United States: E-Discovery Duties and the Range of Sanctions for Failures to Comply with Them

Why is it that every litigator must become conversant with the language and intricacies of electronically stored information (ESI)? And why is it that they should feel highly motivated to do so in a non-negligent manner? This article addresses these questions.

Attorneys know, of course, that the discovery of potentially relevant evidence is a standard part of every lawsuit. But what is new is that, within the last five years, it has been recognized that ESI comprises most of all potentially relevant evidence. It has been noted that even the smallest fender-benders can involve ESI; for example, if the driver was texting just before the crash. In such a case, the amount of ESI might be relatively small, but then again, the existence and timing of the texting might be critical. In anti-trust, securities, fraud, mass tort or employment class actions, and in trade secret and patent cases, the amount of ESI is different and can, in fact, be prodigious.

Indeed, the hallmark of ESI is its immense volume. The larger cases can involve terabytes of ESI. For context, a megabyte is about 75 pages; a gigabyte is about 75,000 pages, if printed.¹ A terabyte is a thousand times more than a gigabyte, which means 75 million pages, which is 25,000 boxes, and that's the equivalent of about 50,000 trees.

Why is there so much of it? The answer is simple. In 2003, researchers at UC Berkeley published an update to their study, How Much Information? They explained that, in 2002, each of us produced almost 800 megabytes of recorded information each year.² There is no doubt that each of us produces even more ESI today. Because the cost of storing information electronically is cheap, ESI now goes by many names: (1) voice-mail messages and files, (2) e-mail messages and attachments, (3) deleted files, programs, or e-mails, (4) data files, (5) program files, (6) backup and archival tapes, (7) temporary files, (8) system-history files, (9) website information stored in textual, graphical, or audio format, (10) website log files, (11) cache files, and (12) cookies.

While we used to create paper one page at a time on a typewriter, ESI multiplies like rabbits. There are copies stored electronically each time we change a document, each time we send it to someone else, and each time they send it back.

ESI is everywhere these days. It can be stored in a wide variety of devices, e.g., desktop computers (office, home), laptops (office, home), cell phones, network servers, disk drives, thumb/flash drives, photocopy machines with digital memory, and backup tapes. And, still more devices continually come into the marketplace. ESI can reside in all of these devices, and when it comes to preserving ESI for possible future production, we have to gather up all of these devices in order to gather up all of the ESI they contain.

Thus, we can define electronic discovery (e-Discovery) as encompassing the duties and processes of collecting, preparing, reviewing and producing discoverable information that is stored electronically.

So the answer to the first question—why must attorneys know about ESI—has two parts: (1) ESI is the likely source of the evidence attorneys will present at trial, and (2) we now have rules governing e-Discovery. While the rules for discovery in general are well-established, the rules for e-Discovery are relatively new, if not brand new:

Although the rules are less than five years old, e-Discovery has quickly become a multi-billion dollar industry, and there has been sufficient time for "best practices" guidelines to be established. Best practices, recommendations and principles have been promulgated by The Sedona Conference.⁴ Courts often cite the Sedona Principles as a leading "industry" authority on e-Discovery.⁵

The Duty to Preserve ESI

Is there a rule requiring attorneys to preserve ESI? Specifically, no. Neither the Federal Rules of Civil Procedure nor California Code of Civil Procedure impose on attorneys a duty to preserve ESI, but the duty is there, no doubt because ESI is just one form of potentially relevant evidence. The duty to preserve all potentially relevant evidence is an affirmative obligation imposed on attorneys by the courts,⁶ and it is imposed not only on outside counsel, but on in-house attorneys and, take note, on certain high level executives as well.⁷

But there are several other, expressly stated sources of the duty to preserve ESI:

When does the duty to preserve ESI arise? The duty to preserve potentially relevant evidence arises at the time when a party or one of its key employees can reasonably anticipate litigation, e.g., based on the circumstances or upon receipt of a letter requesting preservation of evidence. In certain circumstances, the duty to preserve evidence arises before a lawsuit is filed.

