not observed [by VarigLog] from April 1, 2008 through March 3, 2009. Moreover, the record establishes that, during that period: (1) the majority of VarigLog’s five-member board was at all times independent of the MP [D]efendants, with only one director having been an employee of the MP [D]efendants 13 and one having been a sister of a partner in one of the MP entities; (2) no employee of the MP [D]efendants served as a VarigLog officer, although the aforementioned sister of a partner in one of the MP entities was chief executive officer for part of the relevant time; [and] (3) VarigLog had its own staff, offices, operations, and computer systems. R1242-43 (Appellate Decision) at n.3. Moreover, during the period between April 1st and December 9, 2008, members of the Judicial Oversight Committee were present at VarigLog’s offices on a daily basis and participated in VarigLog’s business discussions and decisions. See, e.g., R893-95 (except of deposition transcript of Peter M. Miller, a former principal at MP Advisers, dated March 19, 2010 (the “Miller Tr.”)) at 47:13-48:13, 49:13-20; R845-50 (Abad Tr.) at 53:14-18, 55:4-6, 55:24-56:5, 58:6-15. By virtue of VarigLog’s financial condition during this period, VarigLog had numerous competing creditor claims and struggled to maintain its cargo operations. In this regard, the record is clear that payments to and settlements with VarigLog’s creditors required Judicial Oversight Committee approval. R848-50, 853-54, 856-61 (Abad Tr.) at 56:11-57:10, 57:22-58:2; 61:19- 62:5, 64:7-15; 65:9-69:13; R726 (Born Tr.) at 95:3-25; R900 (Miller Tr.) at 69:12- 18. By its April 1st Order, the Brazilian Court also maintained control over VarigLog’s financial resources, and thus prohibited the MP Defendants from “waiv[ing] or relinquish[ing] any right [of VarigLog’s] in any proceedings underway, either in Brazil or abroad,” and required VarigLog to obtain court approval before adopting or revising its business plan. R9037-21 (Brazilian Court 14 Order, dated April 1, 2008); R897 (Miller Tr.) at 51:7-21; R932-35 (excerpt of deposition transcript of Lup Wai Chan Ohira, VarigLog’s CEO, dated October 11, 2011 (the “Ohira Tr.”)) at 82:18-85:7. C. Pegasus’s Lawsuits Against VarigLog As relevant here, in 2005 and 2006, Pegasus and VarigLog entered into four aircraft lease agreements, pursuant to which VarigLog leased four cargo airplanes from Pegasus. See R654 (Complaint) ¶1. The MP Defendants were neither parties to, nor guarantors of, the aircraft lease agreements. Pegasus alleges that in or around September 2007, VarigLog failed to make scheduled lease payments, resulting in a breach of the aircraft lease agreements. See R664, 666, 668 (Complaint) ¶¶36, 44, 53. Four months later, in February 2008, Pegasus filed a lawsuit against VarigLog in Florida state court, seeking return of the leased aircraft and damages for breach of contract. On February 15, 2008, Pegasus declared the lease agreements to be terminated. R665 (Complaint) ¶38. Pegasus did not name the MP Defendants as defendants in the Florida action. In fact, it is undisputed that, at the time of VarigLog’s payment defaults in September 2007 and the commencement of the Florida action in February 2008, the MP Defendants were frozen out of VarigLog’s offices and denied any access to VarigLog. VarigLog was represented in the Florida action first by Holland & Knight LLP and later by Shutts & Bowen LLP. 15 In October 2008, Appellants discontinued the Florida action without prejudice and re-filed virtually identical claims against VarigLog in New York Supreme Court with respect to three of the aircraft.4 See R660 (Complaint) ¶19; R654-685 (id.) ¶¶1-3; R661-71 (id.) ¶¶22-30, 33-65; R674-76 (id.) ¶¶73-79; R679- 81 (id.) ¶¶87-93. In search of a deep pocket, given VarigLog’s precarious financial condition, Appellants added the MP Defendants as parties on the theory that, as VarigLog’s alleged alter ego, the MP Defendants should be held liable in damages for VarigLog’s breach of contract and conversion. R658-59 (id.) at ¶¶14-15. VarigLog retained independent counsel in defense of the newly-filed New York case and was initially represented in this action by Edwards Angell Palmer & Dodge LLP (now Locke Lord Edwards LLP). D. Appellants’ Spoliation Motion And The Decisions Below 1. The Trial Court Order For three years, as this action proceeded through motion practice, interlocutory appeals and discovery, Appellants always dealt directly with VarigLog and its counsel for all VarigLog-related discovery and directly with the MP Defendants and their separate counsel for all discovery from the MP Defendants. At no time throughout the entire process did Appellants suggest that 4 The Florida action involved four Pegasus aircraft, one of which was not included in the New York action. 16 the MP Defendants should be responsible for collecting documents from VarigLog. To the contrary, Appellants agreed from the outset that the MP Defendants would only be responsible for searching and producing documents from the files of seven “custodians,” all of whom were employees of the MP Defendants. See R1000 (email from Daniel S. Meyers to Allison Ehlert, and others, dated May 28, 2009). It is undisputed that the MP Defendants appropriately preserved relevant documents, produced substantial documents, including the MP Defendants’ ESI, produced numerous witnesses for depositions and otherwise complied with their discovery obligations. VarigLog’s compliance, on the other hand, was frequently under attack by Appellants during discovery. Ultimately, the Trial Court determined that VarigLog, which was represented by separate counsel from the outset of this litigation, should be sanctioned not only for the loss of ESI, but also for ignoring or violating the Trial Court’s discovery orders. R9-43 (Trial Court Order). The Trial Court made no such finding against the MP Defendants because nothing in the record would remotely warrant it, and Appellants never sought any sanction relating to the MP Defendants’ conduct in discovery. On January 27, 2010, during a regularly-scheduled status conference, VarigLog disclosed that, in February and March 2009, it had suffered two 17 computer crashes that resulted in the loss of its ESI.5 See R118 (Affirmation of Allison Ehlert, dated March 1, 2012 (the “Ehlert Aff.”)) ¶22. The data lost in these crashes principally included emails sent and received between March 2008 and the dates of the two crashes in February and March 2009. There is absolutely no evidence that these computer crashes were anything other than inadvertent. In fact, VarigLog had implemented a wholly new computer system in March 2008 - one month before the Brazilian Court’s Order appointing MP Volo to administer and manager VarigLog - that provided for the daily, weekly and monthly back up of VarigLog’s ESI.6 Prior to March 2008, VarigLog had used an IT system that did not retain or back up emails. As the First Department explained: Although VarigLog did not implement a litigation “hold” to preserve its ESI, it did install new information technology systems in March 2008 (the month after plaintiffs commenced the Florida action) that provided for daily, weekly and monthly backing-up of its ESI. Plaintiffs adduce no evidence that anyone took steps to defeat these back-up systems or otherwise deliberately destroyed ESI relevant to this litigation at any point after April 1, 2008. Unfortunately, however, as a result of computer system crashes that occurred in February and March 5 Thereafter, VarigLog provided an affidavit from its Information Technology Manager explaining that as a result of these crashes, even the back-up systems that VarigLog had in place were “corrupted” and that VarigLog had “[n]o success to restore backups.” R235 (Affidavit of Walter Antonio Gomez, Information and Technology Manager of VarigLog, dated July 5, 2010 (the “Gomez Aff.”)) ¶ 3. 6 Specifically, in March 2008, VarigLog replaced its prior ESI system, called “SendMail,” in which emails were not retained or backed up, and transitioned to Microsoft Exchange 2007 in which “there are daily backups of the Exchange’s database and copies of the mailboxes of each user,” with two different back-up systems and with back-ups being conducted on a “[f]ull weekly,” “[a]dditional [d]aily” and “[f]ull [m]onthly” basis. R233-35 (Gomez Aff.) ¶¶ 1-3. 18 of 2009, all of VarigLog’s preexisting ESI was destroyed. As previously noted, plaintiffs do not claim that the MP defendants were to blame for these crashes. R1239-40 (Appellate Decision). As for VarigLog’s failure to implement a litigation hold, the evidence in the record shows that VarigLog’s initial counsel in the New York action explained that he had “ascertained that the Brazilian lawyers representing Varig[Log] understood Varig[Log’s] discovery obligations under American law, including with respect to the preservation of documents, in whatever form, and [ ] reinforced that understanding by sending them a copy of CPLR 3126, dealing with the potential penalties for non-compliance.” See R502-03 (Affidavit of Ira G. Greenberg, Esq. dated March 20, 2012 (the “Greenberg Aff.”)) ¶4. VarigLog’s New York counsel also confirmed that he “reminded [VarigLog]” by email of these obligations and had received “assur[ances] that responsive documents would be produced.” See R503 (Grenberg Aff.) ¶¶1, 4. There is no evidence in the record as to what advice, if any, VarigLog’s counsel in the Florida action provided with regard to its document preservation obligations in connection with the Florida action. Despite this loss of VarigLog’s ESI, discovery in this action has been extensive, consisting of approximately 590,000 pages of documents produced and approximately 2,000 pages of deposition testimony taken from nine witnesses. R652 (Hefter Aff.) ¶63. Included in this production are approximately 300 pages 19 of VarigLog’s banking records, which were produced by VarigLog, and approximately 2,200 communications between the MP Defendants and VarigLog, which were produced by the MP Defendants. Id. After “more than two years after they learned in January 2010 that VarigLog’s ESI had been lost in computer crashes,” R1251-52 (Appellate Decision), Appellants moved for discovery sanctions pursuant to CPLR § 3126 on March 2, 2012. Pegasus sought the sanction of a default judgment against VarigLog7 and, against the MP Defendants, a “trial adverse inference . . . for [their] failure to properly preserve electronic and paper records relevant to this action and within [their] control, albeit in the possession of [their] subsidiary, VarigLog.” R109 (Order to Show Cause by Plaintiffs, dated April 25, 2012). Without any basis, Pegasus contends that the lost documents may have included communications with the Judicial Oversight Committee, internal emails concerning VarigLog’s relationship with the MP Defendants and copies of 7 Appellants also sought sanctions against VarigLog for failing to (i) produce bank records; (ii) produce responsive documents contained within 35,000 unsearched boxes located in Brazil; (iii) comply with various discovery rulings; and (iv) preserve its ESI. R107 (Order to Show Cause by Plaintiffs). There is no allegation that the documents in the 35,000 boxes were not preserved, only that VarigLog failed to search them for responsive documents. Appellants note that when they went to Brazil to inspect the boxes they found that some were marked for incineration, Pegasus Br. at 25, but there is no evidence in the record of any actual destruction. Certainly, there is no evidence that the MP Defendants had anything to do with the allegation. 20 VarigLog’s banking and financial records.8 The Trial Court heard argument on the sanctions motion on April 25, 2012, and read its decision into the record on December 4, 2012. R44-106 (transcript of oral argument before the Honorable Barbara R. Kapnick, dated April 25, 2012); R9-43 (Trial Court Order). The Trial Court granted the sanctions motion in full, striking VarigLog’s answer and imposing the requested “trial adverse inference” instruction against the MP Defendants “for [their] failure to properly preserve electronic and paper records relevant to this action and within [their] control, albeit in the possession of [their] subsidiary, VarigLog. . . .” R9 (Trial Court Order). The Court’s reasons for reaching such a conclusion were stated on the record during the December 4, 2012 conference. R9-43 (Trial Court Order). On January 2, 2013, the MP Defendants filed a timely notice of appeal.9 R7-8 (Notice of Appeal). 2. The Appellate Division Decision On June 5, 2014, the First Department reversed. R1237 (Appellate Decision). While the First Department found that the MP Defendants had a 8 In the sanctions motion, Appellants originally included additional categories of documents that they no longer argue were lost and/or are relevant. R138-39 (Ehlert Aff.) ¶65. 9 VarigLog did not appeal. 21 sufficient degree of “practical control”10 over VarigLog’s documents to trigger a preservation duty,11 it held that the failure to discharge this duty did not rise to the level of gross negligence. R1245-1247 (Appellate Decision). Applying prior Appellate Division precedent, the First Department concluded that because the MP Defendants’ conduct did not rise to the level of gross negligence, Pegasus was required to show prejudice before sanctions could be imposed. The Appellate Division further held that Pegasus “[did] not even claim to have made such a showing,” instead “rel[ying] on the presumption arising from the gross negligence finding,” and had therefore failed to establish its entitlement to sanctions. R1248 (Appellate Decision) at n.7. Justice Andrias filed a separate decision concurring in part and dissenting in part. Justice Andrias agreed with the majority’s holding that “upon a contextual assessment of all pertinent facts . . . [the MP Defendants’] failure to discharge [their] duty did not rise to the level of gross negligence,” but believed that the First Department should have remanded the matter to the Trial Court for a determination 10 It is undisputed that “control” or “practical control” for purposes of whether the MP Defendants had a duty to cause VarigLog to preserve its ESI is not akin to the “control” required to prove alter ego liability. That said, as the Appellate Division correctly found, in an alter ego case, the risk of substantial prejudice and jury confusion from an adverse inference instruction predicated on the alleged alter ego’s “control” is very high. See discussion at Section II.A.4, infra. 11 The First Department explained that because “there seems to be little doubt that [VarigLog] would have complied with a timely request by [the MP Defendants] to preserve [their ESI],” it could conclude “that VarigLog’s ESI was sufficiently under the MP [D]efendants’ ‘practical control.’” R1243-44 (Appellate Decision). 22 of the extent of the prejudice to Pegasus and the sanction, if any, that should be imposed. R1254 (Appellate Decision). Justice Richter filed a dissent holding that the record supported a finding of gross negligence, R1258 (Appellate Decision), and thus she presumed relevance and prejudice against the MP Defendants for VarigLog’s failure to institute a litigation hold. Pegasus sought re-argument or, in the alternative, leave to appeal to this Court. On November 18, 2014, the First Department denied Pegasus’s motion for re-argument, but granted its motion for leave to appeal. ARGUMENT I. LEGAL STANDARDS A. Standard Of Review “While discovery determinations rest within the sound discretion of the trial court, the Appellate Division is vested with a corresponding power to substitute its own discretion for that of the trial court, even in the absence of abuse.” Andon ex rel. Andon v. 302-304 Mott St. Assocs., 94 N.Y.2d 740, 745 (2000); see also Merrill Lynch, 22 N.Y. 3d at 880 (orders imposing or denying discovery sanctions are reviewed for abuse of discretion). “Where the Appellate Division has made such a discretionary determination,” this Court’s “review is limited to whether the Appellate Division abused its discretion as a matter of law.” Andon, 94 N.Y.2d at 745. Even where, as here, “the Appellate Division’s 23 certification order states that its decision was made as a matter of law and not in the exercise of discretion,’” this Court is “not bound by that characterization,” but rather “look[s] to see whether the Appellate Division's decision, regardless of its characterization, nonetheless reflects a discretionary balancing of interests.” Id.12 Here, rather than “categorically den[ying] [Appellants’] request as a matter of law,” the First Department “evaluated competing interests and concluded that, under the circumstances of this case,” the sanction imposed by the Trial Court was not warranted. Id. at 746. “Further, the Appellate Division’s opinion stated that its reversal was ‘on the law and the facts.’” Id.; see also R1237 (Appellate Decision) (“[Trial Court Order], which, insofar as appealed from, granted plaintiffs’ motion for a trial adverse inference instruction against defendants- appellants as a sanction for spoliation of electronic evidence, reversed, on the law and the facts, without costs, and the motion denied.”). Therefore, the order of the Appellate Division is reviewed by this Court for abuse of discretion, except to the extent it is “premised on errors of law,” in which case “this Court does not defer to it.” Mashreqbank PSC v. Ahmed Hamad Al Gosaibi & Bros. Co., 23 N.Y.3d 129, 137 (2014). 12 Appellants’ contention - made without citation to authority - that the First Department’s “pronouncement that it decided the sanctions issue ‘as a matter of law and not in the exercise of discretion’” requires this Court to “apply the law to the facts as found by the Supreme Court,” and “ignore” “new or different facts” found by the First Department, misconceives the nature of this Court’s review as set forth, inter alia, in this Court’s ruling in Andon. 24 B. The First Department’s Spoliation Framework “Under CPLR 3126, if a court finds that a party destroyed evidence that ‘ought to have been disclosed ..., the court may make such orders with regard to the failure or refusal as are just,’” which can include “employing an adverse inference instruction at the trial of the action.” Ortega v. City of N.Y., 9 N.Y.3d 69, 76 (2007). This Court has not previously addressed the standards that govern the imposition of sanctions for the spoliation of ESI. In VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 93 A.D.3d 33, 45 (1st Dep’t 2012), the First Department adopted the framework for the imposition of ESI spoliation sanctions that was originally set forth in Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003): A party seeking sanctions based on the spoliation of evidence must demonstrate: (1) that the party with 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 finally, (3) that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense. VOOM, 93 A.D.3d at 45. Thus, under VOOM, a party seeking spoliation sanctions must prove (i) control and a duty to preserve; (ii) culpability; and (iii) relevance. As to the first element, VOOM held that “a party” who “reasonably anticipates litigation” - i.e., is on notice of a credible probability that it will become involved in litigation - is required to “institute an appropriate litigation 25 hold to prevent the routine destruction of electronic data,” which should “describe the ESI at issue, direct that routine destruction policies such as auto-delete functions and rewriting over e-mails cease, and describe the consequences for failure to so preserve electronically stored evidence.” Id. at 41-42. Neither VOOM nor Zubulake, on which it relies, analyzes the “control” element in any detail; both cases involved spoliation motions brought against the parties from whom the lost evidence was sought, and whose control over their own documents was obvious - not, as here, a motion brought against an alleged spoliator’s corporate affiliates on the theory that they had a preservation duty by virtue of their affiliation. As to the second element, VOOM held that a “‘culpable state of mind’ for purposes of a spoliation sanction includes ordinary negligence” in addition to gross negligence and intentional or willful destruction of evidence. Id. at 45. VOOM again did not analyze this issue in any detail, instead simply citing Zubulake and Treppel v. Biovail Corp., 249 F.R.D. 111, 121 (S.D.N.Y. 2008), cases which themselves rely without analysis on Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 108 (2d Cir. 2002).13 Finally, VOOM held that “when the destruction of evidence is merely negligent … relevance must be proven by the party seeking spoliation sanctions,” but “[t]he intentional or willful destruction of evidence is sufficient to presume 13 For a further discussion of Residential Funding, see Section II.B.2, infra. 26 relevance, as is destruction that is the result of gross negligence.” 93 A.D.3d at 45. This presumption can be rebutted by the spoliator, “for example, by demonstrating that the innocent party had access to the evidence alleged to have been destroyed or that the evidence would not support the innocent party's claims or defenses.” Id. The First Department, applying VOOM, held that “the record supports, at most, a finding of simple negligence against the MP defendants,” and that Appellants had failed to “prove that the lost ESI would have supported their claims.” R1247-48 (Appellate Decision). These holdings are amply supported by the law and by the record, and this Court should affirm the First Department’s ruling. II. THE FIRST DEPARTMENT CORRECTLY CONCLUDED THAT THE MP DEFENDANTS WERE NOT GROSSLY NEGLIGENT A. The First Department Properly Analyzed The Facts And Circumstances Of This Case Based on a careful review of the record, the First Department correctly held that “it cannot be said that the MP defendants’ failure to discharge [their duty with regard to the preservation of VarigLog’s ESI] was so egregious as to rise to the level of gross negligence.” R1244 (Appellate Decision). In light of all of the circumstances as they existed at the time, the MP Defendants’ conduct did not “smack[] of intentional wrongdoing,” “evince a reckless disregard for the rights of others,” or otherwise rise to a level such that a finding of gross negligence was 27 warranted. Id. (quoting Hartford Ins. Co. v. Holmes Prot. Grp., 250 A.D.2d 526, 527 (1st Dep’t 1998)).14 In so holding, the First Department recognized that, if a duty to preserve a corporate affiliate’s ESI can be imposed on a shareholder, that duty is not necessarily coextensive with the duty imposed on the party itself. Instead, an analysis of the facts and circumstances of both the spoliator’s relationship to the shareholder and the nature of the litigation is necessary. As discussed below, the First Department properly concluded that “the facts of this case do not support a finding of gross negligence against the MP defendants” because (i) “the MP defendants did not take control of VarigLog until April 1, 2008, after plaintiffs had commenced suit against VarigLog” (but not the MP Defendants) “in Florida the previous February,” and the MP Defendants had no reason to believe that VarigLog’s counsel had not advised VarigLog of its discovery obligations; (ii) “the MP defendants are conceded to have discharged their responsibility to preserve and produce their own documents in this matter, which negates any inference that they deliberately sought to defeat plaintiffs’ right 14 See also, e.g., Colnaghi, U.S.A. v. Jewelers Protection Servs., 81 N.Y.2d 821, 823-24 (1993); Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 385 (N.Y. 1983); Food Pageant, Inc. v. Consolidated Edison Co., Inc., 429 N.E.2d 738, 740 (N.Y. 1981) (“[G]ross negligence had been termed as the failure to exercise even ‘light care.”); Goldstein v. Carnell Assocs., 74 A.D.3d 745, 746-47 (2d Dep’t 2010) (“[A] party is grossly negligent when it fails to ‘exercise even slight care’ or ‘slight diligence.’”) (internal citations, quotation marks and modifications omitted)); Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., 685 F. Supp. 2d 456, 464 (S.D.N.Y. 2010) (“Gross negligence has been described as a failure to exercise even that care which a careless person would use.”) (internal quotation marks omitted)). 28 to disclosure or were reckless as to that possibility”; and (iii) “VarigLog was an organization separate from the MP defendants, with its own offices, staff, operations, and computer systems.” R1245-47 (Appellate Decision). Each of these findings is fully supported by the record. 1. VarigLog’s Preservation Obligations Arose At A Time When The MP Defendants Undisputedly Had Neither Access To VarigLog Nor “Control” Of VarigLog’s Documents First, and perhaps most importantly, it is undisputed that the MP Defendants had no access to VarigLog, let alone any type of control over its documents or computer systems, when Appellants claim that VarigLog failed to make payments under the aircraft lease agreements in or around September 2007. Nor did the MP Defendants have access to VarigLog when litigation between Appellants and VarigLog commenced in February 2008 in Florida. R1245-46 (Appellate Decision). VarigLog’s obligation to implement document preservation measures arose at some point between September 2007 and February 2008, and there is no dispute that the MP Defendants had neither the legal duty nor the practical ability to implement document preservation measures at this time. The First Department correctly recognized the significance of these facts to the analysis: In concluding that the MP defendants were grossly negligent, the dissent . . . assert[s] that the MP defendants “fail[ed] to take even the most rudimentary steps” to preserve evidence at 29 VarigLog. This ignores the fact that VarigLog - which presumably could have anticipated being sued by plaintiffs before the Florida suit was commenced in February 2008, during the freeze-out of the MP Defendants - had a duty to preserve evidence substantially before the MP defendants acquired control or were sued themselves the following October. R1249 (Appellate Decision). Tellingly, in concluding that the MP Defendants were grossly negligent, the Trial Court relied on the patently incorrect statement that “[the MP Defendants] were brought into the litigation at the commencement, February 2008 in Florida[.]” R28:4-6 (Trial Court Order). This fundamental error, which Appellants cannot contend is anything else, infected the Trial Court’s assessment of the reasonableness of the MP Defendants’ conduct. There is also no evidence that the MP Defendants had any reason to believe that VarigLog’s counsel was giving inadequate advice or direction concerning the preservation of information relevant to the litigation, nor was there any evidence that the MP Defendants should have been aware of any inadequacy at any later point. R1246-47 (Appellate Decision) (relying on GenOn Mid-Atlantic LLC v. Stone & Webster, Inc., 282 F.R.D. 346, 355 (S.D.N.Y. 2012) aff’d, 2012 U.S. Dist. LEXIS 70750 (S.D.N.Y. May 21, 2012) for the proposition that a party is not grossly negligent when it assumes that a third party represented by independent counsel is being advised of, and is complying with, its duty to preserve data). VarigLog was represented by a reputable U.S. law firm in the 30 Florida action as well as another reputable U.S. law firm when this action commenced in New York.15 R1249-50 (Appellate Decision) (“The MP defendants evidently assumed that these attorneys, before and after the MP defendants took control, had been giving VarigLog employees adequate advice and direction about evidence preservation, and that VarigLog employees had been following that advice”). 