Publications

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Many lawyers consider electronic discovery the great peril of the 21st century. Judge Shira Scheindlin’s most recent opinion in Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC et al., No. 05-9016, 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010) paints another ugly picture of the consequences of the failure to comply with discovery obligations.

Anyone engaged in litigation where such rules may apply needs to know and understand the decision.

An Introduction to the Opinion

The well written and crafted opinion titled "Zubulake Revisited: Six Years Later," (Opinion) begins ominously. Its tone hints that punishment is near for some parties and suggests that the well known Zubulake opinions should be heeded as a watershed in legal history:

In an era where vast amounts of electronic information is available for review, discovery in certain cases has become increasingly complex and expensive. Courts cannot and do not expect that any party can meet a standard of perfection. Nonetheless, the courts have a right to expect that litigants and counsel will take the necessary steps to ensure that relevant records are preserved when litigation is reasonably anticipated, and that such records are collected, reviewed, and produced to the opposing party. As discussed six years ago in the Zubulake opinions, when this does not happen, the integrity of the judicial process is harmed and the courts are required to fashion a remedy. Once again, I have been compelled to closely review the discovery efforts of parties in a litigation, and once again have found that those efforts were flawed. As famously noted, ‘[t]hose who cannot remember the past are condemned to repeat it.’ By now, it should be abundantly clear that the duty to preserve means what it says and that a failure to preserve records – paper or electronic – and to search in the right places for those records, will inevitably result in the spoliation of evidence.

(Slip Op. at 2) (quoting George Santayana, Reason in Common Sense)

The Opinion addresses discovery failures in a large commercial dispute stemming from the liquidation of Lancer Offshore, Inc. and OmniFund Ltd., two hedge funds in which investors sought to recover more than $500 million under the federal securities laws and New York state law. The investors sued former directors, administrators, an auditor and a broker and custodian of the hedge funds. Lancer Management Group LLC (Lancer) and its principal managed the hedge funds. The hedge funds also received services from an administrator for a period of time. Additional parties will be discussed below as necessary.

Lancer filed for bankruptcy in April 2003, and the hedge funds were placed in receivership in July 2003. In 2007, Citco, its parent company and various individuals directors and officers (Citco Defendants) asserted that "substantial gaps" had been identified in the plaintiffs’ document productions. Substantial discovery followed, after which the Citco Defendants moved for sanctions against the plaintiffs for failing to preserve and produce documents and information and for submitting misleading statements in respect of document collection and preservation efforts which had taken place. The moving defendants sought "dismissal of the Complaint – or any lesser sanction the Court deems appropriate...."

Legal Framework to Consider a Litigant’s Conduct

Judge Scheindlin painstakingly establishes the "Analytical Framework and Applicable Law" for the Opinion, and what is drafted is perhaps best described as a small treatise on the essential elements and standards of conduct for discovery (electronic and otherwise) that should be reviewed by all outside counsel, inside counsel and clients (whether plaintiffs or defendants). The Opinion discusses negligence, gross negligence and willfulness in a discovery context, and the relevant law regarding the imposition of sanctions.

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"failure to conform to this standard is negligent
even if it results from a pure heart and an empty head"

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Before setting forth the legal platform, Judge Scheindlin clarifies that what is at issue are not "any egregious examples of litigants purposefully destroying evidence." Slip Op. at 5. Rather, it is a case where the plaintiffs failed to timely issue litigation hold instructions and "engaged in careless and indifferent collection efforts after the duty to preserve arose," leaving little doubt about the loss or destruction of information and documents. Id.

To determine whether each plaintiff’s conduct called for the imposition of sanctions, the court identified several preliminary matters and concepts:

• Level of culpability: Was the conduct of discovery by the plaintiff "acceptable, or was it negligent, grossly negligent, or willful"?
• Interplay between the duty to preserve and spoliation of evidence
• Which party bears the burden of proving evidence has been lost or destroyed and the consequences therefrom, and
• An appropriate remedy for the harm resulting from spoliation

Defining Negligence, Gross Negligence and Willfulness in the Discovery Context

Judge Scheindlin notes the abundance of treatises defining concepts of negligence and willfulness in a tort context, but a dearth of definitions for purposes of discovery. However, the court adopts the same theory as in tort, observing that the terms negligence, gross negligence or willfulness "simply describe a continuum." Id. at 6. The court explains:

Conduct is either acceptable or unacceptable. Once it is unacceptable the only question is how bad is the conduct. That is a judgment call that must be made by a court reviewing the conduct through the backward lens known as hindsight. It is also a call that cannot be measured with exactitude and might be called differently by a different judge. That said, it is well established that negligence involves unreasonable conduct in that it creates a risk of harm to others, but willfulness involves intentional or reckless conduct that is so unreasonable that harm is highly likely to occur.