For example, in Doe v. Norwalk Cmty. Coll.,¹¹ (Doe), a sex discrimination case, the duty to preserve was found to have arisen even before the employer received the intent-to-sue letter. Thus, almost any contentious job action will likely trigger the preservation duty. Depending on the circumstances, waiting for the lawsuit to be filed is simply waiting too long. When litigation can be reasonably anticipated, "[the party] must suspend its routine document retention/destruction policy and put in place a 'litigation hold' to ensure the preservation of relevant documents."¹²

It is vital to understand what a "hold" means. It means that attorneys are supposed to find out about his or her clients' routine document-retention-and-destruction policies and, for the key personnel, act to have those policies suspended. In Doe, the defendant employer argued that they had no option but to continue deleting information from their systems because the plaintiff was only identified as Jane Doe. That argument proved unsuccessful and sanctions were imposed.¹³

The scope of the duty to preserve evidence is limited to all evidence that is reasonably likely (or anticipated) to be the subject of a future discovery request, not all potential evidence.¹⁴

For how long must ESI be preserved? The answer is that the duration of the preservation duty is continuing, and it extends into the indefinite future. It requires not only monitoring but follow-up to identify still other "custodians" of ESI, should they appear.¹⁵

Thus, counsel are now required to

So, even seasoned attorneys must learn to speak "tech." Because of their experience, they may have spotted the issues. They may understand how to deploy Requests for Admission, Interrogatories, and Requests for Production of Documents. But ESI now pervades the factual universe and so now dominates the discovery proceedings in litigation and even arbitration proceedings,¹⁷ and will do so into the indefinite future. We cannot un-ring this bell. It is fast becoming standard practice for an attorney's first deposition in a case to be the deposition of the manager of other side's IT department.

Sanctions

If attorneys fail to put (and keep) ESI and e-Discovery at the top of their minds, they may face a variety of serious sanctions. In the early days of e-Discovery, courts were perhaps more lenient than they are today. Those days are gone. Now the range of sanctions is worrisome indeed to litigants and their counsel. A wide range and severity of sanctions can be imposed for negligently or intentionally failing to preserve potentially relevant evidence.

Sanctions can take many forms. The most frequently imposed sanction is monetary.¹⁸ The most serious sanctions are terminating sanctions, burden-shifting orders, and adverse inference instructions.¹⁹

When a motion to compel further production of documents and for sanctions is granted, the likely penalty will be monetary, usually in the form of an award of attorney fees to the party who did not receive the documents it requested and had to go to the expense of making the successful motion. Monetary sanctions can be significant, and can range from tens of thousands of dollars to millions.²⁰

The case of Qualcomm v. Broadcom is famous in part because it involved a sanction of $8.5 million. A sanction that high is worth some discussion. Qualcomm was a patent lawsuit where critical to the claim was whether Qualcomm participated in the Joint Video Team (JVT), an industry standard-setting body, in 2002 and early 2003. Qualcomm asserted that it had only begun to participate in the fall of 2003, after the standard had been set, and only with respect to professional extensions (or additions to) the standard. At trial, a key witness testified that she had not read e-mails indicating that she had participated in the JVT in late 2002. But Broadcom's counsel asked the right question on cross: had she received e-mails when the JVT was meeting? The answer was yes. This revelation prompted Broadcom to ask for the e-mails and, during the lunch break, Qualcomm's attorneys produced 21 of them. Qualcomm and its counsel argued that they were not responsive to Broadcom's discovery requests and did not believe that these newly discovered e-mails called their earlier search procedures into question.

