Modern technology has blessed today's corporations with the ability to store vast amounts of detailed information at low cost. It has also cursed them with burdens of document retention and production that make one long for the days of carbon paper, shorthand dictation, and the IBM Selectric. Four years ago, amendments to the Federal Rules of Civil Procedure pertaining to electronically stored information (ESI) brought "litigation holds" out of obscurity and onto center stage for every corporate litigant. Those who fail to issue and implement a litigation hold of the proper scope at the proper time to the appropriate persons are likely to face, in the course of litigation, a motion for sanctions for spoliation of documents. Sanctions can be as severe as default judgment and imprisonment for contempt. Unfortunately, although corporate litigants are highly motivated, compliance may be difficult to attain, even for the most willing and able.
As one court noted, many corporations take actions that touch multiple jurisdictions, yet they "cannot look to any single standard to measure the appropriateness of their preservation activities, or their exposure or potential liability for failure to fulfill their preservation duties." Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497, 523 (D. Md. 2010). Because such corporations cannot practicably adopt a different preservation policy for each federal circuit and state in which they operate, they must either adopt a uniform policy that complies with "the most demanding requirements of the toughest court to have spoken on the issue," id., or live with an increased risk of sanctions for failing to do so.
Generally speaking, courts will impose sanctions where the party seeking discovery can prove that documents were destroyed or altered, a duty to preserve the documents had arisen at the time they were destroyed or altered, the nonpreserving party had a "culpable state of mind" at time of the destruction or alteration, the documents were relevant to claims or defenses at issue, and the party seeking the documents was prejudiced by the destruction or alteration. (Cases setting forth the specific test that applies in individual circuits are collected in a chart appended to the Victor Stanley opinion. See id. at 542–53.) While these elements may appear straightforward, they have proven challenging to apply in practice. The outcomes of spoliation motions have been unpredictable as to whether a sanction will be imposed and, if so, the nature and severity of the sanction that will result. This uncertainty stems from the lack of a settled understanding of issues such as the scope of a corporation's duty to preserve electronic documents, when this duty arises, the level of culpability that should lead to sanctions, and the nature of sanctions that should be imposed. See generally id. at 516.
Recent decisions have summarized the global concerns, analyzed the principles that govern them, and provided guidance as to the obligations of the corporate community. These decisions are exerting a moderating influence on the e-discovery chaos of recent years, and they give institutional litigants some comfort that they will not suffer unreasonable penalties where they have made reasonable efforts to preserve relevant documents.
Victor Stanley v. Creative Pipe
The leading principles and the extent of potential sanctions are scrutinized in the landmark opinion in Victor Stanley, Inc. v. Creative Pipe, Inc., an 89-page decision that not only provides a thorough analysis of the issues pertinent to the case but also collects and analyzes the leading federal cases in an accompanying chart. In Victor Stanley, the plaintiff brought claims of violations of copyrights and patents, as well as unfair competition.
Four years after the complaint was filed, the Victor Stanley court addressed the plaintiff's motion seeking sanctions against the defendant for intentional destruction of evidence and other litigation misconduct. The plaintiff alleged that, over the course of four years of discovery during which the president of the defendant company had actual knowledge of his duty to preserve relevant information, the defendants engaged in multiple acts of misconduct. The plaintiff identified eight discrete preservation failures, including failure to implement a litigation hold, deletion of ESI soon after the plaintiff filed suit, failure to preserve an external hard drive after the plaintiff demanded preservation of ESI, failure to preserve files and emails after the plaintiff demanded their preservation, deletion of ESI after the court issued its first preservation order, continued deletion of ESI and use of programs to remove files permanently after the court admonished the parties as to their duty to preserve evidence and issued a second preservation order, failure to preserve ESI after the company's server was replaced, and further use of programs to delete ESI permanently after the court issued numerous production orders. Id. at 501.
