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Think Before You Delete or Pay the Price

The Connecticut Law Tribune

December 22, 2014

To preserve or not to preserve evidence, that is the question.

Preservation of evidence is the golden rule in litigation.  Most lawyers are aware of the importance of this rule and should be quick to remind their clients that once there is any possible threat or anticipation of litigation, any and all documents should be preserved, including those stored electronically.  While judges in different jurisdictions may vary on the type or amount of sanctions for the failure to preserve, the reality is clear:  Sanctions can be imposed not only against the client, but also against the attorneys.  As discussed below, recent case law shows us how severe and even draconian those sanctions can be.

The fear of monetary sanctions, or worse – the dreaded sanction of an adverse inference for the destruction of relevant documents – has resulted in some corporate clients expending huge amounts of time and money to preserve inordinate amounts of information, even if the ultimate liability is quite small.  One light at the end of this tunnel is that the court rules are being modified to help parties and counsel understand the scope of their preservation obligations.  The currently proposed amendments to the Federal Rules of Civil Procedure, which are scheduled to take effect in December 2015, provide some guidance in making more efficient preservation decisions based on what is  “proportional” to the needs of a case (i.e., weighing the amount in controversy, evidence accessibility, the issues at stake, the parties resources, and the expense versus the benefit of the evidence) along with some clarifications on which sanctions may be imposed under what conditions.  We expect many state courts to follow suit but this will take time.

One of the leading cases to draw attention to the issue of spoliation of electronic discovery is Zubulake v. UBS Warburg, LLC, 229 F.R.D. 422 (S.D.N.Y. 2004).  Here, Judge Scheindlin imposed sanctions on UBS because it was aware of its duty to preserve documents but its employees failed to comply and continued to delete emails after the EEOC charge was received.  Such actions resulted in Judge Scheindlin ordering that an empaneled jury be instructed on an adverse inference for each and every e-mail deleted after the charge was received.  The result was devastating for the company.  Electronic discovery issues have soared since 2004, and decisions regarding spoliation remain current.

A recent example of this issue occurred in April 2014, in Knickerbocker v. Corinthian Colleges, 298 F.R.D. 670 (W.D. Wash. 2014), where the court monetarily sanctioned the defendant and its counsel for discovery misconduct.  The Court noted, among other things, that in the past, when the defendant had been notified of a lawsuit, it had issued companywide litigation holds, but in this case it had not.  Instead, only certain “key” employees were informed to hold and search for relevant materials.  When these same employees were questioned, however, they did not appear to have thoroughly searched for anything.  In addition, since the defendant had a 30 day automatic e-mail deletion policy for terminated employees, automatic deletion of certain e-mail accounts did occur after the company knew of the EEOC claim – which is when the duty to preserve should have clearly begun.

While the company subsequently tried to defend its behavior by arguing that it did have backup tapes of all deleted e-mails, so that there was no spoliation of evidence, this argument highlighted a game of corporate contradictions for the judge because the lawyers had represented to the court that the defendant had searched “all available electronic sources and/or servers” but failed to mention the backup tapes.  Plaintiffs’ counsel assumed backup tapes had been searched and defense counsel argued they never said they had searched tapes.  The failure of defendant to be forthright had an impact on the judge.

Ultimately, the judge determined that the standard of proof of bad faith supported by clear and convincing evidence was met and sanctioned the defendant $25,000 and its law firm $10,000.  Plaintiffs’ counsel tried to get a factual negative inference ruling, but the court denied that request because evidence was subsequently found on the backup tapes and there was no proof of any actual evidence being lost.  In addition to the sanctions, the court ordered that defendant pay plaintiffs’ legal fees for fees incurred for their sanction motions, for any duplicative discovery efforts, and for costs, the amount of which was determined in a subsequent motion.

In another case from a different district, Osberg v. Foot Locker, Inc., 2014 U.S. Dist. LEXIS 104538 (S.D.N.Y. July 25, 2014), Judge Forrest of the Southern District of New York, held that spoliation had occurred.  In so ruling, the Court found that simple negligence, coupled with the fact that the missing evidence could have been favorable to plaintiff, justified an adverse inference.  In this case, the defendant was aware of claims that arose regarding Foot Locker’s Retirement Plan, as early as 2006, when two other plaintiffs filed a lawsuit.  However, no litigation hold was issued until October of 2009, when the third lawsuit was filed.  Apparently, during that lapse of time, potentially relevant documents were destroyed.