Initially, the court believed that the attorneys knew better. As a result, the court levied an $8.5 million monetary sanction against Qualcomm, and imposed a court-monitored Case Review and Enforcement of Discovery Obligations (CREDO) program. As a result of the CREDO program, it was discovered that, while more than a million pages of only marginally relevant documents had been produced, 46,000 relevant documents (totaling more than 300,000 pages) had not been produced. Needless to say, the court was not pleased and, in addition to the monetary sanction, the court referred the offending attorneys to the State Bar for discipline.²¹

But on April 2, 2010, after substantial discovery proceedings on remand and a three-day hearing, Magistrate Judge Barbara Taylor issued an order which lifted the sanctions against the individual attorneys and relieved Qualcomm of its obligations under the CREDO program. Noting, however, that the $8.5 million sanction had not been appealed, Judge Taylor concluded:

As the Qualcomm case indicates, monetary sanctions are often coupled with other penalties. Besides awarding monetary sanctions and reporting offending attorneys for discipline, a court might also order additional searches, e.g., of servers and a CEO's personal laptop, at the non-moving party's expense.²³

Or, as is sometimes the case when parties are having discovery disputes, a court might appoint a "special master."

Terminating Sanctions

The courts have hit both sides of a lawsuit with terminating sanctions because of willful failures to comply with ESI preservation and discovery obligations. When such case-ending sanctions are ordered, two key factors are present: (1) evidence has been destroyed intentionally and cannot be recovered and (2) without that evidence, the other side is so prejudiced that a terminating sanction is the only fair remedy.²⁴ When a defendant is found to have engaged in such misconduct, the remedy is a default judgment.

For example, in Magana v. Hyundai Motor Am.,²⁵ Hyundai's in-house counsel, in response to discovery requests, searched for responsive documents but only in its own legal department. As a result, the trial court found that (1) the parties did not agree to limit discovery, (2) the defendant falsely responded to plaintiff's requests for production and interrogatories, (3) the plaintiff was substantially prejudiced in preparing for trial, and (4) the potentially relevant evidence was lost forever. The trial court considered lesser sanctions, but concluded that the only just remedy was the entry of a default judgment – for $8 million. Now that is a terminating sanction with real bite. The appellate court reversed, but the Washington State Supreme Court reinstated the trial court's ruling and awarded attorney fees pertaining to the trial and appellate proceedings.

E-Discovery mishaps can impale either side of a case, and Plaintiffs and their counsel can also suffer "terminating sanctions" nightmares. In another e-Discovery case, a magistrate judge recommended dismissal of plaintiff's claims because of willful statutory violations and disobedience of court orders to produce documents. Although the district court concluded that total dismissal of all claims would be excessive, plaintiff's claims for damages arising from an alleged interruption of business were dismissed. In addition, plaintiff was ordered to pay $75,000 to defendant for its costs in bringing the sanctions motion.²⁶

Shifting the Burden of Proof

Short of a default, could a court impose a sanction on a defendant that comes perilously close to terminating sanctions? Yes. In the Genger case,²⁷ the court found that defendant Genger had knowingly destroyed potentially relevant evidence (emails). The court considered but declined to enter a default judgment.

But the sanctions it imposed were nevertheless severe, if not worse than a default. First, Genger was ordered to pay attorney fees estimated at $750,000 for having made and prevailed on a complicated but successful motion. In addition, Genger was ordered to produce privileged documents. But that was hardly the end of it. The court also ruled that, to prevail on any affirmative defense or counterclaim, Genger could not prevail by producing a preponderance of evidence, but would have to provide evidence sufficient to meet the "clear and convincing" threshold. And, Genger could not prevail on any material factual issue if the only evidence in support of his position was his own.

Imagine having to go to trial with those burdens. If Genger were a multi-armed God of some sort, all of his arms would be tied behind his back.