These, as well as other deletions that did not permanently destroy evidence, led the plaintiff to file multiple motions for sanctions. The fourth motion, decided in September 2010, resulted in filings and exhibits "exceeding the Manhattan telephone directory in its girth," id. at 500, as well as six days of evidentiary hearings held over a seven-month period. The defendants ultimately acknowledged that most of the plaintiff's allegations were true. As a result, the court entered a default judgment against them on the copyright infringement claim at the heart of the case. In addition, the court ruled that the company president "be imprisoned for a period not to exceed two years, unless and until he pays to Plaintiff the attorney's fees and costs that will be awarded to Plaintiff as the prevailing party." Id.
No opinion could make clearer than Victor Stanley what is at stake with regard to the preservation of all discoverable information, including ESI.
The Duty to Preserve and Breach of That Duty
There is no inherent duty imposed on entities or persons to preserve documents; however, at the moment litigation is reasonably anticipated, a preservation duty emerges—whether the entity is the initiator or the target of the litigation. Id. at 521–22 (citing The Sedona Conference, The Sedona Conference Commentary on Legal Holds: The Trigger and the Process [PDF] 3 (public cmt. ed. Aug. 2007)). It is a fact-intensive inquiry, because the duty is not absolute; rather, the preservation efforts must merely be reasonable under the circumstances and made in good faith. Id. at 522. "Reasonableness" depends on what is proportional to the case and consistent with established standards. Id. (citing Rimkus Consulting Grp., Inc. v. Cammarata, 688 F. Supp. 2d 598, 613 (S.D. Tex. 2010)). See also Jones v. Bremen High Sch. Dist., No. 08-C-3548, 2010 WL 2106640, at *6–7 (N.D. Ill. May 25, 2010). "Proportionality" is evaluated with regard to what is at stake in the litigation and what costs and burdens are imposed by the preservation efforts. Victor Stanley, 269 F.R.D. at 523 (citing Paul W. Grimm, Michael D. Berman, Conor R. Crowley, Leslie Wharton, "Proportionality in the Post-Hoc Analysis of Pre-Litigation Preservation Decisions,"37 U. Balt. L. Rev., 388, 405). See also Procter & Gamble Co. v. Haugen, 427 F.3d 727, 739 n.8 (10th Cir. 2005) (ruling spoliation sanctions should not be imposed where burden or expense of proposed discovery outweighs its likely benefit). The resources available to a party can be a factor affecting whether sanctions will be imposed. As e-discovery has become an increasing focus for litigants and the courts deciding discovery disputes, the debate over defining the "contemporary standards" and when and how they should be imposed has been active, resulting in competing interpretations and outcomes. Whereas failure to issue a written litigation hold in a timely manner may constitute gross negligence in some cases, a written hold may not even be necessary in others. See Orbit One Commc'ns, Inc. v. Numerex Corp., 271 F.R.D. 429 (S.D.N.Y. 2010).
While the relativistic nature of these inquiries is good news for institutional litigants, there remains cause for concern, as some authorities opine that "[t]he general duty to preserve may include deleted data, data in slack spaces, backup tapes, legacy systems, and metadata." Victor Stanley, 269 F.R.D. at 524 (citing Grimm, 37 U. Balt. L. Rev. at 410) (emphasis added). For example, the court in Treppel v. Biovail Corp., 233 F.R.D. 363, 372 n.4 (S.D.N.Y. 2006), found that "permitting the downgrading of data to a less accessible form—which systematically hinders future discovery by making the recovery of the information more costly and burdensome—is a violation of the preservation obligation." See also Orbit One, 271 F.R.D. at 437 (quoting Treppel v. Biovail Corp., 233 F.R.D. 363, 372 n.4 (S.D.N.Y. 2006)). Even courts that do not denominate downgrading as a violation of the preservation obligation appear prepared to remedy any prejudice that it causes, imposing costs of recovering inaccessible data on the party that converted the data to a less accessible format. Id. at 437. As anyone familiar with modern information technology knows, requirements such as maintaining legacy systems where software is no longer subject to an active contract between the litigant and the software company, where information technology staff are no longer familiar with servicing a system, or where a software company no longer exists are likely to impose a heavy burden, even on entities with tremendous resources. The threat that such a burden will be imposed in high-stakes cases diminishes the comfort that would otherwise come from knowing that a "reasonableness" or "proportionality" test will be applied.