(Id. at 6-7)

In this vein, the court defines "negligent" behavior in discovery as the failure to conform to the standards of "what a party must do to meet its obligation to participate meaningfully and fairly in the discovery phase of a judicial proceeding." Id. at 7-8. Significantly – and this should be understood by all – "[a] failure to conform to this standard is negligent even if it results from a pure heart and an empty head." Id. at 8 (emphasis added).

The court borrows from Prosser and Keeton to describe "gross negligence" as "a failure to exercise even that care which a careless person would use," explaining that "gross negligence is something more than negligence ‘and differs from ordinary negligence only in degree, and not in kind.’" Id. at 8 (citation omitted) Relying further on Prosser and Keeton, the court "groups willful, wanton and reckless into one category that requires ‘that the actor has intentionally done an act of an unreasonable character in disregard of a known or obvious risk that was so great as to make it highly probable that harm would follow, and which thus is usually accompanied by a conscious indifference to the consequences.’" Id. (citation omitted)

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"after July, 2004, when the final relevant Zubulake opinion was issued,
the failure to issue a written litigation hold constitutes gross negligence
because that failure is likely to result in the destruction of relevant information"

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With the terms defined for purposes of discovery, the court turns to applying them in a discovery context. Beginning with the first step, the preservation of relevant information, the court states:

A failure to preserve evidence resulting in the loss or destruction of relevant information is surely negligent, and, depending on the circumstances, may be grossly negligent or willful. For example, the intentional destruction of relevant records, either paper or electronic, after the duty to preserve has attached, is willful. Possibly after October, 2003, when Zubulake IV was issued, and definitely after July, 2004, when the final relevant Zubulake opinion was issued, the failure to issue a written litigation hold constitutes gross negligence because that failure is likely to result in the destruction of relevant information.

Id. at 9 (emphasis added).

The court then turns to the second step in the discovery process, collection and review. Again, the court notes the spectrum of possible outcomes relating to discovery failures, specifically surrounding the duties to collect and review:

Once again, depending on the extent of the failure to collect evidence, or the sloppiness of review, the resulting loss or destruction of evidence is surely negligent, and, depending on the circumstances may be grossly negligent or willful. For example, the failure to collect records – either paper or electronic – from key players constitutes gross negligence or willfulness as does the destruction of email or certain backup tapes after the duty to preserve has attached. By contrast, the failure to obtain records from all employees (some of whom may have had only a passing encounter with the issues in the litigation), as opposed to key players, likely constitutes negligence as opposed to a higher degree of culpability. Similarly, the failure to take all appropriate measures to preserve ESI likely falls in the negligence category. These examples are not meant as a definitive list. Each case will turn on its own facts and the varieties and efforts and failures is infinite. I have drawn the examples above from this case and others. Recent cases have also addressed the failure to collect information from the files of former employees that remain in a party’s possession, custody, or control after the duty to preserve has attached (gross negligence) or the failure to assess the accuracy and validity of selected search terms (negligence).

Id. at 10-11.

The Duty to Preserve and Spoliation

Advancing to the second preliminary consideration, the court very simply defines spoliation and articulates the duty to preserve. "Spoliation refers to the destruction or material alteration of evidence or to the failure to preserve property for another’s use as evidence in pending or foreseeable litigation." Id. at 11. Courts have the inherent power to impose sanctions for spoliation of evidence.

As for the well settled duty to preserve, "it arises when a party reasonably anticipates litigation. ‘[O]nce a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents.’" Id. at 12 (citations omitted). As a result, the plaintiff’s duty is "more often triggered before litigation commences." Id.