16 15 Appellants attempt to impugn the U.S. law firm that represented VarigLog in the New York litigation against MP Volo and that initially represented VarigLog in this matter for not filing an opposition to MP Volo’s summary judgment motion for loans that were clearly due upon their face. See Pegasus Br. at 24. Appellants, however, ignore the record evidence that in not opposing summary judgment motions by MP Volo and other lenders (including non-affiliate Atlantic Aviation Investments LLC) counsel was taking its orders from the Judicial Oversight Committee, not the MP Defendants. See, e.g., R833 (Greenberg Letter to Justice Lowe) (“I have been directed by my client, Varig Logistica S.A., more particularly at the insistence of the financial monitors associated with the Brazilian Court to request another short adjournment of the time for it to decide whether to oppose the pending summary judgment motions.”); see also R826-827 (Summary Judgment Transcript) at 6:19-7:4 (Mr. Greenberg: “[O]ur client is in some form of Brazilian judicial oversight because of litigation that’s taking place in Brazil. The judge in Sao Paulo has exercised a great deal of control over the client. Among the things that it has done, . . . it has appointed two independent monitors. . . . So I am obligated, I am told, to take instruction not only from the client but also from these ‘monitors,’ we’ll call them.”). Appellants’ argument further ignores Supreme Court’s holdings that VarigLog had no viable defenses to its failure to repay the loans to MP Volo and other creditors. See Volo Logistics, Index No. 602536/07, at 5; see also Atlantic Aviation Investments LLC v. Varig Logistica, S.A., Index. No. 602920/07 (Sup. Ct. N.Y. Cty. Oct. 10, 2008) (making the same findings in a related action in which VarigLog failed to repay nearly identical loans to a non-affiliated entity). 16 Relatedly, there is no evidence that the MP Defendants had knowledge of VarigLog’s computer crashes at any time prior to VarigLog’s disclosure to Pegasus in January of 2010 that it had suffered such crashes. Appellants’ assertion that “no one associated with [] Matlin [] bothered to tell Pegasus about the crashes when they occurred in February and March 2009, but instead waited until January 2010, nine months later, to come clean with this pivotal information[,]” Pegasus Br. at 54, is without any support in the record as Appellants cite only to their own attorney’s affidavit containing unsubstantiated statements on this point. 31 2. The MP Defendants Complied With Their Own Discovery Obligations Significantly, Appellants concede that the MP Defendants properly discharged their responsibility to preserve and produce their own documents in this matter. The First Department correctly found that this “negates any inference that [the MP Defendants] deliberately sought to defeat plaintiffs’ right to disclosure or were reckless as to that possibility.” R1246 (Appellate Decision); see also R1250 (id.) (“Again, there is no dispute that the MP defendants preserved their own organization’s ESI and other documents relevant to this dispute, which, in our view, largely negates any inference that their culpability rose to the level of gross negligence.”). In so holding, the First Department relied again on GenOn, which found that the fact that “there [was] no suggestion that [an alleged spoliator] had failed to preserve and produce all of its own documents” weighed against a finding that it was grossly negligent for failing to direct a consultant to implement its own document preservation procedures. 282 F.R.D. at 357. 3. VarigLog Was A Separate Organization From The MP Defendants And Was Treated As Such In This Litigation It cannot be disputed that VarigLog was a separate organization from the MP Defendants with its own offices, staff, operations and computer systems. As the First Department recognized, “even after the MP Defendants acquired control of VarigLog in April 2008, VarigLog remained organizationally distinct from the 32 MP defendants,” and “there is no evidence that the VarigLog ‘team’ established by the MP defendants, which monitored VarigLog and set its overall business strategy, displaced VarigLog’s own employees.” R1250 (Appellate Decision). Appellants do not challenge this finding. Nor do they contest the fact that “members of the MP defendants’ VarigLog ‘team’. . . continued to use accounts on the MP defendants’ email system rather than switching to accounts on VarigLog’s email system.” R1247 (Appellate Decision). Indeed, prior to the filing of the sanctions motion, Appellants never suggested that they expected the MP Defendants to preserve and produce VarigLog’s data or would seek to hold the MP Defendants liable for VarigLog’s failure to do so. See R1247 (Appellate Decision) at n.6. (“Significantly, as the MP defendants note, in this litigation, plaintiffs have always dealt with VarigLog and its counsel directly in discovery matters, and have not directed demands for production of documents in VarigLog’s possession to the MP defendants.”). The fact that Appellants, who had every incentive to take an expansive view of the MP Defendants’ duty to preserve and produce VarigLog’s documents, agreed that the MP Defendants would search and produce documents only from their own custodians and did not seek to bring the MP Defendants into the numerous discovery motions that preceded the filing of the sanctions motion is relevant 33 context for evaluating the MP Defendants’ state of mind.17 See, e.g., R1000 (email reflecting agreement that the MP Defendants would only be responsible for searching and producing documents from seven “custodians” of the MP Defendants, none of which was a VarigLog employee). 4. The First Department Properly Considered The Highly Prejudicial Nature Of The Adverse Inference Sanction It is well established under New York law that spoliation sanctions must be “proportionate” and that sanctions should be calculated to “restore balance to the litigation.” Ortega, 9 N.Y.3d at 76; Merrill Lynch., 22 N.Y. 3d at 880 (a “sanction should be commensurate with the particular disobedience it is designed to punish, and go no further than that”) (citing Patrick M. Connors, Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, CPLR C3126:8 at 462)). Courts recognize that an adverse inference instruction is an extremely severe sanction in any type of litigation. As the Zubulake court stated: In practice, an adverse inference instruction often ends litigation-it is too difficult a hurdle for the spoliator to overcome. The in terrorem effect of an adverse inference is obvious. When a jury is instructed that it may infer that the party who destroyed potentially relevant evidence did so out of a realization that the evidence was unfavorable, the party 17 Appellants now take the position that the MP Defendants “sat on [their] hands” during numerous court conferences involving discovery disputes between Appellants and VarigLog. See Pegasus Br. at 50. Appellants cannot dispute that the MP Defendants did not actively participate in these conferences because they had met all of their discovery obligations and, until the filing of the sanctions motion, Appellants had never intimated that the MP Defendants should be held responsible for VarigLog’s discovery deficiencies. 34 suffering this instruction will be hard-pressed to prevail on the merits. Accordingly, the adverse inference instruction is an extreme sanction and should not be given lightly. 220 F.R.D. at 219-20 (internal modifications and citations omitted); see also Morris v. Union Pac. R.R., 373 F.3d 896 (8th Cir. 2004) (adverse inference instructions should be used sparingly because they “brand[] one party as a bad actor, guilty of destroying evidence” and “necessarily open[] the door to a certain degree of speculation by the jury”). The First Department was therefore entirely correct to consider the uniquely prejudicial effect of an adverse inference instruction in this case and to rely on this as one factor supporting its conclusion that this sanction was not warranted. As the First Department stated, “the drastic sanction of an adverse inference instruction telling the jury that the MP defendants were directly responsible for preserving VarigLog’s ESI - which, in a case based on an alter ego claim, is tantamount to granting plaintiffs summary judgment - is not warranted in this case.” R1253 (Appellate Decision); see also id. at n.10 (noting the “severe prejudice that would accrue to the MP defendants, which are being sued on a theory that VarigLog was their alter ego, if the court were to tell the jury that the MP defendants were responsible for preserving documents in VarigLog’s possession”). Such a sanction would not have “restore[d] balance” to the litigation, Ortega, 9 N.Y.3d at 76, but would have significantly weighted the 35 balance in Appellants’ favor. Appellants claim that in so concluding, the First Department “created a new rule by which adverse inferences are completely unavailable to plaintiffs in alter-ego cases.” Pegasus Br. at 70. The argument lacks any foundation. The First Department never suggested it was adopting any such per se rule. To the contrary, it specifically stated that the exceptional prejudice that would result from such an instruction bolstered its conclusion that an adverse inference “is not warranted in this case.” R1253 (Appellate Decision) (emphasis added). This is a paradigmatic case-specific, discretionary determination regarding the propriety of a discovery sanction, and “the Appellate Division is vested with its own discretion and corresponding power to substitute its own discretion for that of the trial court” as to such matters, “even in the absence of abuse.” Those Certain Underwriters at Lloyds, London v. Occidental Gems, Inc., 11 N.Y.3d 843, 845 (2008). The First Department so exercised its discretion in this case, and in this Court such determinations “will remain undisturbed unless there has been a clear abuse of discretion.” Merrill Lynch, 22 N.Y.3d at 880. Appellants do not, and cannot, purport to identify any such abuse. B. Appellants’ Inflexible And Absolute Gross Negligence Standard Is Legally Unsupported And Unworkable Appellants advocate an inflexible and unsupportable reading of the law under which the mere finding that a corporate affiliate had “practical control” over 36 a litigant’s documents necessarily triggers a preservation duty as to that litigant’s ESI coextensive with the litigant’s own preservation obligations, regardless of the facts and circumstances of the case. Appellants present no reasoned arguments to support their position and fail to confront the merits of the First Department’s reasoning in this case and the flexible and nuanced approach that follows from its decision. Instead, Appellants simply beg the question by assuming, without any legal basis, that the finding that the MP Defendants had “practical control” requires the MP Defendants to be treated as if they were VarigLog. See, e.g., Pegasus Br. at 48 (“For all practical purposes, ‘VarigLog’s’ documents were ‘Matlin’s’ documents.”). Notably, Appellants cite no cases that adopt any such rule, and none of the cases they do cite, in which spoliation sanctions were imposed, involve a corporation’s alleged failure to preserve an affiliate’s documents. The First Department properly recognized that the inflexible approach advocated by Appellants, and adopted by the Trial Court, is unrealistic and unworkable, and instead analyzed the entirety of the MP Defendants’ conduct in light of the circumstances as they existed at the time. See Chin v. Port Authority of N.Y. & N.J., 685 F.3d 135, 162 (2d Cir. 2012) (rejecting “the notion that a failure to institute a litigation hold constitutes gross negligence per se,” and holding that the “better approach is to consider the failure to adopt good preservation practices as one factor in the determination”) (internal quotations and brackets omitted) 37 (emphasis added)); Surowiec v. Capital Title Agency, Inc., 790 F. Supp. 2d 997, 1007 (D. Ariz. 2011) (“Per se rules are too inflexible for this factually complex area of the law where a wide variety of circumstances may lead to spoliation accusations.”). Appellants present no valid argument as to why the First Department’s well-reasoned conclusions should be disturbed. 1. The Scope And Extent Of The MP Defendants’ Preservation Duties Is An Issue Of Law First, Appellants contend that because “Supreme Court made a factual finding that Matlin did indeed have the necessary control over VarigLog’s documents to trigger a duty to preserve them for use in this litigation” and “[t]he Appellate Division affirmed that finding,” the issue of whether “[the MP Defendants] had control of VarigLog’s documents and an obligation to preserve them” is “settled” and should be “treated as established and unreviewable by this Court.” Pegasus Br. at 35. Appellants overstate their case. That the MP Defendants had the ability to obtain documents from VarigLog during the period between April 1, 2008, and VarigLog’s March 3, 2009 bankruptcy filing is a factual finding, which the MP Defendants do not challenge on this appeal. Whether this gives rise to a preservation duty - and if so, the scope and extent of that duty - is, however, neither unreviewable nor a factual issue; it is a question of law subject to review by this Court. See, e.g., Di Ponzio v. Riordan, 89 N.Y.2d 578, 583 (1997) (“The existence and scope of an alleged tortfeasor’s duty is, in the 38 first instance, a legal question for determination by the court.”); Austin Instrument, Inc. v. Loral Corp., 29 N.Y.2d 124, 131 n.5 (1971) (“The suggestion advanced that we are precluded from reaching this determination because the trial court’s findings of fact have been affirmed by the Appellate Division ignores the question to be decided. That question, undoubtedly one of law, is, accepting the facts found, did the courts below properly apply the law to them.”) (internal citation omitted)); Gass v. Woods, 954 N.Y.S.2d 759, 759 (Sup. Ct. Nassau Cty. 2012) (“Generally, the existence of a defendant’s duty is a legal question to be determined by the court in the first instance.”); Michael Kane Color Litho, Inc. v. Willowtex, Inc., 305 A.D.2d 646, 646 (2d Dep’t 2003) (“The existence and scope of the duty is, first, a legal question for determination by the courts.”), appeal denied, 100 N.Y.2d 512 (2003). 2. Appellants Fail To Justify The Duty They Seek To Impose On The MP Defendants Appellants never explain why the finding that a shareholder (or other corporate affiliate) has the ability to “obtain documents . . . upon request” from a related corporation gives rise to a duty on the part of the shareholder to preserve its affiliate’s documents in connection with litigation against that affiliate. Nor do Appellants explain why, if such a duty exists, it should be necessarily coextensive with the preservation duty imposed on the affiliate itself. While Appellants never clearly specify the duty they endorse, it appears they contend that once the MP 39 Defendants regained access to VarigLog on April 1, 2008, the MP Defendants became immediately obligated to review VarigLog’s document preservation practices - even though VarigLog’s preservation obligation arose well before the MP Defendants regained access to VarigLog (and well before the MP Defendants could have reasonably anticipated litigation), and in the absence of any evidence that VarigLog’s separate counsel was not advising it with respect to its preservation obligations. Appellants do not, it appears, advocate for a general preservation duty that would render all corporate affiliates liable for the preservation of each other’s ESI so long as “practical control” existed. Such a duty would be unworkable, as well as inconsistent with the fundamental principle that a corporation and its shareholders are separate legal entities. See, e.g., Billy v. Consolidated Mach. Tool Corp., 51 N.Y.2d 152, 163 (1980) (“As a general rule, the law treats corporations as having an existence separate and distinct from that of their shareholders and consequently, will not impose liability upon shareholders for the acts of the corporation.”). It would also be inconsistent with this Court’s holding that there is no “tort of third-party negligent spoliation of evidence.” Ortega, 9 N.Y.3d at 73. Instead, it appears that the duty Appellants propose would attach at the time that the shareholder anticipates litigation against itself concerning a matter 40 involving an affiliate. 18 Again, Appellants cite no such cases in which such a duty was found to exist. But in any event, it is clear that the nature and extent of any such duty is highly fact-specific and ill-suited for the kind of per se rule Appellants propose, under which a corporate affiliate would face potentially severe discovery sanctions, and in this alter ego case, a highly prejudicial adverse inference, based merely on a finding that a corporation “could obtain documents from [its affiliate] upon request” and therefore exercise “practical control” over its affiliate’s documents. R1243-44 (Appellate Decision). The corporate relationships encompassed by the First Department’s expansive conception of “control” take many forms. So, too, do the disputes in which affiliated corporations can become enmeshed. Appellants present no justification for replacing the nuanced, fact-specific standard applied by the First Department with the inflexible, one-size-fits-all rule they propose. As discussed above, in determining that the MP Defendants’ conduct did not constitute gross negligence, the First Department found that (i) VarigLog’s 18 Until such time as a party reasonably anticipates litigation, it has no duty to take any preservation measures whatsoever. See VOOM, 93 A.D.3d at 41. The MP Defendants did not reasonably anticipate litigation until October 2008, when Pegasus withdrew the pending Florida action and refiled it in New York adding the MP Defendants to the caption. There is no evidentiary basis to conclude otherwise. The First Department noted that “the MP defendants have not denied that it was reasonably foreseeable as of April 1, 2008, that plaintiffs would ultimately sue them.” R1244 (Appellate Decision) at n.5. The MP Defendants respectfully disagree. In its case against the MP Defendants, Pegasus largely relies on the MP Defendants’ conduct after April 1, 2008. 41 preservation obligations arose “substantially before the MP Defendants acquired control or were sued themselves”; (ii) VarigLog and the MP Defendants were at all times represented by separate counsel, and Appellants sought discovery from VarigLog and the MP Defendants separately; (iii) VarigLog (a Brazilian airline) had separate offices and operations than the MP Defendants (a New York-based private equity firm) and VarigLog’s IT systems were not integrated with those of the MP Defendants; and (iv) the MP Defendants preserved and produced their own documents in compliance with their own discovery obligations. Appellants do not contend that these findings lack support in the record, and provide no basis for this Court to conclude that such facts and circumstances should be ignored as a matter of law in assessing a corporation’s potential liability for its affiliate’s spoliation. See, e.g., Pirrello v. Gateway Marina, No. 2008 CV. 1798 (KAM) (MDG), 2011 WL 4592689, at *5 (E.D.N.Y. Sept. 30, 2011) (“A potential spoliator need do only what is reasonable under the circumstances.”) (internal modifications and quotation marks omitted); Jones v. Bremen High Sch. Dist. 228, 08 C 3548, 2010 WL 2106640, at *6 (N.D. Ill. May 25, 2010) (“[R]easonableness is the key to determining whether or not a party breached its duty to preserve evidence.”). Rather than providing a reasoned basis for the duty they seek to impose, Appellants simply cite cases holding, on the specific facts of those cases, that failures to issue litigation holds as to a party’s own documents constitute gross 42 negligence. See, e.g., VOOM, 93 A.D.3d at 40 (defendant failed to implement preservation procedures as to its ESI); Harry Weiss, Inc. v. Moskowitz, 106 A.D.3d 668, 669 (1st Dep’t 2013) (plaintiff improperly disposed of its computer); County of Erie v. Abbott Labs., Inc., 913 N.Y.S.2d 482, 485 (Sup. Ct. Erie Cty. 2010) (plaintiff made “no discernable effort” to preserve documents in the possession of its employees); Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., 685 F. Supp. 2d 456 (S.D.N.Y. 2010) (plaintiffs failed to institute timely litigation holds as to their own documents).19 Appellants do not explain why these rulings require the same result in the specific, distinguishable context of this case. Likewise, Appellants’ argument that the First Department should not have relied on the fact (1) that the MP Defendants preserved their own documents and (2) that the MP Defendants and VarigLog were represented by separate counsel is meritless. The First Department cited those facts as support for its conclusion that, in light of all of the circumstances, it was error for the Trial Court to find the MP Defendants grossly negligent. Appellants’ response is circular. As to the MP Defendants’ preservation of their own documents, Appellants argue that this is a “distinction without a difference” because the finding of control means that “[f]or all practical purposes, ‘VarigLog’s’ documents 19 Appellants also cite 915 Broadway Assocs., LLC v. Paul, Hastings, Janofsky & Walker, LLP, 34 Misc. 3d 1229(A), at *6 (Sup. Ct. N.Y. Cty. 2012), in which gross negligence was found where a litigation hold was issued, but “six of [plaintiff’s] 11 primary custodians” failed to comply. 43 were ‘Matlin’s’ documents”; as to VarigLog’s separate counsel, Appellants contend that “[i]f the duty was Matlin’s, . . . Matlin and its own counsel were obligated to take charge of the preservation process.” Pegasus Br. at 48-49. Appellants cite no authority for these propositions, and instead simply attempt to derive them axiomatically from the finding of “control.” Here, again, Appellants’ argument amounts to nothing more than a re-wording of the Trial Court’s now- rejected conclusion “that failure to institute a litigation hold, in all cases and under all circumstances, constitutes gross negligence per se.” R1245 (Appellate Decision). As the First Department found, this rule (i) arises from “a statement by a federal district court of the Southern District of New York that . . . has been disapproved by the Second Circuit” and (ii) “has never . . . been adopted by a New York state appellate court.” R1244 (Appellate Decision) (citing Chin, 685 F.3d at 162) (rejecting the “gross negligence per se” standard articulated in Pension Committee, 685 F. Supp. 2d at 464-65).20 20 Along these same lines, Appellants’ reliance on Hawley v. Mphasis Corp., 302 F.R.D. 37, 50- 51 (S.D.N.Y. 2014) and Sekisui Am. Corp. v. Hart, 945 F. Supp. 2d 494, 507 (S.D.N.Y. 2013), Pegasus Br. At 45, is similarly misplaced. In both cases, parties were found grossly negligent for failing to issue litigation holds as to their own documents until over a year after litigation was reasonably anticipated. Appellants contend that “[i]t makes no sense to say that a party is grossly negligent when it implements incomplete or untimely preservation safeguards, but that it is merely negligent when it does precisely nothing.” Pegasus Br. at 45. Again, Appellants simply disregard the contexts of these cases, implicitly relying on a per se rule that all cases involving failures to issue litigation holds should be treated the same, regardless of context - a rule which both of these cases explicitly reject. See Hawley, 302 F.R.D. at 49 (“failure to institute a timely litigation hold does not constitute gross negligence per se”); Sekisui, 945 F. Supp. 2d at 507 (same; relying on specific “egregious” facts in finding gross negligence). 44 Nor do Appellants explain, much less reconcile, how their argument is any way helped by the GenOn case relied on by the First Department. GenOn involved a plaintiff that engaged a consulting firm “in connection with an audit of [the defendant] and, potentially, a subsequent lawsuit.” GenOn, 282 F.R.D. at 348. The court found that the plaintiff had “practical control” of the consultant’s documents, and therefore a duty to preserve them once litigation was reasonably foreseeable, but had failed to “cause [the consultant] to issue a litigation hold letter . . . and did not take steps to ensure that [its] records were preserved.” Id. at 353, 357. The court noted that Pension Committee had characterized such failures as gross negligence per se, but concluded (even before the Second Circuit subsequently rejected this per se rule in the Chin case) that “the particular circumstances of this case suggest that a categorical designation of [the plaintiff’s] omissions as gross negligence may not be warranted.” Id. at 357. In holding that the plaintiff’s omissions constituted ordinary, not gross, negligence, the court relied on the same “mitigating factors” cited by the First Department in this case - the plaintiff’s reasonable, if mistaken, assumption that a separately-represented party would comply with its discovery obligations, and the plaintiff’s own “preserv[ation] and produc[tion] [of] all of its own documents.” Id. If anything, the particular circumstances of the instant case present a much more compelling case against a finding of gross negligence. Rather than failing to preserve the 45 documents of an agent retained by the principal to aid in connection with anticipated litigation, the MP Defendants’ purported duty was allegedly triggered by VarigLog, whose acts or omissions gave rise to its own preservation obligations well before the MP Defendants had the potential ability to implement any preservation measures, and for whose conduct Appellants are seeking to hold the MP Defendants vicariously liable. 3. A Growing Consensus Against Adverse Inference Instructions In Cases Of Negligence Further Supports Affirmance Appellants would have New York courts impose an adverse inference sanction on the mere finding that a party had failed to issue a litigation hold regardless of the circumstances or the party’s actual state of mind. Such a holding would be inconsistent with the growing national consensus that a level of culpability far exceeding that alleged in this case is required in order to justify the imposition of the extreme sanction of a trial adverse inference. Importantly, in 2014 the United State Judicial Conference adopted a proposed amendment to Federal Rules of Civil Procedure 37(e) that “permits adverse inference instructions only on a finding that the party ‘acted with the intent to deprive another party of the information’s use in the litigation.’”21 The 21 Judicial Conf. Mem., Rules Appendix B-17, available at http://www.uscourts.gov/uscourts/ RulesAndPolicies/rules/Reports/ST09-2014-add.pdf, and included in the appendix hereto. These 46 reasoning of the Judicial Conference is instructive: Adverse-inference instructions were developed on the premise that a party’s intentional loss or destruction of evidence to prevent its use in litigation gives rise to a reasonable inference that the evidence was unfavorable to the party responsible for loss or destruction of the evidence. Negligent or even grossly negligent behavior does not logically support that inference. Information lost through negligence may have been favorable to either party, including the party that lost it, and inferring that it was unfavorable to that party may tip the balance at trial in ways the lost information never would have. The better rule for the negligent or grossly negligent loss of electronically stored information is to preserve a broad range of measures to cure prejudice caused by its loss, but to limit the most severe measures to instances of intentional loss or destruction.22 The Judicial Conference also explained that it had “several concerns” specific to ESI that further counseled against permitting adverse inference instructions where ESI is lost through negligence: [First], in a world where ESI is more easily lost than tangible evidence, particularly by unsophisticated parties, the sanction of an adverse inference instruction imposes a heavy penalty for losses that are likely to become increasingly frequent as ESI multiplies. [Second], permitting an adverse inference for negligence creates powerful incentives to over-preserve, often at great cost. [Third], the ubiquitous nature of ESI and the fact that it often may be found in many locations presents less risk of severe prejudice from negligent loss than may be present due to the loss of tangible things or hard-copy documents.23 amendments are currently awaiting review by the U.S. Supreme Court, and, if approved, by Congress. See http://www.uscourts.gov/ RulesAndPolicies/rules/pending-rules.aspx. 22 Id. 23 Id. at B-18. 