Some circuits have an expansive understanding of what it means for a document to be "under the control" of a party to litigation. For example, in the Second and Fourth Circuits, documents are considered to be under a party's control when that party "has the right, authority, or practical ability" to obtain them from a third party. Victor Stanley, 269 F.R.D. at 523 (quoting Goodman v. Praxair Servs., Inc., 632 F. Supp. 2d 494, 515 (D. Md. 2009)) (emphasis added). Within the First, Fourth, and Sixth Circuits, courts have found a duty to notify the opposing parties of evidence in the hands of third parties. Id. (citing Velez v. Marriott PR Mgmt., Inc., 590 F. Supp. 2d 235, 258 (D.P.R. 2008); Silvestri v. Gen. Motors Corp., 271 F.3d 583, 590 (4th Cir. 2001); and Jain v. Memphis Shelby Airport Auth., No. 08-2119-STA-dkv, 2010 WL 711328, at *2 (W.D. Tenn. Feb. 25, 2010)). Courts in the Third, Fifth, and Ninth Circuits have declined to impose such a duty. Id. (citing Bensel v. Allied Pilots Ass'n, 263 F.R.D. 150, 152 (D.N.J. 2009); Rimkus Consulting Grp., Inc. v. Cammarata, 688 F. Supp. 2d 598, 615–16 (S.D. Tex. 2010); and Melendres v. Arpaio, No. CV-07-2513-PHX-GMS, 2010 WL 582189, at *4 (D. Ariz. Feb. 12, 2010)).
With such a complex landscape of opinions, and with the knowledge that default judgment and imprisonment are potential sanctions, many observers have despaired of attaining predictability in the law without many more years of litigation or further revisions to the Federal Rules. There is one bedrock principle, however, that may provide some relief to corporate litigants: The duty to preserve evidence in most jurisdictions is owed to the court, not to other parties. The court's inherent ability to sanction acts of spoliation springs from its duty to protect the integrity of the judicial process so that public confidence is not undermined. See id. at 526.
Public confidence requires belief that litigants obtain a just result based on a fair fact-finding process. Public confidence in a just result is not undermined in cases where irrelevant or duplicative documents were destroyed. Conversely, if critical documents were destroyed, were unavailable from any other source, and were not cumulative in their contents, then the fact-finding process iscompromised, even if the spoliation resulted from an innocent mistake. For this reason, a court is likely to impose a severe sanction where key evidence has been lost, regardless of the good faith shown by the party in possession of the evidence. Such sanctions may be imposed even though they make "little logical sense" if one views the adverse inference as a punishment for wrongdoing rather than a prophylactic measure required to preserve the integrity of the court system in the view of the public.
This distinction is explained by the Victor Stanley court and exemplified in recent cases such as Orbit One Communications, Inc. v. Numerex Corp., 271 F.R.D. 429 (S.D.N.Y. 2010). The Orbit One court discussed the Second Circuit rule that ordinary negligence constitutes a culpable state of mind for purposes of a spoliation inference. See id. at 438 (citing Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 108 (2d Cir. 2002)). As Orbit One explained, this standard "protects the innocent litigant from the destruction of evidence by a spoliator who would otherwise assert an 'empty head, pure heart' defense." Id. (quoting Residential Funding, 306 F.3d at 108 and citing for this same principle Turner v. Hudson Transit Lines, Inc., 142, F.R.D. 68, 75 (S.D.N.Y. 1991) and Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Secs., LLC, 685 F. Supp. 2d 456, 464 (S.D.N.Y. 2010)). Courts imposing this rule do so because "[i]t is cold comfort to a party whose potentially critical evidence has just been destroyed to be told that the spoliator did not act in bad faith." Id. at 438.