Burdens of Proof

The third preliminary consideration is what process should be adopted when documents are no longer available. The critical problem in this scenario is that it is usually difficult, if not impossible, to know what information any lost documents contained. Perhaps, as the court notes, the information might be inferred from other information, or recalled during depositions. However, that is not always possible. Who, then, should bear the burden of establishing the relevance of lost evidence; and who should be required to prove that the absence of missing information prejudiced an innocent party? Id. at 13.

The court reasons that relative satisfaction of the burden of proof depends on the severity of the potential sanction. Less severe sanctions, such as fines or cost-shifting, require an inquiry that focuses on the conduct of the spoliator. More severe sanctions, including dismissal, preclusion or the imposition of an adverse inference, require consideration of the spoliator’s conduct, and whether missing information was relevant and whether an innocent party is prejudiced by the loss. The court explains that "relevant" in this context has a meaning distinct from Rule 401 of the Federal Rules of Evidence, which the Second Circuit has found to "‘mean[] something more than sufficiently probative to satisfy Rule 401." Id. at 14 (quoting Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 108-09 (2d Cir. 2002)). Thus, "[i]t is not enough for the innocent party to show that the destroyed evidence would have been responsive to a document request. 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. at 14-15.

From this analysis arose three elements that the court held an innocent party must prove: "that the spoliating party (1) had control over the evidence and an obligation to preserve it at the time of destruction or loss; (2) acted with a culpable state of mind upon destroying or losing the evidence; and that (3) the missing evidence is relevant to the innocent party’s claim or defense." Id. at 15.

Significantly, relevance and prejudice under this analysis can be presumed when the spoliator acted in bad faith or in a manner deemed grossly negligent. "However, when the spoliating party was merely negligent, the innocent party must prove both relevance and prejudice in order to justify imposition of a severe sanction." Id. at 15-16. This can be accomplished by presenting evidence from which to infer the nature of the information lost. "‘[I]n other words, the [innocent party] must present extrinsic evidence tending to show that the destroyed e-mails would have been favorable to [its] case.’ ‘Courts must take care not to ‘hold[] the prejudiced party to too strict a standard of proof regarding the likely contents of the destroyed [or unavailable] evidence,’ because doing so ‘would . . . allow parties who have . . . destroyed evidence to profit from that destruction.’" Id. at 16-17.

Ultimately, Judge Scheindlin develops a burden shifting test to address the relevant presumptions and burdens:

To ensure that no party’s task is too erroneous or too lenient, I am employing the following burden shifting test: When the spoliating party’s conduct is sufficiently egregious to justify a court’s imposition of a presumption of relevance and prejudice, or when the spoliating party’s conduct warrants permitting the jury to make such a presumption, the burden shifts to the spoliating party to rebut that presumption. The spoliating party can do so, 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. If the spoliating party demonstrates to a court’s satisfaction that there could not have been any prejudice to the innocent party, then no jury instruction will be warranted, although a lesser sanction still might be required.

Id. at 18.

Remedies

The final preliminary consideration identified by the court is the appropriate remedy, which is a matter subject to a court’s broad discretion. An appropriate sanction in the discovery context "should ‘(1) deter the parties from engaging in spoliation; (2) place the risk of an erroneous judgment on the party who wrongfully created the risk; and (3) restore ‘the prejudiced party to the same position [it] would have been in absent the wrongful destruction of evidence by the opposing party.’" Id. at 19.

Judge Scheindlin notes that a court should impose the least harsh sanction providing an adequate remedy, and lists alternatives, from least to most harsh, including further discovery, cost-shifting, fines, special jury instructions, preclusion and default judgment or dismissal ("terminating sanctions"). Id. at 20. Although the Citco Defendants had requested dismissal, Judge Scheindlin explains that "a terminating sanction is justified in only the most egregious cases, such as where a party has engaged in perjury, tampering with evidence, or intentionally destroying evidence by burning, shredding, or wiping out computer hard drives." Id. at 20-21. The court concluded that the evidence at issue did not warrant terminating sanctions, but rather, among other things, an adverse inference instruction.

"[A]n adverse inference instruction can take many forms, again ranging in degrees of harshness." Judge Scheindlin suggested a measuring stick for such instructions:

In its most harsh form, when a spoliating party has acted willfully or in bad faith, a jury can be instructed that certain facts are deemed admitted and must be accepted as true. At the next level, when a spoliating party has acted willfully and recklessly, a court may impose a mandatory presumption. Even a mandatory presumption, however, is considered to be rebuttable.