47 In adopting this standard, the Judicial Conference sided with the majority of the federal courts of appeals, which have held mere negligence is insufficient to warrant an adverse inference instruction. See United States v. Laurent, 607 F.3d 895, 902 (1st Cir. 2010) (“In general, the instruction usually makes sense only where the evidence permits a finding of bad faith destruction; ordinarily, negligent destruction would not support the logical inference that the evidence was favorable to the defendant.”); Harding v. Careerbuilder, LLC, 168 Fed App’x 535, 540 (3d Cir. 2006) (“No adverse inference can be drawn . . . absent evidence that [the records] were intentionally concealed or destroyed.”); Buckley v. Mukasey, 538 F.3d 306, 322-23 (4th Cir. 2008) (mere negligence not enough, intentional conduct - but not bad faith - required); Vick v. Texas Emp’t Comm’n, 514 F.2d 734, 737 (5th Cir. 1975) (“The adverse inference to be drawn from destruction of records is predicated on bad conduct of the defendant. Moreover, the circumstances of the act must manifest bad faith. Mere negligence is not enough . . .” (internal quotations and citation omitted)); Condrey v. Sun Trust Bank of Georgia, 431 F.3d 191, 203 (5th Cir. 2005) (same); Bracey v. Grondin, 712 F.3d 1012, 1018 (7th Cir. 2013) (“In this circuit, when a party intentionally destroys evidence in bad faith, the judge may instruct the jury to infer the evidence contained incriminatory content.”); Hallmark Cards, Inc. v. Murley, 703 F.3d 456, 461 (8th Cir. 2013) (“[W]e conclude that a district court must issue explicit findings of bad faith and 48 prejudice prior to delivering an adverse inference instruction.”); Aramburu v. Boeing Co., 112 F.3d 1398, 1407 (10th Cir. 1997) (“The adverse inference must be predicated on the bad faith of the party destroying the records.”); Bashir v. Amtrak, 119 F.3d 929, 931 (11th Cir. 1997) (“In this circuit, an adverse inference is drawn from a party’s failure to preserve evidence only when the absence of that evidence is predicated on bad faith.”); Talavera v. Shah, 638 F.3d 303, 312 (D.C. Cir. 2011) (non-accidental destruction required for adverse inference). While a minority of the federal courts of appeals have disagreed - including the Second Circuit, see Residential Funding Corp., 306 F.3d at 101, 108- 10 - the Judicial Conference, in adopting its proposed amendments, expressly “reject[ed] the view of such cases as Residential Funding . . . that authorize the giving of adverse inference instructions on a finding of negligence or gross negligence.”24 Significantly, and as noted above, in adopting the Zubulake spoliation standards, the First Department in VOOM did not independently analyze the level of culpability that should be required, but instead simply adopted Zubulake’s conclusion that ordinary negligence constituted sufficient culpability for the imposition of an adverse inference instruction, a conclusion to which the Zubulake court was bound at the time under Residential Funding. See Zubulake, 24 Id. B-45. The Sixth Circuit also holds that adverse inference instructions can appropriately issue on a finding of mere negligence. See Rogers v. T.J. Samson Cmty. Hosp., 276 F.3d 228, 233 (6th Cir. 2002). The Ninth Circuit has not addressed the issue. 49 220 F.R.D. at 220 (citing Residential Funding for the proposition that “[i]n this circuit, a ‘culpable state of mind’ for purposes of a spoliation inference includes ordinary negligence”). The Judicial Conference’s conclusions are consistent with those of numerous state appellate courts that have also determined that mere negligence, and in many cases even gross negligence, in the spoliation of evidence is insufficient to support an adverse inference sanction; instead, either bad faith, fraud, or intentional conduct is often required. See, e.g., Brookshire Bros. v. Aldridge, 438 S.W.3d 9, 23 (Tex. 2014) (“[W]e conclude that a party must intentionally spoliate evidence in order for a spoliation instruction to constitute an appropriate remedy.”); Prins v. Dir. of Revenue, 333 S.W.3d 17, 20 (Mo. Ct. App. 2010) (“The standard for application of the spoliation doctrine requires that there is evidence of an intentional destruction of the evidence indicating fraud and a desire to suppress the truth. . . . Simple negligence is insufficient to warrant the application of the spoliation doctrine.”) (internal citations and quotations omitted); Surrells v. Belinkie, 898 A.2d 232, 236 (Conn. App. 2006) (quoting Beers v. Bayliner Marine Corp., 675 A.2d 829, 833-34 (Conn. 1996)) (“[A]n adverse inference may be drawn against a party [where] the evidence [has] been disposed of intentionally and not merely destroyed inadvertently[.]”); Trieweiler v. Sears, 689 N.W.2d 807, 840-841 (Neb. 2004) (“When intentional destruction of evidence 50 is established, the fact finder may draw the inference that the evidence destroyed was unfavorable to the party responsible for its destruction.”); Phillips v. Covenant Clinic, 625 N.W.2d 714, 719 (Iowa 2001) (“[T]he [adverse] inference . . . is not warranted if the disappearance of the evidence is due to mere negligence, or if the evidence was destroyed during a routine procedure.”) (internal citations omitted); Ward v. Consol. Rail Corp., 693 N.W.2d 366, 371 (Mich. 2005) (“It is well settled that missing evidence gives rise to an adverse presumption only when the complaining party can establish intentional conduct indicating fraud and a desire to destroy [evidence] and thereby suppress the truth.”); Jerista v. Murray, 883 A.2d 350, 366 (N.J. 2005) (“If plaintiffs can make a threshold showing that defendant’s recklessness caused the loss or destruction of relevant evidence …, the jury should be instructed that it may infer that the missing evidence would have been helpful to plaintiffs’ case and inured to defendant’s detriment.”); Beard Research, Inc. v. Kates, 981 A.2d 1175, 1191 (Del. Ch. 2009) (“An adverse inference instruction is appropriate where a litigant intentionally or recklessly destroys evidence. . . . Before giving such an instruction, a trial judge must, therefore, make a preliminary finding that the evidence shows such intentional or reckless conduct.”).25 What all of this authority demonstrates is that the adoption of the 25 But see Farrell v. Connetti Trailer Sales, Inc., 727 A.2d 183, 186 (R.I. 1999); Wuest ex rel. Carver v. McKennan Hosp., 619 N.W.2d 682, 687 (S.D. 2000). 51 inflexible rule that Appellants champion would cause New York to buck the trend of correlating severe sanctions, which often may be outcome determinative, to a sufficiently culpable state of mind. 4. The Low Threshold For “Practical Control” Articulated By The First Department Further Counsels Against Finding Gross Negligence As noted above, the First Department relied on GenOn to find that the MP Defendants had “control” over VarigLog’s documents and, therefore, a duty to preserve. GenOn, however, involved a principal’s duty to preserve its agent’s documents where the agent had been retained by the principal to perform an audit in connection with anticipated litigation.26 It did not involve a parent’s duty to preserve its subsidiary’s documents in connection with a dispute concerning the subsidiary. Extending a spoliation sanction to a parent-subsidiary relationship of this kind is unprecedented (especially concerning a corporation organized under foreign law) and unwarranted on this record. 26 Appellants cite to a handful of other inapposite cases finding that principals had “control” of their agents’ documents. See, e.g., Haskins v. First Am. Title Ins. Co., No. 10-5044, 2012 WL 5183908 (D.N.J. Oct. 18, 2012) (defendant title insurer found to have control of documents held by its “independent title agents” by virtue of their contractual relationship); Coral Group, Inc. v. Shell Oil Co., 286 F.R.D. 426, 441 (W.D. Mo. 2012) (plaintiff had control over records held by its accountant, who was first an employee and later an “outside accounting consultant”); Cheng v. Lakeforest Assocs., LLC, No. CBD-13-1365, 2014 WL 2964082 (D. Md. June 30, 2014) (defendant had control of security footage held by its security contractor). Neither these cases nor GenOn, all of which concern the control of a principal over its agent, stands for the proposition that a corporation necessarily has control of its affiliates’ documents. 52 Indeed, in importing GenOn’s agency-based standards into the parent- subsidiary context, the First Department adopted a framework that is less rigorous than a standard used to determine whether a corporation has an obligation to produce (not preserve) its affiliates’ documents, which looks to “the degree of ownership and control exercised by the parent over its subsidiary, a showing that the two entities operate as one, demonstrated access to documents in the ordinary course of business, and an agency relationship.” In re Vivendi Universal, S.A. Sec. Litig., 2009 WL 8588405, at *3 (S.D.N.Y. July 10, 2009) (citation omitted); see also, e.g., Sicav v. Wang, No. 12 Civ. 6682 (PAE), 2014 WL 2624753, at *4 (S.D.N.Y. June 12, 2014) (same). In Vivendi, for instance, the court held that a parent did not have control of its subsidiary’s documents despite the fact that (1) the subsidiary was wholly owned; (2) six of the subsidiary’s seven directors were executive officers of the parent; and (3) the parent had demonstrated access to the subsidiary’s financial documents. 2009 WL 8588405, at *3-4 (S.D.N.Y. July 10, 2009). The court found that these facts demonstrated nothing more than an ordinary parent-subsidiary relationship, and that the requisite showing that the companies were “operating as one entity” by utilizing “shared employees, shared facilities, shared office space and . . . common practices and forms” had not been made. Id. at *4; see also Pitney Bowes, Inc. v. Kern Int’l, Inc., 239 F.R.D. 62, 68 (D. Conn. 2006) (the fact that defendant “may share some documents” with 53 affiliate “during the ordinary course of business” is “insufficient” to demonstrate control (citation omitted)).27 In any event, it is far from clear that the same test should be employed to determine a party’s production and preservation obligations. The duty to preserve can be far more intrusive and costly than the duty to produce. In the preservation context, the duty to preserve is triggered the first time litigation is reasonably anticipated, which could be years before litigation is filed (if it ever is), and even further before any document request is served.28 Moreover, the fact that a corporation may be able to “obtain documents upon request” from its affiliate does not necessarily mean that it has the access to and control over its affiliate’s personnel and information technology systems that is required to implement the preservation procedures courts have required. See VOOM, 93 A.D.3d at 41-42 (once the duty to preserve is triggered, the party must (i) “take active steps to halt” any “automatic deletion features that periodically purge electronic documents such 27 By contrast, the only case cited by Appellants in which a parent entity was required to produce the documents of its wholly-owned subsidiary, Wachovia Secs, LLC v. Loop Corp., involved a situation in which there was “no appreciable difference” between the two corporate affiliates. No. 05-C-3788, 2008 WL 2625907 (N.D. Ill. June 27, 2008). This is undisputedly not the case here. 28 See, e.g., U.S. Judicial Conference Memo at B-14 (“Many entities described spending millions of dollars preserving ESI for litigation that may never be filed.”). Indeed, one of the primary reasons that the Judicial Conference approved the amendments to the FRCP regarding ESI was the desire to reduce the significant sums that businesses spend to preserve ESI. Id. at B-14, B-58 (finding the current version of the federal rules do “not adequately address[]the serious problems resulting from the continued exponential growth in the volume of [ESI],” including that litigants “expend excessive effort and money on preservation[.]”). 54 as e-mails,” (ii) “direct appropriate employees to preserve all relevant records,” and (iii) “create a mechanism for collecting the preserved records so they might be searched by someone other than the employee.”). Appellants’ attempt to demonstrate that the MP Defendants had the requisite “control” over VarigLog’s ESI falls short and misstates the record. See Pegasus Br. at 37-40.29 Appellants offer only generic contentions about the MP Defendants’ involvement in high-level corporate strategy, which have nothing to do with whether the MP Defendants had the sort of intimate, day-to-day control over VarigLog’s IT infrastructure, personnel and finances that would give the MP Defendants the practical ability to preserve VarigLog’s ESI. As to this, Appellants point to only two pieces of evidence, neither of which provides Appellants meaningful support. First, Appellants argue that Mr. Born, then a partner at one of the MP Defendants, “was able to obtain any VarigLog documents he wanted[.]” Pegasus Br. at 39. But in the testimony on which Appellants rely, Mr. Born testified unequivocally that he did not have “free access” to VarigLog’s documents, but rather, he could only request and be provided with copies of such documents by VarigLog’s independent management: 29 Appellants take some significant liberties in characterizing the record with respect to these issues. Because such “facts” are beside the point on the merits of this motion, the MP Defendants will not address them in full here. It bears repeating, however, that Appellants’ conclusory assertions that VarigLog’s officers and directors were somehow the puppets of the MP Defendants are, as the First Department expressly found, unsupported by the record. See R1242-43 (Appellate Decision) at n.3; see also Counterstatement of the Case, Section B, supra. 55 Q: Were you able to walk into the Varig Log’s office and ask to see any documents you wanted to see and did they give them to you? A: No, I think I, I would ask - management had - each manager had its own set of documents and spreadsheets and everything, and sometimes I requested some documents. But it’s not that I had free access. I had to ask for the, for the documents through management. R435 (Born Tr.) at 99:1-10 (emphasis added). Appellants also argue that a consultant retained by one of the MP Defendants, Roula Zaarour, was in charge of “[r]eorganizing VarigLog’s IT systems.” Pegasus Br. at 39 (citing R1216-1217 (email from Zaarour to Born, Miller and Abad, dated April 17, 2008 (“4/17/08 Zaarour Email”))). The assertion that somehow the contents of this one email, purporting to establish that Ms. Zaarour had some consulting role for the MP Defendants in connection with the VarigLog IT systems, leads to the conclusion that the MP Defendants had the practical ability to control VarigLog’s computer systems to initiate and maintain document preservation measures is meritless. The assertion is directly contradicted by the testimony of the only witness that was actually questioned about the MP Defendants’ access to VarigLog’s computer systems, Ms. Ohira, who testified that nobody “from Matlin[P]atterson assist[ed] VarigLog with its computer systems” in 2009 (i.e., at the time of the computer crashes). R1026-27 (Ohira Tr.) at 23:11- 24:18. Further, the evidence that Appellants rely upon is an email from Ms. 56 Zaarour, dated April 17, 2008 - i.e., a mere two weeks after the MP Defendants’ access to VarigLog was restored after nine months of being frozen out - offering her opinions as to what VarigLog should do in order to update and streamline certain aspects of VarigLog’s IT network (e.g., “IFS, SITA, Brayner, Embratel, LH Systems”). R1216-17 (4/17/08 Zaarour Email). Appellants, however, present no evidence that Ms. Zaarour had the actual power or ability to implement those changes or whether any of her proposed changes related to the preservation of ESI.30 In short, the low standard the First Department employed to determine “practical control,” and thus whether the MP Defendants had a preservation duty as to VarigLog’s documents, further counsels strongly against adoption of Appellants’ overzealous articulation of this duty. The First Department’s “control” test - which turned on the MP Defendants’ ability to obtain documents upon request, and the inference that “VarigLog would have complied with a timely request by the MP defendants to preserve its ESI” - would be satisfied in many, if 30 Ms. Zaarour’s lack of actual control over VarigLog’s IT infrastructure is demonstrated by another email in the record, dated August 6, 2008, in which she contacts the senior managers of VarigLog, including VarigLog’s CEO and CFO, to offer her “suggest[ions]” and “proposed organizational structure for the IT department” at VarigLog. See R1218-19 (email from Zaarour to Abad, and others, dated August 6, 2008). This email demonstrates that Ms. Zaarour was a “consultant” that was advising VarigLog’s management on IT issues. See R477 (Miller Tr.) at 33:18-23 (Ms. Zaarour was a “consultant[] retained by MatlinPatterson to be involved in VarigLog[.]”); R935 (Ohira Tr.) at 85:14-23; Pegasus Br. at 1 (“Key Players” list). Further, it refutes the notion that Ms. Zaarour was a decision-maker, let alone in control of the IT Department. 57 not most, parent-subsidiary relationships. If a potential preservation duty is to be imposed on such a basis, courts must at a minimum be afforded the discretion exercised by the First Department in this case to make case-specific determinations as to the nature and extent of that duty and the reasonableness of its discharge. III. THE APPELLATE DIVISION CORRECTLY DETERMINED THAT APPELLANTS HAVE NOT ESTABLISHED PREJUDICE Because the First Department properly determined that the MP Defendants were not grossly negligent, Appellants bore the burden of establishing that the lost VarigLog ESI was relevant and helpful to their claims. It was no secret to Appellants at the time they initially filed their motion and on appeal to the Appellate Division that they bore the burden of proving the relevance of the missing VarigLog ESI and the resulting prejudice if the MP Defendants’ conduct did not rise to the level of gross negligence. However, they made the strategic decision to rely on a presumption of relevance and prejudice based on their fatally flawed position that a per se gross negligence finding would relieve them of their evidentiary burden. And, as the First Department correctly held, Appellants had failed to raise this issue in their briefs. The First Department also properly exercised its discretion in declining to give Appellants another opportunity to make a showing of relevance. This Court can and should affirm on these grounds alone. If this Court were to analyze, however, the merits of Appellants’ relevancy arguments, the question is not close; Appellants have clearly failed to establish 58 relevance, and have therefore failed to demonstrate the sort of prejudice that would entitle them to the sanctions they seek. A. The First Department Properly Held Appellants To Their Exclusive Reliance On The Presumption The First Department correctly found that Appellants had not established relevance, and, in fact, “[had] not even claim[ed] to have made such a showing,” instead “rely[ing] on the presumption arising from the gross negligence finding.” R1248 (Appellate Decision) at n.7; see also id. at n.9 (“[P]laintiffs’ appellate brief does not argue, even in the alternative, that the record demonstrates the relevance of the lost ESI, should we determine that a presumption of relevance should not have been applied against the MP defendants.”). On this point, all five justices of the First Department panel were in accord. The majority concluded that “plaintiffs, having had an ample opportunity to demonstrate the relevance of the lost material to their claims against the MP defendants, instead chose to rely on a presumption (which we have found inapplicable) to satisfy the relevance prong of the showing required on their motion,” and “decline[d] to give plaintiffs what would amount to a second bite at the apple[]” given “the extensive litigation that has already taken place on the spoliation issue.” R1252 (Appellate Decision). The partial dissent, implicitly agreeing that prejudice to Appellants could not be found on the present record, concluded that on remand a “hearing should be held to assess the extent of the prejudice suffered by plaintiffs, and for a determination as 59 to the sanction, if any, that would be appropriate.” R1256-57 (Appellate Decision); see also R1251 (id.) (“The partial dissent does not dispute that the existing record does not support a finding that VarigLog’s lost ESI would have supported plaintiff’s claims.”). The full dissent, like the Trial Court, simply relied on the presumption of relevance that arose from its finding of gross negligence. Even Appellants do not contend that the Appellate Division erred in this regard. They instead attempt to sidestep their strategic decision to rely solely on the presumption by pointing to what they call a “logical inconsistency” in the Appellate Division’s opinion - that “[o]n the one hand, the Appellate Division held that Pegasus did not even attempt to satisfy the relevance requirement,” but “[o]n the other hand, the Appellate Division implied that Appellants did attempt to establish the relevance of the destroyed documents, but offered ‘only speculat[ion]’ that they would have been favorable to it.” Pegasus Br. at 60. The argument is pure sophistry. When the Appellate Division discussed that Appellants offered only speculation that the missing VarigLog documents would have been favorable to Appellants, it was in the context of addressing Appellants’ argument that the MP Defendants could not rebut the presumption of relevance and prejudice assumed to exist, albeit erroneously, by the Trial Court. Given the Appellate Division’s finding that the presumption applied by the Trial Court was erroneous, the 60 Appellate Division’s finding that Appellants’ “very weak showing” of relevance did not satisfy Appellants’ burden of affirmatively proving relevance was entirely correct. R1252 (Appellate Decision). As such, Appellants did not attempt to affirmatively prove relevance at the First Department, and even now they do not argue in their brief before this Court that their Motion should be remanded to the Trial Court for a determination of prejudice. Instead, they improperly attempt to argue the fact-intensive issue of relevance to this Court in the first instance. The First Department properly exercised its discretion to conclude that Appellants, who “had an ample opportunity to attempt to demonstrate the relevance of the lost material to their claims against the MP defendants, instead chose to rely on a presumption,” and that they should not be “give[n] what would amount to a second bite at the apple.” R1252 (Appellate Decision). Under this Court’s jurisprudence, “[o]nce the lower courts have undertaken [the] balancing of interests” that lies at the heart of the resolution of discovery disputes, “this Court’s review is limited to determining whether there has been an abuse of discretion.” Kavanagh v. Ogden Allied Maintenance Corp., 92 N.Y.2d 952, 954 (1998); see also Hamilton v. Miller, 23 N.Y.3d 592, 602 (2014) (lower courts have “wide, inherent discretion to manage discovery, foster orderly proceedings, and limit counsel’s gamesmanship”). Appellants’ arguments provide no basis - and there is none - for this Court to 61 conclude that the First Department’s well-reasoned conclusion constituted an abuse of discretion. This Court should therefore affirm. B. Appellants’ Attempts To Demonstrate Relevance Fail Even if this Court were to determine that it would be appropriate to consider the merits of Appellants’ relevance arguments, it should affirm the Appellate Decision because, for the reasons discussed below, Appellants have failed to carry their burden of proving the relevance of VarigLog’s missing documents and prejudice to them as a result of such loss. In deciding whether to impose an adverse inference instruction, “the court must consider, in addition to the conduct of the spoliating party, whether any missing evidence was relevant and whether the innocent party has suffered prejudice as a result of the loss of evidence.” Pension Comm., 685 F. Supp. 2d at 467. “The innocent party must also show that the evidence would have been helpful in proving its claims or defenses - i.e., that the innocent party is prejudiced without that evidence. Proof of relevance does not necessarily equal proof of prejudice.” Id; see also Zubulake, 220 F.R.D. at 221 (“In order to receive an adverse inference instruction, Zubulake must demonstrate not only that UBS destroyed relevant evidence as that term is ordinarily understood, but also that the destroyed evidence would have been favorable to her.”); VOOM, 93 A.D.3d at 45 (“when the destruction of evidence is merely negligent, however, relevance must 62 be proven by the party seeking spoliation sanctions”); Curcio v. Roosevelt Union Free Sch. Dist., 283 F.R.D. 102, 112 (E.D.N.Y. 2012) (“In other words, the moving party must show through extrinsic evidence that the destroyed evidence would have been favorable to its case.”). 31 Courts have rejected the notion that in the e-discovery context a non- spoliating party is relieved of its burden of establishing relevance merely based on the argument that it is impossible to establish relevance without access to the missing ESI. “A finding of spoliation may not be premised on . . . mere supposition that additional documents must have existed and must have been destroyed.” Roberts v. Corwin, 980 N.Y.S.2d 278, 278 (Sup. Ct. N.Y. Cty.) aff'd, 118 A.D.3d 571 (1st Dep’t 2014). Rather, the best evidence of the relevance of missing documents is deposition testimony or documents establishing what the lost evidence would have said. See, e.g., In re Pfizer Inc. Sec. Litig., 288 F.R.D. 297, 324 (S.D.N.Y. 2013) (“Plaintiffs have not attempted to explain how these documents would have been favorable to them either through reference to pertinent 31 Appellants argue that their burden should be minimal with respect to showing the relevance of VarigLog’s missing ESI and the prejudice they have suffered due to its loss. In support of this misguided contention, Appellants cite federal case law stating that even in the context of negligent spoliation, a prejudiced party should not be held to ‘“too strict a standard of proof regarding the contents’” of the destroyed evidence. See Pegasus Br. at 59 (quoting Residential Funding Corp., 306 F.3d at 109), Pension Comm., 685 F.Supp.2d at 478-79 and In re Terrorist Attacks on September 11, 2001, No. 03-1570, 2013 U.S. Dist. LEXIS 155085, *1001 (S.D.N.Y. Oct. 28, 2013)). Appellants’ argument runs counter to the evolving standard which only permits an adverse inference instruction where there is an “intentional loss or destruction of evidence[,]” regardless of its relevance or the level of prejudice caused to the innocent party. See U.S. Judicial Conference Memo at B-65. 