Judge Clarifies ESI Preservation Duty and Spoliation Consequences
Complex commercial litigation is costly and disruptive. That has long been the case, but over the past 20 years those costs—particularly the costs of discovery—have grown exponentially. Much has been written about this issue, and many competing solutions have been proposed, some of which are embodied in the proposed amendments to the Federal Rules of Civil Procedure published for comment this summer. While there is substantial disagreement about the right way to combat this growing problem, there is no real question about its source: the explosive growth of electronically stored information (ESI) in organizations large and small, and the failure of discovery rules and practices to account for that change.
Of course, ESI has been a major component of discovery for decades, but 20 years ago a company tasked with collecting its ESI faced a fairly limited task: For each relevant employee, it might have to search a group of electronic documents, an internal email address and calendar, and perhaps some relevant internal databases. Now, those same employees likely use several email addresses (personal and corporate), electronic calendars and contact lists, text messaging, instant messaging, voicemail, BlackBerry services (including messaging, calendars, contacts and emails), electronic documents (stored on local computers, flash drives, company servers and in the cloud), social media accounts, websites and a host of complex proprietary data sources maintained by the company or its vendors. All of these resources—and their backups—are potential sources of discoverable ESI, and in many large organizations, there is no single person who can even identify them all, much less search them or collect from them.
Thus, an attorney tasked with discovery in any complex case must begin by having a detailed conversation with the client about every potential source of ESI and the methods available for preserving, collecting and reviewing it. Identification and preservation of every possible source of ESI is a critical first step because, notwithstanding the modern trend to limit discovery of ESI in some cases, there is no such limit on the obligation to preserve the information in the first place. Even if it turns out that some ESI is beyond the scope of discovery, that does not mean it can be disposed of before that determination has been made, and while the cost of preserving all this information can certainly be high, the costs of improperly destroying it—called "spoliation"—may be far higher. Sekisui American v. Hart,1 a recent decision by Judge Shira Scheindlin of the Southern District of New York, serves as a reminder of how the process can go wrong.
Scheindlin's 'Zubulake' Opinions
Ten years ago, Judge Scheindlin essentially wrote the book on ESI preservation and production in a series of opinions in Zubulake v. UBS Warburg. In those opinions, Scheindlin outlined when a litigant's duty to preserve documents attaches, what a litigant must do to preserve and collect information once that duty attaches, and when sanctions may be appropriate for the failure to adhere to these obligations.2 Of particular importance are Zubulake IV and Zubulake V, which together fundamentally changed the landscape of litigation regarding ESI discovery obligations in the federal and state courts.3
In Zubulake IV, Scheindlin discussed the important questions: "When does the duty to preserve attach, and what evidence must be preserved?"4 Scheindlin answered those questions as follows: "Once 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."5 Reasonable anticipation of litigation is defined broadly and does not require formal notice of claims.
Zubulake V further refines the standard with several specific requirements: First, "counsel must issue a 'litigation hold' at the outset of litigation or whenever litigation is reasonably anticipated." Second, "counsel should communicate directly with the 'key players' in the litigation" regarding their preservation duties. Third, "counsel should instruct all employees to produce electronic copies of their relevant active files" and "make sure that all backup media which the party is required to retain is identified and stored in a safe place."6 These requirements have been widely adopted, though there has been substantial variation in how courts have treated litigants who fail to abide by them.
Last month, in the Sekisui case, Judge Scheindlin addressed one such litigant. Her opinion addresses the question of when the destruction of ESI should be considered willful and prejudicial—thus making an "adverse inference" jury instruction appropriate. But Scheindlin also uses the opinion to provide her negative view of the proposed changes to Fed. R. Civ. P. 37(e), which were published for comment by the Standing Committee on Rules of Practice and Procedure of the Judicial Conference of the United States Courts (the Rules Committee) the same day as the Sekisui opinion was handed down. The court's message to litigants (and the Rules Committee) is that the risk of destruction of ESI must fall on the party who controls the documents, not on the innocent party seeking them, and that the rules must not be interpreted (or written) to incentivize the "careless" destruction of potentially relevant information.
Sekisui presents a study in how to fail at document preservation. Sekisui acquired a company called America Diagnostica Inc. (ADI) from Richard Hart and Marie Louise Tudel-Hart in 2009. In October 2010, Sekisui determined that the Harts had breached certain representations made in connection with the sale. Accordingly, Sekisui sent the Harts a notice of claim in which it threatened a lawsuit. Sekisui did not file suit, however, until May 2012. Although Sekisui—the potential plaintiff—obviously "reasonably anticipated" litigation in October 2010, it did not institute a litigation hold until January 2012. In the meantime, Sekisui permanently deleted the emails of two key employees, including Richard Hart—the very individual it had threatened to sue.7
Discovery regarding the spoliation was damning. In March 2011, an ADI employee named Dicey Taylor, after determining that additional space was needed on ADI's server, unilaterally reviewed Hart's emails, printed those she "deemed pertinent," and then instructed ADI's IT vendor to delete the entire mailbox, over the recommendation of the vendor that it be backed up. In October 2011 (one year after the notice of claim was sent and three months before the litigation hold was issued), Taylor also instructed the IT vendor to delete the email files of the ADI employee formerly responsible for FDA compliance.8
Defendants moved for sanctions for spoliation, and the motion was referred to the magistrate judge. The magistrate judge denied the motion, noting that, although the destruction of the ESI "may well rise to the level of gross negligence," it was not done for "any malevolent purpose." He therefore held that Sekisui had not acted with the culpable state of mind necessary to issue sanctions.
Defendant objected to the report and the court agreed, rejecting the magistrate's recommendation and awarding sanctions. The court's opinion relies on the Second Circuit's opinion in Residential Funding v. DeGeorge Financial,9 which permits the jury to draw an adverse inference where (1) the party against whom the inference is sought had a duty to preserve; (2) the party destroyed the documents with a "culpable state of mind"; and (3) the destroyed documents were relevant.10
Applying this standard, the court held that the destruction was willful, "[b]ecause Hart's ESI was destroyed at the direct request of an ADI employee after the duty to preserve had attached" and "the law does not require a finding of malevolence to constitute willfulness in the context of spoliation."11 The court further found that Sekisui's failure to preserve documents was grossly negligent because (1) the litigation hold was issued 15 months after the notice of claim was sent; and (2) Sekisui did not notify its IT vendor of the litigation hold until six months after it was issued (and one month after the complaint was filed).12