What does all this mean for corporate litigants? Developing trends in judicial opinions should be discouraging to plaintiffs' lawyers intent on using the spoliation motion as a weapon to inflate corporate costs and extort settlements. Frivolous sanctions motions based on spoliation of irrelevant and duplicative documents will be denied by courts properly crediting public policy principles, leaving, for the most part, only those motions that seek to rectify some actual harm. Until a settled policy is established, however, a fact-intensive analysis will continue to be required to defeat these motions and develop precedents that will curb abuse.
The Culpable State of Mind
Once a court determines that documents were destroyed and that the destroying party was under a duty to preserve them, the court will examine that party's culpability. As with duty, a culpability determination requires fact-intensive examination. Courts inquire as to whether the destruction was inadvertent or intentional, though they do so for varying reasons and with varying results.
It remains unsettled what level of bad faith is required before sanctions will be imposed, as well as what consequences will be imposed based on the culpability inquiry. Some courts require a showing of bad faith before any sanction will be imposed; others match the level of sanction to the perceived degree of bad faith; some do not require bad faith at all but require more than negligence; and others will impose sanctions upon a showing of "fault," which encompasses bad faith, willfulness, and gross or ordinary negligence. Victor Stanley, 269 F.R.D. at 529. See also Ashton v. Knight Transp., Inc., No. 3:09-CV-0759-B, 2011 WL 734282, *26 (N.D. Tex. Feb. 22, 2011).
In sum, courts have grappled with the interplay among conduct, intent, and consequence, and they have reached incompatible results. Perhaps the spotlight now shining on frivolous e-discovery disputes and the overburdened dockets they have created will eventually lead to a settled and uniform understanding of how intent relates to consequence. For now, however, clients and counsel should be mindful that conflicting standards exist and should take precautions to avoid conduct that appears even careless.
Destroyed or Altered Documents and Resulting Prejudice
The final considerations in a spoliation inquiry are whether the documents in question were "relevant" and whether their absence or alteration is prejudicial to the party seeking them. "Relevance" in the spoliation context means that a reasonable trier of fact could conclude that the lost evidence would have supported the claims or defenses of the party that sought it. Victor Stanley, 269 F.R.D. at 531 (citing Thompson v. U.S. Dep't of Hous. & Urban Dev., 219 F.R.D. 93, 101 (D. Md. 2003) and Goodman v. Praxair Servs., LLC, 632 F. Supp. 2d 494, 509 (D. Md. 2009)).
In addition, for sanctions to issue, the party seeking them must have been prejudiced by the absence of the evidence that was destroyed or altered. Id. (citing Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., 685 F. Supp. 2d 456, 467 (S.D.N.Y. 2010) and Consol. Aluminum Corp. v. Alcoa, Inc., 244 F.R.D. 335, 346 (M.D. La. 2006)). In general, "prejudice" in the spoliation context means that the party claiming spoliation is precluded from presenting evidence essential to its claim or defense. Id. (citing Krumwiede v. Brighton Assocs., L.L.C., No. 05-C-3003, 2006 WL 1308629, at *10 (N.D. Ill. May 8, 2006) and Ashton, 2011 WL 734282, at *27). Some courts, however, hold that delayed production of evidence causes prejudice, creating a prejudice test that most spoliation respondents are certain to fail. Id. at 532 (citing Jones v. Bremen High Sch. Dist., No. 08-C-3548, 2010 WL 2106640, at *8–9 (N.D. Ill. May 25, 2010). In addition, courts may apply a presumption that the spoliated evidence was essential, if the destroying party's conduct was sufficiently culpable, such as where destruction or alteration was intentional. Other courts expand this concept to apply a presumption of prejudice to bad faith or grossly negligent conduct. See, e.g., Sampson v. City of Cambridge, 251 F.R.D. 172, 179 (D. Md. 2008). Again, the lack of uniformity among jurisdictions has frustrated responsible corporate citizens who are prepared to comply with the document preservation standards that apply to them but who cannot ascertain what those standards are.