The "Adverse Inference" Instruction

Courts are understandably reluctant to impose "terminating" sanctions or their like on either side. However, when courts conclude that the e-Discovery duties have been willfully violated, and that evidence has been destroyed as a result, they have yet another fearsome weapon: the "adverse inference" instruction. An adverse inference instruction tells the jury that they may conclude that the reason some evidence was lost or destroyed is because it was arguably unfavorable to the party who lost or destroyed it. In a recent decision involving a finding by the court that e-Discovery misconduct had been intentional, the court wrote this:

Courts may also give adverse inference instructions in other contexts, e.g., in cases where e-Discovery duties have been shirked due to negligence and/or gross negligence,²⁹ as in or where lost or destroyed evidence makes it difficult to calculate damages.³⁰

Adverse inference instructions can have a devastating impact on a jury. In Zubulake v. UBS Warburg, the plaintiff was an individual who brought a case against her former employer for sex discrimination. UBS Warburg had a duty to preserve potentially relevant evidence after Laura Zubulake complained about how she had been treated by her supervisor and others, and the company recognized that litigation was likely. This was several months before Zubulake filed a complaint with the EEOC and then filed her lawsuit. After determining that UBS had willfully destroyed potentially relevant emails after the duty to preserve them had arisen, the court decided to give an adverse inference instruction. At trial, the jury awarded $9 million in compensatory damages and $20 million in punitive damages, for a total of $29 million.

Zubulake was the "poster child" for Big Damages in a case where an e-Discovery failing was critical; that is, until Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., Inc.³¹

Here's what happened in Morgan Stanley: Sunbeam Corporation retained Morgan Stanley to advise it on the merger with Coleman. After the deal closed, Sunbeam declared bankruptcy. Coleman's parent holding company sued Morgan Stanley alleging that it had intentionally misrepresented Sunbeam's true financial condition, so that the deal would close and Morgan Stanley could collect its commission. During the lawsuit, Coleman sought documents that Morgan Stanley was required to keep under the federal securities laws. But Morgan Stanley, the court found, not only did not produce a large amount of relevant records or search the attachments of many emails it did in fact produce, Morgan Stanley continued the practice of overwriting email messages for more than 12 months after it had instructed its own employees to preserve paper documents. Worse still, perhaps, was this: Morgan Stanley's litigation counsel certified that the company had complied with the court's discovery orders even though it was later discovered that the company still had not searched nearly 2,000 backup tapes that had, in fact, been located.

As a result, the court entered a partial default judgment, decided to give an adverse inference instruction, and shifted the burden of proof to Morgan Stanley. Coleman did not have to show the first few elements of fraud and needed to prove only its reliance on what happened and damages. To win, Morgan Stanley had the burden of proving that it had not defrauded Coleman, and it is notoriously difficult to prove a negative.

For Morgan Stanley, the outcome was predictably and enormously adverse. The jury awarded $600 million in compensatory damages and $850 million in punitive damages, for a total of $1.45 billion.

Avoiding Sanctions

Sanctions will not always be the order of the day. A motion for sanctions will be denied, for example, if a requesting party has been dilatory either in seeking information or in making a motion to compel and/or for sanctions. In these circumstances, a motion to compel further ESI will likely be denied and, in that circumstance, a request for sanctions will also be denied.³² In this connection, it should be remembered (when practicing in federal court) that it is the District Court who sets the discovery cut-off date. Magistrate Judges, who usually hear and decide discovery motions, will be forced to deny relief if it means changing a cut-off date they have no authority to alter.

To avoid sanctions on the merits, counsel should comply with the eight factors set forth in Zubulak V, which, along with the Sedona Principles, should be considered as basic guidelines. While law firms may engage consultants to assist them, it must be said, however, that neither counsel nor their clients can shirk their duties by engaging either consultants or e-Discovery vendors, and remain ultimately responsible for preserving and producing ESI.³³

Conclusion

ESI is a daily tsunami of information, and many attorneys are playing "ostrich" at their peril. The rules are new, but they have been in place long enough for the courts to believe that attorneys should have received the message by now. The intelligent use of e-Discovery can help an attorney win his or her case, or mount a successful defense to a claim without merit, but e-Discovery can also be used as a trap for the unwary: to create failures that make attorneys look negligent at best.