63 deposition testimony or to other documents that were found in that same eRoom.”); De Espana v. Am. Bureau of Shipping, No. 03 Civ. 3573, 2007 WL 1686327, at *8 (S.D.N.Y. June 6, 2007) (“Typically, the evidence used to establish relevance of missing documents is deposition testimony.”). Neither can Appellants satisfy their burden of establishing relevance merely by repeating, as they do throughout their brief, that their burden is “not onerous.” See Pegasus Br. at 56-60. Even if that were the standard (which it is not),32 Appellants were still required to come forward with extrinsic evidence - deposition testimony or other documents produced in the litigation (and there were many in this case) - showing that the categories of documents that Appellants now claim are missing (1) actually exist within the lost VarigLog ESI and (2) would have been favorable to Appellants’ case. 32 The cases upon which Appellants rely simply do not support their effort to minimize their burden. For example, Strong v. City of New York, 112 A.D.3d 15, 24 (1st Dep’t 2013), New York City Hous. Auth. v. Pro Quest Sec., Inc., 108 A.D.3d 471, 473-74 (1st Dep’t 2013), Alleva v. United Parcel Serv., Inc., 112 A.D.3d 543, 544 (1st Dep’t 2013), and Sage Realty Corp. v. Proskauer Rose, 275 A.D.2d 11, 16 (1st Dep’t 2000), are all factually distinguishable and do not squarely address the extent of a moving party’s burden to prove prejudice. In all of these cases, the court was confronted with circumstances entirely different from those it encountered here because there was a clear record of relevance. The distinction between this case and others, like Strong, Pro Quest, Alleva and Sage, is illustrated by Santana v. Castillo, 114 A.D.3d 621 (1st Dep’t 2014), another decision upon which Appellants rely. In Santana, confronted with a lost bicycle that had been involved in an accident, the First Department concluded that the “Defendants cite no testimony or provide any evidence to support their contention that the bicycle, by virtue of its involvement in the accident, constituted key evidence.” Santana, 114 A.D.3d at 622. The court observed that “[w]hile the destruction of evidence may diminish a party’s ability to prove the relevancy of, and need for, the destroyed evidence,” citing Sage as an example of such an instance, “that is not the case here since there is no suggestion that the condition of the bicycle caused or contributed to the accident.” Id. The same distinction is applicable here. 64 The First Department correctly found that “[t]he most important evidence bearing on plaintiffs’ alter ego claims against the MP defendants would be communications between the MP defendants and VarigLog, but plaintiffs have abandoned any contention that the loss of VarigLog’s ESI has deprived them of these communications.” R1248 (Appellate Decision) (emphasis added). In other words, the Appellate Division properly concluded that such evidence is not claimed to have been lost, given “that the MP defendants have produced their own ESI embodying these communications.” Id. Nevertheless, Appellants point to three categories of documents that they claim were lost and would have been favorable to their claims: (1) VarigLog’s internal email communications, (2) VarigLog’s email exchanges with the Judicial Oversight Committee and (3) VarigLog’s banking records.33 Appellants, however, have not offered any proof that these documents were included in VarigLog’s lost ESI, let alone that the evidence would support their claims. Notably, while Appellants rely on the Trial Court to support their contentions as to the relevance of these three categories of documents, the language they quote-“the spoliated documents ‘clearly would be very relevant and important for the plaintiff to prove their case,’” Pegasus Br. at 60-refers to 33 Appellants do not allege, nor could they, that internal VarigLog emails, email communications with the Judicial Oversight Committee or banking records were lost as a result of the 35,000 boxes that VarigLog allegedly failed to search. 65 Appellants’ underlying claims against VarigLog, not Appellants’ claims against the MP Defendants. The full quote makes this clear: There were no Varig Log documents that dealt with the original acquisition of the planes or correspondence between Varig Log and predecessor for the prior services of the airplanes. A lot of documents that clearly would be very relevant and important for the plaintiff to prove their case since that is what this case is about, these leases of these airplanes. R17 (Trial Court Order) at 8:18-25. The Trial Court imposed the ultimate sanction of a default judgment on VarigLog; VarigLog did not appeal. Appellants should not be permitted to bootstrap a finding of relevance as to the claims against the MP Defendants from a finding of relevance as to the claims against VarigLog. 1. There Is No Evidence As To The Existence Of The Communications Appellants Seek As a threshold matter, Pegasus has not offered any evidence establishing that VarigLog’s lost ESI includes communications between VarigLog employees and the Judicial Oversight Committee, or internal VarigLog communications-i.e., without the MP Defendants’ involvement-that would “reveal[] valuable insights into the experience of VarigLog employees working under Matlin.”34 Pegasus Br. at 64. Appellants’ failure in this regard should end the relevance analysis because “[f]or sanctions to be appropriate, it is a necessary, but insufficient, condition that 34 To the extent that the MP Defendants were part of the communications with VarigLog’s management and employees or the Judicial Oversight Committee, Appellants would already be in possession of such communications based on the MP Defendants’ production of the MP Defendants’ ESI. 66 the sought-after evidence actually existed and was destroyed.” Orbit One Commc’ns, Inc. v. Numerex Corp., 271 F.R.D. 429, 441 (S.D.N.Y. 2010) (internal quotation marks and citation omitted) (emphasis in original). To be sure, setting aside the issue of whether the documents would help Pegasus, the mere existence of such documents rests on nothing more than Appellants’ own say so. For example, Appellants posit with respect to the Judicial Oversight Committee communications that “[h]ad the records not been spoliated, Pegasus could show that the existence of a small number of communications with the fiscais demonstrates that the fiscais were not controlling VarigLog.” Pegasus Br. at 63. Likewise, as to the internal VarigLog communications, Appellants surmise that the lost ESI would reveal “whether VarigLog’s employees felt free to function independently, or whether they were beholden to Matlin’s orders.” Pegasus Br. at 65. These assertions, however, rest upon nothing more than rank speculation. See Am. Mach. & Foundry Co. v. Santini Bros., 283 N.Y.S.2d 574, 578 (Sup. Ct. N.Y. Cty. 1967) (rejecting evidentiary assertion that has “no greater efficacy than the assertion of the fictional Bellman that ‘What I tell you three times is true.’”) (quoting Lewis Carroll’s The Hunting of the Snark)). Appellants have not set forth any evidence to establish that VarigLog employees communicated with the Judicial Oversight Committee via email and, even if they did, without the MP Defendants’ involvement (in which case the email 67 would have been produced). To the contrary, the record evidence suggests that no such communications would have been part of VarigLog’s lost ESI. Witnesses consistently have testified that while the Judicial Oversight Committee was present in VarigLog’s offices on a daily basis and were involved in discussions concerning VarigLog’s operations, such correspondence generally was oral, not written. See R847 (Abad Tr.) at 55:4-11 (testifying that he communicated with the Judicial Oversight Committee on a daily basis, but “[v]ery seldom[]” in writing); R893-95 (Miller Tr.) at 47:9-49:10 (testifying that he communicated extensively with the Judicial Oversight Committee, but “very rarely” in writing). Against that evidence, Appellants fail to cite a single document or excerpt from a deposition establishing that the standard mode of communication between the Judicial Oversight Committee and VarigLog was through email communications. Neither is there any evidence that VarigLog employees emailed one another discussing the manner in which the MP Defendants played a role in VarigLog’s operations. Appellants’ evidentiary failure is particularly egregious because, despite what they describe as the “tortured history” of discovery in this case, Appellants never made any effort to establish whether these categories of communications actually exist. For example, Appellants could have sought a deposition of one of the members of the Judicial Oversight Committee to ask whether any one of them communicated with VarigLog’s employees by email without any involvement by 68 the MP Defendants. Similarly, Appellants could have sought the testimony of VarigLog employees to confirm that the airline’s staff expressed feelings to each other via email about the MP Defendants. For this reason, in rejecting the partial dissent’s suggestion that this case be remanded for a determination of relevance, the Appellate Division properly concluded that Pegasus had an “ample opportunity to attempt to demonstrate the relevance of the lost material to their claims against the MP defendants,” but took no steps to do so and should not be afforded a remand that “would amount to a second bite at the apple.” R1252 (Appellate Decision). The paucity of Appellants’ evidentiary showing is well illustrated by cases in which a non-spoliating party has successfully established relevance, such as Harkabi v. SanDisk Corp., 275 F.R.D. 414, 420 (S.D.N.Y. 2010), where the relevance prong in an ESI case was satisfied when the innocent party “submitted affidavits cataloging the contents of the missing laptops.” In stark contrast, Appellants rely only on conjecture, which is not enough to support the imposition of an adverse inference. See, e.g., Duluc v. AC & L Food Corp., 119 A.D.3d 450, 453 (1st Dep’t 2014) (refusing to impose adverse inference where plaintiff’s argument concerning content of lost videotape “rest[ed] on mere speculation” and holding that “[t]o argue that the unpreserved tapes might potentially have shown a condition that caused plaintiff’s fall does not meet plaintiff’s burden”); Roberts, 41 69 Misc. 3d at 1210 (finding no showing of relevance where non-spoliating party made “no showing, through either deposition testimony or other documents, that any documents were destroyed”); Guerrero v. Lenox Hill Hosp., 270 A.D.2d 179, 179 (1st Dep’t 2000) (“Defendants’ speculation that pertinent information may exist in the additional medical records sought is insufficient . . . .”); Orbit One, 271 F.R.D. at 443 (denying imposition of adverse inference where “[n]o witness has identified any significant document that has not been produced in discovery”); De Espana, 2007 WL 1686327, at *8 (denying imposition of adverse inference where “[t]here is no evidence that ABS asked any deponent whether lost or destroyed emails included information concerning its proposed adverse inferences”). 2. There Is No Evidence That VarigLog’s Lost ESI Would Support Appellants’ Alter Ego Claims Even if Appellants were to demonstrate the existence of communications between the Judicial Oversight Committee and VarigLog, or independently, internal communications at VarigLog concerning the subject of the MP Defendants’ role in the management of VarigLog, the record is devoid of evidence, and certainly there is none cited by Appellants, demonstrating that such evidence would have supported Appellants’ claims. Again, Appellants rely on nothing more 70 than rank speculation.35 For example, Appellants assert that they have “marshalled substantial evidence tending to show that had [communications between VarigLog and the Judicial Oversight Committee] not been destroyed, those communications would have supported Pegasus’s alter-ego claim.” Pegasus Br. at 62. However, the “evidence” relied on by Appellants does no such thing. Rather, Appellants merely point to parts of the record that they believe support the underlying merits of their alter ego claims. Pegasus Br. at 62-63. But Appellants miss the point because that evidence does not establish that the lost emails would have shown the same thing. Indeed, it is equally, if not more plausible, in light of the Brazilian Court orders (which are part of the public record and for which there is no allegation of spoliation), that VarigLog’s communications with the Judicial Oversight Committee (if they existed and would independently be admissible) may very well have undercut Appellants’ alter ego theories. Likewise, Appellants rely upon “evidence of Matlin’s control over VarigLog and over the Pegasus planes,” as well as a single email from a VarigLog employee to an employee of the MP Defendants raising concerns over the management of VarigLog’s fleet, to support the proposition that the lost ESI must 35 The Court need not reach this point. Given Appellants’ inability to prove the existence of the VarigLog communications within the lost ESI, it necessarily follows that there is no evidentiary basis upon which to conclude that such evidence would have supported Appellants’ claims. 71 include “dozens or more [emails] revealing VarigLog’s impotence in Matlin’s hands.” Pegasus Br. at 65-66. This too is nothing more than conjecture and, perhaps more importantly, Appellants do not (and cannot) explain how internal VarigLog correspondence, purportedly showing employees’ alleged “misgivings” of the MP Defendants’ business decisions (or other evidence showing the MP Defendants’ involvement in VarigLog’s decisions) would be relevant to the legal determination of whether the MP Defendants completely dominated VarigLog with respect to its dealings with Appellants. Absent any evidence to the contrary (and Appellants cite none), internal email communications within VarigLog may contain communications in which VarigLog management exercised autonomy, all of which would certainly be unfavorable to Appellants’ claims. Therefore, Appellants’ argument fairly can be reduced to the legally unsupportable proposition that because there is evidence in the record showing the MP Defendants’ involvement in VarigLog’s business decisions - a wholly innocuous scenario in any other parent company context, but clearly expected in light of the Brazilian Court’s orders - all other evidence must necessarily support Appellants’ alter ego assertions. This is exactly the type of speculation that has been rejected by the courts as a basis of establishing relevance of missing ESI. The monumental leap that Appellants would have this Court endorse is thus directly counter to the purpose of the adverse inference, which is to “restor[e] the 72 prejudiced party to the same position he would have been in absent the wrongful destruction of evidence by the opposing party.” Kronisch v. United States, 150 F.3d 112, 126 (2d Cir. 1998); see also Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68, 75 (S.D.N.Y. 1991) (recognizing that the adverse inference is intended to “restor[e] the evidentiary balance”). Here, as the Appellate Division held, on this record where there is no evidence of gross negligence, much less than extrinsic evidence supporting any inference that the missing VarigLog ESI would support a finding in Appellants’ favor, an adverse inference would unfairly tip the evidentiary balance against the MP Defendants. Nearly identical arguments were proffered by the non-spoliating party in De Espana, a federal case involving lost ESI. In that case, the defendant, the American Bureau of Shipping (“ABS”), sought an adverse inference based upon Spain’s spoliation of ESI involving Spain’s response to the sinking of an oil tanker. In support of its claim that the missing ESI was relevant, ABS relied upon statements by representatives of the Spanish government tending to show that the incident was not handled properly and that the missing emails “would have revealed what Spanish officials were thinking and doing in response to the casualty and that they would have revealed Spain’s ‘true feelings’ about the response efforts.” De Espana, 2007 WL 1686327, at *7. The court rejected ABS’s argument and agreed with Spain’s assertion that “ABS has failed to prove through 73 extrinsic evidence that the missing emails would have been favorable to them, or that it was prejudiced in its ability to litigate this case given the voluminous records already produced regarding the precise actions taken by Spanish officials.” Id. The same result is appropriate here because Appellants have not offered any extrinsic evidence that the lost ESI, if it existed, would have helped Appellants to prove their case. Without such evidence, there simply is no basis upon which to impose an adverse inference. See Denoyelles v. Gallagher, 40 A.D.3d 1027, 1027 (2d Dep’t 2007) (affirming denial of spoliation sanctions where “plaintiffs failed to demonstrate that . . . [the lost documents] rendered the plaintiffs prejudicially bereft of appropriate means to prove their claims”) (internal quotations and citations omitted)); Myers v. Sadlor, 16 A.D.3d 257, 258 (1st Dep’t 2005) (affirming denial of spoliation sanctions on the ground that the movant failed to establish that the lost evidence was “crucial” evidence when “an abundance of other relevant medical evidence remain[ed] available to the parties for the period in question.”); Longo v. Armor Elev. Co., 278 A.D.2d 127, 128 (1st Dep’t 2000) (affirming denial of spoliation sanctions on ground that “on the present record, there is no reason to suppose that the missing items will prevent plaintiff from supporting her causes of action.”); Jennosa v. Vermeer Mfg. Co., 64 A.D.3d 630, 631-32 (2d Dep’t 2009) (reversing trial court’s grant of spoliation sanctions on the 74 ground that plaintiff failed to demonstrate prejudice because the loss of evidence complained of did not prevent plaintiff from opposing defendants’ motion for summary judgment); accord Pension Comm., 685 F.Supp.2d at 478-79 (“The [movants] have gathered an enormous amount of discovery - both from documents and witnesses. Unless they can show through extrinsic evidence that the loss of the documents has prejudiced their ability to defend the case, then a lesser sanction than a spoliation charge is sufficient to address any lapse in the discovery efforts of the negligent plaintiffs.”). 3. Appellants Have Not Carried Their Burden As To The Allegedly Missing Bank Records Finally, Appellants offer no basis to reverse the Appellate Division’s conclusion that they will not suffer prejudice by virtue of VarigLog’s failure to produce banking records contained in its email records. The Appellate Division correctly found that, given Appellants’ concession that they received some banking records that they claim would support their alter ego theory, any additional evidence would be cumulative. See R1248 (Appellate Decision). In other words, Appellants cannot validly claim prejudice in light of the fact that the record already contains much of the evidence they seek. Notably, Appellants’ unsupported contention that “just because destroyed evidence would be cumulative to existing evidence is hardly a reason to deny spoliation sanctions[,]” Pegasus Br. at 68, reflects an ignorance of the law 75 governing the imposition of an adverse inference, and of courts’ recognition that “[t]he in terrorem effect of an adverse inference is obvious. . . . Accordingly, the adverse inference instruction is an extreme sanction and should not be given lightly.” Zubulake, 220 F.R.D. at 219-20. Because, as the First Department found, an adverse inference instruction can be tantamount to summary judgment, Appellants should not be permitted to brush aside the fact that they already have many of the “lost” documents. And, of course, Appellants have not offered any legitimate excuse for their failure to obtain the relevant bank records from the banks that issued them. As noted by Appellants, discovery in this case lasted for years. Appellants had plenty of time to seek relevant documents from non-parties, even if doing so would have involved seeking information from entities “incorporated abroad, thus complicating matters.” Pegasus Br. at 69. * * * In sum, Appellants have failed to establish beyond speculation and conjecture that VarigLog’s lost documents include relevant evidence or that Appellants will be prejudiced by the absence of such evidence. The First Department properly found that, under these circumstances, no spoliation sanction was warranted. The First Department’s conclusion as to relevance should be affirmed. CONCLUSION For the foregoing reasons, the Appellate Decision should be affirmed. Dated: New York, New York March 16, 2015 By: SIMPSON THACHER & BARTLETT LLP I Roy L. Reardon Thomas C. Rice Isaac M. Rethy 425 Lexington A venue New York, New York 10017 Tel: (212) 455-2000 Fax: (212) 455-2502 -and- Michael C. Hefter Kelly Koscuiszka David A. Shargel BRACEWELL & GIULIANI LLP 1251 Avenue of the Americas New York, New York 10020 (212) 508-6100 Attorneys for Defendants-Respondents 76 Memorandum of the United States Judicial Conference COMMITTEE ON RULES OF PRACTICE AND PROCEDURE OF THE JUDICIAL CONFERENCE OF THE UNITED STATES WASHINGTON, D.C. 20544 JEFFREY S. SUTTON CHAIR JONATHAN C. ROSE SECRETARY CHAIRS OF ADVISORY COMMITTEES STEVEN M. COLLOTON APPELLATE RULES EUGENE R. WEDOFF BANKRUPTCY RULES DAVID G. CAMPBELL CIVIL RULES REENA RAGGI CRIMINAL RULES SIDNEY A. FITZWATER EVIDENCE RULES MEMORANDUM TO: Judge Jeffrey Sutton Chair, Standing Committee on Rules of Practice and Procedure FROM: Judge David G. Campbell Chair, Advisory Committee on Federal Rules of Civil Procedure RE: Proposed Amendments to the Federal Rules of Civil Procedure DATE: June 14, 2014 Over the course of the last four years, the Advisory Committee on the Federal Rules of Civil Procedure has developed, published, and refined a set of proposed amendments that will implement conclusions reached at a May 2010 Conference on Civil Litigation held at Duke University Law School. The Committee has also proposed and published amendments that would abrogate Rule 84 and the forms appended to the civil rules, and make a modest change to Rule 55. Final versions of the proposals were approved unanimously by the Committee at its meeting in Portland, Oregon on April 10-11, 2014, and approved unanimously by the Standing Committee at its meeting in Washington, D.C. on May 29-30, 2014. This report explains the proposed amendments. The text of the proposed rules and the proposed Advisory Committee Notes immediately follow this report. The Committee respectfully requests that you forward the proposed amendments for consideration by the Judicial Conference, the Supreme Court, and Congress. Agenda E-19 (Appendix B) Rules September 2014 Rules Appendix B-1 I. THE DUKE CONFERENCE. The 2010 Duke Conference was organized by the Committee for the specific purpose of examining the state of civil litigation in federal courts and exploring better means to achieve Rule 1’s goal of the just, speedy, and inexpensive determination of every action. The Committee invited 200 participants to attend, and all but one accepted. Participants were selected to ensure diverse views and expertise, and included trial and appellate judges from federal and state courts; plaintiff, defense, and public interest lawyers; in-house counsel from governments and corporations; and many law professors. Empirical studies were conducted in advance of the conference by the Federal Judicial Center (“FJC”), bar associations, private and public interest research groups, and academics. More than seventy judges, lawyers, and academics made presentations to the conference, followed by a broad-ranging discussion among all participants. The Conference was streamed live by the FJC. The conference planning committee and its chair, Judge John Koeltl of the Southern District of New York, spent more than one year assembling the panels and commissioning, coordinating, and reviewing the empirical studies and papers. Materials prepared for the Conference can be found at http://www.uscourts.gov, and include more than 40 papers, 80 presentations, and 25 compilations of empirical research. The Duke Law Review published some of the papers in Volume 60, Number 3 (December 2010). The Conference concluded that federal civil litigation works reasonably well -major restructuring of the system is not needed. There was near-unanimous agreement, however, that the disposition of civil actions could be improved by advancing cooperation among parties, proportionality in the use of available procedures, and early judicial case management. A panel on e-discovery unanimously recommended that the Committee draft a rule to deal with the preservation and loss of electronically stored information (“ESI”). Following the conference, the Committee created a Duke Subcommittee, chaired by Judge Koeltl, to consider recommendations made during the Duke Conference. The Committee also assigned the existing Discovery Subcommittee to draft a rule addressing the preservation and loss of ESI. The work of these subcommittees led to two categories of proposed amendments discussed below: the Duke proposals drafted by the Duke Subcommittee, and proposed new Rule 37(e) drafted by the Discovery Subcommittee. The proposed abrogation of Rule 84 and the proposed amendment to Rule 55 were developed independently of the Duke Conference initiatives. This report will discuss separately the Duke proposals, proposed Rule 37(e), the abrogation of Rule 84, and the amendment to Rule 55. Additional insight can be gained by reviewing the proposed rule language and committee notes in the Appendix. II. THE DUKE PROPOSALS. In a report to the Chief Justice following the Duke Conference, the Committee provided this summary of key conference conclusions: “What is needed can be described in two words - cooperation and proportionality - and one phrase - sustained, active, hands-on judicial case Rules Appendix B-2 management.” Since the conference, the Committee and others have sought to promote cooperation, proportionality, and active judicial case management through several means. First, the FJC has sought to develop enhanced education programs. Among other measures, in 2013 the FJC published a new Benchbook for Federal District Court Judges with a new, comprehensive chapter on judicial case management written with substantial input from members of the Committee and the Standing Committee. Second, the Committee and the National Employment Lawyers Association (“NELA”) worked cooperatively with the Institute for Advancement of the American Legal System (“IAALS”) to develop protocols for initial disclosures in employment cases. The protocols were developed by a team of experienced plaintiff and defense lawyers and include substantial mandatory disclosures required of both sides at the beginning of employment cases. The protocols are now being used by more than 50 federal district judges. The FJC and the Committee intend to monitor this pilot program and other innovative changes made in several state and federal courts. Third, the Committee developed proposed rule amendments through the Duke Subcommittee. The Subcommittee began with a list of proposals made at the Duke Conference and held numerous conference calls, circulated drafts of proposed rules, and sponsored a mini- conference with 25 invited judges, lawyers, and law professors to discuss possible rule amendments. The Subcommittee presented recommendations for full discussion by the Committee and the Standing Committee during meetings held in 2011, 2012, and 2013. The proposed Duke amendments were published as a package in August 2013 along with the other proposed amendments discussed in this report. More than 2,300 written comments were received and more than 120 witnesses appeared and addressed the Committee in public hearings held in Washington, D.C., Phoenix, and Dallas. Following the public comment process, the Subcommittee withdrew some proposals, amended others, and proposed the package of amendments discussed below. We believe that this process has resulted in fully-informed rulemaking at its best. The original Duke Conference, the lengthy and detailed deliberations of the Duke Subcommittee, the mini-conference held by the Subcommittee, repeated reviews of the proposals by the full Committee and the Standing Committee, and the vigorous public comment process have provided a sound basis for proposing changes to the civil rules. Rather than discuss the proposed Duke amendments in numerical rule order, this report will address the discovery proposals, followed by proposals on judicial case management and cooperation. Rules Appendix B-3 A. Discovery Proposals. 