Interestingly, Foot Locker had a document retention policy that required its General Counsel to immediately distribute a “document retention memorandum” and its outside counsel reminded them that a document retention memo needed to be done.  While Foot Locker did notify some third parties of the suit and had collected some relevant documents from its personnel, it never issued a formal litigation hold until October 8, 2009, despite the fact that the instant lawsuit was initially commenced in November 2006 (and voluntarily dismissed in February 2007) and then refiled later in February 2007.

In determining whether to issue spoliation sanctions, the court reasoned that there must be a culpable mind or gross negligence.  If the act were merely negligent, then one must also demonstrate that the evidence would have been favorable to the aggrieved party.  The court held that the failure to issue a litigation hold by Foot Locker was negligent and plaintiff met its burden of proving that a trier of fact could reasonably infer the lost information was favorable to plaintiff.  The sanction was to provide an adverse inference ruling at trial, the scope of which would be determined at a later date, and the terms of which would explain that certain lost information could have been or would have been favorable to plaintiff.

Issues regarding e-discovery are vast, and attorneys frustrated by the cost of preservation and the differing sanction standards in different jurisdictions have expressed these concerns.  Committee on Rules of Practice and Procedure, Summary of the Report of the Judicial Conference Committee on Rules of Practice and Procedure Rules Appendix B14 to B19 (2014), available at http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/Reports/ST09-2014.pdf (“Summary”).  As a result, some of the proposed amendments to the Federal Rules of Civil Procedure address these issues.  The sections of the amendments that appear to most impact e-discovery are those of proportionality of discovery in Federal Rule of Civil Procdure 26 and the re-drafting of Federal Rule of Civil Procedure 37(e) to deal with the failure of preservation of electronically stored information.

The proposed amendments to Federal Rule of Civil Procedure 26 highlight the concept of proportionality.  The proposed changes, as set forth in the Summary, read as follows:

Rule 26. Duty to Disclose; General Provisions;

              Governing Discover

                                                                        * * * * *


(b)   Discovery scope and Limits.

(1) Scope in General. Unless otherwise limited by court order, the scope of discovery is 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. Information within this scope of discovery need not be admissible in evidence to be discoverable.

       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. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence. All discovery is subject to the limitations imposed by Rule26(b)(2)(C).


Federal Rule of Civil Procedure 37(e)’s proposed amendments, also set forth in the Summary, clarify the standards in imposing sanctions for failure to take reasonable and timely steps to preserve e-discovery:


* * * * *


Rule 37(e)

(e)    Failure to ProvidePreserve Electronically Stored Information. 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. If 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, the court;


(1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or

(2) 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.


* * * * *


As the Summary explains, e-discovery will be viewed while balancing the proportionality issues expressed in Federal Rule of Civil Procedure 26.  While the amendments do not detail what has to be preserved, they do detail sanctions for a failure to preserve.  The circuits should then have a more uniform understanding of what sanctions apply when spoliation occurs, rather than each defining its own standards.  Interestingly, the negligence plus standard articulated by Judge Forrest in the Southern District of New York in Osberg v. Foot Locker, Inc., supra, may no longer be viable for the imposition of a negative inference if the proposed rules go into effect.

While the amendments will surely not be a panacea, they should limit the need to unnecessarily preserve hordes of documents when the amount or issue in controversy is small.  They also should result in more consistent standards for sanctions when preservation fails.  Nonetheless, sanctions are not going away and counsel and their clients must stay in compliance with the current rules to avoid them.  Both monetary sanctions and an adverse ruling are penalties no client or lawyer wants.

As with all litigation, pre or post the proposed amendments, a proper discovery hold is essential.  Make sure you deal with it timely, in writing, and follow up to make sure it is implemented.  To make sure you are implementing your litigation hold correctly, you should consult counsel.  Brody and Associates regularly advises management on complying with state and federal laws and court rules.  If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.965.0560.