If you haven't faced up to e-Discovery, get over it; it is here to stay.

After graduating with a B.S. in engineering systems from the University of California at Los Angeles (U.C.L.A.), Nick Brestoff earned an M.S. in environmental engineering science from the California Institute of Technology (Caltech) and graduated from the Gould School of Law at the University of Southern California (U.S.C.) in 1975. For the next 35 years, Mr. Brestoff litigated business, employment, environmental and other civil disputes in state and federal court. He is currently a consultant to attorneys as a Principal with Stonefield Josephson, Inc., a California accounting and business advisory firm, www.sjaccounting.com, where he focuses on matters pertaining to economic damages, ESI and e-Discovery.

Originally published by The Organization of Legal Professionals, www.theolp.org

Footnotes

1. Peter Lyman and Hal Varian, How Much Information? (2003) http://www.sims.berkeely.edu/how-much-info-2003 (reviewed on April 15, 2010).

2. Ibid.

3. See Columbia Pictures, Inc. v. Bunnell, 245 F.R.D. 443, 447(C.D.Cal. 2007).

4. Sedona Principles: Best Practices, Recommendations & Principles for Addressing Electronic Document Production, Second Edition (Sedona Conference Working Group Series, 2007) (Sedona Principles). See www.thesedonaconference.org.

5. See Ford Motor Co. v. Edgewood Props., Inc., 257 F.R.D. 418, 424 (D.N.J. 2009).

6. In Green v. MClendon, 262 F.R.D. 284 (S.D.N.Y. 2009), the court held that the obligation to preserve potentially relevant evidence runs first to counsel, who then has a duty to advise the client of the type of information to be preserved and of the need to prevent its destruction.

7. See John B. v. Goetz, 531 F.3d 448, 459 (6^th Cir. 2008).

8. See FRCP 16(b)(3)(B)(iii); Treppel v. Biovail Corp., 233 F.R.D. 363, 368 (S.D.N.Y. 2006) (reviewing standards for issuance of preservation orders, and applying a three-prong balancing test).

9. For example: 17 C.F.R. §240.17a-4(f) (by certain exchange members, brokers, and dealers); 29 C.F.R. §1602.14 (by employers).

10. See Martin v. Northwestern Mutual Life Ins. Co., 2006 WL 148991 (M.D.Fla. Jan. 19, 2006) (Magistrate judge rejected attorney's excuse of "computer illiteracy" as "frankly ludicrous.").

11. 248 F.R.D. 372, 377 (D.Conn. 2007).

12. Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 216-18 (S.D.N.Y. 2003) (Zubulake IV); see Covad Comms. v. Revonet, Inc., 258 F.R.D. 5, 14-15 (D.D.C. 2009) (after defendant was on notice of litigation, an e-mail server crashed and yet defendant did not try to recover lost e-mails; court ordered defendant to pay for imaging and a search of all of defendant's servers).

13. See Doe, 248 F.R.D. at 378 & fn. 9.

14. See Zubulake IV at 218.

15. See Zubulake v. UBS Warburg LLC, 229 F.R.D. 422 (S.D.N.Y. 2004) (Zubulake V).

16. Zubulake V at 431.

17. Richard Chernick, E-Discovery Threatens to Litigize Arbitration, Law Technology News, (Apr. 16, 2010). See www.law.com. (Reviewed on 4/19/2010).

18. If a party does not ask for metadata or otherwise specify the form of production in its first request for production, it may be ordered to bear the costs of re-producing Word and PowerPoint files a second time if metadata is desired. See Aguilar v. Immigration and Customs Enforcement Division of the U.S. Dept. of Homeland Security, 225 F.R.D. 350 (S.D.N.Y. 2008).

19. See FRCP 37(e). Other sanctions include issue and evidentiary preclusion orders, contempt proceedings, attorney discipline, and criminal penalties. They are beyond the scope of this article.