The least harsh instruction permits (but does not require) a jury to presume that the lost evidence is both relevant and favorable to the innocent party. If it makes this presumption, the spoliating party’s rebuttal evidence must then be considered by the jury, which must then decide whether to draw an adverse inference against the spoliating party. This sanction still benefits the innocent party in that it allows the jury to consider both the misconduct of the spoliating party as well as proof of prejudice to the innocent party. Such a charge should be termed a ‘spoliating charge’ to distinguish it from a charge where the jury is directed to presume, albeit still subject to rebuttal, that the missing evidence would have been favorable to the innocent party, and from a charge where the jury is directed to deem certain facts admitted.

Id. at 21-23.

In concluding the framework discussion, Judge Scheindlin reflects that each case is a judgment call for the court and thus subject to an intensive factual investigation. It is not possible to create a list of relevant criteria for each and every case. However, she offers the following guidance:

After a discovery duty is well established, the failure to adhere to contemporary standards can be considered gross negligence. Thus, after the final relevant Zubulake opinion in July, 2004, the following failures support a finding of gross negligence, when the duty to preserve is attached: to issue a written litigation hold; to identify all of the key players and to ensure that their electronic and paper records are preserved; to cease the deletion of email or to preserve the records of former employees that are in a party’s possession, custody, or control; and to preserve backup tapes when they are the sole source of relevant information or when they relate to key players, if the relevant information maintained by those players is not obtainable from readily accessible sources.

Id. at 24-25.

Applying the Law to the Facts and Parties

The plaintiffs retained counsel in Fall 2003, and counsel shortly thereafter began document collection and preservation. Plaintiffs’ counsel instructed their clients to provide them information, erring on the side of being over-inclusive, and to include emails and electronic documents. The court found the process was deficient and failed to meet the standard for a litigation hold. Judge Sheindlin remarked that the instructions did "not direct employees to preserve all relevant records – both paper and electronic – nor does it create a mechanism for collecting the preserved records so that they can be searched by someone other than the employee. Rather, the directive places total reliance on the employee to search and select what the employee believed to be responsive records without any supervision from Counsel." Id. at 28.

A stay instituted in 2004 remained in effect until 2007, when it was lifted and depositions began (in 2005 the case was transferred from the Southern District of Florida to the Southern District of New York). Those depositions raised questions about the various plaintiffs’ document productions, and the court ordered the plaintiffs to provide declarations regarding their preservation and production efforts. After further discovery, the Citco Defendants identified hundreds of documents which should have been produced by plaintiffs, but were not, and also discovered that almost all of the declarations provided by the plaintiffs were false and misleading, and at times even executed by an individual without personal knowledge.

Analyzing the specific facts and circumstances of the case, the court concluded that plaintiffs failed to properly preserve documents, leading "inexorably to the conclusion that relevant records have been lost or destroyed." Id. at 35 Moreover, the court found that the plaintiffs’ failure to issue a litigation hold when the case was transferred to the Southern District of New York was "at a minimum, grossly negligent." The court noted, however, that "[t]he severity of this misconduct would have justified severe sanctions had the Citco Defendants demonstrated that any documents were destroyed after 2005." Id. The plaintiffs’ conduct prior to 2005 was "best characterized as either grossly negligent or negligent because they failed to execute a comprehensive search for documents and/or failed to sufficiently supervise or monitor their employees’ document collection." Id. at 36-37. In respect of the various periods of time involved in the litigation, the curt found that no plaintiffs engaged in willful misconduct, but several acted with gross negligence, and several others were simply negligent.

Regarding the six plaintiffs that were grossly negligent, the court held that the jury shall be permitted to presume both the relevance of missing documents and the resulting prejudice to the Citco Defendants, subject to the presumption being rebutted. As for the seven plaintiffs found to be negligent, the court found that the missing body of documents and information was relevant, but that the Citco Defendants had not demonstrated prejudice, hence a lesser sanction than a spoliation charge would be appropriate.

Ultimately, the court set forth a detailed instruction that it would provide to the jury in the upcoming trial. It is an interesting demonstration of how the issue is ultimately decided by the trier of fact. Id. at 82-84. Additionally, the Citco Defendants were held entitled to their reasonable costs, including attorney’s fees, related to reviewing the declarations, taking depositions of the declarants and bringing the discovery motion that is the subject of the Opinion.

