United States: E-Discovery Alert! Protect Against Court Sanctions

Million Dollar Sanctions Against Companies

Background. Under the new federal rules, companies must preserve e-mails and other electronic data when litigation is anticipated. At some point early in litigation, you also may receive a "litigation hold" letter, from an attorney who is representing a former employee. "Litigation hold" letters put you and your company under the responsibility to warn employees to preserve electronic data immediately.

Serious consequences arise when one ignores a litigation hold letter. Federal judges can enter "sanctions," against companies which do not preserve electronic data, or who alter electronic data. Sanctions also can be entered against employees.

$4.0 Million. In June, 2007, in an ERISA case, a federal judge entered a $4.0 million monetary sanction against a healthcare insurance provider, Health Net. The insurance provider had failed to retain, search and produce important e-mail and other electronic data some of which showed that Health Net employees had used fabricated spreadsheet data. Wachtel v. Health Net, Inc. (New Jersey, 2007).

$1.2 Million. Also in June, 2007, a $1.2 million monetary sanction was entered against another company and its law firm. The litigation there stemmed from property damage insurance claims filed after the September 11th destruction at the World Trade Center. A defendant company deleted electronic data and other relevant documents, including a 62-page report. The defendant and its attorneys then procrastinated for two years alleging the paper copy of the 62-page report had been lost before producing a paper copy. In Re September 11th Liability Insurance Coverage Cases (New York, 2007).

Negative Inference to Jury. While not all court sanctions carry such a big price tag, courts also can instruct a jury to assume that electronic documents were destroyed because they contained electronic data damaging to that party's case (i.e., a "negative inference" jury instruction).

No Litigation Hold. Paying for the other sides costs for re-deposing witnesses, attorneys fees and additional discovery, also can be ordered for failing to implement a proper "litigation hold," not preserving electronic evidence or altering that evidence. Consolidated Aluminum Corp. v. Alcoa, Inc. (Louisiana, 2006).

State Court. Do not relax your vigilance in state court. Some judges in state courts are applying the same standards.

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.