United States: Federal Court Provides A $3 Million Reason To Comply With Duty To Preserve ESI

After years of decisions, the issues surrounding the preservation of electronically stored information (ESI) seem almost old hat. It is well known that, upon notice of a claim or commencement of litigation, a party needs to implement a litigation hold. However, a recent federal court decision reminds that an effective litigation hold depends on an inherently uncertain factor – employees' actual compliance – and gives Wisconsin businesses a $3 million reason to get it right.

So, how can a party to litigation avoid finding itself on the receiving end of a sanction order like Plantronics? Below are a few guidelines:

  • Ensure that all employees, even high-level executives, are aware of the severe repercussions that can result from deletion or failure to preserve ESI.
  • Consider implementing automatic back-up procedures from the time the litigation hold is imposed to ensure that ESI is retained even if one bad actor disregards the hold.
  • If destruction of ESI is discovered, promptly and thoroughly explore the issue with a forensics expert, and take all practicable steps to preserve or recover the deleted ESI. Had Plantronics spent the few thousand dollars necessary to complete its forensic review, it may have avoided millions of dollars in sanctions.
  • If recovery of deleted ESI is impossible, be forthright and acknowledge the extent of the loss with opposing counsel and the court. The court may still impose some form of sanctions, but they are likely to be much less severe if the party owns up to the issue and cooperates in attempting to resolve it.

Under Rule 34 of the Federal Rules of Civil Procedure, a party may request production of documents and ESI in another party's possession, custody, or control. As a corollary, a party has a duty to preserve evidence over which it had control and reasonably knew or could reasonably foresee was material to a potential legal action. Typically, a party to a lawsuit satisfies this duty to preserve relevant documents and ESI by issuing a litigation hold and suspending normal document retention and destruction policies. As one company recently learned, establishing a litigation hold and implementing protective measures is just the first step. Effective monitoring and compliance with the litigation hold is essential to avoid punitive sanctions, and quick and candid action is required when a company learns that an employee has disregarded the hold. See generally GN Netcom, Inc. v. Plantronics, Inc., No. 12-1318-LPS, 2016 U.S. Dist. LEXIS 93299 (D. Del. July 12, 2016).

The GN Netcom decision effectively illustrates the importance of monitoring and complying with litigation holds. GN Netcom alleged that its competitor Plantronics violated antitrust laws and tortiously interfered with GN Netcom's business relations in an attempt to monopolize the market. Even before the lawsuit was filed, Plantronics promptly issued a litigation hold and conducted training sessions to ensure compliance. When the lawsuit was filed, Plantronics updated the litigation hold, conducted additional training sessions, and sent quarterly reminders to custodians requiring affirmative acknowledgment of compliance with the hold. On paper, it did all the right things.

Deleting "Sloppy" E-Mails Despite Compliance Training

Despite these efforts, a senior Plantronics executive deleted relevant emails and asked his subordinates to follow suit. On at least three occasions after the lawsuit was filed and the litigation hold was in place, that employee instructed his team to delete emails relating to competition with GN. The executive deleted more than 40 percent of his own emails, and in fact, double-deleted them, removing the emails from both his legal hold folder and his deleted items folder. The executive later testified that, "he was not attempting to suppress or withhold evidence," but "was concerned about inappropriate or 'sloppy' language in the emails, which would reflect poorly on Plantronics." The executive also claimed to believe that the emails were still somehow being preserved by Plantronics' back-up systems.

Upon learning of this conduct, Plantronics' in-house counsel took immediate steps to resolve the issue, such as putting that employee's assistant on a litigation hold, engaging a forensics expert to recover deleted emails, and agreeing to produce documents from additional custodians. The forensics work revealed that the executive had deleted tens of thousands of emails and that several thousand of those emails were likely responsive. Despite this report, Plantronics did not (for budgetary reasons) complete the work necessary to restore backup tapes fully, and its attorneys and other witnesses obfuscated about the deletion and whether the deleted emails had been recovered. GN Netcom ultimately engaged its own expert to determine the scope of the deletion and, based on that analysis, filed a motion for sanctions.

Acted in Bad Faith?

In considering the motion, the court looked to Federal Rule of Civil Procedure 37(e), as recently amended on December 1, 2015. The rule specifically addresses sanctions for spoliation of ESI and provides that if ESI is lost because a party fails to take reasonable steps to preserve it and it cannot be restored or replaced through additional discovery, the court may impose sanctions necessary to cure the prejudice. Under the revised rule, if a party acts in "bad faith" – with the intent to deprive another party of the information's use in the litigation – the court may instruct the jury that the information would have been unfavorable or even enter default judgment. Before the amendment, courts in the Seventh Circuit likewise imposed sanctions on the offending party for bad faith destruction of ESI. See, e.g., Malibu Media, LLC v. Tashiro, No. 1:13-cv-00205-WTL-MJD, 2015 U.S. Dist. LEXIS 64281 (S.D. Ind. May 18, 2015).

Plantronics did not dispute that the deleted emails should have been preserved and could not be recovered. Nonetheless, it argued that sanctions were inappropriate because it initially took reasonable steps to preserve ESI and had no intent to deprive GN of discovery, and GN had not demonstrated prejudice. The court rejected these arguments and imposed severe sanctions, including attorneys' fees and a penalty of $3 million!

While acknowledging that Plantronics attempted to prevent loss of information after learning of the deletion, that did not excuse its executive's initial misconduct. Moreover, the court was not convinced that Plantronics took sufficient steps to recover the deleted emails, noting the failure to complete the forensic study and restore certain backup tapes. The court attributed bad faith to Plantronics (as opposed to just the employee), concluding that the deletion was not done for personal reasons, the employee was a high-level executive, and Plantronics was not sufficiently concerned about the deletion once it was discovered.

Punitive Monetary Sanctions

After finding that GN Netcom was prejudiced by the loss, the court issued sanctions. The court found, "that Plantronics' high degree of fault, its bad-faith intent to deprive GN of responsive documents, and the prejudice it has caused to GN's case — along with the difficulties it has created for GN in 'getting to the bottom of the deletion story' and its (at times) unwillingness to acknowledge wrongdoing — further merit punitive monetary sanctions ... in the amount of $3,000,000 on Plantronics, payable to GN." In addition to attorneys' fees, the court held open the possibility of future evidentiary sanctions and ordered that an adverse inference instruction be given to the jury, permitting the jury to conclude that the deleted emails would have been unfavorable to Plantronics.

As the GN Netcom decision shows, imposing a litigation hold, conducting training sessions, and sending periodic reminders does not satisfy the duty to preserve ESI where an employee deliberately disregards the hold.

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.

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