1. Withdrawn Proposals. The proposals published last August sought to encourage more active case management and advance the proportional use of discovery by amending the presumptive numerical limits on discovery. The intent was to promote efficiency and prompt a discussion early in each case about the amount of discovery needed to resolve the dispute. Under these proposals, Rules 30 and 31 would have been amended to reduce from 10 to 5 the presumptive number of depositions permitted for plaintiffs, defendants, and third-party defendants; Rule 30(d) would have been amended to reduce the presumptive time limit for an oral deposition from 7 hours to 6 hours; Rule 33 would have been amended to reduce from 25 to 15 the presumptive number of interrogatories a party may serve on any other party; and a presumptive limit of 25 would have been introduced for requests to admit under Rule 36, excluding requests to admit the genuineness of documents. These proposals received some support in the public comment process, but they also encountered fierce resistance. Many expressed fear that the new presumptive limits would become hard limits in some courts and would deprive parties of the evidence needed to prove their claims or defenses. Some asserted that many types of cases, including cases that seek relatively modest monetary recoveries, require more than 5 depositions. Fears were expressed that opposing parties could not be relied upon to recognize and agree to the reasonable number needed; that agreement among the parties might require unwarranted trade-offs in other areas; and that the showing now required to justify an 11th or 12th deposition would be needed to justify a 6th or 7th deposition, reducing the overall number of depositions permitted under the rules. After reviewing the public comments, the Subcommittee and Committee decided to withdraw these recommendations. The intent of the proposals was never to limit discovery unnecessarily, but many worried that the changes would have that effect. The Committee concluded that it could promote the goals of proportionality and effective judicial case management through other proposed rule changes, such as the renewed emphasis on proportionality and steps to promote earlier and more informed case management, without raising the concerns spawned by the new presumptive limits. 2. Amendments to Rule 26(b)(1): Four Elements. The proposed amendments to Rule 26(b)(1) include four elements: (1) the factors included in present Rule 26(b)(2)(C)(iii) are moved up to become part of the scope of discovery in Rule 26(b)(1), identifying elements to be considered in determining whether discovery is proportional to the needs of the case; (2) language regarding the discovery of sources of information is removed as unnecessary; (3) the distinction between discovery of information relevant to the parties’ claims or defenses and discovery of information relevant to the subject matter of the action, on a showing of good cause, is eliminated; (4) the sentence allowing discovery of information “reasonably calculated to lead to the discovery of admissible evidence” is rewritten. Each proposal will be discussed separately. Rules Appendix B-4 a. Scope of Discovery: Proportionality. There was widespread agreement at the Duke Conference that discovery should be proportional to the needs of the case, but subsequent discussions at the mini-conference sponsored by the Subcommittee revealed significant discomfort with simply adding the word “proportional” to Rule 26(b)(1). Standing alone, the phrase seemed too open-ended, too dependent on the eye of the beholder. To provide clearer guidance, the Subcommittee recommended that the factors already prescribed by Rule 26(b)(2)(C)(iii), which currently are incorporated by cross-reference in Rule 26(b)(1), be relocated to Rule 26(b)(1) and included in the scope of discovery. Under this amendment, the first sentence of Rule 26(b)(1) would read as follows: Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.1 This proposal produced a division in the public comments. Many favored the proposal. They asserted that costs of discovery in civil litigation are too often out of proportion to the issues at stake in the litigation, resulting in cases not being filed or settlements made to avoid litigation costs regardless of the merits. They stated that disproportionate litigation costs bar many from access to federal courts and have resulted in a flight to other dispute resolution fora such as arbitration. They noted that the proportionality factors currently found in Rule 26(b)(2)(C)(iii) often are overlooked by courts and litigants, and that the proposed relocation of those factors to Rule 26(b)(1) will help achieve the just, speedy, and inexpensive determination of every action. Many others saw proportionality as a new limit that would favor defendants. They criticized the factors from Rule 26(b)(2)(C)(iii) as subjective and so flexible as to defy uniform application. They asserted that “proportionality” will become a new blanket objection to all discovery requests. They were particularly concerned that proportionality would impose a new burden on the requesting party to justify each and every discovery request. Some argued that the proposed change is a solution in search of a problem - that discovery in civil litigation already is proportional to the needs of cases. After considering these public comments carefully, the Committee remains convinced that transferring the Rule 26(b)(2)(C)(iii) factors to the scope of discovery, with some 1The current version of this language in Rule 26(b)(2)(C)(iii) reads as follows: “On motion or on its own, the court must limit the frequency or extent of discovery otherwise allowed by these rules or by local rule if it determines that: . . . (iii) the burden or expense of the proposed discovery outweighs its likely benefit, considering the needs of the case, the amount in controversy, the parties’ resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues.” Rules Appendix B-5 modifications as described below, will improve the rules governing discovery. The Committee reaches this conclusion for three primary reasons. Findings from the Duke Conference. As already noted, a principal conclusion of the Duke Conference was that discovery in civil litigation would more often achieve the goals of Rule 1 through an increased emphasis on proportionality. This conclusion was expressed often by speakers and panels at the conference and was supported by a number of surveys. In its report to the Chief Justice, the Committee observed that “[o]ne area of consensus in the various surveys . . . was that district or magistrate judges must be considerably more involved in managing each case from the outset, to tailor the motions practice and shape the discovery to the reasonable needs of the case.” The FJC prepared a closed-case survey for the Duke Conference. The survey questioned lawyers in 3,550 cases terminated in federal district courts for the last quarter of 2008. Although the survey found that a majority of lawyers thought the discovery in their case generated the “right amount” of information, and more than half reported that the costs of discovery were the “right amount” in proportion to their clients’ stakes in the case, a quarter of attorneys viewed discovery costs in their cases as too high relative to their clients’ stakes in the case. A little less than a third reported that discovery costs increased or greatly increased the likelihood of settlement, or caused the case to settle, with that number increasing to 35.5% of plaintiff attorneys and 39.9% of defendant attorneys in cases that actually settled. On the question of whether the cost of litigating in federal court, including the cost of discovery, had caused at least one client to settle a case that would not have settled but for the cost, those representing primarily defendants and those representing both plaintiffs and defendants agreed or strongly agreed 58.2% and 57.8% of the time, respectively, and those representing primarily plaintiffs agreed or strongly agreed 38.6% of the time. The FJC study revealed agreement among lawyers representing plaintiffs and defendants that the rules should be revised to enforce discovery obligations more effectively. Other surveys prepared for the Duke Conference showed greater dissatisfaction with the costs of civil discovery. In surveys of lawyers from the American College of Trial Lawyers (“ACTL”), the ABA Section of Litigation, and NELA, more lawyers agreed than disagreed with the proposition that judges do not enforce Rule 26(b)(2)(C) to limit discovery. The ACTL Task Force on Discovery and IAALS reported on a survey of ACTL fellows, who generally tend to be more experienced trial lawyers than those in other groups. A primary conclusion from the survey was that today’s civil litigation system takes too long and costs too much, resulting in some deserving cases not being filed and others being settled to avoid the costs of litigation. Almost half of the ACTL respondents believed that discovery is abused in almost every case, with responses being essentially the same for both plaintiff and defense lawyers. The report reached this conclusion: “Proportionality should be the most important principle applied to all discovery.” Surveys of ABA Section of Litigation and NELA attorneys found more than 80% agreement that discovery costs are disproportionately high in small cases, with more than 40% of respondents saying they are disproportionate in large cases. In the survey of the ABA Section of Rules Appendix B-6 Litigation, 78% percent of plaintiffs’ attorneys, 91% of defense attorneys, and 94% of mixed- practice attorneys agreed that litigation costs are not proportional to the value of small cases, with 33% of plaintiffs’ lawyers, 44% of defense lawyers, and 41% of mixed-practice lawyers agreeing that litigation costs are not proportional in large cases. In the NELA survey, which included primarily plaintiffs’ lawyers, more than 80% said that litigation costs are not proportional to the value of small cases, with a fairly even split on whether they are proportional to the value of large cases. An IAALS survey of corporate counsel found 90% agreement with the proposition that discovery costs in federal court are not generally proportional to the needs of the case, and 80% disagreement with the suggestion that outcomes are driven more by the merits than by costs. In its report summarizing the results of some of the Duke empirical research, IAALS noted that between 61% and 76% of the respondents in the ABA, ACTL, and NELA surveys agreed that judges do not enforce the rules’ existing proportionality limitations on their own. The History of Proportionality in Rule 26. The proportionality factors to be moved to Rule 26(b)(1) are not new. Most of them were added to Rule 26 in 1983 and originally resided in Rule 26(b)(1). The Committee’s original intent was to promote more proportional discovery, as made clear in the 1983 Committee Note which explained that the change was intended “to guard against redundant or disproportionate discovery by giving the court authority to reduce the amount of discovery that may be directed to matters that are otherwise proper subjects of inquiry,” and “to encourage judges to be more aggressive in identifying and discouraging discovery overuse.” The 1983 amendments also added Rule 26(g), which now provides that a lawyer’s signature on a discovery request, objection, or response constitutes a certification that it is “neither unreasonable nor unduly burdensome or expensive, considering the needs of the case, prior discovery in the case, the amount in controversy, and the importance of the issues at stake in the action.” The 1983 amendments thus made proportionality a consideration for courts in limiting discovery and for lawyers in issuing and responding to discovery requests. The proportionality factors were moved to Rule 26(b)(2)(C) in 1993 when section (b)(1) was divided, but their constraining influence on discovery remained important in the eyes of the Committee. The 1993 amendments added two new factors: whether “the burden or expense of the proposed discovery outweighs its likely benefit,” and “the importance of the proposed discovery in resolving the issues.” The 1993 Committee Note stated that “[t]he revisions in Rule 26(b)(2) are intended to provide the court with broader discretion to impose additional restrictions on the scope and extent of discovery[.]” The proportionality factors were again addressed by the Committee in 2000. Rule 26(b)(1) was amended to state that “[a]ll discovery is subject to the limitations imposed by Rule 26(b)(2)(i), (ii), and (iii) [now Rule 26(b)(2)(C)].” The 2000 Committee Note explained that courts were not using the proportionality limitations as originally intended, and that “[t]his otherwise redundant cross-reference has been added to emphasize the need for active judicial use of subdivision (b)(2) to control excessive discovery.” Rules Appendix B-7 As this summary illustrates, three previous Civil Rules Committees in three different decades have reached the same conclusion as the current Committee - that proportionality is an important and necessary feature of civil litigation in federal courts. And yet one of the primary conclusions of comments and surveys at the 2010 Duke Conference was that proportionality is still lacking in too many cases. The previous amendments have not had their desired effect. The Committee’s purpose in returning the proportionality factors to Rule 26(b)(1) is to make them an explicit component of the scope of discovery, requiring parties and courts alike to consider them when pursuing discovery and resolving discovery disputes. Adjustments to the 26(b)(1) Proposal. The Committee considered carefully the concerns expressed in public comments: that the move will shift the burden of proving proportionality to the party seeking discovery, that it will provide a new basis for refusing to provide discovery, and that it will increase litigation costs. None of these predicted outcomes is intended, and the proposed Committee Note has been revised to address them. The Note now explains that the change does not place a burden of proving proportionality on the party seeking discovery and explains how courts should apply the proportionality factors. The Note also states that the change does not authorize boilerplate refusals to provide discovery on the ground that it is not proportional, but should instead prompt a dialogue among the parties and, if necessary, the court, concerning the amount of discovery reasonably needed to resolve the case. The Committee remains convinced that the proportionality considerations will not increase the costs of litigation. To the contrary, the Committee believes that more proportional discovery will decrease the cost of resolving disputes without sacrificing fairness. In response to public comments, the Committee also reversed the order of the initial proportionality factors to refer first to “the importance of the issues at stake” and second to “the amount in controversy.” This rearrangement adds prominence to the importance of the issues and avoids any implication that the amount in controversy is the most important concern. The Committee Note was also expanded to emphasize that courts should consider the private and public values at issue in the litigation - values that cannot be addressed by a monetary award. The Note discussion draws heavily on the Committee Note from 1983 to show that, from the beginning, the rule has been framed to recognize the importance of nonmonetary remedies and to ensure that parties seeking such remedies have sufficient discovery to prove their cases. Also in response to public comments, the Committee added a new factor: “the parties’ relative access to relevant information.” This factor addresses the reality that some cases involve an asymmetric distribution of information. Courts should recognize that proportionality in asymmetric cases will often mean that one party must bear greater burdens in responding to discovery than the other party bears. With these adjustments, the Committee believes that moving the factors from Rule 26(b)(2)(C) to Rule 26(b)(1) will satisfy the need for proportionality in more civil cases, as identified in the Duke Conference, while avoiding the concerns expressed in some public comments. Rules Appendix B-8 b. Discovery of Information in Aid of Discovery. Rule 26(b)(1) now provides that discoverable matters include “the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter.” The Committee believes that these words are no longer necessary. The discoverability of such information is well established. Because Rule 26 is more than twice as long as the next longest civil rule, the Committee believes that removing excess language is a positive step. Some public comments expressed doubt that discovery of these matters is so well entrenched that the language is no longer needed. They urged the Committee to make clear in the Committee Note that this kind of discovery remains available. The Note has been revised to make this point. c. Subject-Matter Discovery. Before 2000, Rule 26(b)(1) provided for discovery of information “relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party.” Responding to repeated suggestions that discovery should be confined to the parties’ claims or defenses, the Committee amended Rule 26(b)(1) in 2000 to narrow the scope of discovery to matters “relevant to any party’s claim or defense,” but preserved subject-matter discovery upon a showing of good cause. The 2000 Committee Note explained that the change was “designed to involve the court more actively in regulating the breadth of sweeping or contentious discovery.” The Committee proposes that the reference to broader subject matter discovery, available upon a showing of good cause, be deleted. In the Committee's experience, the subject matter provision is virtually never used, and the proper focus of discovery is on the claims and defenses in the litigation. Only a small portion of the public comments addressed this proposal, with a majority favoring it. The Committee Note includes three examples from the 2000 Note of information that would remain discoverable as relevant to a claim or defense: other incidents similar to those at issue in the litigation, information about organizational arrangements or filing systems, and information that could be used to impeach a likely witness. The Committee Note also recognizes that if discovery relevant to the pleaded claims or defenses reveals information that would support new claims or defenses, the information can be used to support amended pleadings. d. “Reasonably calculated to lead.” The final proposed change in Rule 26(b)(1) deletes the sentence which reads: “Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” The proposed amendment would replace this sentence with the following language: “Information within this scope of discovery need not be admissible in evidence to be discoverable.” Rules Appendix B-9 This change is intended to curtail reliance on the “reasonably calculated” phrase to define the scope of discovery. The phrase was never intended to have that purpose. The “reasonably calculated” language was added to the rules in 1946 because parties in depositions were objecting to relevant questions on the ground that the answers would not be admissible at trial. Inadmissibility was used to bar relevant discovery. The 1946 amendment sought to stop this practice with this language: “It is not ground for objection that the testimony will be inadmissible at the trial if the testimony sought appears reasonably calculated to lead to the discovery of admissible evidence.” Recognizing that the sentence had this original intent and was never designed to define the scope of discovery, the Committee amended the sentence in 2000 to add the words “relevant information” at the beginning: “Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” The Committee Note explained that “relevant means within the scope of discovery as defined in this subdivision [(b)(1)].” Thus, the “reasonably calculated” phrase applies only to information that is otherwise within the scope of discovery set forth in Rule 26(b)(1); it does not broaden the scope of discovery. As the 2000 Committee Note explained, any broader reading of “reasonably calculated” “might swallow any other limitation on the scope of discovery.” Despite the original intent of the sentence and the 2000 clarification, lawyers and courts continue to cite the “reasonably calculated” language as defining the scope of discovery. Some even disregard the reference to admissibility, suggesting that any inquiry “reasonably calculated” to lead to something helpful in the litigation is fair game in discovery. The proposed amendment will eliminate this incorrect reading of Rule 26(b)(1) while preserving the rule that inadmissibility is not a basis for opposing discovery of relevant information. Most of the comments opposing this change complained that it would eliminate a “bedrock” definition of the scope of discovery, reflecting the very misunderstanding the amendment is designed to correct. 3. Rule 26(b)(2)(C)(iii). Rule 26(b)(2)(C)(iii) would be amended to reflect the move of the proportionality factors to Rule 26(b)(1). 4. Rule 26(c)(1): Allocation of Expenses. Rule 26(c)(1)(B) would be amended to include “the allocation of expenses” among the terms that may be included in a protective order. Rule 26(c)(1) already authorizes an order to protect against “undue burden or expense,” and this includes authority to allow discovery only on condition that the requesting party bear part or all of the costs of responding. The Supreme Court has acknowledged that courts have that authority now, Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 358 (1978), and it is useful to make the authority explicit on the face of the rule to ensure that courts and the parties will consider this choice as an alternative to either denying requested discovery or ordering it despite the risk of imposing undue burdens and expense on the party who responds to the request. Rules Appendix B-10 The Committee Note explains that this clarification does not mean that cost-shifting should become a common practice. The assumption remains that the responding party ordinarily bears the costs of responding. 5. Rules 34 and 37(a): Specific Objections, Production, Withholding. The Committee proposes three amendments to Rule 34. (A fourth, dealing with requests served before the Rule 26(f) conference, is described later.) The first requires that objections to requests to produce be stated “with specificity.” The second permits a responding party to state that it will produce copies of documents or ESI instead of permitting inspection, and should specify a reasonable time for the production. A corresponding change to Rule 37(a)(3)(B)(iv) adds authority to move for an order to compel production if “a party fails to produce documents” as requested. The third amendment to Rule 34 requires that an objection state whether any responsive materials are being withheld on the basis of the objection. These amendments should eliminate three relatively frequent problems in the production of documents and ESI: the use of broad, boilerplate objections that provide little information about the true reason a party is objecting; responses that state various objections, produce some information, and do not indicate whether anything else has been withheld from discovery on the basis of the objections; and responses which state that responsive documents will be produced in due course, without providing any indication of when production will occur and which often are followed by long delays in production. All three practices lead to discovery disputes and are contrary to Rule 1’s goals of speedy and inexpensive litigation. 6. Early Discovery Requests: Rule 26(d)(2). The Committee proposes to add Rule 26(d)(2) to allow a party to deliver a Rule 34 document production request before the Rule 26(f) meeting between the parties. For purposes of determining the date to respond, the request would be treated as having been served at the first Rule 26(f) meeting. Rule 34(b)(2)(A) would be amended by adding a parallel provision for the time to respond. The purpose of this change is to facilitate discussion between the parties at the Rule 26(f) meeting and with the court at the initial case management conference by providing concrete discovery proposals. Public comments on this proposal were mixed. Some doubt that parties will seize this new opportunity. Others expressed concern that requests formed before the case management conference will be inappropriately broad. Lawyers who represent plaintiffs appeared more likely to use this opportunity to provide advance notice of what should be discussed at the Rule 26(f) meeting. The Committee continues to view this amendment as a worthwhile effort to focus early case management discussions. B. Early Judicial Case Management. The Committee recommends several changes to Rules 16 and 4 designed to promote earlier and more active judicial case management. Rules Appendix B-11 1. Rule 16. Four sets of changes are proposed for Rule 16. First, participants at the Duke Conference agreed that cases are resolved faster, fairer, and with less expense when judges manage them early and actively. An important part of this management is an initial case management conference where judges confer with parties about the needs of the case and an appropriate schedule for the litigation. To encourage case management conferences where direct exchanges occur, the Committee proposes that the words allowing a conference to be held “by telephone, mail, or other means” be deleted from Rule 16(b)(1)(B). The Committee Note explains that such a conference can be held by any means of direct simultaneous communication, including telephone. Rule 16(b)(1)(A) continues to allow the court to base a scheduling order on the parties’ Rule 26(f) report without holding a conference, but the change in the text and the Committee Note hopefully will encourage judges to engage in direct exchanges with the parties when warranted. Second, the time for holding the scheduling conference is set at the earlier of 90 days after any defendant has been served (reduced from 120 days in the present rule) or 60 days after any defendant has appeared (reduced from 90 days in the present rule). The intent is to encourage early management of cases by judges. Recognizing that these time limits may not be appropriate in some cases, the proposal also allows the judge to set a later time on finding good cause. In response to concerns expressed by the Department of Justice, the Committee Note states that “[l]itigation involving complex issues, multiple parties, and large organizations, public or private, may be more likely to need extra time to establish meaningful collaboration between counsel and the people who can supply the information needed to participate in a useful way.” Third, the proposed amendments add two subjects to the list of issues that may be addressed in a case management order: the preservation of ESI and agreements reached under Federal Rule of Evidence 502. ESI is a growing issue in civil litigation, and the Committee believes that parties and courts should be encouraged to address it early. Similarly, Rule 502 was designed in part to reduce the expense of producing ESI or other voluminous documents, and the parties and judges should consider its potential application early in the litigation. Parallel provisions are added to the subjects for the parties’ Rule 26(f) meeting. Fourth, the proposed amendments identify another topic for discussion at the initial case management conference - whether the parties should be required to request a conference with the court before filing discovery motions. Many federal judges require such pre-motion conferences, and experience has shown them to be very effective in resolving discovery disputes quickly and inexpensively. The amendment seeks to encourage this practice by including it in the Rule 16 topics. 