20. Monetary sanctions can range from tens of thousands of dollars, e.g., Phoenix Four, Inc. v. Strategic Resources Corp., No. 05-CIV-4837, 2006 WL 2135798 (S.D.N.Y. Aug. 1, 2006) (defendant and its law firm were sanctioned $45,161.82 for overlooking hidden server partitions containing discoverable ESI), to hundreds of thousands, e.g., See TR Investors LLC v. Genger, 2009 WL 4696062 (Del. Ch. Dec. 9, 2009) ($750,000) (Genger), and even millions of dollars, e.g., Keithley v. HomeStore.com, Inc., No. C-03-04447 SI (N.D.Cal 2008) (no pub.;8-12-08) ($1 million, because defendants did not "even come close to making reasonable efforts" to meet preservation and discovery requirements) and Qualcomm Inc. v. Broadcom Corp., No. 05 Civ. 1958-B, 2008 U.S. Dist. (S.D.Cal. Jan. 7, 2008) ($8.5 million) (Qualcomm).

21. Qualcomm, Order Granting In Part and Denying in Part Defendant's Motion for Sanctions, Etc. (Jan. 7, 2008).

22. Qualcomm, Order Declining to Impose Sanctions, Etc. (Document 998; filed Apr. 2, 2010).

23. See Treppel v. BioVail Corp., 2008 U.S. Dist. LEXIS 25867 (S.D.N.Y. Apr. 2, 2008) (to recover e-mails that may have been deleted). In Cenveo Corp. v. S. Graphic Systs., No. 08-5521 JRT/AJB (D.Minn. Nov.18, 2009), the plaintiff was ordered to re-produce documents in native format after producing documents in only .pdf format, despite requesting documents in their native format, meaning that the documents had to be produced with all of the content and functionality they had originally.

24. In OZ Optics Limited v. Hakimoglu, 2009 Cal. App. Upub. LEXIS 2952, an executive ran a "scrubbing" program on a company laptop prior to handing it over, and a $90,000 sanction was ordered. The court refused to give a terminating sanction because there was no evidence that a claim or defense had been lost as a result.

25. 2009 WL 4070952 (Wash. Nov. 25, 2009).

26. See Bray & Gillespie Mgmt., LLC v. Lexington Ins. Co., 2009 WL 5218035 (M.D. Fla Aug. 3, 2009); 2010 WL 55595 (M.D. Fla. Jan. 5, 2010).

27. See citation in footnote xv.

28. Rimkus Consulting Group, Inc. v. Cammarata, 2010 U.S. Dist. LEXIS 14573 (S.D.TEX Feb. 19, 2010).

29. See Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010) (negligence and gross negligence) (decided by the same court who ruled in the Zubulake cases).

30. See Sensonics, Inc. v. Aerosonic Corp., 81 F.3d 1566, 1572 (Fed. Cir. 1996) ("When the calculation of damages is impeded by incomplete records of the infringer, adverse inferences are appropriately drawn"), citing Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056, 1065 (Fed.Cir. 1983) (any adverse consequences rest upon the infringer when the inability to ascertain lost profits is due to the infringer's failure to keep accurate or complete records).

31. 2005 WL 679071 (Fla.Cir.Ct. Mar. 1 2005).

32. See Oracle USA, Inc. v. SAP AG, 2009 U.S. Dist. LEXIS 91432 (N.D.Cal. Sept. 17, 2009) (court denied additional discovery re new theories of damages where new theories were listed two years after the initial Rule 26 disclosures had been made) and Bellinger v. Astrue, 2009 WL 2496476 (E.D.N.Y. Aug. 14, 2009) (court denied a motion to compel production of documents in electronic format because hard copies existed, had already been produced, and were reasonably usable).

33. See Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 113 (2d Cir. 2002) (party can be sanctioned when its vendor adds to "purposeful sluggishness" during discovery).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.