The State of the Law after Victor Stanley
Victor Stanley provides a comprehensive and useful survey of preservation and spoliation law as it stood in mid-2010. It summarizes the state of the law and provides guidance as to how our evolving adversary system can remain a source of public confidence in the face of technological developments that threaten to overwhelm corporate budgets and responsible corporate attorneys. Victor Stanley, however, has not gone without criticism. The Orbit One court disagreed that "the definition of what must be preserved should be guided by principles of 'reasonableness and proportionality.'" 271 F.R.D. at 436 (citing Victor Stanley, 269 F.R.D. at 523, and Rimkus Consulting Grp., Inc. v. Cammarata, 688 F. Supp. 2d 598, 613 (S.D. Tex. 2010)). Rather, the court in Orbit One advised that "this standard may prove too amorphous to provide much comfort to a party deciding what files it may delete or backup tapes it may recycle." Id. at 436. While acknowledging that reasonableness and proportionality are good guiding principles in general, the court cautioned that these principles are "highly elastic" and "cannot be assumed to create a safe harbor for a party that is obligated under a court-imposed preservation order." Id. Accordingly, the court warned, parties are well-advised to "retain all relevant documents (but not multiple identical copies) in existence at the time the duty to preserve attaches" until a more precise definition emerges as to what must be preserved. Id. (quoting Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y. 2003)).
Without doubt, the complexities presented by the interplay of developing technologies with long-standing procedural and evidentiary rules will continue to pose challenges to courts, lawyers, and litigants. The most important lesson to draw from Victor Stanley and its progeny is that proactive measures can ameliorate, if not eliminate, the most significant risk of sanctions posed by an uncertain present.
Practice Guidance
Corporate citizens and their counsel must become familiar with how to craft, issue, and maintain an effective litigation hold in a cost-effective manner. Best practices on this include these tips.
Adopt a written retention policy and inform all employees about it. Explain what records are to be retained, by whom, and for how long. Include a catchall provision setting forth the decision-making process or principles for retention.
Be sure electronic controls conform to this policy. Work with your information technology (IT) professionals to be sure they understand the written retention policy and can implement litigation holds that comply with it.
Know when to issue a hold. Plan to issue the hold as soon as a dispute has been identified and described with particularity and as soon as an initial list of persons subject to the hold can be developed.
Know to whom a hold should issue. Immediately seek to identify those persons likely to have relevant information, including third parties, and deliver a written litigation hold as soon as one of the appropriate scope can be drafted.
Establish a reporting procedure. Establish a procedure for employees to report information they may have about a potential dispute.
Understand the proper scope of a hold. Clearly define the nature of the information to be preserved and the steps required to preserve it.
Conduct a reasonable investigation when a dispute emerges. Take steps to determine who has likely been involved in the situation and what they know.
Review, revise, and re-circulate the hold as the dispute evolves. Establish a system to review all litigation holds a company has in place, both periodically and upon key events such as the addition of a party or claim.
Identify the "end" of the dispute. Understand whether the dispute has "ended"—once a court decision becomes final, or in the case of a settlement, upon the effective date of the settlement agreement. Include in settlement agreements a provision stating that the litigation hold is lifted as of the effective date.
Resume normal destruction procedures. Inform hold recipients and IT personnel that they no longer need to retain documents and what duties they may have to destroy documents and to resume standard destruction procedures following the end of the hold.
Conclusion
The Victor Stanley decision and opinions that have commented on its teachings are important milestones in the continuing quest for fairness in the e-discovery context. Without predictability and some modicum of uniformity in the way the Federal Rules of Civil Procedure are applied, corporations are destined to be frustrated in their attempts to determine their legal obligations and comply with them. E-discovery rules have put into the hands of scurrilous and aggressive counsel who sue corporations a powerful weapon that can be used effectively against even prudent and honest corporate litigants. Fortunately, the strong tradition of fairness and balance in American jurisprudence continues to serve as the foundation of our civil procedure, and there is no reason to fear that reasonable parameters will not emerge to govern the e-discovery landscape. The critical question is how quickly they will do so and how the bench and bar can advance that effort.
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.