2. Rule 4(m): Time to Serve. Rule 4(m) now sets 120 days as the time limit for serving the summons and complaint. The Committee initially sought to reduce this period to 60 days, but the public comments Rules Appendix B-12 persuaded the Committee to recommend a limit of 90 days. The intent, as with the similar Rule 16 change, is to get cases moving more quickly and shorten the overall length of litigation. The experience of the Committee is that most cases require far less than 120 days for service, and that some lawyers take more time than necessary simply because it is permitted under the rules. Public comments noted that a 60-day service period could be problematic in cases with many defendants, defendants who are difficult to locate or serve, or defendants who must be served by the Marshals Service. Others suggested that a 60-day period would undercut the opportunity to request a waiver of service because little time would be left to effect service after a defendant refuses to waive service. After considering these and other comments, the Committee concluded that the time should be set at 90 days. Language has been added to the Committee Note recognizing that additional time will be needed in some cases. C. Cooperation. Rule 1 now provides that the civil rules “should be construed and administered to secure the just, speedy, and inexpensive determination of every action and proceeding.” The proposed amendment would provide that the rules “be construed, administered, and employed by the court and the parties to secure the just, speedy, and inexpensive determination of every action and proceeding.” As already noted, cooperation among parties was a theme heavily emphasized at the Duke Conference. Cooperation has been vigorously urged by many other voices, and principles of cooperation have been embraced by concerned organizations and adopted by courts and bar associations. The Committee proposes that Rule 1 be amended to make clear that parties as well as courts have a responsibility to achieve the just, speedy, and inexpensive resolution of every action. The proposed Committee Note explains that “discussions of ways to improve the administration of civil justice regularly include pleas to discourage over-use, misuse, and abuse of procedural tools that increase cost and result in delay. Effective advocacy is consistent with - and indeed depends upon - cooperative and proportional use of procedure.” The public comments expressed little opposition to the concept of cooperation, but some expressed concerns about the proposed amendment. One concern was that Rule 1 is iconic and should not be altered. Another was that this change may invite ill-founded attempts to seek sanctions for violating a duty to cooperate. To avoid any suggestion that the amendment authorizes such sanctions or somehow diminishes procedural rights provided elsewhere in the rules, the Committee Note provides: “This amendment does not create a new or independent source of sanctions. Neither does it abridge the scope of any other of these rules.” The Committee recognizes that a rule amendment alone will not produce reasonable and cooperative behavior among litigants, but believes that the proposed amendment will provide a meaningful step in that direction. This change should be combined with continuing efforts to educate litigants and courts on the importance of cooperation in reducing unnecessary costs in civil litigation. Rules Appendix B-13 D. Summary: The Duke Proposals as a Whole. The Committee views the Duke proposals as a package. While each proposed amendment must be judged on its own merits, the proposals are designed to work together. Case management will begin earlier, judges will be encouraged to communicate directly with the parties, relevant topics are emphasized for the initial case management conference, early Rule 34 requests will facilitate a more informed discussion of necessary discovery, proportionality will be considered by all participants, unnecessary discovery motions will be discouraged, and obstructive Rule 34 responses will be eliminated. At the same time, the change to Rule 1 will encourage parties to cooperate in achieving the just, speedy, and inexpensive resolution of every action. Combined with the continuing work of the FJC on judicial education and the continuing exploration of discovery protocols and other pilot projects, the Committee believes that these changes will promote worthwhile objectives identified at the Duke Conference and improve the federal civil litigation process. III. RULE 37(e): FAILURE TO PRESERVE ESI. Present Rule 37(e) was adopted in 2006 and provides: “Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.” The Committee recognized in 2006 that the continuing expansion of ESI might provide reasons to adopt a more detailed rule. A panel at the Duke Conference unanimously recommended that the time has come for such a rule. The Committee agrees. The explosion of ESI in recent years has affected all aspects of civil litigation. Preservation of ESI is a major issue confronting parties and courts, and loss of ESI has produced a significant split in the circuits. Some circuits hold that adverse inference jury instructions (viewed by most as a serious sanction) can be imposed for the negligent loss of ESI. Others require a showing of bad faith. The Committee has been credibly informed that persons and entities over-preserve ESI out of fear that some ESI might be lost, their actions might with hindsight be viewed as negligent, and they might be sued in a circuit that permits adverse inference instructions or other serious sanctions on the basis of negligence. Many entities described spending millions of dollars preserving ESI for litigation that may never be filed. Resolving the circuit split with a more uniform approach to lost ESI, and thereby reducing a primary incentive for over- preservation, has been recognized by the Committee as a worthwhile goal. During the two years following the Duke Conference, the Discovery Subcommittee, now chaired by Judge Paul Grimm of the District of Maryland, considered several different approaches to drafting a new rule, including drafts that undertook to establish detailed preservation guidelines. These drafts started with an outline proposed by the Duke Conference panel which called for specific provisions on when the duty to preserve arises, its scope and duration in advance of litigation, and the sanctions or other measures a court can take when information is lost. The Subcommittee conducted research into existing spoliation law, canvassed statutes and regulations that impose preservation obligations, received comments and Rules Appendix B-14 suggestions from numerous sources (including proposed draft rules from some sources), and held a mini-conference in Dallas with 25 invited judges, lawyers, and academics to discuss possible approaches to an ESI-preservation rule. The Subcommittee ultimately concluded that a detailed rule specifying the trigger, scope, and duration of a preservation obligation is not feasible. A rule that attempts to address these issues in detail simply cannot be applied to the wide variety of cases in federal court, and a rule that provides only general guidance on these issues would be of little value to anyone. The Subcommittee chose instead to craft a rule that addresses actions courts may take when ESI that should have been preserved is lost. Thus, the proposed Rule 37(e) does not purport to create a duty to preserve. The new rule takes the duty as it is established by case law, which uniformly holds that a duty to preserve information arises when litigation is reasonably anticipated. Although some urged the Committee to eliminate any duty to preserve information before an action is actually filed in court, the Committee believes such a rule would result in the loss or destruction of much information needed for litigation. The Committee Note, responding to concerns expressed in public comments, also makes clear that this rule does not affect any common-law tort remedy for spoliation that may be established by state law. Proposed Rule 37(e) applies when “electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery.” Subdivisions (e)(1) and (e)(2) then address actions a court may take when this situation arises. A. Limiting the Rule to ESI. Like current Rule 37(e), the proposed rule is limited to ESI. Although the Committee considered proposing a rule that would apply to all forms of information, it ultimately concluded that an ESI-only rule was appropriate for several reasons. First, as already noted, the explosion of ESI in recent years has presented new and unprecedented challenges in civil litigation. This is the primary fact motivating an amendment of Rule 37(e). Second, the remarkable growth of ESI will continue and even accelerate. One industry expert reported to the Committee that there will be some 26 billion devices on the Internet in six years - more than three for every person on earth. Significant amounts of ESI will be created and stored not only by sophisticated entities with large IT departments, but also by unsophisticated persons whose lives are recorded on their phones, tablets, cars, social media pages, and tools not even presently foreseen. Most of this information will be stored somewhere on remote servers, often referred to as the “cloud,” complicating the preservation task. Thus, the litigation challenges created by ESI and its loss will increase, not decrease, and will affect unsophisticated as well as sophisticated litigants. Rules Appendix B-15 Third, the law of spoliation for evidence other than ESI is well developed and longstanding, and should not be supplanted without good reason. There has been little complaint to the Committee about this body of law as applied to information other than ESI, and the Committee concludes that this law should be left undisturbed by a new rule designed to address the unprecedented challenges presented by ESI. The Advisory Committee recognizes that its decision to confine Rule 37(e) to ESI could be debated. Some contend that there is no principled basis for distinguishing ESI from other forms of evidence, but repeated efforts made clear that it is very difficult to craft a rule that deals with failure to preserve tangible things. In addition, there are some clear practical distinctions between ESI and other kinds of evidence. ESI is created in volumes previously unheard of and often is duplicated in many places. The potential consequences of its loss in one location often will be less severe than the consequences of the loss of tangible evidence. ESI also is deleted or modified on a regular basis, frequently with no conscious action on the part of the person or entity that created it. These practical distinctions, the difficulty of writing a rule that covers all forms of evidence, as well as an appropriate respect for the spoliation law that has developed over centuries to deal with the loss of tangible evidence, all persuaded the Advisory Committee that the new Rule 37(e) should be limited to ESI. B. Reasonable Steps to Preserve. The proposed rule applies if ESI “that should have been preserved in the anticipation or conduct of litigation of litigation is lost because a party failed to take reasonable steps to preserve it.” The rule calls for reasonable steps, not perfection. As explained in the Committee Note, determining the reasonableness of the steps taken includes consideration of party resources and the proportionality of the efforts to preserve. The Note also recognizes that a party’s level of sophistication may bear on whether it should have realized that information should have been preserved. C. Restoration or Replacement of Lost ESI. If reasonable steps were not taken and information was lost as a result, the rule directs that the next focus should be on whether the lost information can be restored or replaced through additional discovery. As the Committee Note explains, nothing in this rule limits a court’s powers under Rules 16 and 26 to order discovery to achieve this purpose. At the same time, however, the quest for lost information should take account of whether the information likely was only marginally relevant or duplicative of other information that remains available. D. Subdivision (e)(1). Proposed Rule 37(e)(1) provides that the court, “upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice.” This proposal preserves broad trial court discretion to cure prejudice caused by the loss of ESI that cannot be remedied by restoration or replacement of the lost information. It further provides that the measures be no greater than necessary to cure the prejudice. Rules Appendix B-16 Proposed subdivision (e)(1) does not say which party bears the burden of proving prejudice. Many public comments raised concerns about assigning such burdens, noting that it often is difficult for an opposing party to prove it was prejudiced by the loss of information it never has seen. Under the proposed rule, each party is responsible for providing such information and argument as it can; the court may draw on its experience in addressing this or similar issues, and may ask one or another party, or all parties, for further information. The proposed rule does not attempt to draw fine distinctions as to the measures a trial court may use to cure prejudice under (e)(1), but instead limits those measures in three general ways: there must be a finding of prejudice, the measures must be no greater than necessary to cure the prejudice, and the court may not impose the severe measures listed in subdivision (e)(2). E. Subdivision (e)(2). Proposed (e)(2) provides that the court: only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation, may: (A) presume that the lost information was unfavorable to the party; (B) instruct the jury that it may or must presume the information was unfavorable to the party; or (C) dismiss the action or enter a default judgment. A primary purpose of this provision is to eliminate the circuit split on when a court may give an adverse inference jury instruction for the loss of ESI. As already noted, some circuits permit such instructions upon a showing of negligence, while others require bad faith. Subdivision (e)(2) permits adverse inference instructions only on a finding that the party “acted with the intent to deprive another party of the information’s use in the litigation.” This intent requirement is akin to bad faith, but is defined even more precisely. The Committee views this definition as consistent with the historical rationale for adverse inference instructions. The Discovery Subcommittee analyzed the existing cases on the use of adverse inference instructions. Such instructions historically have been based on a logical conclusion: when a party destroys evidence for the purpose of preventing another party from using it in litigation, one reasonably can infer that the evidence was unfavorable to the destroying party. Some courts hold to this traditional rationale and limit adverse inference instructions to instances of bad faith loss of the information. See, e.g., Aramburu v. Boeing Co., 112 F.3d 1398, 1407 (10th Cir. 1997) (“The adverse inference must be predicated on the bad faith of the party destroying the records. Mere negligence in losing or destroying records is not enough because it does not support an inference of consciousness of a weak case.”) (citations omitted). Circuits that permit adverse inference instructions on a showing of negligence adopt a different rationale: the adverse inference restores the evidentiary balance, and the party that lost Rules Appendix B-17 the information should bear the risk that it was unfavorable. See, e.g., Residential Funding Corp. v. DeGeorge Finan. Corp., 306 F.3d 99 (2d Cir. 2002). Although this approach has some equitable appeal, the Committee has several concerns when it is applied to ESI. First, negligently lost information may have been favorable or unfavorable to the party that lost it - negligence does not necessarily reveal the nature of the lost information. Consequently, an adverse inference may do far more than restore the evidentiary balance; it may tip the balance in ways the lost evidence never would have. Second, in a world where ESI is more easily lost than tangible evidence, particularly by unsophisticated parties, the sanction of an adverse inference instruction imposes a heavy penalty for losses that are likely to become increasingly frequent as ESI multiplies. Third, permitting an adverse inference for negligence creates powerful incentives to over-preserve, often at great cost. Fourth, the ubiquitous nature of ESI and the fact that it often may be found in many locations presents less risk of severe prejudice from negligent loss than may be present due to the loss of tangible things or hard-copy documents. These reasons have caused the Committee to conclude that the circuit split should be resolved in favor of the traditional reasons for an adverse inference. ESI-related adverse inferences drawn by courts when ruling on pretrial motions or ruling in bench trials, and adverse inference jury instructions, should be limited to cases where the party who lost the ESI did so with an intent to deprive the opposing party of its use in the litigation. Subdivision (e)(2) extends the logic of the mandatory adverse-inference instruction to the even more severe measures of dismissal or default. The Committee thought it incongruous to allow dismissal or default in circumstances that do not justify the instruction. Subdivision (e)(2) covers any instruction that directs or permits the jury to infer from the loss of information that the information was in fact unfavorable to the party that lost it. The subdivision does not apply to jury instructions that do not involve such an inference. For example, subdivision (e)(2) would not prohibit a court from allowing the parties to present evidence to the jury concerning the loss and likely relevance of information and instructing the jury that it may consider that evidence, along with all the other evidence in the case, in making its decision. These measures, which would not involve instructing a jury that it may draw an adverse inference from loss of information, would be available under subdivision (e)(1) if no greater than necessary to cure prejudice. In addition, subdivision (e)(2) does not limit the discretion of courts to give traditional missing evidence instructions based on a party’s failure to present evidence it has in its possession at the time of trial. Subdivision (e)(2) does not include a requirement that the court find prejudice to the party deprived of the information. This is because the finding of intent required by the subdivision can support not only an inference that the lost information was unfavorable to the party that intentionally destroyed it, but also an inference that the opposing party was prejudiced by the loss of that favorable information. The Committee Note states that courts should exercise caution in using the measures specified in (e)(2). Finding an intent to deprive another party of the lost information’s use in the litigation does not require a court to adopt the measures listed in subdivision (e)(2). The remedy should fit the wrong, and the severe measures authorized by this subdivision should not be used Rules Appendix B-18 when the information lost was relatively unimportant or lesser measures such as those specified in subdivision (e)(1) would be sufficient to redress the loss. IV. ABROGATION OF RULE 84. The Federal Rules of Civil Procedure are followed by an Appendix of Forms. The Appendix includes 36 separate forms illustrating things such as the proper captions for pleadings, proper signature blocks, and forms for summonses, requests for waivers of service, complaints, answers, judgments, and other litigation documents. Rule 84 provides that the forms “suffice under these rules and illustrate the simplicity and brevity that these rules contemplate.” Many of the forms are out of date. The sample complaints, for example, embrace far fewer causes of action than now exist in federal court and illustrate a simplicity of pleading that has not been used in many years. The increased use of Rule 12(b)(6) motions to dismiss, the enhanced pleading requirements of Rule 9 and some federal statutes, the proliferation of statutory and other causes of action, and the increased complexity of most modern cases have resulted in a detailed level of pleading that is far beyond that illustrated in the forms. Amendment of the civil forms is cumbersome. It requires the same process as amendment of the civil rules themselves - amendments proposed by the Committee must be approved by the Standing Committee, the Judicial Conference, the Supreme Court, and Congress. Public notice and comment are also required. The process ordinarily takes at least three years. In addition to being out of date and difficult to amend, the Committee’s perception was that the forms are rarely used. The Committee established a Rule 84 Subcommittee, chaired by Judge Gene Pratter of the Eastern District of Pennsylvania, to consider the current forms and the process of their revision, and to recommend possible changes. Members of the Subcommittee canvassed judges, law firms, public interest law offices, and individual lawyers, and found that virtually none of them use the forms. Many alternative sources of civil forms are available. These include forms created by private publishing companies and a set of non-pleading forms created and maintained by a Forms Working Group at the Administrative Office of the United States Courts (“AO”). The Working Group consists of six federal judges and six clerks of court, and the forms they create in consultation with the various rules committees can be downloaded from the AO website at http://www.uscourts.gov/FormsAndFees/Forms/CourtFormsByCategory.aspx. A May 2012 survey of the websites maintained by the 94 federal district courts around the country found that 88 of the 94 either link electronically to the AO forms or post some of the AO forms on their websites. Only six of the 94 mention the Rule 84 forms on their websites or in their local rules, confirming that the rules forms are rarely used. The Subcommittee ultimately recommended that the Committee get out of the forms business. The Committee agreed, and published a proposal in August 2013 to abrogate Rule 84 and eliminate the forms appended to the rules. The two exceptions to this recommendation are Rules Appendix B-19 forms 5 and 6, which are referenced in Rule 4 and would, under the proposal, be appended to that specific rule. Very few of the public comments addressed the abrogation of Rule 84. Among the objections, most asserted that the elimination of the forms would be viewed as an indirect endorsement of the Twombly and Iqbal pleading standards. A few argued that the forms assist pro se litigants and new lawyers, but of these, only one stated that the writer had ever actually used the forms. The general lack of response to the Rule 84 proposal reinforced the Committee’s view that the forms are seldom used. After considering the public comments, the Committee continues to believe that the forms and Rule 84 should be eliminated. The forms are not used; revising them is a difficult and time-consuming process; other forms are readily available; and the Committee can better use its time addressing more relevant issues in the rules. The Committee continues to review the effects of Twombly and Iqbal. If it decides action is needed in this area, the more direct approach will be to amend the rules, not the forms. V. RULE 55. The Committee proposes that Rule 55(c) be amended to clarify that a court must apply Rule 60(b) only when asked to set aside a final judgment. The reason for the change is explained in the proposed Committee Note. Rules Appendix B-20 PROPOSED AMENDMENTS TO THE FEDERAL RULES OF CIVIL PROCEDURE∗ Rule 1. Scope and Purpose 1 These rules govern the procedure in all civil actions 2 and proceedings in the United States district courts, except 3 as stated in Rule 81. They should be construed, and 4 administered, and employed by the court and the parties to 5 secure the just, speedy, and inexpensive determination of 6 every action and proceeding. 7 Committee Note Rule 1 is amended to emphasize that just as the court should construe and administer these rules to secure the just, speedy, and inexpensive determination of every action, so the parties share the responsibility to employ the rules in the same way. Most lawyers and parties cooperate to achieve these ends. But discussions of ways to improve the administration of civil justice regularly include pleas to discourage over-use, misuse, and abuse of procedural tools that increase cost and result in delay. Effective advocacy is ∗ New material is underlined; matter to be omitted is lined through. Rules Appendix B-21 2 FEDERAL RULES OF CIVIL PROCEDURE consistent with - and indeed depends upon - cooperative and proportional use of procedure. This amendment does not create a new or independent source of sanctions. Neither does it abridge the scope of any other of these rules. Rules Appendix B-22 FEDERAL RULES OF CIVIL PROCEDURE 3 Rule 4. Summons 1 * * * * * 2 (m) Time Limit for Service. If a defendant is not served 3 within 12090 days after the complaint is filed, the 4 court - on motion or on its own after notice to the 5 plaintiff - must dismiss the action without prejudice 6 against that defendant or order that service be made 7 within a specified time. But if the plaintiff shows 8 good cause for the failure, the court must extend the 9 time for service for an appropriate period. This 10 subdivision (m) does not apply to service in a foreign 11 country under Rule 4(f) or 4(j)(1) or to service of a 12 notice under Rule 71.1(d)(3)(A). 13 * * * * * 14 Committee Note Subdivision (m). The presumptive time for serving a defendant is reduced from 120 days to 90 days. This Rules Appendix B-23 4 FEDERAL RULES OF CIVIL PROCEDURE change, together with the shortened times for issuing a scheduling order set by amended Rule 16(b)(2), will reduce delay at the beginning of litigation. Shortening the presumptive time for service will increase the frequency of occasions to extend the time for good cause. More time may be needed, for example, when a request to waive service fails, a defendant is difficult to serve, or a marshal is to make service in an in forma pauperis action. The final sentence is amended to make it clear that the reference to Rule 4 in Rule 71.1(d)(3)(A) does not include Rule 4(m). Dismissal under Rule 4(m) for failure to make timely service would be inconsistent with the limits on dismissal established by Rule 71.1(i)(1)(C). Shortening the time to serve under Rule 4(m) means that the time of the notice required by Rule 15(c)(1)(C) for relation back is also shortened. Rules Appendix B-24 FEDERAL RULES OF CIVIL PROCEDURE 5 Rule16. Pretrial Conferences; Scheduling; Management 1 * * * * * 2 (b) Scheduling. 3 (1) Scheduling Order. Except in categories of 4 actions exempted by local rule, the district judge 5 - or a magistrate judge when authorized by 6 local rule - must issue a scheduling order: 7 (A) after receiving the parties’ report under 8 Rule 26(f); or 9 (B) after consulting with the parties’ attorneys 10 and any unrepresented parties at a 11 scheduling conference by telephone, mail, 12 or other means. 