Considerations and Concerns

This Opinion raises the bar again for both lawyer and client. Courts believe that parties are not doing enough to properly manage electronic discovery, and this Opinion is yet another judicial attempt to provide some parameters.

The Opinion confirms certain "black letter" criteria. For instance, following the attachment of the duty to preserve, gross negligence equals (i) failure to issue a written litigation hold; (ii) failure to identify all key players and ensure records are preserved; (iii) failure to cease deleting email or preserve records of former employees in the party’s possession, custody or control; and (iv) failure to "preserve backup tapes when they are the sole source of relevant information or when they relate to key players, if the relevant information maintained by those players is not obtainable from readily accessible sources." In many cases, it will be easy to comply with these standards, so there will be no issue. But there are also many cases which are large, not only in terms of potential damages (as in Pension Committee), but in terms of the potential universe of documents and information. In such cases, the standards may not be so easily met.

Suspending deletion or destruction of documents and information. This is perhaps the easiest aspect of e-discovery, particularly when a proper document management policy is in place. It is easy in that it is not difficult to order, even though the client, who will need to expend potentially considerable resources and funds to ensure compliance, will not welcome the decision. Often, the most difficult challenge is identifying the "key players" and the "location" for all relevant information. That said, it is incumbent on counsel and parties to take very significant steps at the front end of litigation to ensure that everything that can be done to comply with applicable standards is being done. Given the complexities of clients, cases, and issues, this may be a very costly and time-consuming task.

Backup tapes. In footnote 99 of the Opinion, Judge Sheindlin states that "[a] cautionary note with respect to backup tapes is warranted. I am not requiring that all backup tapes must be preserved. Rather, if such tapes are the sole source of relevant information (e.g., the active files of key players are no longer available), then the backup tapes should be segregated and preserved." (Id. at 43 n.99) This is a nettlesome problem. It simply may not be possible to determine whether the client’s backup tapes are the sole source of relevant information, if they relate to key players, or if the information related to key players is not obtainable from other, more readily accessible sources. Unless the answer is easily available to a party, the practice will mostly likely be to preserve backup tapes to avoid a later finding that the conduct was negligent, grossly negligent or perhaps even willful. The discussion on this subject, it seems, approaches one of strict liability.

The rules of e-discovery strain attorney-client relations. When clients are advised about every requirement surrounding the universe of discovery in litigation, they are not amused. This problem is not going to get any better. As preservation duties become more immediate, enlarged, complex and expensive, the tug of war between in-house and outside counsel will certainly grow more strained. In fairness, however, that is how the world has trended over time. From communications delivered by foot, then by sail, to the Pony Express and the invention of the telegraph, telephone and photocopier, to the immediacy of e-communications and information gathering today, the pressure to develop information ever faster, in ever greater volumes and in ever more formats will only exacerbate the challenge we face.

Proportionality. Many litigants raise proportionality in defense and in support of limiting discovery. Of course, parties are free to develop and agree on a certain discovery plan and steps for electronic discovery, or seek protection from the court. Litigants in federal courts have the protections of Rule 26 of the Federal Rules of Civil Procedure, including, but not limited to, Rule 26(b)(2)(B) ("Specific Limitations on Electronically Stored Information"). However, absent specific agreement or court ruling, proportionality may be difficult to assert when a party cannot establish that it has complied with the duties and standards of discovery as discussed in Pension Committee. Only time will tell whether litigants are truly heeding the warnings and complying therewith. It is fair to say that, for now, all counsel and clients must continue to roll up their sleeves, try harder and do the best they can.

Conclusion

Judge Scheindlin comments at the outset that "[c]ourts cannot and do not expect that any party can meet a standard of perfection." Id. at 2. The words of Vince Lombardi seem apropos here: "Perfection is not attainable, but if we chase perfection we can catch excellence." Counsel and clients are in the position of chasing perfection, knowing it cannot likely be achieved. Of course, excellence is never an accident, but is attainable with hard work and diligence. Serious concerns remain about the burdens placed upon parties, particularly at the commencement of the duty to preserve. The inherent uncertainties in the scope of obligations placed on litigants will need to be clarified and further developed over time, as, in the words of Hank Stram, the litigants "keep matriculating the ball down the field."