13 (2) Time to Issue. The judge must issue the 14 scheduling order as soon as practicable, but in 15 any eventunless the judge finds good cause for 16 Rules Appendix B-25 6 FEDERAL RULES OF CIVIL PROCEDURE delay, the judge must issue it within the earlier of 17 12090 days after any defendant has been served 18 with the complaint or 9060 days after any 19 defendant has appeared. 20 (3) Contents of the Order. 21 * * * * * 22 (B) Permitted Contents. The scheduling order 23 may: 24 * * * * * 25 (iii) provide for disclosure, ordiscovery, 26 or preservation of electronically 27 stored information; 28 (iv) include any agreements the parties 29 reach for asserting claims of 30 privilege or of protection as trial-31 preparation material after 32 Rules Appendix B-26 FEDERAL RULES OF CIVIL PROCEDURE 7 information is produced, including 33 agreements reached under Federal 34 Rule of Evidence 502; 35 (v) direct that before moving for an 36 order relating to discovery, the 37 movant must request a conference 38 with the court; 39 (vvi) set dates for pretrial conferences and 40 for trial; and 41 (vivii) include other appropriate matters. 42 * * * * * 43 Committee Note The provision for consulting at a scheduling conference by “telephone, mail, or other means” is deleted. A scheduling conference is more effective if the court and parties engage in direct simultaneous communication. The conference may be held in person, by telephone, or by more sophisticated electronic means. Rules Appendix B-27 8 FEDERAL RULES OF CIVIL PROCEDURE The time to issue the scheduling order is reduced to the earlier of 90 days (not 120 days) after any defendant has been served, or 60 days (not 90 days) after any defendant has appeared. This change, together with the shortened time for making service under Rule 4(m), will reduce delay at the beginning of litigation. At the same time, a new provision recognizes that the court may find good cause to extend the time to issue the scheduling order. In some cases it may be that the parties cannot prepare adequately for a meaningful Rule 26(f) conference and then a scheduling conference in the time allowed. Litigation involving complex issues, multiple parties, and large organizations, public or private, may be more likely to need extra time to establish meaningful collaboration between counsel and the people who can supply the information needed to participate in a useful way. Because the time for the Rule 26(f) conference is geared to the time for the scheduling conference or order, an order extending the time for the scheduling conference will also extend the time for the Rule 26(f) conference. But in most cases it will be desirable to hold at least a first scheduling conference in the time set by the rule. Three items are added to the list of permitted contents in Rule 16(b)(3)(B). The order may provide for preservation of electronically stored information, a topic also added to the provisions of a discovery plan under Rule 26(f)(3)(C). Parallel amendments of Rule 37(e) recognize that a duty to preserve discoverable information may arise before an action is filed. Rules Appendix B-28 FEDERAL RULES OF CIVIL PROCEDURE 9 The order also may include agreements incorporated in a court order under Evidence Rule 502 controlling the effects of disclosure of information covered by attorney- client privilege or work-product protection, a topic also added to the provisions of a discovery plan under Rule 26(f)(3)(D). Finally, the order may direct that before filing a motion for an order relating to discovery the movant must request a conference with the court. Many judges who hold such conferences find them an efficient way to resolve most discovery disputes without the delay and burdens attending a formal motion, but the decision whether to require such conferences is left to the discretion of the judge in each case. Rules Appendix B-29 10 FEDERAL RULES OF CIVIL PROCEDURE Rule 26. Duty to Disclose; General Provisions; 1 Governing Discovery 2 * * * * * 3 (b) Discovery Scope and Limits. 4 (1) Scope in General. Unless otherwise limited by 5 court order, the scope of discovery is as follows: 6 Parties may obtain discovery regarding any 7 nonprivileged matter that is relevant to any 8 party’s claim or defense and proportional to the 9 needs of the case, considering the importance of 10 the issues at stake in the action, the amount in 11 controversy, the parties’ relative access to 12 relevant information, the parties’ resources, the 13 importance of the discovery in resolving the 14 issues, and whether the burden or expense of the 15 proposed discovery outweighs its likely benefit. 16 Information within this scope of discovery need 17 Rules Appendix B-30 FEDERAL RULES OF CIVIL PROCEDURE 11 not be admissible in evidence to be discoverable. 18 - including the existence, description, nature, 19 custody, condition, and location of any 20 documents or other tangible things and the 21 identity and location of persons who know of 22 any discoverable matter. For good cause, the 23 court may order discovery of any matter relevant 24 to the subject matter involved in the action. 25 Relevant information need not be admissible at 26 the trial if the discovery appears reasonably 27 calculated to lead to the discovery of admissible 28 evidence. All discovery is subject to the 29 limitations imposed by Rule 26(b)(2)(C). 30 (2) Limitations on Frequency and Extent. 31 * * * * * 32 Rules Appendix B-31 12 FEDERAL RULES OF CIVIL PROCEDURE (C) When Required. On motion or on its own, 33 the court must limit the frequency or extent 34 of discovery otherwise allowed by these 35 rules or by local rule if it determines that: 36 * * * * * 37 (iii) the burden or expense of the proposed 38 discovery is outside the scope 39 permitted by Rule 26(b)(1)outweighs 40 its likely benefit, considering the 41 needs of the case, the amount in 42 controversy, the parties’ resources, the 43 importance of the issues at stake in the 44 action, and the importance of the 45 discovery in resolving the issues. 46 * * * * * 47 Rules Appendix B-32 FEDERAL RULES OF CIVIL PROCEDURE 13 (c) Protective Orders. 48 (1) In General. A party or any person from whom 49 discovery is sought may move for a protective 50 order in the court where the action is pending - 51 or as an alternative on matters relating to a 52 deposition, in the court for the district where the 53 deposition will be taken. The motion must 54 include a certification that the movant has in 55 good faith conferred or attempted to confer with 56 other affected parties in an effort to resolve the 57 dispute without court action. The court may, for 58 good cause, issue an order to protect a party or 59 person from annoyance, embarrassment, 60 oppression, or undue burden or expense, 61 including one or more of the following: 62 * * * * * 63 Rules Appendix B-33 14 FEDERAL RULES OF CIVIL PROCEDURE (B) specifying terms, including time and 64 place or the allocation of expenses, for the 65 disclosure or discovery; 66 * * * * * 67 (d) Timing and Sequence of Discovery. 68 * * * * * 69 (2) Early Rule 34 Requests. 70 (A) Time to Deliver. More than 21 days after 71 the summons and complaint are served on a 72 party, a request under Rule 34 may be 73 delivered: 74 (i) to that party by any other party, and 75 (ii) by that party to any plaintiff or to any 76 other party that has been served. 77 Rules Appendix B-34 FEDERAL RULES OF CIVIL PROCEDURE 15 (B) When Considered Served. The request is 78 considered to have been served at the first 79 Rule 26(f) conference. 80 (23) Sequence. Unless, on motion, the parties 81 stipulate or the court orders otherwise for the 82 parties’ and witnesses’ convenience and in the 83 interests of justice: 84 (A) methods of discovery may be used in any 85 sequence; and 86 (B) discovery by one party does not require any 87 other party to delay its discovery. 88 * * * * * 89 (f) Conference of the Parties; Planning for Discovery. 90 * * * * * 91 (3) Discovery Plan. A discovery plan must state the 92 parties’ views and proposals on: 93 Rules Appendix B-35 16 FEDERAL RULES OF CIVIL PROCEDURE * * * * * 94 (C) any issues about disclosure, ordiscovery, or 95 preservation of electronically stored 96 information, including the form or forms in 97 which it should be produced; 98 (D) any issues about claims of privilege or of 99 protection as trial-preparation materials, 100 including - if the parties agree on a 101 procedure to assert these claims after 102 production - whether to ask the court to 103 include their agreement in an order under 104 Federal Rule of Evidence 502; 105 * * * * * 106 Committee Note Rule 26(b)(1) is changed in several ways. Rules Appendix B-36 FEDERAL RULES OF CIVIL PROCEDURE 17 Information is discoverable under revised Rule 26(b)(1) if it is relevant to any party’s claim or defense and is proportional to the needs of the case. The considerations that bear on proportionality are moved from present Rule 26(b)(2)(C)(iii), slightly rearranged and with one addition. Most of what now appears in Rule 26(b)(2)(C)(iii) was first adopted in 1983. The 1983 provision was explicitly adopted as part of the scope of discovery defined by Rule 26(b)(1). Rule 26(b)(1) directed the court to limit the frequency or extent of use of discovery if it determined that “the discovery is unduly burdensome or expensive, taking into account the needs of the case, the amount in controversy, limitations on the parties’ resources, and the importance of the issues at stake in the litigation.” At the same time, Rule 26(g) was added. Rule 26(g) provided that signing a discovery request, response, or objection certified that the request, response, or objection was “not unreasonable or unduly burdensome or expensive, given the needs of the case, the discovery already had in the case, the amount in controversy, and the importance of the issues at stake in the litigation.” The parties thus shared the responsibility to honor these limits on the scope of discovery. The 1983 Committee Note stated that the new provisions were added “to deal with the problem of over- discovery. The objective is to guard against redundant or disproportionate discovery by giving the court authority to reduce the amount of discovery that may be directed to matters that are otherwise proper subjects of inquiry. The Rules Appendix B-37 18 FEDERAL RULES OF CIVIL PROCEDURE new sentence is intended to encourage judges to be more aggressive in identifying and discouraging discovery overuse. The grounds mentioned in the amended rule for limiting discovery reflect the existing practice of many courts in issuing protective orders under Rule 26(c). . . . On the whole, however, district judges have been reluctant to limit the use of the discovery devices.” The clear focus of the 1983 provisions may have been softened, although inadvertently, by the amendments made in 1993. The 1993 Committee Note explained: “[F]ormer paragraph (b)(1) [was] subdivided into two paragraphs for ease of reference and to avoid renumbering of paragraphs (3) and (4).” Subdividing the paragraphs, however, was done in a way that could be read to separate the proportionality provisions as “limitations,” no longer an integral part of the (b)(1) scope provisions. That appearance was immediately offset by the next statement in the Note: “Textual changes are then made in new paragraph (2) to enable the court to keep tighter rein on the extent of discovery.” The 1993 amendments added two factors to the considerations that bear on limiting discovery: whether “the burden or expense of the proposed discovery outweighs its likely benefit,” and “the importance of the proposed discovery in resolving the issues.” Addressing these and other limitations added by the 1993 discovery amendments, the Committee Note stated that “[t]he revisions in Rule 26(b)(2) are intended to provide the court with broader discretion to impose additional restrictions on the scope and extent of discovery . . . .” Rules Appendix B-38 FEDERAL RULES OF CIVIL PROCEDURE 19 The relationship between Rule 26(b)(1) and (2) was further addressed by an amendment made in 2000 that added a new sentence at the end of (b)(1): “All discovery is subject to the limitations imposed by Rule 26(b)(2)(i), (ii), and (iii)[now Rule 26(b)(2)(C)].” The Committee Note recognized that “[t]hese limitations apply to discovery that is otherwise within the scope of subdivision (b)(1).” It explained that the Committee had been told repeatedly that courts were not using these limitations as originally intended. “This otherwise redundant cross-reference has been added to emphasize the need for active judicial use of subdivision (b)(2) to control excessive discovery.” The present amendment restores the proportionality factors to their original place in defining the scope of discovery. This change reinforces the Rule 26(g) obligation of the parties to consider these factors in making discovery requests, responses, or objections. Restoring the proportionality calculation to Rule 26(b)(1) does not change the existing responsibilities of the court and the parties to consider proportionality, and the change does not place on the party seeking discovery the burden of addressing all proportionality considerations. Nor is the change intended to permit the opposing party to refuse discovery simply by making a boilerplate objection that it is not proportional. The parties and the court have a collective responsibility to consider the proportionality of all discovery and consider it in resolving discovery disputes. Rules Appendix B-39 20 FEDERAL RULES OF CIVIL PROCEDURE The parties may begin discovery without a full appreciation of the factors that bear on proportionality. A party requesting discovery, for example, may have little information about the burden or expense of responding. A party requested to provide discovery may have little information about the importance of the discovery in resolving the issues as understood by the requesting party. Many of these uncertainties should be addressed and reduced in the parties’ Rule 26(f) conference and in scheduling and pretrial conferences with the court. But if the parties continue to disagree, the discovery dispute could be brought before the court and the parties’ responsibilities would remain as they have been since 1983. A party claiming undue burden or expense ordinarily has far better information - perhaps the only information - with respect to that part of the determination. A party claiming that a request is important to resolve the issues should be able to explain the ways in which the underlying information bears on the issues as that party understands them. The court’s responsibility, using all the information provided by the parties, is to consider these and all the other factors in reaching a case-specific determination of the appropriate scope of discovery. The direction to consider the parties’ relative access to relevant information adds new text to provide explicit focus on considerations already implicit in present Rule 26(b)(2)(C)(iii). Some cases involve what often is called “information asymmetry.” One party - often an individual plaintiff - may have very little discoverable information. The other party may have vast amounts of information, including information that can be readily Rules Appendix B-40 FEDERAL RULES OF CIVIL PROCEDURE 21 retrieved and information that is more difficult to retrieve. In practice these circumstances often mean that the burden of responding to discovery lies heavier on the party who has more information, and properly so. Restoring proportionality as an express component of the scope of discovery warrants repetition of parts of the 1983 and 1993 Committee Notes that must not be lost from sight. The 1983 Committee Note explained that “[t]he rule contemplates greater judicial involvement in the discovery process and thus acknowledges the reality that it cannot always operate on a self-regulating basis.” The 1993 Committee Note further observed that “[t]he information explosion of recent decades has greatly increased both the potential cost of wide-ranging discovery and the potential for discovery to be used as an instrument for delay or oppression.” What seemed an explosion in 1993 has been exacerbated by the advent of e-discovery. The present amendment again reflects the need for continuing and close judicial involvement in the cases that do not yield readily to the ideal of effective party management. It is expected that discovery will be effectively managed by the parties in many cases. But there will be important occasions for judicial management, both when the parties are legitimately unable to resolve important differences and when the parties fall short of effective, cooperative management on their own. It also is important to repeat the caution that the monetary stakes are only one factor, to be balanced against other factors. The 1983 Committee Note recognized “the significance of the substantive issues, as measured in Rules Appendix B-41 22 FEDERAL RULES OF CIVIL PROCEDURE philosophic, social, or institutional terms. Thus the rule recognizes that many cases in public policy spheres, such as employment practices, free speech, and other matters, may have importance far beyond the monetary amount involved.” Many other substantive areas also may involve litigation that seeks relatively small amounts of money, or no money at all, but that seeks to vindicate vitally important personal or public values. So too, consideration of the parties’ resources does not foreclose discovery requests addressed to an impecunious party, nor justify unlimited discovery requests addressed to a wealthy party. The 1983 Committee Note cautioned that “[t]he court must apply the standards in an even-handed manner that will prevent use of discovery to wage a war of attrition or as a device to coerce a party, whether financially weak or affluent.” The burden or expense of proposed discovery should be determined in a realistic way. This includes the burden or expense of producing electronically stored information. Computer-based methods of searching such information continue to develop, particularly for cases involving large volumes of electronically stored information. Courts and parties should be willing to consider the opportunities for reducing the burden or expense of discovery as reliable means of searching electronically stored information become available. A portion of present Rule 26(b)(1) is omitted from the proposed revision. After allowing discovery of any matter relevant to any party’s claim or defense, the present rule Rules Appendix B-42 FEDERAL RULES OF CIVIL PROCEDURE 23 adds: “including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter.” Discovery of such matters is so deeply entrenched in practice that it is no longer necessary to clutter the long text of Rule 26 with these examples. The discovery identified in these examples should still be permitted under the revised rule when relevant and proportional to the needs of the case. Framing intelligent requests for electronically stored information, for example, may require detailed information about another party’s information systems and other information resources. The amendment deletes the former provision authorizing the court, for good cause, to order discovery of any matter relevant to the subject matter involved in the action. The Committee has been informed that this language is rarely invoked. Proportional discovery relevant to any party’s claim or defense suffices, given a proper understanding of what is relevant to a claim or defense. The distinction between matter relevant to a claim or defense and matter relevant to the subject matter was introduced in 2000. The 2000 Note offered three examples of information that, suitably focused, would be relevant to the parties’ claims or defenses. The examples were “other incidents of the same type, or involving the same product”; “information about organizational arrangements or filing systems”; and “information that could be used to impeach a likely witness.” Such discovery is not foreclosed by the amendments. Discovery that is relevant to the parties’ claims or defenses may also support amendment of the Rules Appendix B-43 24 FEDERAL RULES OF CIVIL PROCEDURE pleadings to add a new claim or defense that affects the scope of discovery. The former provision for discovery of relevant but inadmissible information that appears “reasonably calculated to lead to the discovery of admissible evidence” is also deleted. The phrase has been used by some, incorrectly, to define the scope of discovery. As the Committee Note to the 2000 amendments observed, use of the “reasonably calculated” phrase to define the scope of discovery “might swallow any other limitation on the scope of discovery.” The 2000 amendments sought to prevent such misuse by adding the word “Relevant” at the beginning of the sentence, making clear that “‘relevant’ means within the scope of discovery as defined in this subdivision . . . .” The “reasonably calculated” phrase has continued to create problems, however, and is removed by these amendments. It is replaced by the direct statement that “Information within this scope of discovery need not be admissible in evidence to be discoverable.” Discovery of nonprivileged information not admissible in evidence remains available so long as it is otherwise within the scope of discovery. Rule 26(b)(2)(C)(iii) is amended to reflect the transfer of the considerations that bear on proportionality to Rule 26(b)(1). The court still must limit the frequency or extent of proposed discovery, on motion or on its own, if it is outside the scope permitted by Rule 26(b)(1). Rule 26(c)(1)(B) is amended to include an express recognition of protective orders that allocate expenses for Rules Appendix B-44 FEDERAL RULES OF CIVIL PROCEDURE 25 disclosure or discovery. Authority to enter such orders is included in the present rule, and courts already exercise this authority. Explicit recognition will forestall the temptation some parties may feel to contest this authority. Recognizing the authority does not imply that cost-shifting should become a common practice. Courts and parties should continue to assume that a responding party ordinarily bears the costs of responding. Rule 26(d)(2) is added to allow a party to deliver Rule 34 requests to another party more than 21 days after that party has been served even though the parties have not yet had a required Rule 26(f) conference. Delivery may be made by any party to the party that has been served, and by that party to any plaintiff and any other party that has been served. Delivery does not count as service; the requests are considered to be served at the first Rule 26(f) conference. Under Rule 34(b)(2)(A) the time to respond runs from service. This relaxation of the discovery moratorium is designed to facilitate focused discussion during the Rule 26(f) conference. Discussion at the conference may produce changes in the requests. The opportunity for advance scrutiny of requests delivered before the Rule 26(f) conference should not affect a decision whether to allow additional time to respond. Rule 26(d)(3) is renumbered and amended to recognize that the parties may stipulate to case-specific sequences of discovery. Rule 26(f)(3) is amended in parallel with Rule 16(b)(3) to add two items to the discovery plan - Rules Appendix B-45 26 FEDERAL RULES OF CIVIL PROCEDURE issues about preserving electronically stored information and court orders under Evidence Rule 502. Rules Appendix B-46 FEDERAL RULES OF CIVIL PROCEDURE 27 Rule 30. Depositions by Oral Examination 1 (a) When a Deposition May Be Taken. 2 * * * * * 3 (2) With Leave. A party must obtain leave of court, 4 and the court must grant leave to the extent 5 consistent with Rule 26(b)(1) and (2): 6 * * * * * 7 (d) Duration; Sanction; Motion to Terminate or Limit. 8 (1) Duration. Unless otherwise stipulated or 9 ordered by the court, a deposition is limited to 10 one day of 7 hours. The court must allow 11 additional time consistent with Rule 26(b)(1) and 12 (2) if needed to fairly examine the deponent or if 13 the deponent, another person, or any other 14 circumstance impedes or delays the examination. 15 * * * * * 16 Rules Appendix B-47 28 FEDERAL RULES OF CIVIL PROCEDURE Committee Note Rule 30 is amended in parallel with Rules 31 and 33 to reflect the recognition of proportionality in Rule 26(b)(1). Rules Appendix B-48 FEDERAL RULES OF CIVIL PROCEDURE 29 Rule 31. Depositions by Written Questions 1 (a) When a Deposition May Be Taken. 2 * * * * * 3 (2) With Leave. A party must obtain leave of court, 4 and the court must grant leave to the extent 5 consistent with Rule 26(b)(1) and (2): 6 * * * * * 7 Committee Note Rule 31 is amended in parallel with Rules 30 and 33 to reflect the recognition of proportionality in Rule 26(b)(1). Rules Appendix B-49 30 FEDERAL RULES OF CIVIL PROCEDURE Rule 33. Interrogatories to Parties 1 (a) In General. 2 (1) Number. Unless otherwise stipulated or ordered 3 by the court, a party may serve on any other 4 party no more than 25 written interrogatories, 5 including all discrete subparts. Leave to serve 6 additional interrogatories may be granted to the 7 extent consistent with Rule 26(b)(1) and (2). 8 * * * * * 9 Committee Note Rule 33 is amended in parallel with Rules 30 and 31 to reflect the recognition of proportionality in Rule 26(b)(1). Rules Appendix B-50 FEDERAL RULES OF CIVIL PROCEDURE 31 Rule 34. Producing Documents, Electronically Stored 1 Information, and Tangible Things, or 2 Entering onto Land, for Inspection and 3 Other Purposes 4 * * * * * 5 (b) Procedure. 6 * * * * * 7 (2) Responses and Objections. 8 (A) Time to Respond. The party to whom the 9 request is directed must respond in writing 10 within 30 days after being served or - if 11 the request was delivered under 12 Rule 26(d)(2) - within 30 days after the 13 parties’ first Rule 26(f) conference. A 14 shorter or longer time may be stipulated to 15 under Rule 29 or be ordered by the court. 16 (B) Responding to Each Item. For each item or 17 category, the response must either state that 18 Rules Appendix B-51 32 FEDERAL RULES OF CIVIL PROCEDURE inspection and related activities will be 19 permitted as requested or state an objection 20 with specificity the grounds for objecting to 21 the request, including the reasons. The 22 responding party may state that it will 23 produce copies of documents or of 24 electronically stored information instead of 25 permitting inspection. The production must 26 then be completed no later than the time for 27 inspection specified in the request or 28 another reasonable time specified in the 29 response. 30 (C) Objections. An objection must state 31 whether any responsive materials are being 32 withheld on the basis of that objection. An 33 Rules Appendix B-52 FEDERAL RULES OF CIVIL PROCEDURE 33 objection to part of a request must specify 34 the part and permit inspection of the rest. 35 * * * * * 36 Committee Note Several amendments are made in Rule 34, aimed at reducing the potential to impose unreasonable burdens by objections to requests to produce. Rule 34(b)(2)(A) is amended to fit with new Rule 26(d)(2). The time to respond to a Rule 34 request delivered before the parties’ Rule 26(f) conference is 30 days after the first Rule 26(f) conference. Rule 34(b)(2)(B) is amended to require that objections to Rule 34 requests be stated with specificity. This provision adopts the language of Rule 33(b)(4), eliminating any doubt that less specific objections might be suitable under Rule 34. The specificity of the objection ties to the new provision in Rule 34(b)(2)(C) directing that an objection must state whether any responsive materials are being withheld on the basis of that objection. An objection may state that a request is overbroad, but if the objection recognizes that some part of the request is appropriate the objection should state the scope that is not overbroad. Examples would be a statement that the responding party will limit the search to documents or electronically stored information created within a given period of time prior to Rules Appendix B-53 34 FEDERAL RULES OF CIVIL PROCEDURE the events in suit, or to specified sources. When there is such an objection, the statement of what has been withheld can properly identify as matters “withheld” anything beyond the scope of the search specified in the objection. Rule 34(b)(2)(B) is further amended to reflect the common practice of producing copies of documents or electronically stored information rather than simply permitting inspection. The response to the request must state that copies will be produced. The production must be completed either by the time for inspection specified in the request or by another reasonable time specifically identified in the response. When it is necessary to make the production in stages the response should specify the beginning and end dates of the production. Rule 34(b)(2)(C) is amended to provide that an objection to a Rule 34 request must state whether anything is being withheld on the basis of the objection. This amendment should end the confusion that frequently arises when a producing party states several objections and still produces information, leaving the requesting party uncertain whether any relevant and responsive information has been withheld on the basis of the objections. The producing party does not need to provide a detailed description or log of all documents withheld, but does need to alert other parties to the fact that documents have been withheld and thereby facilitate an informed discussion of the objection. An objection that states the limits that have controlled the search for responsive and relevant materials qualifies as a statement that the materials have been “withheld.” Rules Appendix B-54 FEDERAL RULES OF CIVIL PROCEDURE 35 Rule 37. Failure to Make Disclosures or to Cooperate 1 in Discovery; Sanctions 2 (a) Motion for an Order Compelling Disclosure or 3 Discovery. 4 * * * * * 5 (3) Specific Motions. 6 * * * * * 7 (B) To Compel a Discovery Response. A party 8 seeking discovery may move for an order 9 compelling an answer, designation, 10 production, or inspection. This motion may 11 be made if: 12 * * * * * 13 (iv) a party fails to produce documents or 14 fails to respond that inspection will be 15 permitted - or fails to permit 16 Rules Appendix B-55 36 FEDERAL RULES OF CIVIL PROCEDURE inspection - as requested under 17 Rule 34. 18 * * * * * 19 (e) Failure to ProvidePreserve Electronically Stored 20 Information. Absent exceptional circumstances, a 21 court may not impose sanctions under these rules on a 22 party for failing to provide electronically stored 23 information lost as a result of the routine, good-faith 24 operation of an electronic information system.If 25 electronically stored information that should have 26 been preserved in the anticipation or conduct of 27 litigation is lost because a party failed to take 28 reasonable steps to preserve it, and it cannot be 29 restored or replaced through additional discovery, the 30 court: 31 Rules Appendix B-56 FEDERAL RULES OF CIVIL PROCEDURE 37 (1) upon finding prejudice to another party from loss 32 of the information, may order measures no 33 greater than necessary to cure the prejudice; or 34 (2) only upon finding that the party acted with the 35 intent to deprive another party of the 36 information’s use in the litigation may: 37 (A) presume that the lost information was 38 unfavorable to the party; 39 (B) instruct the jury that it may or must 40 presume the information was unfavorable to 41 the party; or 42 (C) dismiss the action or enter a default 43 judgment. 44 * * * * * 45 Rules Appendix B-57 38 FEDERAL RULES OF CIVIL PROCEDURE Committee Note Subdivision (a). Rule 37(a)(3)(B)(iv) is amended to reflect the common practice of producing copies of documents or electronically stored information rather than simply permitting inspection. This change brings item (iv) into line with paragraph (B), which provides a motion for an order compelling “production, or inspection.” Subdivision (e). Present Rule 37(e), adopted in 2006, provides: “Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.” This limited rule has not adequately addressed the serious problems resulting from the continued exponential growth in the volume of such information. Federal circuits have established significantly different standards for imposing sanctions or curative measures on parties who fail to preserve electronically stored information. These developments have caused litigants to expend excessive effort and money on preservation in order to avoid the risk of severe sanctions if a court finds they did not do enough. New Rule 37(e) replaces the 2006 rule. It authorizes and specifies measures a court may employ if information that should have been preserved is lost, and specifies the findings necessary to justify these measures. It therefore forecloses reliance on inherent authority or state law to determine when certain measures should be used. The rule does not affect the validity of an independent tort claim for Rules Appendix B-58 FEDERAL RULES OF CIVIL PROCEDURE 39 spoliation if state law applies in a case and authorizes the claim. The new rule applies only to electronically stored information, also the focus of the 2006 rule. It applies only when such information is lost. Because electronically stored information often exists in multiple locations, loss from one source may often be harmless when substitute information can be found elsewhere. The new rule applies only if the lost information should have been preserved in the anticipation or conduct of litigation and the party failed to take reasonable steps to preserve it. Many court decisions hold that potential litigants have a duty to preserve relevant information when litigation is reasonably foreseeable. Rule 37(e) is based on this common-law duty; it does not attempt to create a new duty to preserve. The rule does not apply when information is lost before a duty to preserve arises. In applying the rule, a court may need to decide whether and when a duty to preserve arose. Courts should consider the extent to which a party was on notice that litigation was likely and that the information would be relevant. A variety of events may alert a party to the prospect of litigation. Often these events provide only limited information about that prospective litigation, however, so that the scope of information that should be preserved may remain uncertain. It is important not to be blinded to this reality by hindsight arising from familiarity with an action as it is actually filed. Rules Appendix B-59 40 FEDERAL RULES OF CIVIL PROCEDURE Although the rule focuses on the common-law obligation to preserve in the anticipation or conduct of litigation, courts may sometimes consider whether there was an independent requirement that the lost information be preserved. Such requirements arise from many sources - statutes, administrative regulations, an order in another case, or a party’s own information-retention protocols. The court should be sensitive, however, to the fact that such independent preservation requirements may be addressed to a wide variety of concerns unrelated to the current litigation. The fact that a party had an independent obligation to preserve information does not necessarily mean that it had such a duty with respect to the litigation, and the fact that the party failed to observe some other preservation obligation does not itself prove that its efforts to preserve were not reasonable with respect to a particular case. The duty to preserve may in some instances be triggered or clarified by a court order in the case. Preservation orders may become more common, in part because Rules 16(b)(3)(B)(iii) and 26(f)(3)(C) are amended to encourage discovery plans and orders that address preservation. Once litigation has commenced, if the parties cannot reach agreement about preservation issues, promptly seeking judicial guidance about the extent of reasonable preservation may be important. The rule applies only if the information was lost because the party failed to take reasonable steps to preserve the information. Due to the ever-increasing volume of electronically stored information and the multitude of Rules Appendix B-60 FEDERAL RULES OF CIVIL PROCEDURE 41 devices that generate such information, perfection in preserving all relevant electronically stored information is often impossible. As under the current rule, the routine, good-faith operation of an electronic information system would be a relevant factor for the court to consider in evaluating whether a party failed to take reasonable steps to preserve lost information, although the prospect of litigation may call for reasonable steps to preserve information by intervening in that routine operation. This rule recognizes that “reasonable steps” to preserve suffice; it does not call for perfection. The court should be sensitive to the party’s sophistication with regard to litigation in evaluating preservation efforts; some litigants, particularly individual litigants, may be less familiar with preservation obligations than others who have considerable experience in litigation. Because the rule calls only for reasonable steps to preserve, it is inapplicable when the loss of information occurs despite the party’s reasonable steps to preserve. For example, the information may not be in the party’s control. Or information the party has preserved may be destroyed by events outside the party’s control - the computer room may be flooded, a “cloud” service may fail, a malign software attack may disrupt a storage system, and so on. Courts may, however, need to assess the extent to which a party knew of and protected against such risks. Another factor in evaluating the reasonableness of preservation efforts is proportionality. The court should be sensitive to party resources; aggressive preservation efforts can be extremely costly, and parties (including Rules Appendix B-61 42 FEDERAL RULES OF CIVIL PROCEDURE governmental parties) may have limited staff and resources to devote to those efforts. A party may act reasonably by choosing a less costly form of information preservation, if it is substantially as effective as more costly forms. It is important that counsel become familiar with their clients’ information systems and digital data - including social media - to address these issues. A party urging that preservation requests are disproportionate may need to provide specifics about these matters in order to enable meaningful discussion of the appropriate preservation regime. When a party fails to take reasonable steps to preserve electronically stored information that should have been preserved in the anticipation or conduct of litigation, and the information is lost as a result, Rule 37(e) directs that the initial focus should be on whether the lost information can be restored or replaced through additional discovery. Nothing in the rule limits the court’s powers under Rules 16 and 26 to authorize additional discovery. Orders under Rule 26(b)(2)(B) regarding discovery from sources that would ordinarily be considered inaccessible or under Rule 26(c)(1)(B) on allocation of expenses may be pertinent to solving such problems. If the information is restored or replaced, no further measures should be taken. At the same time, it is important to emphasize that efforts to restore or replace lost information through discovery should be proportional to the apparent importance of the lost information to claims or defenses in the litigation. For example, substantial measures should not be employed to restore or replace information that is marginally relevant or duplicative. Rules Appendix B-62 FEDERAL RULES OF CIVIL PROCEDURE 43 Subdivision (e)(1). This subdivision applies only if information should have been preserved in the anticipation or conduct of litigation, a party failed to take reasonable steps to preserve the information, information was lost as a result, and the information could not be restored or replaced by additional discovery. In addition, a court may resort to (e)(1) measures only “upon finding prejudice to another party from loss of the information.” An evaluation of prejudice from the loss of information necessarily includes an evaluation of the information’s importance in the litigation. The rule does not place a burden of proving or disproving prejudice on one party or the other. Determining the content of lost information may be a difficult task in some cases, and placing the burden of proving prejudice on the party that did not lose the information may be unfair. In other situations, however, the content of the lost information may be fairly evident, the information may appear to be unimportant, or the abundance of preserved information may appear sufficient to meet the needs of all parties. Requiring the party seeking curative measures to prove prejudice may be reasonable in such situations. The rule leaves judges with discretion to determine how best to assess prejudice in particular cases. Once a finding of prejudice is made, the court is authorized to employ measures “no greater than necessary to cure the prejudice.” The range of such measures is quite broad if they are necessary for this purpose. There is no all-purpose hierarchy of the severity of various measures; Rules Appendix B-63 44 FEDERAL RULES OF CIVIL PROCEDURE the severity of given measures must be calibrated in terms of their effect on the particular case. But authority to order measures no greater than necessary to cure prejudice does not require the court to adopt measures to cure every possible prejudicial effect. Much is entrusted to the court’s discretion. In an appropriate case, it may be that serious measures are necessary to cure prejudice found by the court, such as forbidding the party that failed to preserve information from putting on certain evidence, permitting the parties to present evidence and argument to the jury regarding the loss of information, or giving the jury instructions to assist in its evaluation of such evidence or argument, other than instructions to which subdivision (e)(2) applies. Care must be taken, however, to ensure that curative measures under subdivision (e)(1) do not have the effect of measures that are permitted under subdivision (e)(2) only on a finding of intent to deprive another party of the lost information’s use in the litigation. An example of an inappropriate (e)(1) measure might be an order striking pleadings related to, or precluding a party from offering any evidence in support of, the central or only claim or defense in the case. On the other hand, it may be appropriate to exclude a specific item of evidence to offset prejudice caused by failure to preserve other evidence that might contradict the excluded item of evidence. Subdivision (e)(2). This subdivision authorizes courts to use specified and very severe measures to address or deter failures to preserve electronically stored information, but only on finding that the party that lost the Rules Appendix B-64 FEDERAL RULES OF CIVIL PROCEDURE 45 information acted with the intent to deprive another party of the information’s use in the litigation. It is designed to provide a uniform standard in federal court for use of these serious measures when addressing failure to preserve electronically stored information. It rejects cases such as Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99 (2d Cir. 2002), that authorize the giving of adverse-inference instructions on a finding of negligence or gross negligence. Adverse-inference instructions were developed on the premise that a party’s intentional loss or destruction of evidence to prevent its use in litigation gives rise to a reasonable inference that the evidence was unfavorable to the party responsible for loss or destruction of the evidence. Negligent or even grossly negligent behavior does not logically support that inference. Information lost through negligence may have been favorable to either party, including the party that lost it, and inferring that it was unfavorable to that party may tip the balance at trial in ways the lost information never would have. The better rule for the negligent or grossly negligent loss of electronically stored information is to preserve a broad range of measures to cure prejudice caused by its loss, but to limit the most severe measures to instances of intentional loss or destruction. Similar reasons apply to limiting the court’s authority to presume or infer that the lost information was unfavorable to the party who lost it when ruling on a pretrial motion or presiding at a bench trial. Subdivision (e)(2) limits the ability of courts to draw Rules Appendix B-65 46 FEDERAL RULES OF CIVIL PROCEDURE adverse inferences based on the loss of information in these circumstances, permitting them only when a court finds that the information was lost with the intent to prevent its use in litigation. Subdivision (e)(2) applies to jury instructions that permit or require the jury to presume or infer that lost information was unfavorable to the party that lost it. Thus, it covers any instruction that directs or permits the jury to infer from the loss of information that it was in fact unfavorable to the party that lost it. The subdivision does not apply to jury instructions that do not involve such an inference. For example, subdivision (e)(2) would not prohibit a court from allowing the parties to present evidence to the jury concerning the loss and likely relevance of information and instructing the jury that it may consider that evidence, along with all the other evidence in the case, in making its decision. These measures, which would not involve instructing a jury it may draw an adverse inference from loss of information, would be available under subdivision (e)(1) if no greater than necessary to cure prejudice. In addition, subdivision (e)(2) does not limit the discretion of courts to give traditional missing evidence instructions based on a party’s failure to present evidence it has in its possession at the time of trial. Subdivision (e)(2) requires a finding that the party acted with the intent to deprive another party of the information’s use in the litigation. This finding may be made by the court when ruling on a pretrial motion, when presiding at a bench trial, or when deciding whether to give an adverse inference instruction at trial. If a court were to Rules Appendix B-66 FEDERAL RULES OF CIVIL PROCEDURE 47 conclude that the intent finding should be made by a jury, the court’s instruction should make clear that the jury may infer from the loss of the information that it was unfavorable to the party that lost it only if the jury first finds that the party acted with the intent to deprive another party of the information’s use in the litigation. If the jury does not make this finding, it may not infer from the loss that the information was unfavorable to the party that lost it. Subdivision (e)(2) does not include a requirement that the court find prejudice to the party deprived of the information. This is because the finding of intent required by the subdivision can support not only an inference that the lost information was unfavorable to the party that intentionally destroyed it, but also an inference that the opposing party was prejudiced by the loss of information that would have favored its position. Subdivision (e)(2) does not require any further finding of prejudice. Courts should exercise caution, however, in using the measures specified in (e)(2). Finding an intent to deprive another party of the lost information’s use in the litigation does not require a court to adopt any of the measures listed in subdivision (e)(2). The remedy should fit the wrong, and the severe measures authorized by this subdivision should not be used when the information lost was relatively unimportant or lesser measures such as those specified in subdivision (e)(1) would be sufficient to redress the loss. Rules Appendix B-67 48 FEDERAL RULES OF CIVIL PROCEDURE Rule 55. Default; Default Judgment 1 * * * * * 2 (c) Setting Aside a Default or a Default Judgment. 3 The court may set aside an entry of default for good 4 cause, and it may set aside a final default judgment 5 under Rule 60(b). 6 * * * * * 7 Committee Note Rule 55(c) is amended to make plain the interplay between Rules 54(b), 55(c), and 60(b). A default judgment that does not dispose of all of the claims among all parties is not a final judgment unless the court directs entry of final judgment under Rule 54(b). Until final judgment is entered, Rule 54(b) allows revision of the default judgment at any time. The demanding standards set by Rule 60(b) apply only in seeking relief from a final judgment. Rules Appendix B-68 FEDERAL RULES OF CIVIL PROCEDURE 49 Rule 84. Forms 1 [Abrogated (Apr. __, 2015, eff. Dec. 1, 2015).] 2 The forms in the Appendix suffice under these rules 3 and illustrate the simplicity and brevity that these rules 4 contemplate. 5 Committee Note Rule 84 was adopted when the Civil Rules were established in 1938 “to indicate, subject to the provisions of these rules, the simplicity and brevity of statement which the rules contemplate.” The purpose of providing illustrations for the rules, although useful when the rules were adopted, has been fulfilled. Accordingly, recognizing that there are many excellent alternative sources for forms, including the Administrative Office of the United States Courts, Rule 84 and the Appendix of Forms are no longer necessary and have been abrogated. Rules Appendix B-69 50 FEDERAL RULES OF CIVIL PROCEDURE APPENDIX OF FORMS 1 [Abrogated (Apr. __, 2015, eff. Dec. 1, 2015).] 2 Rules Appendix B-70 FEDERAL RULES OF CIVIL PROCEDURE 51 Rule 4. Summons 1 * * * * * 2 (d) Waiving Service. 3 (1) Requesting a Waiver. An individual, 4 corporation, or association that is subject to 5 service under Rule 4(e), (f), or (h) has a duty to 6 avoid unnecessary expenses of serving the 7 summons. The plaintiff may notify such a 8 defendant that an action has been commenced 9 and request that the defendant waive service of a 10 summons. The notice and request must: 11 * * * * * 12 (C) be accompanied by a copy of the complaint, 13 2 copies of athe waiver form appended to 14 this Rule 4, and a prepaid means for 15 returning the form; 16 Rules Appendix B-71 52 FEDERAL RULES OF CIVIL PROCEDURE (D) inform the defendant, using text prescribed 17 in Form 5the form appended to this Rule 4, 18 of the consequences of waiving and not 19 waiving service; 20 * * * * * 21 Rule 4 Notice of a Lawsuit and Request to Waive 22 Service of Summons. 23 (Caption) 24 To (name the defendant or - if the defendant is a 25 corporation, partnership, or association - name an officer 26 or agent authorized to receive service): 27 Why are you getting this? 28 A lawsuit has been filed against you, or the entity you 29 represent, in this court under the number shown above. A 30 copy of the complaint is attached. 31 This is not a summons, or an official notice from the 32 court. It is a request that, to avoid expenses, you waive 33 formal service of a summons by signing and returning the 34 enclosed waiver. To avoid these expenses, you must return 35 the signed waiver within (give at least 30 days or at least 36 60 days if the defendant is outside any judicial district of 37 the United States) from the date shown below, which is the 38 Rules Appendix B-72 FEDERAL RULES OF CIVIL PROCEDURE 53 date this notice was sent. Two copies of the waiver form 39 are enclosed, along with a stamped, self-addressed 40 envelope or other prepaid means for returning one copy. 41 You may keep the other copy. 42 What happens next? 43 If you return the signed waiver, I will file it with the 44 court. The action will then proceed as if you had been 45 served on the date the waiver is filed, but no summons will 46 be served on you and you will have 60 days from the date 47 this notice is sent (see the date below) to answer the 48 complaint (or 90 days if this notice is sent to you outside 49 any judicial district of the United States). 50 If you do not return the signed waiver within the time 51 indicated, I will arrange to have the summons and 52 complaint served on you. And I will ask the court to 53 require you, or the entity you represent, to pay the expenses 54 of making service. 55 Please read the enclosed statement about the duty to 56 avoid unnecessary expenses. 57 I certify that this request is being sent to you on the 58 date below. 59 Date: ___________ 60 ___________________________ 61 (Signature of the attorney 62 or unrepresented party) 63 Rules Appendix B-73 54 FEDERAL RULES OF CIVIL PROCEDURE ___________________________ 64 (Printed name) 65 ___________________________ 66 (Address) 67 ___________________________ 68 (E-mail address) 69 ___________________________ 70 (Telephone number) 71 Rule 4 Waiver of the Service of Summons. 72 (Caption) 73 To (name the plaintiff’s attorney or the unrepresented 74 plaintiff): 75 I have received your request to waive service of a 76 summons in this action along with a copy of the complaint, 77 two copies of this waiver form, and a prepaid means of 78 returning one signed copy of the form to you. 79 I, or the entity I represent, agree to save the expense 80 of serving a summons and complaint in this case. 81 I understand that I, or the entity I represent, will keep 82 all defenses or objections to the lawsuit, the court’s 83 jurisdiction, and the venue of the action, but that I waive 84 any objections to the absence of a summons or of service. 85 Rules Appendix B-74 FEDERAL RULES OF CIVIL PROCEDURE 55 I also understand that I, or the entity I represent, must 86 file and serve an answer or a motion under Rule 12 within 87 60 days from _____________________, the date when this 88 request was sent (or 90 days if it was sent outside the 89 United States). If I fail to do so, a default judgment will be 90 entered against me or the entity I represent. 91 Date: ___________ 92 ___________________________ 93 (Signature of the attorney 94 or unrepresented party) 95 ___________________________ 96 (Printed name) 97 ___________________________ 98 (Address) 99 ___________________________ 100 (E-mail address) 101 ___________________________ 102 (Telephone number) 103 (Attach the following) 104 Rules Appendix B-75 56 FEDERAL RULES OF CIVIL PROCEDURE Duty to Avoid Unnecessary Expenses 105 of Serving a Summons 106 Rule 4 of the Federal Rules of Civil Procedure 107 requires certain defendants to cooperate in saving 108 unnecessary expenses of serving a summons and complaint. 109 A defendant who is located in the United States and who 110 fails to return a signed waiver of service requested by a 111 plaintiff located in the United States will be required to pay 112 the expenses of service, unless the defendant shows good 113 cause for the failure. 114 “Good cause” does not include a belief that the 115 lawsuit is groundless, or that it has been brought in an 116 improper venue, or that the court has no jurisdiction over 117 this matter or over the defendant or the defendant’s 118 property. 119 If the waiver is signed and returned, you can still 120 make these and all other defenses and objections, but you 121 cannot object to the absence of a summons or of service. 122 If you waive service, then you must, within the time 123 specified on the waiver form, serve an answer or a motion 124 under Rule 12 on the plaintiff and file a copy with the 125 court. By signing and returning the waiver form, you are 126 allowed more time to respond than if a summons had been 127 served. 128 Rules Appendix B-76 FEDERAL RULES OF CIVIL PROCEDURE 57 Committee Note Subdivision (d). Abrogation of Rule 84 and the other official forms requires that former Forms 5 and 6 be directly incorporated into Rule 4. Rules Appendix B-77